UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended July 31, 2007

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

For the transition period from          to

PALL CORPORATION

(Exact name of registrant as specified in its charter)

New York		11-1541330
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer 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)

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

Title of each class		Name of each exchange on which registered
Common Stock, $.10 par value		New York Stock Exchange
Common Share Purchase Rights		–

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

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

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

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

      Large accelerated filer þ               Accelerated filer o                         Non-accelerated filer o                         Smaller reporting company o

                                        (Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Act). Yes o No þ

The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant, computed by reference to the closing price of a share of common stock on January 31, 2008 (the last business day of the registrant’s most recently completed second fiscal quarter) was $4,516,443,478.

On March 21, 2008, there were 122,872,069 outstanding shares of the registrant’s common stock, $.10 par value.

 

 

TABLE OF CONTENTS

				Page No.
PART I
Item 1.		Business			3
Item 1A.		Risk Factors			8
Item 1B.		Unresolved Staff Comments			11
Item 2.		Properties			12
Item 3.		Legal Proceedings			13
Item 4.		Submission of Matters to a Vote of Security Holders			17
PART II
Item 5.		Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			18
Item 6.		Selected Financial Data			21
Item 7.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			23
Item 7A.		Quantitative and Qualitative Disclosure About Market Risk			42
Item 8.		Financial Statements and Supplementary Data			43
Item 9.		Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			44
Item 9A.		Controls and Procedures			44
Item 9B.		Other Information			46
PART III
Item 10.		Directors, Executive Officers and Corporate Governance			46
Item 11.		Executive Compensation			49
Item 12.		Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			80
Item 13.		Certain Relationships and Related Transactions, and Director Independence			82
Item 14.		Principal Accounting Fees and Services			84
PART IV
Item 15.		Exhibits, Financial Statement Schedules			85
SIGNATURES					89
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM					90
FINANCIAL STATEMENT SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS					133
EX-10.1.IV: THIRD AMENDMENT AND WAIVER TO THE FIVE-YEAR CREDIT AGREEMENT
EX-10.8: EMPLOYMENT AGREEMENT
EX-10.20: FORM OF NOTICE OF GRANT OF STOCK OPTION GRANT AGREEMENT
EX-10.37: AMENDMENT TO EMPLOYMENT AGREEMENT
EX-10.39: AMENDED EMPLOYMENT AGREEMENT
EX-21: SUBSIDIARIES
EX-23: CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
EX-31.1: CERTIFICATION
EX-31.2: CERTIFICATION
EX-32.1: CERTIFICATION
EX-32.2: CERTIFICATION

PART I

ITEM 1. BUSINESS.

GENERAL:

     Pall Corporation, a New York corporation incorporated in July 1946, and its subsidiaries (the “Company”) is a leading supplier of filtration, separation and purification technologies, principally made by the Company using its engineering capability and fluid management expertise, proprietary filter media, and other fluid clarification and separations equipment for the removal of solid, liquid and gaseous contaminants from a wide variety of liquids and gases.

     The Company serves customers through two business groups globally: Life Sciences and Industrial. The Life Sciences business group is focused on developing, manufacturing and selling products to customers in the Medical and BioPharmaceuticals marketplaces. The Industrial business group is focused on developing, manufacturing and selling products to customers in the Aerospace & Transportation, Microelectronics and General Industrial markets. These business groups are supported by shared and corporate services groups that facilitate the Company’s corporate governance and business activities globally. The transition to this business structure began in fiscal year 2005 and was completed in the first quarter of fiscal year 2007. While there is overlap in the intellectual property that underlies the products sold by the business groups, Company management believes that this structure positions the Company for future profitable growth. This business structure holistically focuses on the global marketplace presenting opportunities for sales growth, efficiencies and cost reduction in both of the business groups, as well as in the Company’s corporate and shared services infrastructure, while leveraging its entire intellectual property portfolio to the marketplaces efficiently.

     With few exceptions, research activities conducted by the Company are Company sponsored. Research expenditures totaled $62,414,000 in fiscal year 2007, $57,371,000 in fiscal year 2006 and $56,183,000 in fiscal year 2005.

     No one customer accounted for 10% or more of the Company’s consolidated sales in fiscal years 2007, 2006 or 2005.

     The Company is in substantial compliance with federal, state and local laws regulating the discharge of materials into the environment or otherwise relating to the protection of the environment. To date, compliance with environmental matters has not had a material effect upon the Company’s capital expenditures or competitive position. For a further description of environmental matters in this report, see Part I – Item 3 – Legal Proceedings, and Note 16, Contingencies and Commitments, to the accompanying consolidated financial statements.

     At July 31, 2007, the Company employed approximately 10,700 persons.

     For financial information of the Company by operating segment and geography, please see Note 20, Segment Information and Geographies, to the accompanying consolidated financial statements and the information under the caption “Review of Operating Segments” in Management’s Discussion and Analysis of Financial Condition and Results of Operations (Part II – Item 7 of this report).

     The Company’s website address is www.pall.com. The Company’s reports filed with the U.S. Securities and Exchange Commission (“SEC”) are also available free of charge on its website as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. As discussed in the special note preceding Part I of this Form 10-K, on August 1, 2007, the audit committee of the Company’s board of directors, on the recommendation of management, concluded that the Company’s previously issued financial statements for each of the eight fiscal years in the period ended July 31, 2006 (including the interim periods within those years), and for each of the fiscal quarters ended October 31, 2006, January 31, 2007 and April 30, 2007, should no longer be relied upon. Accordingly, the Company has restated its previously issued financial statements for those periods in this Form 10-K. The Company has not amended its previously filed Annual Reports on Form 10-K or Quarterly Reports on Form 10-Q for the periods affected by this restatement.

OPERATIONS:

     Pall Corporation is a broad-based filtration, separation and purification company. Its proprietary products are used to discover, develop and produce biotechnology drugs, vaccines and safe drinking water, protect hospital patients as in the case of the Company’s blood filters, bacterial detection systems and hospital water filters, enhance the quality and efficiency of manufacturing processes, keep equipment such as manufacturing equipment and airplanes running efficiently and to protect the environment. Requirements for product quality, purity, environmental protection, health and safety apply to a wide range of industries and across geographic borders. The Company has more than a 60-year history of commercializing successful products and continues to develop new materials and technologies for its Life Sciences and Industrial customers and their increasingly difficult fluid filtration, purification and separation challenges. The Company has an array of core materials and technologies that can be combined and manipulated in many ways to solve complex fluid separation challenges. These proprietary materials and technologies, coupled with the Company’s ability to engineer them into useful forms and place them into fully integrated systems, are the cornerstone of the Company’s capabilities. Proprietary materials and technologies, customer process knowledge, and engineering know-how enable the Company to provide customers with products that are well matched to their needs, to develop new products and to enter new markets.

     The global drivers for the filtration, separation and purification market include, water and energy scarcity, emerging pathogens, environmental issues, industrial globalization and consolidation, increasing government regulations and process innovation and optimization. These all require more and ever finer levels of filtration, separation and purification. Opportunities to filter water exist in every one of the Company’s markets. The Company has a balanced portfolio of products that are sold into diversified markets. The Company’s strategy for growth includes capitalizing on new markets for its products in high-growth geographies such as Asia and Eastern Europe as well as focusing on high-growth markets such as biotechnology, cell therapy, vaccine production, micro and macroelectronics, next-generation aircraft, energy and water. The Company’s products help to meet the evolving needs of markets worldwide.

     The Company actively pursues applications in which Pall products can make a substantial difference to its customers and especially targets projects, under the umbrella of its Total Fluid Management^SM (“TFM”) strategy, whereby it can engineer integrated filtration, purification and separation system solutions to enhance performance and economics. The TFM strategy leverages the Company’s resources and capabilities to help its customers improve operating efficiencies within their processes through the optimal selection and integrated use of filtration and separation products. This approach makes use of Pall’s engineering and scientific expertise in fluid management to create unique and cost-effective solutions for customers. Integrated systems are an important part of this approach, and generally couple or automate filtration/separation steps for greater efficiency and ease and economy of use. These systems typically include the Company’s proprietary consumable filtration products. When fully commissioned, Company management expects these systems to provide an ongoing annuity stream for the Company’s consumable filtration products. Systems represent a growing portion of the Company’s revenues.

Consumable filtration products sold are principally filters made with proprietary Pall filter media produced by chemical film casting, melt blowing of polymer fibers, papermaking and metallurgical processes.

     The Company is executing a full suite of initiatives aimed at strengthening its processes while increasing efficiency and reducing costs. Such improvement initiatives include the facilities rationalization program in which the Company is consolidating manufacturing, reducing its footprint and realigning plants with its customers’ general locations. The Company is also executing major initiatives to streamline processes and infrastructure.

     Competition is intense in all of the Company’s markets and includes numerous large companies and many smaller regional competitors. In many cases, the Company’s primary competition comes from alternative, often older, technologies, such as in beer production from pasteurization, as opposed to sophisticated filtration of the kind Pall provides. The Company believes that no one competitor overlaps in more than 20% of its business. In many markets, there are significant barriers to entry limiting the number of qualified suppliers. These barriers result from stringent product performance standards, product qualification protocols and requirements for consistent levels of global service and support. The Company’s broad array of patented materials and product designs coupled with its engineering and manufacturing expertise and global reach enable it to provide customers with differentiated product performance and value.

     During fiscal year 2005, the Company undertook to reorganize its global business structure into three underlying vertically integrated businesses: Life Sciences, comprising Medical and BioPharmaceuticals markets; Aeropower, comprising Aerospace and the Machinery & Equipment portion of the General Industrial marketplace; and Process Technologies, comprising General Industrial’s Food & Beverage, Fuels & Chemicals, Power Generation, Municipal Water and Microelectronics markets. In fiscal year 2006, management began a further integration of the Industrial markets (Aeropower and Process Technologies) to form one vertically integrated Industrial business. In conjunction with the reorganization, in the first quarter of fiscal year 2007, the Industrial sales and marketing group was reorganized such that a portion of the commercial original equipment manufacturers (“OEM”) business previously tended to by, and reported in, the General Industrial market was tended to by, and reported in, a realigned market called Aerospace & Transportation. At the end of the first quarter of fiscal year 2007, the reorganization was completed. Each business now has full responsibility for its global manufacturing, sales and marketing and research and development functions, enabling the Company to better meet its customers’ needs in order to achieve greater efficiencies and profit growth. This revised organizational structure is in contrast to the former matrix organizational structure where, within each geography, these functions supported the market-based part of the matrix on a shared basis (as opposed to being directly vertically integrated into these businesses).

     The Company’s financial reporting systems have been converted to support the new organizational structure, providing financial information consistent with how the businesses are measured. Additionally, certain of the internal segment financial reporting principles utilized in the measurement and evaluation of the profitability of the Company’s businesses (such as the allocation of shared overhead costs) have been revised for consistency with the underlying reorganized structure of the Company. The chief executive officer manages the Company and makes key decisions about the allocation of Company resources based on the two businesses. The Company’s sales subsidiaries sell both Life Sciences and Industrial products. As such, certain overhead costs of these subsidiaries have been, and will continue to be, shared by the businesses.

     Consistent with the new corporate structure, management has determined that the Company’s reportable segments, which are also its operating segments, consist of its two vertically integrated businesses, Life Sciences and Industrial, in accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 131, Disclosures about Segments of an Enterprise and Related Information.

LIFE SCIENCES SEGMENT:

     The Company’s Life Sciences technologies facilitate the process of drug discovery, development and production. They are used extensively in the research laboratory, pharmaceutical and biotechnology industries, in blood centers and in hospitals at the point of patient care. The Company’s broad capability in the life sciences industry is a competitive strength and an important element of its strategy going forward. Sales in the Medical and BioPharmaceuticals markets are made through direct sales and distributors.

     Safety, quality, efficacy, ease of use, technical support, product delivery and price are all important considerations among the Company’s Life Sciences customers. Pricing for blood filtration products has become a major consideration as the Company’s customers have increasingly become large centralized procurers, such as blood centers in the Western Hemisphere and nationalized blood services in Europe and Asia. The backlog for the Life Sciences segment at July 31, 2007 was approximately $115,095,000 (all of which is expected to be shipped in fiscal year 2008) compared with $91,570,000 at July 31, 2006.

MEDICAL MARKET:

     The Company’s medical products improve the safety of blood transfusions and help control the spread of infections in hospitals. Its broad laboratory product line is used in drug discovery, gene manipulation and proteomics applications. Pall’s cell therapy product portfolio provides efficient enabling technologies for the emerging regenerative medicine market. The Company is in the process of developing its second generation product to remove infectious prions from donor blood and believes that prion reduction could be a large potential long-term market opportunity.

