10-K
Table of Contents

 
 
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
or
     
o   Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from          to
Commission File Number 001- 04311
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.
           
 
           
  Business     3  
  Risk Factors     8  
  Unresolved Staff Comments     11  
  Properties     12  
  Legal Proceedings     13  
  Submission of Matters to a Vote of Security Holders     17  
 
           
           
 
           
  Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities     18  
  Selected Financial Data     21  
  Management’s Discussion and Analysis of Financial Condition and Results of Operations     23  
  Quantitative and Qualitative Disclosure About Market Risk     42  
  Financial Statements and Supplementary Data     43  
  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure     44  
  Controls and Procedures     44  
  Other Information     46  
 
           
           
 
           
  Directors, Executive Officers and Corporate Governance     46  
  Executive Compensation     49  
  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters     80  
  Certain Relationships and Related Transactions, and Director Independence     82  
  Principal Accounting Fees and Services     84  
 
           
           
 
           
  Exhibits, Financial Statement Schedules     85  
 
           
SIGNATURES     89  
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM     90  
 
    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

 


Table of Contents

Special Note
Along with this report, Pall Corporation (the “Company”) is filing its delayed quarterly reports for the first and second quarters of fiscal year 2008. This Form 10-K and the quarterly reports for the first and second quarters of fiscal year 2008 on Form 10-Q were delayed pending the completion of an inquiry conducted by the Company’s audit committee into the Company’s understatement of its United States (“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 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.
The adjustments made as a result of the restatement are discussed in Note 2, Audit Committee Inquiry and Restatement, to the accompanying consolidated financial statements included in Part IV – Item 15 – Exhibits, Financial Statement Schedules, and the cumulative impact of the restated financial results at the beginning of fiscal year 2003 is presented in Part II – Item 6 – Selected Financial Data. For additional discussion of the inquiry and the restatement adjustments, see Part II – Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Audit Committee Inquiry and Restatement and Note 2 to the accompanying consolidated financial statements. For a description of the material weakness identified by management in internal control over financial reporting with respect to income taxes and management’s remediation of the material weakness, see Part II – Item 9A – Controls and Procedures.
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.

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     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 ManagementSM (“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.

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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.

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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 AcrodoseTM 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 AllegroTM 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.

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     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.

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     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.

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     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.

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     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.

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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.

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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  

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(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.

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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.

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     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.

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     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.

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     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.

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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.

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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.
(PERFORMANCE GRAPH)
                                                                 
 
        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.

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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          
 
                           
 
(1)   On October 14, 2004, the Company’s board of directors authorized the expenditure of up to $200,000 for the repurchase of the Company’s common stock. On November 15, 2006, the board authorized an additional expenditure of $250,000 to repurchase shares. The Company’s shares may be purchased over time, as market and business conditions warrant. There is no time restriction on this authorization. During the fourth quarter of fiscal year 2007, the Company purchased 230 shares in open-market transactions at an aggregate cost of $10,779, with an average price per share of $46.90. Total repurchases in fiscal year 2007 were 1,586 shares at an aggregate cost of $61,795, with an average price per share of $38.98. The aggregate cost of repurchases in fiscal years 2006 and 2005 was $100,727 (3,556 shares at an average price of $28.33) and $64,246 (2,435 shares at an average price of $26.38), respectively. As of July 31, 2007, $348,232 remains to be expended under the current board repurchase authorizations. Repurchased shares are held in treasury for use in connection with the Company’s stock plans and for general corporate purposes.
 
    During the fourth quarter of fiscal year 2007, there were no previously issued shares tendered in partial payment of employee stock option exercises. In fiscal year 2007, 4 shares were traded in by employees in payment of stock option exercises at an average price of $36.98 per share and an aggregate cost of $134.

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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  
 
a)   Includes $2.8, $1.7 and $0.8 of adjustments recorded in cost of sales in fiscal years 2007, 2006 and 2005, respectively. The adjustments include a one-time purchase accounting adjustment to record, at market value, inventory acquired from the BioSepra® Process Division (“BioSepra”) of Ciphergen Biosystems, Inc. This resulted in a $2.4 increase in acquired inventories in fiscal year 2005, in accordance with SFAS No. 141, Business Combinations (“SFAS No. 141”), in the opening balance sheet and an increase in cost of sales of $0.6, $0.9 and $0.8 in fiscal years 2007, 2006 and 2005, respectively, concurrent with the sale of a portion of the underlying inventory. The adjustment is considered non-recurring in nature because, although the Company acquired the manufacturing operations of BioSepra, this adjustment was required by SFAS No. 141 as an elimination of the manufacturing profit in inventory acquired from BioSepra and subsequently sold in the period. The adjustments recorded in cost of sales also reflect $2.2 and $0.8 in fiscal years 2007 and 2006, respectively, primarily comprised of incremental depreciation from the planned early retirement of certain fixed assets recorded in conjunction with the Company’s facilities rationalization initiatives in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS No. 144”).
 