     Products related to transfusion safety represent a significant portion of Life Sciences sales. For example, the Company’s blood filters remove unwanted white blood cells from donor blood. Its Acrodose^TM PL System enables blood centers to tap into the abundant, but often discarded, supply of whole blood platelets. Hospital acquired infections are a growing problem for patients and the world’s health care systems. The Company’s breathing-circuit, intravenous and point-of-use water filters help protect patients from these infections.

     The backlog for the Medical market at July 31, 2007 was approximately $29,158,000 (all of which is expected to be shipped in fiscal year 2008) compared with $30,549,000 at July 31, 2006. The Company’s principal competitors in the Medical market include MacoPharma Group, Fresenius Medical Care AG & Co., Millipore Corporation, General Electric Healthcare (a unit of General Electric Company (“GE”)), Tyco International Ltd., Teleflex Incorporated, and Capital Health Inc.

BIOPHARMACEUTICALS MARKET:

     The Company sells separation systems and disposable filtration and purification technologies primarily to pharmaceutical and biotechnology companies for use by them in the development and commercialization of chemically synthesized and biologically derived drugs and vaccines. The Company provides a broad range of advanced filtration solutions for each critical stage of drug development through drug production. Its filtration systems and validation services assist drug manufacturers through the regulatory process and on to the market.

     The fastest growing part of the market is the biotechnology industry. Biotechnology drugs and biologically derived vaccines are very filtration and purification intensive. One of the factors driving Pall’s growth is increasing adoption of single-use processing systems to produce drugs. Pall has supplied single-use technologies for many years including self-contained filter capsules as an alternative to stainless steel. There are many advantages to Pall’s Allegro^TM single-use disposable systems, including more flexible use of space to speed in setting up a new production line. Critical to the industry, they also can greatly reduce or eliminate the need for cleaning and cleaning validation and reduce the risk of cross-contamination between batches and products.

     Company management believes that the Company’s established record of product performance and innovation, as well as its ability to sell and globally support a complete range of products, including its engineered systems, give it a strong competitive advantage among BioPharmaceutical customers because of the high costs and safety risks associated with drug development and production. The backlog for the BioPharmaceuticals market at July 31, 2007 was approximately $85,937,000 (all of which is expected to be shipped in fiscal year 2008) compared with $61,021,000 at July 31, 2006. Principal competitors in the BioPharmaceuticals market include Millipore Corporation, The Sartorius Group, CUNO (a 3M company) and GE Healthcare.

INDUSTRIAL SEGMENT:

     The Company provides enabling and process enhancing technologies throughout the industrial marketplace. This includes the aerospace, microelectronics and consumer electronics, municipal and industrial water, fuels, chemicals, energy, and food and beverage markets. The Company has the capability to provide customers with integrated solutions for their process fluids. The backlog for the Industrial segment at July 31, 2007 was approximately $456,045,000 (of which approximately $330,366,000 is expected to be shipped in fiscal year 2008) compared with $358,232,000 at July 31, 2006.

GENERAL INDUSTRIAL MARKET:

     Included in this diverse market are sales of filters, coalescers and integrated separation systems for hydraulic, fuel and lubrication systems on mechanical equipment across many industries, as well as to producers of energy (i.e., oil, gas, renewable and alternative fuels, electricity and chemicals), food and beverages, municipal and industrial water. Virtually all of the raw materials, process fluids and waste streams that course through industry are candidates for multiple stages of filtration, separation and purification. The growing demand for “clean” and “green” technology and water and energy scarcity issues also create growth opportunities for the Company.

     Technologies that purify water for use and reuse represent an important opportunity. Governments around the world are implementing stringent new regulations governing drinking water standards and Company management believes that the Company’s filters and systems provide a solution for these requirements. These standards apply to municipal water supplies throughout the United States and in a growing number of countries. Industry, which consumes enormous quantities of water, also increasingly needs to filter water before, during and after use both to conserve it and to ensure it meets discharge requirements.

     Within the energy market, demand is strong as oil and gas producers, refineries and power generating stations work to increase production, produce cleaner burning fuels, conserve water, meet environmental regulations and develop alternative fuel sources. Each of these applications provides opportunities for Pall.

     Within the Food & Beverage market, filtration solutions are provided to the wine, beer, soft drink, bottled water and food ingredient markets. A growing filtration opportunity in this market is the need of wine and beer manufacturers to eliminate the use of diatomaceous earth, a known carcinogen, in their processes.

     The backlog at July 31, 2007 was approximately $279,044,000 (of which approximately $212,966,000 is expected to be shipped in fiscal year 2008) compared with $201,869,000 at July 31, 2006. Sales to General Industrial customers are made through Company personnel, distributors and manufacturers’ representatives. The Company believes that its TFM strategy and ability to engineer fully integrated systems solutions, underscored by product performance and quality, service to the customer, and price, are the principal competitive factors in this market. The Company’s principal competitors in the General Industrial market include CUNO (a 3M company), GE Infrastructure (a unit of GE), U.S. Filter (a Siemens business), The Sartorius Group, Parker Hannifin Corporation and Rohm and Haas Company.

AEROSPACE & TRANSPORTATION MARKET:

     The Company sells filtration and fluid monitoring equipment to the aerospace industry for use on commercial and military aircraft, ships and land-based military vehicles to help protect critical systems and components. Commercial, Military and Industrial OEM sales represented 35%, 41% and 24%, respectively, of total Aerospace & Transportation sales in fiscal year 2007. Key growth drivers in this market include passenger air miles flown, military budgets, new military and commercial aircraft, and demand for new aircraft and mobile construction equipment in emerging geographic markets, particularly in Asia. Increasing environmental regulation faced by the Company’s customers as well as customer requirements for improved equipment reliability and fuel efficiency are also driving growth.

     The Company’s products are sold to customers in this segment through a combination of direct sales to airframe manufacturers and other customers, including the U.S. military, and through the Company’s distribution partner, Satair A/S (“Satair”), for the commercial aerospace “aftermarket”. The backlog at July 31, 2007 was approximately $146,464,000 (of which approximately $96,200,000 is expected to be shipped in fiscal year 2008) compared with $125,375,000 at July 31, 2006. Competition varies by product. The Company’s principal competitors in the Aerospace & Transportation markets include Donaldson Company, Inc., ESCO Technologies Inc. and CLARCOR Inc.

     Company management believes that efficacy, performance and quality of product and service, as well as price, are determinative in most sales.

MICROELECTRONICS MARKET:

     The Company sells highly sophisticated filtration and purification technologies for the semiconductor, data storage, fiber optic, advanced display and materials markets. The Company provides a comprehensive suite of contamination control solutions for chemical, gas, water, chemical mechanical polishing and photolithography processes to meet the needs of this demanding industry. Integrated circuits, which control almost every device or machine in use today, require exceedingly high levels of filtration technologies, which Pall provides. While this part of the market is cyclical, Pall has strategically diversified into the consumer electronics market to lessen the impact of the industry’s cycles. This strategic diversification into the macroelectronics side of the market is enabling the Company to capitalize on demand for computer gaming consoles, MP3 players, flat screen TVs and monitors, multimedia cell phones and ink jet printers and cartridges. These markets are typically less cyclical and just as filtration intensive. A newer application in Microelectronics is in the production of solar cells.

     The Company’s products are sold to customers in this market through its own personnel, distributors and manufacturers’ representatives. The backlog at July 31, 2007 was approximately $30,537,000 (of which approximately $21,200,000 is expected to be shipped in fiscal year 2008) compared with $30,988,000 at July 31, 2006. Company management believes that performance, product quality, innovation and service are the most important factors in the majority of sales in this market. The Company’s principal competitors in the Microelectronics market include Entegris, Inc. (formerly Mykrolis) and Mott Corporation.

The following comments relate to the two operating segments discussed above:

RAW MATERIALS:

     Most raw materials used by the Company are available from multiple sources. A limited number of materials are proprietary products of major chemical companies. Management believes that the Company could obtain satisfactory substitutes for these materials should they become unavailable.

PATENTS:

     The Company owns a broad range of patents covering its filter media, filter designs and other products, but it considers these to be mainly defensive, and its operations rely principally on its proprietary manufacturing methods and engineering skills.

ITEM 1A. RISK FACTORS.

The risk factors described below are not inclusive of all risk factors but highlight those that the Company believes are the most significant and that could impact its performance and financial results. These risk factors should be considered together with all other information presented in this Form 10-K report.

The Company faces risks arising from potential material weaknesses in its internal control environment.

     As a result of the matters addressed in the recently completed audit committee inquiry, as further described in Note 2, Audit Committee Inquiry and Restatement, to the accompanying consolidated financial statements, as well as an internal review by Company management, management identified a material weakness in internal control over financial reporting with respect to its accounting for income taxes. While management believes that this material weakness was remediated as of January 31, 2008, its remedial actions may prove to be ineffective or inadequate and expose the Company to further risk of misstatements in its financial statements. In such circumstances, investors and other users of the Company’s financial statements may lose confidence in the reliability of the Company’s financial information and the Company could fail to comply with certain representations, warranties and covenants in its debt and other financing-related agreements or be obligated to incur additional costs to improve the internal controls. The Company’s failure or inability to remediate the material weakness in a timely and effective manner could also adversely affect its reputation among customers and its operating prospects, if customers perceive the Company as experiencing financial control or other financial difficulties. See Part II – Item 9A – Controls and Procedures for further description of the material weakness identified by management and related remediation actions.

Litigation and regulatory inquiries associated with the restatement of the Company’s prior period financial statements could result in substantial costs, penalties and other adverse effects.

     Substantial costs may be incurred to defend and resolve regulatory proceedings and litigation arising out of or relating to matters addressed in the recently completed audit committee inquiry. These proceedings include the ongoing audits in process as well as audits expected to commence of the Company’s tax returns for some of the periods affected by the restatement. In September 2007, the Company deposited $135 million with the U.S. Treasury, which reflected management’s preliminary assessment of additional taxes and interest that the Company might owe the Internal Revenue Service (“IRS”) for prior years as a result of tax compliance matters identified at the time and did not include any amount with respect to potential penalties. In completing the restatement, the Company examined the appropriateness of the Company’s accounting treatment of the tax consequences of each type of intercompany transaction in the various taxing jurisdictions in which the Company operates. As a result of this analysis, the Company determined that additional financial statement reserves were required with respect to certain other lesser tax compliance matters. The Company cannot predict when the ongoing IRS audit will be completed or the amount or timing of the final resolution with the IRS or other relevant taxing authorities of the matters that gave rise to the restatement, including the amount of any penalties that may be imposed, which could be substantial.

     The Company is also subject to other regulatory and litigation proceedings relating to, or arising out of, the restatement, including pending investigations by the SEC and the Department of Justice, purported securities class action lawsuits and derivative lawsuits seeking relief against certain of the Company’s officers and directors. These proceedings could also result in civil or criminal fines and other non-monetary penalties. The Company has not reserved any amount in respect of these matters in its consolidated financial statements.

     The Company cannot predict whether any monetary losses it experiences in the proceedings will be covered by insurance or whether insurance proceeds recovered will be sufficient to offset such losses. Pending civil, regulatory and criminal proceedings may also divert the efforts and attention of the Company’s management from business operations, particularly if adverse developments are experienced in any of them, such as an expansion of the investigations being conducted by the SEC and the Department of Justice. See Part I – Item 3 – Legal Proceedings, for further discussion of these pending matters.

Changes in the Company’s effective tax rate may affect operating results.

     The Company’s effective tax rate is subject to fluctuation based on a variety of factors, such as:

	•		the geographical mix of income derived from the countries in which it operates;
	•		currently applicable tax rates, including particularly in the United States;
	•		the nature, timing and impact of permanent or temporary changes in tax laws or regulations, including the termination or extension of provisions under U.S. federal income tax law that are or may become subject to “sunset”, such as research and development credits and incentives related to U.S. domestic production;
	•		the timing and amount of the Company’s repatriation of foreign earnings;
	•		the timing and nature of the Company’s resolution of uncertain income tax positions; and
	•		the Company’s success in managing its effective tax rate through the implementation of global tax and cash management strategies.

     Fluctuations in the Company’s effective tax rate may affect operating results. In the near term, the Company expects that its effective tax rate will be affected in particular by the repeal of section 936 of the Internal Revenue Code, which allowed U.S. companies to operate in Puerto Rico at a significantly reduced U.S. tax cost, and recent changes in the IRS’s stance regarding intercompany transfer pricing, which involve revised IRS audit practices for intercompany transactions.