b)   Effective August 1, 2005, the Company adopted SFAS 123(R), Share Based Payment (“SFAS No. 123(R)”). The years ended July 31, 2007 and July 31, 2006 include stock-based compensation expense related to stock options and the employee stock purchase plan of $4.7 and $7.2, respectively, after pro forma tax effect (4 and 6 cents per share, respectively).
 
c)   In addition, the following tables set forth the effects of the restatement on the provision for income taxes, interest expense, net, and net earnings line items in the Company’s consolidated statements of earnings for each of the fiscal years impacted not presented above:

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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 )

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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”.

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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.

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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.

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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.

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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.

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     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  
 
                 
 
(a)   Excludes $757 related to pension liabilities.
 
(b)   Other changes primarily reflect translation impact.
 
(c)   Reflects the reversal of excess restructuring reserves originally recorded in fiscal years 2005 and 2006.
     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.

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     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                  
 
                                   
 
(a)   Operating profit for the year ended July 31, 2006 has been restated in accordance with the Company’s new organizational structure, including the aforementioned changes in certain internal segment financial reporting principles.

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(b)   Included in ROTC, for the purposes of evaluation of segment profitability, are other adjustments recorded in cost of sales. Such adjustments include incremental depreciation and other adjustments of $2,179 and $769 for the years ended July 31, 2007 and July 31, 2006, respectively, recorded in conjunction with the Company’s facilities rationalization initiative. Furthermore, such adjustments include a charge of $566 and $898 for the years ended July 31, 2007 and July 31, 2006, respectively, related to a one-time purchase accounting adjustment to record, at market value, inventory acquired from BioSepra Process Division (“BioSepra”). This resulted in a $2,431 increase in acquired inventories in accordance with SFAS No. 141 and a charge to cost of sales in the periods when the sale of a portion of the underlying inventory occurred. The adjustment is excluded from operating profit as management considers it non-recurring in nature because, although the Company acquired the manufacturing operations of BioSepra, this adjustment was required by SFAS No. 141 as an elimination of the manufacturing profit in inventory acquired from BioSepra and subsequently sold.
 
(c)   Interest expense, net and Earnings before income taxes have been restated for fiscal year 2006 as more fully described in Note 2, Audit Committee Inquiry and Restatement, to the accompanying consolidated financial statements.
     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.

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     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  
 
                           

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     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  
 
                                 
 
(a)   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 (approximately $50,000 in annual sales) previously tended to by, and reported in, the General Industrial market is now tended to by, and reported in, a realigned market called Aerospace & Transportation. Sales for fiscal year 2006 have been restated to reflect this change.
     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.

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     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.

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     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.

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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                  
 
                                   
 
(a)   Operating profit for the fiscal years ended July 31, 2006 and July 31, 2005 has been restated in accordance with the Company’s new organizational structure, including the aforementioned changes in certain internal segment financial reporting principles.
 
(b)   Included in ROTC for the purposes of evaluation of segment profitability are other adjustments recorded in cost of sales. Such adjustments include incremental depreciation and other adjustments of $769 for the fiscal year ended July 31, 2006, recorded in conjunction with the Company’s facilities rationalization initiative. Furthermore, such adjustments include a charge of $898 and $837 for the years ended July 31, 2006 and July 31, 2005, respectively, related to a one-time purchase accounting adjustment to record, at market value, inventory acquired from BioSepra. This resulted in a $2,431 increase in acquired inventories in accordance with SFAS No. 141 and a charge to cost of sales in the periods when the sale of a portion of the underlying inventory occurred. The adjustment is excluded from operating profit as management considers it non-recurring in nature because, although the Company acquired the manufacturing operations of BioSepra, this adjustment was required by SFAS No. 141 as an elimination of the manufacturing profit in inventory acquired from BioSepra and subsequently sold.
 
(c)   Interest expense, net and Earnings before income taxes have been restated for fiscal years 2006 and 2005 as more fully described in Note 2, Audit Committee Inquiry and Restatement, to the accompanying consolidated financial statements.
     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.

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                                    %  
                            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  
 
                                 
     Life Sciences segment sales increased 6.0% in fiscal year 2006 compared to fiscal year 2005. Life Sciences represented approximately 39% of total sales in fiscal year 2006 compared to 40% in fiscal year 2005.
     Within Life Sciences, Medical market sales, which represented approximately 55% of Life Sciences sales, increased 1.7%, driven primarily by growth in the Blood Filtration and BioSciences markets. Sales in Blood Filtration increased in the low single-digit range as growth in Europe (related to new tender wins) and Asia (sales related to the transition from bedside to blood center leukoreduction) was offset by a decline in the Western Hemisphere, reflecting reduced pricing related to long-term contracts put in place at the end of fiscal year 2005. The BioSciences sales increase was driven by an increase in Laboratory sales in all geographies, growth in OEM sales (primarily Europe) as well as increased Cell Therapy sales in the Western Hemisphere and Europe. The overall growth in Laboratory sales was driven by increased sales of core products and the continued success of the Company’s disposable sample preparation products. Growth in Cell Therapy was driven by strong demand for the Company’s Cord Blood mononuclear cell collection, processing and storage systems.
     BioPharmaceuticals market sales increased 12.0%, driven by strong growth in consumables in all geographies. The growth in consumables was driven by the biotechnology and vaccine market sectors. The Chromatography market sector opportunities are developing with BioSepra sorbents now established in a number of new applications at production scale. Euroflow columns and associated systems also contributed to growth in fiscal year 2006. Throughout the year, the Company saw increasing demand for single-use processing technologies and systems.
     Life Sciences gross margins increased slightly to 49.6% in fiscal year 2006 from 49.5% in fiscal year 2005. Gross margins reflect savings generated from the Company’s cost reduction initiatives, largely offset by 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. Furthermore, gross margins were also negatively impacted by increases in energy costs as discussed in the Review of Consolidated Results section above.
     SG&A expenses in fiscal year 2006 increased by $4,354, or about 2%. As a percentage of sales, SG&A expenses were 28.3% in fiscal year 2006 compared with 28.9% in fiscal year 2005. The decrease in SG&A as a percentage of sales reflects the benefit of the Company’s cost reduction programs and the impact of the growth in sales, partly offset by the impact of stock compensation and the adoption of SFAS No. 123(R).
     R&D expenses decreased about 7% year over year; coming in at $31,588 in fiscal year 2006 compared to $33,797 in fiscal year 2005. As a percentage of sales, R&D expenses were 4% in fiscal year 2006 compared to 4.4% in fiscal year 2005.
     As a result of the above factors, operating profit dollars increased approximately 12% to $138,439 in fiscal year 2006 from $124,037 in fiscal year 2005 and operating margin improved to 17.4% from 16.2%.

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     Industrial:
     Presented below are Summary Statements of Operating Profit for the Industrial segment for the fiscal years ended July 31, 2006 and July 31, 2005:
                                 
            % of             % of  
    2006     Sales     2005     Sales  
Sales
  $ 1,220,525             $ 1,137,548          
Cost of sales
    669,859       54.9       591,877       52.0  
 
                           
Gross margin
    550,666       45.1       545,671       48.0  
SG&A
    374,287       30.7       366,461       32.2  
Research and development
    25,783       2.1       22,386       2.0  
 
                           
Operating profit
  $ 150,596       12.3     $ 156,824       13.8  
 
                           
     The tables below present sales by market and geography within the Industrial 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
                                       
General Industrial (a)
  $ 719,605     $ 692,265       4.0     $ (11,715 )     5.6  
Aerospace and Transportation (a)
    242,624       225,824       7.4       (3,371 )     8.9  
Microelectronics
    258,296       219,459       17.7       (5,728 )     20.3  
 
                                 
Total Industrial
  $ 1,220,525     $ 1,137,548       7.3     $ (20,814 )     9.1  
 
                                 
 
                                       
By Geography
                                       
Western Hemisphere
  $ 375,488     $ 346,127       8.5     $ 1,300       8.1  
Europe
    470,941       463,289       1.7       (15,602 )     5.0  
Asia
    374,096       328,132       14.0       (6,512 )     16.0  
 
                                 
Total Industrial
  $ 1,220,525     $ 1,137,548       7.3     $ (20,814 )     9.1  
 
                                 
 