     The Company operates in numerous countries and is subject to taxation in all of the countries in which it operates. The tax rules and regulations in such countries can be complex and, in many cases, uncertain in their application. In addition to challenges to the Company’s tax positions arising during routine audits, disputes can arise with the taxing authorities over the interpretation or application of certain rules to the Company’s business conducted within the country involved and with respect to intercompany transactions when the parties are taxed in different jurisdictions. Pending proceedings to which the Company is subject include ongoing audits of the Company’s tax returns for some of the periods affected by the restatement, and the Company cannot predict the timing or outcome of the completion of that audit, which could result in the imposition of additional taxes and substantial penalties. See “Litigation and regulatory inquiries associated with the restatement of the Company’s prior period financial statements could result in substantial costs, penalties and other adverse effects.”

Changes in product mix and product pricing may affect the Company’s operating results particularly with the expansion of the systems business, in which the Company experiences significantly longer sales cycles with less predictable revenue and no certainty of future revenue streams from related consumable product offerings and services.

     The Company’s TFM strategy is partially reliant on sales of integrated systems. Because systems are generally sold at lower gross margins than many other products, gross margins could decline if systems sales continue to grow as a percentage of total sales and the anticipated future revenue streams from related consumable product offerings and services are not realized.

     The Company’s systems business generally also experiences significantly longer sales cycles and involves less predictable revenue and less certainty of future revenue streams from related consumable product offerings and services. In addition, the profitability of the Company’s systems sales depends substantially on the ability of management to estimate accurately the costs involved in manufacturing and implementing the relevant system according to the customer’s specifications. Company estimates can be adversely affected by disruptions in a customer’s plans or operations and unforeseen events, such as manufacturing defects. Failure to accurately estimate the Company’s cost of system sales can adversely affect the profitability of those sales, and the Company may not be able to recover lost profits through pricing or other actions.

Increases in costs of manufacturing and operating costs may affect operating results.

     The Company’s costs are subject to fluctuations, particularly due to changes in commodity prices, raw materials, energy and related utilities and cost of labor. The achievement of the Company’s financial objectives is reliant on its ability to manage these fluctuations through cost savings actions and efficiency initiatives.

The Company may not be able to achieve the savings anticipated from its cost reduction and margin improvement initiatives, including the timing of completion of its facilities rationalization initiative.

     In fiscal year 2006, the Company began an extensive program to restructure manufacturing operations, including the closing of up to 12 facilities around the globe. One of the purposes of this initiative is to reduce manufacturing costs and improve gross margins. Unexpected delays or other factors in the facilities rationalization initiative and other cost reduction initiatives could impact the Company’s ability to realize the anticipated savings and to improve or maintain gross margins.

Fluctuations in foreign currency exchange rates and interest rates may affect operating results.

     In fiscal year 2007, the Company derived 68% of sales from outside the United States. Sales outside the United States are typically made in the local currencies of those countries. As a result, fluctuations in currency exchange rates may affect operating results. Giving effect to interest rate swaps, the Company’s debt portfolio was approximately 42% variable rate at July 31, 2007. Fluctuations in interest rates may affect operating results.

The Company may not be able to obtain regulatory approval or market acceptance of new technologies.

     Part of the Company’s planned growth is dependent on new products and technologies. Some of those new products may require regulatory approval. Growth from those new technologies may not be realized if regulatory approval is not granted or customer demand for those products or technologies does not materialize.

Changes in demand for the Company’s products and business relationships with key customers and suppliers, including delays or cancellations in shipments, may affect operating results.

     To achieve its objectives, the Company must develop and sell products that are subject to the demands of customers. This is dependent on many factors including, but not limited to, managing and maintaining relationships with key customers, responding to the rapid pace of technological change and obsolescence, which may require increased investment by or greater pressure to commercialize developments rapidly or at prices that may not fully recover the associated investment, and the effect on demand resulting from customers’ research, development and capital expenditure plans.

     The manufacturing of the Company’s products is dependent on an adequate supply of raw materials. The Company’s ability to maintain an adequate supply of raw materials could be impacted by the availability and price of those raw materials and maintaining relationships with key suppliers.

The Company may not successfully enforce patents and protect proprietary products and manufacturing techniques.

     Some of the Company’s products, as well as some competitor’s products, are based on patented technology and other intellectual property rights. Some of these patented technologies and intellectual property require substantial resources to develop. Operating results may be affected by the costs associated with the Company’s defense of its intellectual property against unauthorized use by others as well as third-party challenges to its intellectual property. The Company could also experience disruptions in its business, including loss of revenues and adverse effects on its prospects, if its patented or other proprietary technologies are successfully challenged.

The Company may not be able to successfully complete or integrate acquisitions.

     In so far as acquisition opportunities are identified, there is no assurance of the Company’s ability to complete any such transactions and successfully integrate the acquired business as planned.

The Company is subject to domestic and international competition in all of its global markets.

     The Company is subject to competition in all of the global markets in which it operates. The Company’s achievement of its objectives is reliant on its ability to successfully respond to many competitive factors including, but not limited to, pricing, technological innovations, product quality, customer service, manufacturing capabilities and hiring and retention of qualified personnel.

The Company may be impacted by global and regional economic conditions and legislative, regulatory and political developments.

     The Company conducts operations around the globe. The Company expects to continue to derive a substantial portion of sales and earnings from outside the United States. A recession in the United States could have a negative impact on demand for the Company’s products not only in the United States, but also globally. Sales and earnings could also be affected by the Company’s ability to manage the risks and uncertainties associated with the application of local legal requirements or the enforceability of laws and contractual obligations, trade protection measures, changes in tax laws, regional political instability, war, terrorist activities, severe or prolonged adverse weather conditions and natural disasters as well as health epidemics or pandemics.

ITEM 1B. UNRESOLVED STAFF COMMENTS.

None.

ITEM 2. PROPERTIES.

The following are the Company’s principal facilities (i.e., facilities with square footage in excess of 25,000 square feet), which in the opinion of management are suitable and adequate to meet the Company’s requirements:

Principally Supports

the Following

Fiscal Year 2007

Location

PrincipalActivities (1)

Business Groups (2)

Square Footage

OWNED:

Western Hemisphere

Cortland, NY

A

PI

338,000

DeLand, FL

M

PI

279,000

Fajardo & Luquillo, Puerto Rico

M,W

PLS

261,000

Pt. Washington, NY

L,S

A

234,000

Ann Arbor, MI

A

PLS

186,000

New Port Richey, FL

M,S

PI

179,000

Timonium, MD

M,W,S

PI

160,000

Ft. Myers, FL

M,W

PI

111,000

Pensacola, FL

A

PLS

98,000

Hauppauge, NY

M

PLS

75,000

Putnam, CT

M

PI

63,000

Covina, CA

M,S

PLS

55,000

Europe

Bad Kreuznach, Germany

A

PI

390,000

Portsmouth, U.K.

A

A

270,000

Waldstetten, Germany

A

PI

249,000

Crailsheim, Germany

A

PI

215,000

Tipperary, Ireland

M

PI

178,000

Redruth, U.K.

M

PI

163,000

Ilfracombe, U.K.

M

PLS

125,000

Newquay, U.K.

M

PLS

110,000

Bazet, France

A

PI

96,000

Frankfurt, Germany

W,S

A

75,000

Saint Germain, France

L,W,S

A

60,000

Ascoli & Verona, Italy

M,W,S

A

114,000

Asia

Tsukuba, Japan

M,L,W

PI

122,000

Ahmedabad, India

M

PI

175,000

LEASED:

Western Hemisphere

East Hills, NY

A

A

320,000

Cortland, NY

M,W

PI

111,000

Covina, CA

W

PLS

40,000

Timonium, MD

M,W

PI

71,000

Baltimore, MD

W

PI

41,000

San Diego, CA

A

PI

26,000

Northborough, MA

M,W

A

38,000

Humacao, Puerto Rico

W

PLS

34,000

Europe

Milan & Ascoli, Italy

L,W,S

A

86,000

Johannesburg, South Africa

W,S

A

96,000

Madrid, Spain

L,W,S

A

44,000

Cergy, France

A

PLS

43,000

Saint Germain, France

L,W,S

A

26,000

Asia

Beijing, China

M,W,S

PI

311,000

Melbourne & Somersby, Australia

A

A

102,000

Tokyo, Osaka, Nagoya, Japan

L,S

A

47,000

Mumbai, Banglore, Pune, Bhiwandi, India

L,W,S

A

75,000

(1) Definition of Principal Activities

M: Manufacturing activities

L: Laboratories for research & development and validation activities

W: Warehousing activities

S: Sales, marketing and administrative activities

A: All of the above

(2) Definition of Business Groups

PLS: Pall Life Sciences

PI: Pall Industrial

CS: Corporate and Shared Services

A: All of the above

ITEM 3. LEGAL PROCEEDINGS.

Federal Securities Class Actions:

     Four putative class action lawsuits have been filed against the Company and certain members of its management team alleging violations of the federal securities laws relating to the Company’s understatement of certain of its U.S. income tax payments and of its provision for income taxes in certain prior periods as described in Note 2, Audit Committee Inquiry and Restatement, to the accompanying consolidated financial statements. These lawsuits were filed between August 14, 2007 and October 11, 2007 in the United States District Court for the Eastern District of New York. The plaintiffs principally allege that the defendants violated the federal securities laws by issuing materially false and misleading public statements about the Company’s financial results, financial statements, income tax liability, effective tax rate and internal controls. The plaintiffs seek unspecified compensatory damages, costs and expenses. On October 15, 2007, various plaintiffs and groups of plaintiffs filed motions seeking to consolidate the cases and to be appointed lead plaintiff. These motions have not been decided.

Shareholder Derivative Lawsuits:

     On October 5, 2007, two plaintiffs filed identical derivative lawsuits in New York Supreme Court, Nassau County relating to the tax matter described above. These actions purport to bring claims on behalf of the Company based on allegations that certain current and former directors and officers of the Company breached their fiduciary duties by failing to evaluate and otherwise inform themselves about the Company’s internal controls and financial reporting systems and procedures. In addition, plaintiffs allege that certain officers of the Company were unjustly enriched as a result of the Company’s inaccurate financial results over fiscal years 1999-2006. The complaints seek unspecified compensatory damages on behalf of Pall Corporation, disgorgement of defendants’ salaries, bonuses, stock grants and stock options, equitable relief and costs and expenses. The Company, acting in its capacity as nominal defendant, moved to dismiss the complaints on December 17, 2007 for failure to make a demand upon the Company’s board of directors prior to filing the lawsuits, which motion is pending.

     Another shareholder derivative lawsuit relating to the tax matter described above was filed in the United States District Court for the Eastern District of New York on January 10, 2008. This action purports to bring claims on behalf of the Company based on allegations that certain of the current directors of the Company breached their fiduciary duties and were unjustly enriched in connection with the tax matter. The complaint seeks unspecified compensatory damages on behalf of Pall Corporation, disgorgement of defendants’ profits, benefits and other compensation, equitable and non-monetary relief, and costs and expenses. The Company, acting in its capacity as nominal defendant, moved to dismiss the complaint on March 10, 2008, for lack of subject matter jurisdiction over the complaint, which motion is pending.

Other Proceedings:

     The SEC and U.S. Attorney’s Office for the Eastern District of New York are conducting investigations in connection with the tax matter described above. The Company is cooperating with these investigations.

Environmental Matters:

     The Company has environmental matters, discussed below, at the following four U.S. sites: Ann Arbor, Michigan; Pinellas Park, Florida; Glen Cove, New York and Hauppauge, New York.

     The Company’s balance sheet at July 31, 2007 contains environmental liabilities of $18,127,000, which relate to the items discussed below. In the opinion of Company management, the Company is in substantial compliance with applicable environmental laws and regulatory orders and its accruals for environmental remediation are adequate at this time.

     Reference is also made to Note 16, Contingencies and Commitments, to the accompanying consolidated financial statements.

Ann Arbor, Michigan:

     In February 1988, an action was filed in the Circuit Court for Washtenaw County, Michigan (the “Court”) by the State of Michigan (the “State”) against Gelman Sciences Inc. (“Gelman”), a subsidiary acquired by the Company 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) (the “Consent Judgment”), 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 $4,900,000 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 groundwater concentrations remain above acceptable levels in much of the affected area, the Court 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 “Order”) to address an area of groundwater contamination not addressed in the previously approved plan. Gelman is now in the process of implementing the requirements of the Order.

     In correspondence dated June 5, 2001, the State asserted that stipulated penalties in the amount of $142,000 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. That data has been submitted to the Court, but no ruling has been issued.

     On August 9, 2001, the State made a written demand for reimbursement of $227,000 it has allegedly incurred for groundwater monitoring. On October 23, 2006, the State made another written demand for reimbursement of these costs, which now total $494,000, with interest. In February 2007, the Company met with the State to discuss whether the State would be interested in a proposal for a “global settlement” to include, among other matters, the claim for past monitoring costs ($494,000). Gelman is engaged in discussion with the State with regard to this demand, however, Gelman considers this claim barred by the Consent Judgment.

     By letter dated June 15, 2007, the Michigan Department of Environmental Quality (“DEQ”) claimed Gelman was in violation of the Consent Judgment and related work plans due to its failure to operate a groundwater extraction well in the Evergreen Subdivision at the approved minimum purge rate. The DEQ sought to assess stipulated penalties. Gelman filed a Petition for Dispute Resolution with the court on July 6, 2007 contesting these penalties. Prior to the hearing on Gelman’s petition, the parties met and the DEQ agreed to waive these penalties in exchange for Gelman’s agreement to perform additional investigations in the area. The Court entered a Stipulated Order to this effect on August 7, 2007. Since then, Gelman has installed several monitoring wells requested by the State. Representatives of Gelman and the State met on December 10, 2007 to discuss the data obtained from these wells and to plan further investigative activities. These discussions are ongoing.

     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 sought 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. In February 2006, the Court ordered the parties into a global settlement facilitation, which also included the City’s federal court lawsuit (see below) and its administrative challenge to Gelman’s discharge permit (see below). The facilitation process resulted in a settlement, which the parties have memorialized in a Settlement Agreement dated November 20, 2006 (the “Agreement”). Under the Agreement, Gelman will pay the City $285,000. Gelman will also implement additional surface water and groundwater monitoring programs. If this monitoring indicates that the City’s well must be replaced (based upon agreed trigger levels of contaminants), Gelman would be required to pay the City $4,000,000, plus an adjustment factor to reflect any increase (or decrease) in the construction costs associated with this type of project. The Company believes that it is unlikely that such trigger levels will be reached.

     As part of the Agreement, the City has committed to cooperate with continuing Gelman’s cleanup efforts and exchange relevant information and documents. The cooperation framework established under the Agreement should facilitate a better working relationship with the City and a more cost efficient cleanup program. The state court entered a Stipulated Order of Dismissal on December 4, 2006.

     On August 10, 2005, the City filed a lawsuit against Gelman under the Federal Superfund Statute (“CERCLA”) seeking in this matter essentially the same relief it is seeking in the above-described state court action. As noted above, this lawsuit was resolved as part of the Agreement. The Federal District Court entered a Stipulated Order of Dismissal on December 5, 2006.

     A local resident and the City filed petitions for a contested case on November 26, 2005 and November 30, 2005, respectively. The petitions challenged various aspects of the discharge permit issued to Gelman by the State on September 30, 2005. The petitions commenced an administrative adjudicative hearing, which can result in changes to the discharge permit. Company management does not believe there is substantive merit to the claims made in either petition. The City’s petition was resolved under the Settlement Agreement. The local resident’s petition was resolved under a separate Settlement Agreement dated February 2, 2007. Pursuant to those Agreements, the presiding judge entered an Order of Dismissal regarding these matters on February 21, 2007, dismissing both petitions with prejudice. Neither settlement included any changes to the discharge permit.

Pinellas Park, Florida:

     In 1995, as part of a facility closure, an environmental site assessment was conducted to evaluate potential soil and groundwater impacts from chemicals that may have been used at the Company’s Pinellas Park facility during the previous 24-year period of manufacturing and testing operations. Methyl Isobutyl Ketone (“MIBK”) concentrations in groundwater were found to be higher than regulatory levels. Soil excavation was conducted in 1998 and subsequent groundwater sampling showed MIBK concentrations below the regulatory level.

     In October 2000, environmental consultants for a prospective buyer of the property found groundwater contamination at the Company’s property. In October 2001, a Site Assessment Report conducted by the Company’s consultants, which detailed contamination concentrations and distributions, was submitted to the Florida Department of Environmental Protection (“FDEP”).

     In July 2002, a Supplemental Contamination Assessment Plan and an Interim Remedial Action Plan (“IRAP”) were prepared by the Company’s consultants and submitted to the FDEP. A revised IRAP was submitted by the Company in December 2003, and it was accepted by the FDEP in January 2004. A Remedial Action Plan (“RAP”) was submitted by the Company to the FDEP in June 2004. Final approval by the FDEP of the Company’s RAP was received by the Company on August 26, 2006. Pursuant to the approved RAP, the Company began active remediation on the property.

     On March 31, 2006, the FDEP requested that the Company investigate potential off-site migration of contaminants. Off-site contamination was identified and the FDEP was notified. On April 13, 2007 the FDEP reclassified the previously approved RAP as an Interim Source Removal Plan because a RAP can only be submitted after all contamination is defined. Pursuant to the FDEP’s request in January 2007, the Company installed additional monitoring wells, both on- and off-site. Upon completion of the monitoring activities, the Company will prepare a Site Assessment Report Addendum, delineating the soil and groundwater contamination for FDEP review. The report will also present the scope of all remediation tasks.

Glen Cove, New York:

     A March 1994 report indicated groundwater contamination consisting of chlorinated solvents at a neighboring site to the Company’s Glen Cove facility, and later reports found groundwater contamination in both the shallow and intermediate zones at the facility. In 1999, the Company entered into an Order on Consent with the New York State Department of Environmental Conservation (“NYSDEC”), and completed a Phase II Remedial Investigation at the Glen Cove facility.

     The NYSDEC has designated two operable units (“OUs”) associated with the Glen Cove facility. In March 2004, the NYSDEC finalized the Record of Decision (“ROD”) for the shallow and intermediate groundwater zones, termed OU-1. The Company signed an Order on Consent for OU-1 effective July 5, 2004, which requires the Company to prepare a Remedial Design/Remedial Action (“RD/RA”) Work Plan to address groundwater conditions at the Glen Cove facility.

     The Company completed a pilot test involving the injection of a chemical oxidant into on-site groundwater and, on May 31, 2006, submitted a report to NYSDEC entitled “In-Situ Chemical Oxidation Phase II Pilot Test and Source Evaluation Report” (the “Report”). The Report contained data which demonstrated that (1) in general, the pilot test successfully reduced contaminant levels and (2) the hydraulic controls installed on the upgradient Photocircuits Corporation (“Photocircuits”) site are not effective and contaminated groundwater continues to migrate from that site. On July 31, 2006, the Company received comments from NYSDEC on the Report. On September 27, 2006, the Company submitted responses to the NYSDEC comments. On November 16, 2006, the Company met with the NYSDEC representatives to discuss the Report and the impact of the continued migration of contaminated groundwater from the upgradient Photocircuits site onto the Glen Cove facility. On January 26, 2007, the Company submitted a draft conceptual remedial design document for the Glen Cove facility to NYSDEC for its technical review.

     The Company met with NYSDEC representatives on April 12, 2007 to discuss a possible settlement of liability for OU-1 and for the contamination in the deep groundwater zone, termed OU-2. NYSDEC would not agree to settle OU-2 because a remedial investigation has not been completed. On October 23, 2007, NYSDEC requested submittal of a RD/RA Work Plan, which the Company submitted on December 20, 2007. The Company has pursued possible settlement of liability for OU-1 and met with NYSDEC again on November 30, 2007 to present a settlement framework. On December 20, 2007, the Company submitted a description of the settlement framework for NYSDEC’s further review.

     The ROD for OU-2 has been deferred by NYSDEC until additional data is available to delineate contamination and select an appropriate remedy. NYSDEC requested that the Company and Photocircuits enter into a joint Order on Consent for the remedial investigation. Photocircuits was not willing to enter into an Order and the Company was informed by NYSDEC that it would undertake the OU-2 investigation at the Photocircuits property. Photocircuits is now in Chapter 11 bankruptcy and, in or about March 2006, the assets of Photocircuits’ Glen Cove facility were sold to American Pacific Financial Corporation (“AMPAC”). AMPAC operated the facility under the Photocircuits name, but closed it on or about April 15, 2007.

     In July 2007, NYSDEC commenced the OU-2 investigation at both the Photocircuits and Pall sites. The Company has retained an engineering consultant to oversee NYSDEC’s OU-2 work.

Hauppauge, New York:

     On December 3, 2004, a third-party action was commenced against the Company in the United States District Court for the Eastern District of New York in connection with groundwater contamination. In the primary action, plaintiff Anwar Chitayat (“Chitayat” or the “plaintiff”) seeks recovery against defendants Vanderbilt Associates and Walter Gross for environmental costs allegedly incurred, and to be incurred, in connection with the disposal of hazardous substances from property located in Hauppauge, New York (the “Site”). The Site is a property located in the same industrial park as a Company facility. Vanderbilt Associates is the prior owner of the site and Walter Gross was a partner in Vanderbilt Associates. Walter Gross died in May 2005, and in August 2005, following the issuance of letters testamentary, Barbara Gross was substituted as a third-party plaintiff. Barbara Gross claims that the Company is responsible for releasing hazardous substances into the soil and groundwater at its property, which then migrated to the Site. Barbara Gross seeks indemnification and contribution under Section 113 of CERCLA from third-party defendants, including the Company, in the event she is liable to Chitayat.

     Chitayat alleges that prior to 1985, Vanderbilt Associates leased the Site to Sands Textiles Finishers, Inc. for textile manufacturing and dry cleaning. Chitayat alleges that hazardous substances were disposed at the Site during the time period that Walter Gross and Vanderbilt Associates owned and/or operated the Site, which migrated from the Site to surrounding areas. Chitayat alleges that in August 1998, he entered into a Consent Order with the NYSDEC which resulted in NYSDEC investigating the Site and developing a remediation plan, and required Chitayat to reimburse the State via a periodic payment plan. Chitayat alleges that the total response costs will exceed $3,000,000, and that he has incurred more than $500,000 in costs to date.

     In 2005, the plaintiff moved to amend his complaint to add a claim for contribution under Section 113 of CERCLA against the Company, and the Company opposed the proposed amendment. In March 2006, the Court terminated the plaintiff’s motion to amend, and plaintiff has not renewed his motion. As a result, the only claim asserted against the Company is by Barbara Gross.

     The NYSDEC has designated two OUs associated with the Site. OU-1 relates to the “on-site” contamination at 90, 100 and 110 Oser Avenue, and represents the geographic area which Chitayat alleges will result in response costs in excess of $3,000,000. OU-2 relates to off-site groundwater contamination migrating away from the Site. In January 2006, the NYSDEC issued a ROD selecting a remedial program for OU-2 which is projected to cost approximately $4,500,000 to implement.

     Fact discovery in the case was completed in January 2006. Experts for plaintiff, Barbara Gross, Vanderbilt Associates and the Company served expert reports in March and April 2006, and expert discovery was concluded in May 2006. There is a dispute among the experts as to whether contaminants from the Company’s facility have contributed to cleanup costs at the Site and, if so, to what extent. In September 2006, the Court established a briefing schedule for all parties to submit summary judgment motions, and for Barbara Gross and the Company to make motions to strike certain expert testimony. Third-party defendants, including the Company, filed motions for summary judgment on October 6, 2006. The Company also filed motions to strike certain expert testimony. Plaintiff filed opposition papers with the Court on November 6, 2006, and the moving third-party defendants, including the Company, filed reply papers on November 20, 2006.

     While the motions were pending, the parties enlisted the aid of a mediator to negotiate a settlement of the case. The parties met with the mediator on July 30 through August 1, 2007, which resulted in a tentative settlement agreement, subject to drafting of definitive settlement documents. During the process of negotiating the settlement documents, a disagreement developed between the plaintiff and the primary defendants as to the terms of establishment of the settlement fund that had been agreed upon at the mediation. This dispute has not been resolved and the proposed settlement has not yet been achieved.

     The summary judgment motions remains pending without a decision. On September 27, 2007, the Court issued a decision on the Company’s motions in limine to preclude testimony by the experts for plaintiff and third-party plaintiff Barbara Gross, granting the motions in part and denying them in part.

     If the settlement is completed as contemplated, the Company’s responsibility will be fixed and it will be released from further liability to the plaintiff or third-party plaintiffs. If it is not completed and the Company’s motion for summary judgment is denied, the case will continue. If that happens, the Company will remain subject to potential liability and an allocation of some portion of the response costs paid by plaintiff to the State of New York.

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

     There were no matters submitted to a vote of the Company’s shareholders during the fourth quarter of fiscal year 2007.

PART II

ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

     The Company’s common stock is listed on the New York Stock Exchange (“NYSE”) under the symbol PLL. The table below sets forth quarterly data relating to the Company’s common stock prices and cash dividends declared per share for the past two fiscal years.

																		Cash Dividends
		2007								2006								Declared Per Share
Price per share		High				Low				High				Low				2007				2006
Quarter: First		$	32.20				25.26			$	31.20			$	25.21			$	0.11			$	0.10
Second			35.57				30.58				29.12				25.85				0.12				0.11
Third			42.15				33.70				31.61				27.66				0.12				0.11
Fourth			49.00				38.43				32.44				25.61				—				0.11

     As of March 21, 2008 there were approximately 3,631 holders of record of the Company’s common stock. Dividends are paid when, as and if declared by the board of directors of the Company. There were no dividends declared during the fourth quarter of fiscal year 2007 due to the commencement of the audit committee inquiry as more fully described in Note 2, Audit Committee Inquiry and Restatement, to the accompanying consolidated financial statements. Subsequent to July 31, 2007, the board of directors declared dividends of $0.12, $0.12, $0.12 and $0.13 per share in September 2007, October 2007, January 2008, and March 2008, respectively.

PERFORMANCE GRAPH

     The following graph compares the annual change in the cumulative total return on the Company’s common stock during the Company’s last five fiscal years with the annual change in the cumulative total return of the Standard & Poor’s Composite-500 Index and the Standard & Poor’s Industrial Machinery Index (which includes the Company). The graph assumes an investment of $100 on August 2, 2002 (the last trading day of the Company’s fiscal year 2002) and the reinvestment of all dividends paid during the last five fiscal years.

				2-Aug-02					1-Aug-03					30-Jul-04					29-Jul-05					31-Jul-06					31-Jul-07
	Pall Corp.			$	100				$	140				$	145				$	197				$	169				$	271
	S&P 500			$	100				$	115				$	132				$	151				$	159				$	184
	S&P Industrial Machinery			$	100				$	125				$	162				$	175				$	184				$	237

Copyright ^© 2007, Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. All rights reserved.

The following table provides information with respect to purchases made by or on behalf of the Company or any “affiliated purchaser” of the Company’s common stock during the quarter ended July 31, 2007.

		(In thousands, except per share data)
										Total Number of				Approximate
										Shares Purchased as				Dollar Value of Shares
		Total Number								Part of Publicly				that May Yet Be
		of Shares				Average Price				Announced Plans or				Purchased Under the
Period		Purchased				Paid Per Share				Programs (1)				Plans or Programs (1)
May 1, 2007 to May 31, 2007			19			$	41.46				19				358,232
June 1, 2007 to June 30, 2007			—				—				—				358,232
July 1, 2007 to July 31, 2007			211				47.38				211				348,232
Total			230			$	46.90				230

ITEM 6. SELECTED FINANCIAL DATA.

     The financial information presented below for the years prior to fiscal year 2007 has been restated as set forth in this Form 10-K as more fully described in Note 2, Audit Committee Inquiry and Restatement, to the accompanying consolidated financial statements. The Company has not amended its previously filed Annual Reports on Form 10-K or Quarterly Reports on Form 10-Q for the periods affected by this restatement.

     The following table sets forth selected financial data for the last five fiscal years. This selected financial data is not necessarily indicative of results of future operations and should be read in conjunction with Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and the accompanying consolidated financial statements and related notes included elsewhere in this Form 10-K.

		2007				2006								2005								2004								2003
						As				As				As				As				As				As				As				As
(In millions, except per share data)						Reported				Restated				Reported				Restated				Reported				Restated				Reported				Restated
RESULTS FOR THE YEAR:
Net sales		$	2,249.9			$	2,016.8			$	2,016.8			$	1,902.3			$	1,902.3			$	1,770.7			$	1,770.7			$	1,613.6			$	1,613.6
Cost of sales			1,190.5	(a)			1,072.8	(a)			1,072.8	(a)			978.9	(a)			978.9	(a)			899.1				899.1				810.0				810.0
Gross profit			1,059.4				944.0				944.0				923.4				923.4				871.6				871.6				803.6				803.6
Selling, general and administrative expenses			675.0				641.0				641.0				621.4				621.4				583.5				583.5				536.2				536.2
Research and development			62.4				57.3				57.3				56.2				56.2				57.3				57.3				52.2				52.2
Restructuring and other charges, net			22.4				12.3				12.3				38.8				38.8				12.5				12.5				47.5				47.5
Interest expense, net			39.1				23.0				30.2				25.9				30.0				20.5				23.6				24.5				27.8
Earnings before income taxes			260.5				210.4				203.2				181.1				177.0				197.8				194.7				143.2				139.9
Provision for income taxes			133.0				64.9				151.1				40.3				63.3				46.2				71.0				40.0				56.9
Net earnings		$	127.5	(b)		$	145.5	(b)		$	52.1	(b)		$	140.8			$	113.7			$	151.6			$	123.7			$	103.2			$	83.0
Earnings per share:
Basic			1.04				1.16				0.42				1.13				0.91				1.21				0.98				0.84				0.67
Diluted			1.02				1.16				0.41				1.12				0.91				1.20				0.98				0.83				0.67
Dividends declared per share			0.35				0.43				0.43				0.39				0.39				0.36				0.36				0.36				0.36
Capital expenditures			97.8				96.0				96.0				86.2				86.2				61.3				61.3				62.2				62.2
Depreciation and amortization of long-lived assets			94.0				95.7				95.7				90.9				90.9				88.9				88.9				83.9				83.9
YEAR-END POSITION:
Working capital		$	774.2			$	846.2			$	653.3			$	703.3			$	598.1			$	629.3			$	542.7			$	516.9			$	458.3
Property, plant and equipment, net			607.9				621.0				621.0				608.8				608.8				600.4				600.4				600.2				600.2
Total assets			2,708.8				2,552.9				2,461.3				2,265.3				2,185.3				2,182.7				2,112.7				2,016.7				1,983.9
Long-term debt, net of current portion			591.6				640.0				640.0				510.2				510.2				488.7				488.7				489.9				489.9
Total liabilities			1,648.2				1,374.2				1,524.2				1,125.3				1,193.2				1,128.3				1,179.2				1,082.2				1,142.2
Stockholders’ equity			1,060.6				1,178.7				937.1				1,140.0				992.1				1,054.4				933.5				934.5				841.6

In thousands, except per share data:

		Interest expense, net, as				Adjustment to interest				Interest expense, net, as
		previously reported				expense, net				restated
Year ended July 31, 1999		$	13,015			$	3			$	13,018
Year ended July 29, 2000			14,077				1,088				15,165
Year ended July 28, 2001			16,643				2,046				18,689
Year ended August 3, 2002			14,331				2,515				16,846
		Provision for income taxes,				Adjustment to provision				Provision for income
		as previously reported				for income taxes				taxes, as restated
Year ended July 31, 1999		$	7,397			$	5,961			$	13,358
Year ended July 29, 2000			41,768				18,452				60,220
Year ended July 28, 2001			32,310				16,734				49,044
Year ended August 3, 2002			26,741				25,880				52,621
		Net earnings, as previously				Adjustment to				Net earnings,
		reported				net earnings				as restated
Year ended July 31, 1999		$	51,507			$	(5,964	)		$	45,543
Year ended July 29, 2000			146,636				(19,540	)			127,096
Year ended July 28, 2001			118,010				(18,780	)			99,230
Year ended August 3, 2002			73,234				(28,395	)			44,839
		Basic earnings per share, as				Adjustment to basic				Basic earnings per share,
		previously reported				earnings per share				as restated
Year ended July 31, 1999		$	0.41			$	(0.04	)		$	0.37
Year ended July 29, 2000			1.18				(0.15	)			1.03
Year ended July 28, 2001			0.96				(0.15	)			0.81
Year ended August 3, 2002			0.60				(0.23	)			0.37
		Diluted earnings per share,				Adjustment to diluted				Diluted earnings per
		as previously reported				earnings per share,				share, as restated
Year ended July 31, 1999		$	0.41			$	(0.04	)		$	0.37
Year ended July 29, 2000			1.18				(0.16	)			1.02
Year ended July 28, 2001			0.95				(0.15	)			0.80
Year ended August 3, 2002			0.59				(0.23	)			0.36
						Foreign currency				Net impact to
		Retained earnings				translation				stockholders’ equity
Year ended July 31, 1999		$	(5,964	)		$	—			$	(5,964	)
Year ended July 29, 2000			(25,504	)			—				(25,504	)
Year ended July 28, 2001			(44,284	)			—				(44,284	)
Year ended August 3, 2002			(72,679	)			—				(72,679	)
Year ended August 2, 2003			(92,877	)			(49	)			(92,926	)
Year ended July 31, 2004			(120,768	)			(157	)			(120,925	)
Year ended July 31, 2005			(147,881	)			(13	)			(147,894	)

ITEM 7. 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 accompanying consolidated financial statements and notes thereto and other financial information in this Form 10-K. The discussions under the subheadings “Review of Operating Segments” below are in local currency unless indicated otherwise. Company management considers local currency growth an important measure because by excluding the volatility of exchange rates, underlying volume change is clearer. 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 Annual Report on Form 10-K contain “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements contained in this and other written and oral reports are based on current Company expectations and are subject to risks and uncertainties, which could cause actual results to differ materially. All statements regarding future performance, earnings projections, earnings guidance, management’s expectations about its future cash needs and effective tax rate, and other future events or developments are forward-looking statements. Such risks and uncertainties include, but are not limited to: risks relating to the Company’s restatement of prior period financial statements, including the risks associated with the pending IRS audit and pending SEC and Department of Justice investigations and litigation proceedings; risks associated with the Company’s planned cash management initiatives, which may result in changes in the Company’s effective tax rate; changes in product mix and product pricing may affect the Company’s operating results particularly as the systems business expands in which significantly longer sales cycles are experienced with less predictable revenue and profitability and less certainty of future revenue streams from related consumable product offerings and services; increases in costs of manufacturing and operating costs, including energy and raw materials; the Company’s ability to achieve the savings anticipated from its cost reduction and margin improvement initiatives including the timing of completion of its facilities rationalization initiative; fluctuations in foreign currency exchange rates and interest rates; regulatory approval or market acceptance of new technologies; changes in demand for the Company’s products and business relationships with key customers and suppliers including delays or cancellations in shipments; success in enforcing patents and protecting proprietary products and manufacturing techniques; risks associated with the completion or integration of acquisitions; domestic and international competition; and global and regional economic conditions, including particularly the impact of current challenging conditions in the United States that may also have global implications; and legislative, regulatory and political developments. The Company makes these statements as of the date of this disclosure and undertakes no obligation to update them.

Audit Committee Inquiry and Restatement

     As previously discussed in this Form 10-K, an inquiry was conducted by the Company’s audit committee into the Company’s understatement of its U.S. federal income tax payments and its provision for income taxes. The audit committee completed its inquiry in January 2008. On August 1, 2007, the audit committee, on the recommendation of management, concluded that the Company’s previously issued financial statements for each of the eight fiscal years in the period ended July 31, 2006 (including the interim periods within those years), and for each of the fiscal quarters ended October 31, 2006, January 31, 2007 and April 30, 2007, should no longer be relied upon.

     Accordingly, the Company has restated its previously issued financial statements for those periods. The Company has not amended its previously filed Annual Reports on Form 10-K or Quarterly Reports on Form 10-Q for the periods affected by this restatement. The discussion of financial information related to fiscal years prior to fiscal year 2007 has been restated as set forth in this Form 10-K as more fully described in Note 2, Audit Committee Inquiry and Restatement, to the accompanying consolidated financial statements. Restated amounts have been identified with the wording “as restated”.

Business Reorganization

     During fiscal year 2005, the Company undertook to reorganize its global business structure into three underlying vertically integrated businesses: Life Sciences, comprising Medical and BioPharmaceuticals markets; Aeropower, comprising Aerospace and the Machinery & Equipment portion of the General Industrial marketplace; and Process Technologies, comprising General Industrial’s Food & Beverage, Fuels & Chemicals, Power Generation, Municipal Water and Microelectronics markets. In fiscal year 2006, management began a further integration of the Industrial markets (Aeropower and Process Technologies) to form one vertically integrated Industrial business. In conjunction with the reorganization, in the first quarter of fiscal year 2007, the Industrial sales and marketing group was reorganized such that a portion of the commercial OEM business previously tended to by, and reported in, the General Industrial market was tended to by, and reported in, a realigned market called Aerospace & Transportation. At the end of the first quarter of fiscal year 2007, the reorganization was completed. Each business now has full responsibility for its global manufacturing, sales and marketing, and research and development functions, enabling the Company to better meet its customers’ needs and achieve greater efficiencies and profit growth. This revised organizational structure is in contrast to the former matrix organizational structure where, within each geography, these functions supported the market-based part of the matrix on a shared basis (as opposed to being directly vertically integrated into these businesses).

     The Company’s financial reporting systems have been converted to support the new organizational structure, providing financial information consistent with how the financial results of the businesses will be measured. Additionally, certain of the internal segment financial reporting principles utilized in the measurement and evaluation of the profitability of the Company’s businesses (such as the allocation of shared overhead costs) have been revised for consistency with the underlying reorganized structure of the Company. The chief executive officer manages the Company and makes key decisions about the allocation of Company resources based on the two businesses. The Company’s sales subsidiaries sell both Life Sciences and Industrial products. As such, certain overhead costs of these subsidiaries have been, and will continue to be, shared by the businesses.

     Consistent with the new corporate structure, management has determined that the Company’s reportable segments, which are also its operating segments, consist of its two vertically integrated businesses, Life Sciences and Industrial, in accordance with the provisions of SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information.

Critical Accounting Policies and Estimates

     The Company’s accompanying consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles. These accounting principles require the Company to make certain estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the accompanying consolidated financial statements, as well as the reported amounts of revenues and expenses during the periods presented. Although these estimates are based on Company management’s knowledge of current events and actions it may undertake in the future, actual results may differ from estimates. The following discussion addresses the Company’s most critical accounting policies, which are those that are most important to the portrayal of the Company’s financial condition and results, and that require judgment. See also the notes to the accompanying consolidated financial statements, which contain additional information regarding the Company’s accounting policies.

Income Taxes

     Significant judgment is required in determining the worldwide provision for income taxes. In the ordinary course of a global business, there are many transactions and calculations where the ultimate tax outcome is uncertain. Some of these uncertainties arise as a consequence of revenue sharing and cost reimbursement arrangements among related entities, the process of identifying items of revenue and expense that qualify for preferential tax treatment and appropriate segregation of foreign and domestic income and expense to avoid double taxation. No assurance can be given that the final tax outcome of these matters will not be different than that which is reflected in the Company’s historical income tax provisions and accruals. Such differences could have a material effect on the Company’s income tax provision and net earnings in the period in which a final determination is made.

The Company records a valuation allowance to reduce deferred tax assets to the amount of the future tax benefit that is more likely than not to be realized. While Company management has considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, there is no assurance that the valuation allowance would not need to be increased to cover additional deferred tax assets that may not be realizable. Any increase in the valuation allowance could have a material adverse impact on the Company’s income tax provision and net earnings in the period in which such determination is made.

Purchase Accounting and Goodwill

     Determining the fair value of certain assets and liabilities acquired in a business combination in accordance with SFAS No. 141 is judgmental in nature and often involves the use of significant estimates and assumptions. There are various methods used to estimate the value of tangible and intangible assets acquired, such as discounted cash flow and market multiple approaches. Some of the more significant estimates and assumptions inherent in the two approaches include: projected future cash flows (including timing); discount rates reflecting the risk inherent in the future cash flows; perpetual growth rate; determination of appropriate market comparables; and the determination of whether a premium or a discount should be applied to comparables. There are also judgments made to determine the expected useful lives assigned to each class of assets and liabilities acquired.

     Goodwill is measured as the excess of the cost of acquisition over the sum of the amounts assigned to identifiable assets acquired less liabilities assumed. The Company performs goodwill impairment tests at least annually, including whenever events or circumstances indicate impairment might have occurred. In response to changes in industry and market conditions, the Company may strategically realign its resources and consider restructuring, disposing of, or otherwise exiting businesses, which could result in an impairment of goodwill. Based on impairment tests performed, there was no impairment of goodwill in fiscal years 2007, 2006 and 2005.

Revenue Recognition

     Revenue is recognized when title and risk of loss have transferred to the customer and when contractual terms have been fulfilled. Transfer of title and risk of loss occurs when the product is delivered in accordance with the contractual shipping terms. In instances where contractual terms include a provision for customer acceptance, revenue is recognized when either (i) the Company has previously demonstrated that the product meets the specified criteria for contracts with acceptance provisions based on either seller or customer-specified objective criteria or (ii) upon formal acceptance received from the customer for contracts with acceptance provisions where the product has not been previously demonstrated to meet customer-specified objective criteria. Revenue for contracts which are accounted for under the percentage of completion method is based upon the ratio of costs incurred to date compared with estimated total costs to complete. The cumulative impact of revisions to total estimated costs is reflected in the period of the change, including anticipated losses.

Allowance for Doubtful Accounts

     Company management evaluates its ability to collect outstanding receivables and provide allowances when collection becomes doubtful. In performing this evaluation, significant estimates are involved, including an analysis of specific risks on a customer-by-customer basis. Based upon this information, Company management records in earnings an amount believed to be uncollectible. If the historical data used to calculate the allowance provided for doubtful accounts does not reflect the future ability to collect outstanding receivables, additional provisions for doubtful accounts may be needed and the future results of operations could be materially affected.

Inventories

     Inventories are valued at the lower of cost (principally on the first-in, first-out method) or market. The Company records adjustments to the carrying value of inventory based upon assumptions about historic usage, future demand and market conditions. These adjustments are estimates which could vary significantly, either favorably or unfavorably, from actual requirements if future conditions, customer inventory levels or competitive conditions differ from the Company’s expectations.

Recoverability of Available-for-Sale Investments

     Other than temporary losses relating to available-for-sale investments are recognized in earnings when Company management determines that the recoverability of the cost of the investment is unlikely. Such losses could result in a material adjustment in the period of the change. Company management considers numerous factors, on a case-by-case basis, in evaluating whether the decline in market value of an available-for-sale security below cost is other than temporary. Such factors include, but are not limited to, (i) the length of time and the extent to which the market value has been less than cost; (ii) the financial condition and the near-term prospects of the issuer of the investment; and (iii) whether Company management intends to retain the investment for a period of time that is sufficient to allow for any anticipated recovery in market value.

Defined Benefit Retirement Plans

     The Company sponsors defined benefit retirement plans in various forms covering substantially all employees who meet eligibility requirements. Several statistical and other factors that attempt to anticipate future events are used in calculating the expense and liabilities related to those plans for which the benefit is actuarially determined (i.e., defined benefit plans). These factors include assumptions about the discount rate, expected return on plan assets and rate of future compensation increases as determined by the Company, within certain guidelines. In addition, the Company’s actuarial consultants also use subjective factors, such as withdrawal and mortality rates, to calculate the liabilities and expense. The actuarial assumptions used by the Company are long-term assumptions and may differ materially from actual experience in the short-term due to changing market and economic conditions and changing participant demographics. These differences may have a significant effect on the amount of pension expense recorded by the Company.

     Pension expense associated with the Company’s defined benefit plans was $30,314 in fiscal year 2007, which was based on a weighted average discount rate of 5.34% (calculated using the projected benefit obligation) and a weighted average expected long-term rate of return on plan assets of 6.66% (calculated using the fair value of plan assets).

     The expected rates of return on the various defined benefit pension plans’ assets are based on the asset allocation of each plan and the long-term projected return of those assets. If the expected long-term rate of return on plan assets was reduced by 50 basis points, projected pension expense in fiscal year 2007 would have increased approximately $1,500.

     The objective of the discount rate assumption is to reflect the rate at which the pension benefits could be effectively settled. The Company’s methodology for selecting the discount rate for the U.S. plans as of July 31, 2007 was to match the plan’s cash flows to that of a yield curve that provides the equivalent yields on zero-coupon corporate bonds for each maturity. Benefit cash flows due in a particular year can be “settled” theoretically by “investing” them in the zero-coupon bond that matures in the same year. The discount rate is the single rate that produces the same present value of cash flows. The discount rate assumption for non-U.S. plans reflects the market rate for high-quality, fixed-income debt instruments. Both discount rate assumptions are based on the expected duration of benefit payments for each of the Company’s pension plans as of the annual measurement date and is subject to change each year. If the weighted average discount rate was reduced by 50 basis points, pension expense in fiscal year 2007 would have increased by approximately $3,800.

Accrued Expenses and Contingencies

     Company management estimates certain material expenses in an effort to record those expenses in the period incurred. When no estimate in a given range is deemed to be better than any other, the low end of the range is accrued.

     The accrual requiring the most judgmental estimation relates to environmental proceedings. Environmental accruals are recorded based upon historical costs incurred and estimates for future costs of remediation and on-going legal expenses which have a high degree of uncertainty.

     Self-insured workers’ compensation insurance accruals are recorded based on insurance claims processed, including applied loss development factors as well as historical claims experience for claims incurred but not yet reported. Self-insured employee medical insurance accruals are recorded based on medical claims processed as well as historical medical claims experience for claims incurred but not yet reported. Differences between estimates and assumptions and actual results could result in an accrual requirement materially different from the calculated accrual.

Results of Operations 2007 Compared with 2006

Review of Consolidated Results

     Sales for the fiscal year 2007 increased 11.6% to $2.2 billion from $2 billion in fiscal year 2006. Exchange rates increased reported sales by $71,804, primarily due to the weakening of the U.S. dollar against the Euro, the British Pound and various Asian currencies, partly offset by the strengthening of the U.S. dollar against the Japanese Yen. In local currency (i.e., had exchange rates not changed year over year), sales increased 8%. Increased pricing, primarily in the Life Sciences segment, contributed about 0.5% to overall sales growth in the year.

     Life Sciences segment sales increased 7% (in local currency) attributable to growth in both the BioPharmaceuticals and Medical markets. Industrial segment sales increased 8.7% (in local currency) with all markets contributing to the growth. Overall systems sales increased 25.8%, representing 10.4% of total sales in fiscal year 2007 compared to 8.9% in fiscal year 2006, primarily attributable to strong sales in the General Industrial market. Company management expects overall sales in local currency to increase in the mid-single digit range in fiscal year 2008, with growth in Industrial outpacing Life Sciences. For a detailed discussion of sales, refer to the section “Review of Operating Segments” below.

     Gross margin, as a percentage of sales, was 47.1% in fiscal year 2007 compared to 46.8% in fiscal year 2006. The improvement in gross margin reflects an overall increase in pricing of about 0.5%, driven by both segments which contributed approximately 14 basis points to gross margin, and savings generated from the Company’s facilities rationalization initiatives. In fiscal year 2007, the Company completed the outsourcing and closure of plants in Hamburg and Rostock, Germany and a plant in Ternay, France and has also announced the closure of a plant in Waldstetten, Germany. Additionally, gross margin has been favorably impacted by the Company’s many manufacturing continuous improvement initiatives, including lean initiatives to improve labor productivity (and, therefore, reduce labor cost), and cost reduction initiatives focused on procurement improvements to reduce direct material and freight costs and movement of certain activities to lower cost countries to also reduce labor costs. In addition, initiatives to improve the profitability of systems sales included product rationalization of less profitable systems. These factors are partly offset by the impact of the significant growth in systems sales, which typically have lower margins than consumables, and incremental costs related to the facilities rationalization initiative that include incremental depreciation (on assets to be retired earlier than originally estimated) and training. The incremental costs related to the facilities rationalization initiative are expected to continue into fiscal year 2008 as the Company makes progress on this initiative. Company management expects gross margin to be flat to slightly improved in fiscal year 2008 as the impact of pricing initiatives and the various cost reduction initiatives described above is offset by the impact of the expected growth in systems sales.

     Selling, general and administrative (“SG&A”) expenses in fiscal year 2007 increased by $33,975, or about 5% (approximately 2% in local currency). As a percentage of sales, SG&A expenses decreased to 30% from 31.8% in fiscal year 2006 reflecting cost controls combined with increasing sales. The Company continued a major initiative, begun in fiscal year 2006, to optimize its European operations (“EuroPall”) with the objective of delivering improvements in profitability, with much of the benefit showing through in fiscal year 2007. In fiscal year 2007, the Company launched the equivalent of this program in the Western Hemisphere (“AmeriPall”). The objectives of these initiatives are to revamp the Company’s shared service and corporate infrastructure to create more efficient operations at a reduced cost. Company management is expecting SG&A expenses, as a percentage of sales, in fiscal year 2008 to decrease approximately 100 basis points compared to fiscal year 2007 as the various cost savings initiatives, particularly AmeriPall, progress.

     Research and development (“R&D”) expenses were $62,414 in fiscal year 2007 compared to $57,371 in fiscal year 2006, up just under 9% year over year (approximately 7% in local currency). As a percentage of sales, R&D expenses were 2.8%, on par with fiscal year 2006. In fiscal year 2008, Company management expects R&D expenses in fiscal year 2008 to increase approximately 15% compared to fiscal year 2007.

     In fiscal year 2007, the Company recorded restructuring and other charges (“ROTC”) of $22,352, primarily related to the Company’s on-going cost reduction initiatives (including its facilities rationalization, EuroPall and AmeriPall initiatives). The ROTC recorded in fiscal year 2007 was primarily comprised of severance liabilities, impairment charges related to the planned disposal of buildings and early retirement of certain long-lived assets, and other costs in connection with such initiatives. Additionally, the charges in fiscal year 2007 include an increase to previously established environmental reserves. Such charges were partly offset by the gain on the sale of the Company’s corporate headquarters, an insurance settlement related to an environmental matter, and the reversal of excess restructuring reserves recorded in the accompanying consolidated statements of earnings in fiscal years 2005 and 2006.

     In fiscal year 2006, the Company recorded ROTC of $12,326, primarily comprised of severance and other costs in connection with the Company’s divisional realignment and on-going cost reduction initiatives (including its facilities rationalization and EuroPall initiatives), partly offset by the reversal of excess restructuring reserves recorded in fiscal year 2005. In addition, the charges include an increase to previously established environmental reserves. ROTC also includes a gain on the sale of the Company’s stock rights in Satair A/S (“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.

     The details of ROTC for the years ended July 31, 2007, July 31, 2006 and July 31, 2005 can be found in Note 5, Restructuring and Other Charges, Net, to the accompanying consolidated financial statements. The following table summarizes the activity related to restructuring liabilities that were recorded in fiscal years 2007, 2006 and 2005:

						Lease
						Termination
						Liabilities &
		Severance				Other				Total
2007
Original charge (a)		$	22,083			$	4,321			$	26,404
Utilized			(6,146	)			(3,573	)			(9,719	)
Other changes (b)			611				9				620
Balance at Jul. 31, 2007		$	16,548			$	757			$	17,305
2006
Original charge		$	13,335			$	3,043			$	16,378
Utilized			(7,221	)			(2,900	)			(10,121	)
Other changes (b)			182				9				191
Balance at July 31, 2006			6,296				152				6,448
Utilized			(2,712	)			(108	)			(2,820	)
Reversal of excess reserves (c)			(1,385	)			(40	)			(1,425	)
Other changes (b)			126				2				128
Balance at Jul. 31, 2007		$	2,325			$	6			$	2,331
2005
Original charge		$	17,496			$	2,928			$	20,424
Utilized			(8,404	)			(2,739	)			(11,143	)
Other changes (b)			(86	)			4				(82	)
Balance at July 31, 2005			9,006				193				9,199
Utilized			(3,243	)			(87	)			(3,330	)
Reversal of excess reserves (c)			(1,905	)			(96	)			(2,001	)
Other changes (b)			57				3				60
Balance at July 31, 2006			3,915				13				3,928
Utilized			(2,531	)			—				(2,531	)
Reversal of excess reserves (c)			(811	)			(15	)			(826	)
Other changes (b)			31				2				33
Balance at Jul. 31, 2007		$	604			$	—			$	604

     Earnings before interest and income taxes (“EBIT”) in fiscal year 2007 increased about 28% to $299,585 from $233,353 in fiscal year 2006. The increase in EBIT reflects the impact of sales growth, including increased pricing and an improvement in cost of sales and SG&A as a percentage of sales. These factors were partly offset by an increase in ROTC that was primarily related to the Company’s cost reduction initiatives.

     Net interest expense in fiscal year 2007 increased to $39,056 from $30,123 in fiscal year 2006 (as restated). The comparison of net interest expense compared to fiscal year 2006 reflects an increase in interest expense of approximately $14,600 related to the tax matter as discussed in Note 2, Audit Committee Inquiry and Restatement, to the accompanying consolidated financial statements. The impact of a reduction in average net debt levels as compared to fiscal year 2006 and a slight decrease in interest rates, due to the movement of debt to lower interest rate countries in the fourth quarter of fiscal year 2006, partly offset the above. Company management expects net interest expense in fiscal year 2008 to increase compared to fiscal year 2007.

     In fiscal year 2007, the Company’s effective tax rate was 51.1% as compared to 74.3% (as restated) in fiscal year 2006. The decrease in the effective tax rate was primarily due to an incremental provision for income taxes in fiscal year 2006 related to $398,000 of foreign earnings intended to qualify for repatriation under the Homeland Investment Act (see Note 2, Audit Committee Inquiry and Restatement, to the accompanying consolidated financial statements for further details) and unpaid intercompany balances that resulted from sales of products by a foreign subsidiary of the Company to a U.S. subsidiary of the Company that gave rise to deemed dividend income (see Note 2, Audit Committee Inquiry and Restatement, to the accompanying consolidated financial statements for further details). These decreases were partially offset by a charge taken in fiscal year 2007 for the net tax cost of the anticipated repatriation of approximately $160,000 of foreign earnings which had previously been asserted to be indefinitely reinvested (see Note 13, Income Taxes, to the accompanying consolidated financial statements for further details) and a change in estimate in fiscal year 2007 of the amount of profit the Company expects to derive in Puerto Rico in light of the repeal of benefits previously realized by the Company under Section 936 of the Internal Revenue Code and attendant revisions by the IRS of audit practices. See Note 13, Income Taxes, to the accompanying consolidated financial statements for further details on the components of the Company’s effective tax rate. The Company expects its effective tax rate to be approximately 33% in fiscal year 2008, however, the actual effective tax rate may materially differ based on non-recurring, discrete items.

     Net earnings in fiscal year 2007 were $127,497, or $1.02 per share, compared with net earnings of $52,140, or 41 cents per share in fiscal year 2006 (as restated). In summary, the increase in net earnings reflects the increase in EBIT and a decrease in income taxes as discussed above. These factors were partly offset by an increase in net interest expense as discussed above. Company management estimates that foreign currency translation increased net earnings by approximately 4 cents per share.

Review of Operating Segments

     The following table presents sales and operating profit by segment for the fiscal years ended July 31, 2007 and July 31, 2006.

						%								%				%
		2007				Margin				2006				Margin				Change
SALES:
Life Sciences		$	880,187							$	796,305								10.5
Industrial			1,369,718								1,220,525								12.2
Total		$	2,249,905							$	2,016,830								11.6
OPERATING PROFIT (a):
Life Sciences		$	165,286				18.8			$	138,439				17.4				19.4
Industrial			204,114				14.9				150,596				12.3				35.5
Total operating profit			369,400				16.4				289,035				14.3				27.8
General corporate expenses			44,718								41,689								7.3
Earnings before ROTC, interest expense, net and income taxes (b)			324,682				14.4				247,346				12.3				31.3
ROTC (b)			25,097								13,993
Interest expense, net (c)			39,056								30,123
Earnings before income taxes (c)		$	260,529							$	203,230

     Life Sciences:

     Presented below are Summary Statements of Operating Profit for the Life Sciences segment for the fiscal years ended July 31, 2007 and July 31, 2006:

						% of								% of
		2007				Sales				2006				Sales
Sales		$	880,187							$	796,305
Cost of sales			432,190				49.1				401,224				50.4
Gross margin			447,997				50.9				395,081				49.6
SG&A			248,851				28.3				225,054				28.3
Research and development			33,860				3.8				31,588				4.0
Operating profit		$	165,286				18.8			$	138,439				17.4

     The tables below present sales by market and geography within the Life Sciences segment for the fiscal years ended July 31, 2007 and July 31, 2006, including the effect of exchange rates for comparative purposes.

																		%
														Exchange				Change in
										%				Rate				Local
		2007				2006				Change				Impact				Currency
By Market
Medical		$	475,369			$	444,033				7.1			$	12,900				4.2
BioPharmaceuticals			404,818				352,272				14.9				15,466				10.5
Total Life Sciences		$	880,187			$	796,305				10.5			$	28,366				7.0
By Geography
Western Hemisphere		$	377,301			$	352,027				7.2			$	243				7.1
Europe			391,500				335,089				16.8				26,593				8.9
Asia			111,386				109,189				2.0				1,530				0.6
Total Life Sciences		$	880,187			$	796,305				10.5			$	28,366				7.0

     Life Sciences segment sales increased 7% in fiscal year 2007 compared to fiscal year 2006. Overall, increased pricing, related to the BioPharmaceuticals market, contributed about 0.5% to sales growth year over year. Life Sciences represented approximately 39% of total sales in fiscal year 2007 on par with fiscal year 2006.

     Within Life Sciences, Medical market sales, which represented approximately one-half of Life Sciences sales, increased 4.2%, driven by growth in the Blood Filtration, Hospital and BioSciences markets. The increase in Blood Filtration sales was driven by the Western Hemisphere, reflecting vented whole blood filter and Acrodose™ product sales to independent blood centers in the United States, as well as increased sales in Canada, and by Europe, primarily reflecting increased sales to the U.K. blood markets. This increase was partly offset by decreased blood draws in Japan, as they transition from bedside filtration to blood centers. At this point the decrease in the Company’s sales to hospitals more than offsets increases in sales to blood centers. The Company is in the process of qualifying more of its blood filter models with blood centers. Blood Filtration sales may also fluctuate over time due to increased or reduced volume on contract renewals. Certain of the Company’s significant Western Hemisphere based blood center contracts are due to expire in the second half of fiscal year 2008. If such contracts are not renewed, or are renewed at lower pricing or volume levels, it may have an adverse impact on the Company’s Blood Filtration sales. The growth in the Hospital market primarily reflects high demand for critical care products in Europe. The increase in the BioSciences market was driven by growth in Laboratory sales in all geographies as well as growth in Cell Therapy sales in the Western Hemisphere and Europe. Company management expects overall Medical sales to be down slightly in fiscal year 2008 compared to fiscal year 2007.

     BioPharmaceuticals sales increased 10.5%, driven by growth in consumables in all geographies and in systems sales in the Western Hemisphere, somewhat offset by a decline in systems sales in Europe and Asia. The growth in consumables (+10%) was driven by the vaccine and large-scale biotechnology sectors, particularly capsules and single-use processing technologies. The growth in systems sales in the Western Hemisphere reflects the continuing investment by the biotechnology and vaccine sectors. Systems sales in Europe and Asia were down reflecting the timing of major projects. In fiscal year 2008, Company management expects double-digit sales growth in the BioPharmaceuticals market compared to fiscal year 2007.

     Life Sciences gross margins increased to 50.9% in fiscal year 2007 from 49.6% in fiscal year 2006. The improvement in gross margins was principally driven by savings generated from cost reduction initiatives, primarily the benefits of reduced labor costs from plant automation and utilization of labor in lower cost countries (primarily reflecting the significant movement of blood-bank related manufacturing operations to Mexico), as well as procurement initiatives, quality initiatives aimed at reducing scrap levels, and increased pricing which contributed approximately 18 basis points to gross margin. Furthermore, gross margins also benefited from a change in product mix, as a larger percentage of sales in fiscal year 2007 were in the higher margin BioPharmaceuticals market (comprising 46% of total Life Sciences sales compared to 44% in fiscal year 2006).

     SG&A expenses in fiscal year 2007 increased by $23,797, or about 11%. SG&A expenses were 28.3% as a percentage of sales on par with fiscal year 2006.

     R&D expenses were up about 7% year over year; coming in at $33,860 in fiscal year 2007 compared to $31,588 in fiscal year 2006. As a percentage of sales, R&D expenses were 3.8% compared to 4% in fiscal year 2006.

     As a result of the above factors, operating profit dollars increased approximately 19% to $165,286 in fiscal year 2007 compared to $138,439 in fiscal year 2006 and operating margin improved to 18.8% from 17.4%.

     Industrial:

     Presented below are summary Statements of Operating Profit for the Industrial segment for the fiscal years ended July 31, 2007 and July 31, 2006:

						% of								% of
		2007				Sales				2006				Sales
Sales		$	1,369,718							$	1,220,525
Cost of sales			755,614				55.2				669,859				54.9
Gross margin			614,104				44.8				550,666				45.1
SG&A			381,436				27.8				374,287				30.7
Research and development			28,554				2.1				25,783				2.1
Operating profit		$	204,114				14.9			$	150,596				12.3

     The tables below present sales by market and geography within the Industrial segment for the fiscal years ended July 31, 2007 and July 31, 2006, including the effect of exchange rates for comparative purposes.

																		%
														Exchange				Change in
										%				Rate				Local
		2007				2006				Change				Impact				Currency
By Market
General Industrial (a)		$	821,957			$	719,605				14.2			$	31,605				9.8
Aerospace and Transportation (a)			254,675				242,624				5.0				8,453				1.5
Microelectronics			293,086				258,296				13.5				3,380				12.2
Total Industrial		$	1,369,718			$	1,220,525				12.2			$	43,438				8.7
By Geography
Western Hemisphere		$	398,428			$	375,488				6.1			$	663				5.9
Europe			536,094				470,941				13.8				36,808				6.0
Asia			435,196				374,096				16.3				5,967				14.7
Total Industrial		$	1,369,718			$	1,220,525				12.2			$	43,438				8.7

     Industrial segment sales grew 8.7% with all markets contributing to this gain. Overall, pricing was up slightly as improved pricing in the General Industrial market was largely offset by decreased pricing in large volume-based agreements in the Microelectronics market and decreased pricing in the Aerospace and Transportation market. Industrial systems sales increased 27.6% primarily driven by the General Industrial market. Industrial consumables sales grew 6%. Industrial represented approximately 61% of total sales in fiscal year 2007, on par with fiscal year 2006.

     Within the Industrial segment, General Industrial market sales, which account for about 60% of the Industrial segment, were up 9.8% driven by increased consumables in all markets and increased systems sales in all markets with the exception of Food & Beverage. Sales in the energy-related marketplace increased in the double-digit range, reflecting growth in consumables and systems sales. All geographies contributed to the growth in systems sales to the energy-related marketplace, while the growth in consumable sales was driven by Europe and Asia (consumable sales in the Western Hemisphere were down due to a large sale in fiscal year 2006 which did not recur in fiscal year 2007). The growth in systems sales to the energy-related marketplace reflects continued investment by customers in additional capacity via new plants, as well as the need to address environmental issues and rising energy costs (via alternative energy sources). Municipal Water sales increased in the double-digit range, driven by growth in all geographies. Key drivers in Municipal Water sales growth include water scarcity, government regulations and growing consumer awareness of drinking water safety. Food and Beverage sales were flat as growth in consumables was offset by a decline in systems sales, partly related to the product rationalization of less profitable systems in Europe and the Western Hemisphere. Sales in the Industrial Manufacturing market were up in the mid-single digit range driven by growth in the Western Hemisphere and Asia. The increase in the Western Hemisphere reflects growth in the pulp and paper and lube oil industries, while the increase in Asia reflects growth in the pulp and paper, automotive and steel industries. Company management is expecting growth in the high-single digit range in General Industrial in fiscal year 2008, with the largest growth expected in the Municipal Water and Industrial Manufacturing markets.

     Aerospace and Transportation sales increased 1.5%, primarily attributable to growth in Military sales in the Western Hemisphere and Asia related to CH-47 helicopters as well as increased OEM sales (all geographies). The growth in military and OEM sales was partly offset by a double-digit decline in commercial sales related to the sale of the Company’s Western Hemisphere commercial aerospace distribution arm to Satair in December 2005. This transaction included the one-time sale of substantial inventory and sales going forward at reduced pricing under the distributor model. In the fourth quarter of fiscal year 2007, this trend reversed as Satair restocked their depleted inventory and, as a result, commercial aerospace sales in the Western Hemisphere increased in the double-digit range. Company management is expecting high-single digit growth in the Aerospace and Transportation market in fiscal year 2008.

     Microelectronics sales were up 12.2% with all geographies contributing to this gain. Growth in this market was driven by the strength in the OEM consumer electronics market, particularly in the flat panel display area, as well as integrated circuit production for the launch of wireless gaming consoles. Furthermore, sales growth has also benefited from increased demand in the hard disk storage and ink jet printer markets. Based upon various market indicators, Company management is expecting low-single digit growth in fiscal year 2008.

     Industrial gross margins decreased to 44.8% in fiscal year 2007 from 45.1% in fiscal year 2006. The decrease in gross margins reflects the significant growth in systems sales, which are typically at lower margins, partly offset by the impact of improved profitability of systems sales, and the product rationalization of less profitable systems as discussed in the consolidated cost of sales review above. Furthermore, the Company’s manufacturing cost reduction programs, such as procurement, facilities rationalization and lean initiatives, have favorably impacted gross margins.

     SG&A expenses in fiscal year 2007 increased by $7,149, or about 2%. As a percentage of sales, SG&A expenses improved to 27.8% in fiscal year 2007 from 30.7% in fiscal year 2006. The improvement in SG&A as a percentage of sales reflects the impact of cost reduction programs, particularly EuroPall, and the benefit of increased sales.

     R&D expenses were up about 11% year over year; coming in at $28,554 in fiscal year 2007 compared to $25,783 in fiscal year 2006. As a percentage of sales, R&D expenses were 2.1% in fiscal year 2007, on par with fiscal year 2006.

     As a result of the above factors, operating profit dollars increased approximately 35% to $204,114 in fiscal year 2007 from $150,596 in fiscal year 2006 and operating margin improved to 14.9% from 12.3%.

Results of Operations 2006 Compared with 2005

Review of Consolidated Results

     Sales for the fiscal year 2006 increased 6% to $2 billion from $1.9 billion in fiscal year 2005. Exchange rates reduced reported sales by $35,412, primarily due to the strengthening of the U.S. dollar against the Euro, British Pound and Japanese Yen during the first nine months of the year, partly offset by the weakening of the U.S. dollar against certain other Asian currencies. In local currency (i.e., had exchange rates not changed year over year), sales increased 8%. Overall, pricing was flat for the full year, as decreased pricing in the Life Sciences segment related to long-term contracts in the Medical market in the Western Hemisphere was offset by increases achieved in the Company’s other markets.

     Life Sciences segment sales increased 6.0% (in local currency) largely driven by double-digit growth in the BioPharmaceuticals market. Industrial segment sales increased 9.1% (in local currency) with all markets contributing to the growth. For a detailed discussion of sales, refer to the section “Review of Operating Segments” below.

     Gross margin, as a percentage of sales, decreased to 46.8% in fiscal year 2006 from 48.5% in fiscal year 2005. This reflects pricing reductions in Medical sales in the Western Hemisphere as well as a movement toward in-line blood filtration (in Europe and Asia), which carry higher prices and profit in dollars but at a reduced margin. In addition, the reduction reflects a mix change within consumables to lower margin sales, such as Microelectronics markets’ increased sales to OEM customers and Aerospace and Transportation markets’ sales to Satair at lower distributor margins. Gross margin was also impacted by systems sales increases in the Energy market at lower margins. In addition, cost of sales reflects transitional costs, such as training and incremental depreciation on assets to be retired earlier than originally estimated, related to the Company’s facilities rationalization initiative, increases in energy costs; including costs of utilities in the Company’s manufacturing plants as well as increases in fuel related commodities, such as plastics and steel which are used to manufacture consumable filters and systems. Furthermore, cost of sales was negatively impacted by stock-based compensation and the adoption of SFAS No. 123(R) and a one-time purchase accounting adjustment related to inventory acquired as part of the BioSepra acquisition. These factors were partly offset by savings generated from the Company’s cost reduction initiatives.

     SG&A expenses in fiscal year 2006 increased by $19,629, or about 3% (approximately 5% in local currency). SG&A expenses, as a percentage of sales, decreased to 31.8% from 32.7% in fiscal year 2005. The decrease reflects savings realized from the Company’s cost reduction initiatives, partly offset by the impact of stock-based compensation and the adoption of SFAS No. 123(R), which negatively impacted SG&A expenses by 42 basis points.

     R&D expenses were $57,371 in fiscal year 2006 compared to $56,183 in fiscal year 2005, up about 2% year over year (approximately 3% in local currency). As a percentage of sales, R&D expenses were 2.8% as compared with 3% in fiscal year 2005.

     In fiscal year 2006, the Company recorded ROTC of $12,326 primarily comprised of severance and other costs in connection with the Company’s divisional realignment and on-going cost reduction initiatives (including its facilities rationalization and EuroPall initiatives), partly offset by the reversal of excess restructuring reserves recorded in fiscal year 2005. In addition, the charges include an increase in previously established environmental reserves. ROTC also 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 VITEX, that was recorded in the first quarter.

     In fiscal year 2005, the Company recorded ROTC of $38,763, primarily related to the Company’s cost reduction initiatives, including its divisional realignment plans. In addition, ROTC includes the write-down of the investment in VITEX that was deemed other-than-temporarily impaired and an increase to previously established environmental reserves. Furthermore, ROTC includes a charge of $11,953 related to the early extinguishment of the Company’s $100,000 private placement 7.83% unsecured senior notes. The charge represented the payment to the note holders under the make-whole provision of the notes reduced by the carrying value of the notes.

     The details of the charges for the years ended July 31, 2006 and July 31, 2005 can be found in Note 5, Restructuring and Other Charges, Net, to the accompanying consolidated financial statements.

     EBIT in fiscal year 2006 increased about 13% to $233,353 from $207,021 in fiscal year 2005. The increase in EBIT reflects the impact of sales growth, an improvement in SG&A as a percentage of sales and a reduction in ROTC. These factors were partly offset by the impact of lower gross margins, and stock-based compensation and the adoption of SFAS No. 123(R).

     Net interest expense in fiscal year 2006 increased to $30,123 (as restated) from $29,997 in fiscal year 2005 (as restated). The comparison of net interest expense compared to fiscal year 2005 reflects an increase in interest expense of approximately $3,000 related to the tax matter as discussed in Note 2, Audit Committee Inquiry and Restatement, to the accompanying consolidated financial statements. The impact of a reduction in average net debt levels throughout the year largely offset the above.

     In fiscal year 2006, the Company’s effective tax rate was 74.3% (as restated) as compared to 35.8% (as restated) in fiscal year 2005. The increase in the effective tax rate is mainly attributable to an increase in certain unpaid intercompany payable balances that resulted from sales of products by a foreign subsidiary of the Company to a U.S. subsidiary of the Company that gave rise to deemed dividend income (see Note 2, Audit Committee Inquiry and Restatement, to the accompanying consolidated financial statements for further details) and an incremental provision for income taxes in fiscal year 2006 related to $398,000 of foreign earnings intended to qualify for repatriation under the Homeland Investment Act (see Note 2, Audit Committee Inquiry and Restatement, to the accompanying consolidated financial statements for further details). See Note 13, Income Taxes, to the accompanying consolidated financial statements for further details on the components of the Company’s effective tax rate.

     Net earnings in fiscal year 2006 were $52,140, or 41 cents per share (as restated), compared with net earnings of $113,703, or 91 cents per share, in fiscal year 2005 (as restated). In summary, the decrease in net earnings reflects the increase in EBIT offset by an increase in provision for income taxes as discussed above. Company management estimates that foreign currency translation reduced net earnings by approximately 1 cent per share.

     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 Company valued at $5,683. The $22,000 in cash and notes receivable received for the distribution rights were recorded as deferred revenue and are being amortized as an increase to sales over the life of the distribution agreement. The transaction was accretive to earnings in fiscal year 2006.

Review of Operating Segments

     The following table presents sales and operating profit by segment for the fiscal years ended July 31, 2006 and July 31, 2005.

						%								%				%
		2006				Margin				2005				Margin				Change
SALES:
Life Sciences		$	796,305							$	764,736								4.1
Industrial			1,220,525								1,137,548								7.3
Total		$	2,016,830							$	1,902,284								6.0
OPERATING PROFIT (a):
Life Sciences		$	138,439				17.4			$	124,037				16.2				11.6
Industrial			150,596				12.3				156,824				13.8				(4.0	)
Total operating profit			289,035				14.3				280,861				14.8				2.9
General corporate expenses			41,689								34,240								21.8
Earnings before ROTC, interest expense, net and income taxes (b)			247,346				12.3				246,621				13.0				0.3
ROTC (b)			13,993								39,600
Interest expense, net (c)			30,123								29,997
Earnings before income taxes (c)		$	203,230							$	177,024

     Life Sciences:

     Presented below are Summary Statements of Operating Profit for the Life Sciences segment for the fiscal years ended July 31, 2006 and July 31, 2005:

						% of								% of
		2006				Sales				2005				Sales
Sales		$	796,305							$	764,736
Cost of sales			401,224				50.4				386,202				50.5
Gross margin			395,081				49.6				378,534				49.5
SG&A			225,054				28.3				220,700				28.9
Research and development			31,588				4.0				33,797				4.4
Operating profit		$	138,439				17.4			$	124,037				16.2

     The tables below present sales by market and geography within the Life Sciences segment for the fiscal years ended July 31, 2006 and July 31, 2005, including the effect of exchange rates for comparative purposes.

																		%
														Exchange				Change in
										%				Rate				Local
		2006				2005				Change				Impact				Currency
By Market
Medical		$	444,033			$	443,256				0.2			$	(6,930	)			1.7
BioPharmaceuticals			352,272				321,480				9.6				(7,668	)			12.0
Total Life Sciences		$	796,305			$	764,736				4.1			$	(14,598	)			6.0
By Geography
Western Hemisphere		$	352,027			$	343,045				2.6			$	665				2.4
Europe			335,089				319,192				5.0				(11,694	)			8.6
Asia			109,189				102,499				6.5				(3,569	)			10.0
Total Life Sciences		$	796,305			$	764,736				4.1			$	(14,598	)			6.0