(a)   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 (approximately $50,000 in annual sales) previously tended to by, and reported in, the General Industrial market is now tended to by, and reported in, a realigned market called Aerospace & Transportation. Sales for fiscal years 2006 and 2005 have been restated to reflect this change.
     Industrial segment sales grew 9.1% with all markets contributing to this gain. Overall, Industrial systems sales were flat, while consumables sales grew 10.7%. Industrial represented approximately 61% of total sales in fiscal year 2006 compared with 60% in fiscal year 2005.
     Within the Industrial segment, General Industrial market sales, which account for about 60% of the Industrial segment, were up 5.6% compared to fiscal year 2005, with all markets contributing with the exception of Municipal Water. General Industrial systems sales increased 1.8% as strong sales in the Energy-related and Food & Beverage markets were partly offset by timing of sales in Municipal Water.
     Within General Industrial, Energy-related sales increased in the double-digit range driven by increases in both consumables and systems sales. All geographies contributed to this gain. Customer investment in new plant capacity and upgrading of existing plants drove growth. In light of rising energy costs, the Company’s customers in the energy markets were striving to increase production, protect and extend the life of expensive equipment and develop alternative fuel sources. These trends were key growth drivers in the year. Food and Beverage sales increased in the mid-single digit range driven by growth in the Western Hemisphere (systems and consumables) and Asia (consumables). A decrease in Europe (the Company’s largest Food & Beverage market), related to a weakness in the wine markets, partly offset the above. Municipal Water sales were down in the double-digit range reflecting delays in contract rollouts. Sales in the Industrial Manufacturing market increased in the mid-single digit range as growth in Europe and Asia was offset by a decrease in the Western Hemisphere related to pressure in the pulp and paper markets.

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     Aerospace and Transportation sales increased 8.9%, primarily attributable to growth in military sales in all geographies and incremental, but discounted, commercial sales in the Western Hemisphere attributable to the Company’s expanded agreement/relationship with Satair.
     Microelectronics sales were up 20.3%, as the Company continued to benefit from new fabrication construction and strength in the consumer electronics markets, such as gaming consoles, MP3 players, multimedia cell phones, flat panel screen displays and televisions, and ink jet printers and cartridges. The Company’s strategic diversification of its Microelectronics business into consumer electronics and its OEM sales strategy has enabled it to take advantage of this strong consumer market trend. All geographies achieved double-digit growth compared with fiscal year 2005.
     Industrial gross margins decreased to 45.1% in fiscal year 2006 from 48% in fiscal year 2005. The decrease in gross margins reflects a mix change within consumables to lower margin sales, such as Microelectronics’ increased sales to OEM customers and Aeropower sales to Satair at lower distributor margins. Gross margins were also impacted by systems sales increases in Energy markets, with lower margins as well as by increases in energy costs as discussed in the Review of Consolidated Results section above. These factors were partly offset by savings generated from the Company’s cost reduction initiatives.
     SG&A expenses in fiscal year 2006 increased by $7,826, or about 2%. As a percentage of sales, SG&A expenses improved to 30.7% in fiscal year 2006 from 32.2% in fiscal year 2005. The improvement in SG&A as a percentage of sales reflects the benefit of cost reduction programs and the growth in sales, partly offset by the impact of stock-based compensation and the adoption of SFAS No. 123(R).
     R&D expenses increased about 15% year over year; coming in at $25,783 in fiscal year 2006 compared to $22,386 in fiscal year 2005. As a percentage of sales, R&D expenses were 2.1% in fiscal year 2006 compared to 2% in fiscal year 2005.
     Operating profit dollars decreased approximately 4% to $150,596 in fiscal year 2006 compared to $156,824 in fiscal year 2005, and operating margin decreased to 12.3% from 13.8%, reflecting the factors discussed above.
Liquidity and Capital Resources
     Non-cash working capital, which is defined as working capital excluding cash and cash equivalents, notes receivable, notes payable and the current portion of long-term debt, was approximately $372,400, a turnover ratio of 5.9 at July 31, 2007 as compared with $398,500, a turnover ratio of 4.6 at July 31, 2006. Accounts receivable days sales outstanding (“DSO”) was 74 days as compared to 75 days in fiscal year 2006. Inventory turns were 2.7 for the year ended July 31, 2007 as compared to 2.6 for the year ended July 31, 2006.
     The Company’s balance sheet is affected by spot exchange rates used to translate local currency amounts into U.S. dollars. In comparing spot exchange rates at July 31, 2007 to those at July 31, 2006, the British Pound and the Euro have strengthened against the U.S. dollar, while the Japanese Yen has weakened against the U.S. dollar. The effect of foreign exchange increased non-cash working capital by $23,138, including net inventory, net accounts receivable and other current assets by $16,199, $20,505 and $3,657, respectively, as compared to July 31, 2006. Additionally, foreign exchange increased accounts payable and other current liabilities by $16,107 and income tax payable by $1,116.
     Net cash provided by operating activities in fiscal year 2007 was $332,928, an increase of $114,100, or approximately 52%, as compared with fiscal year 2006. The increase in cash flow reflects increased net earnings as well as changes in working capital items, particularly income taxes, and accounts payable and accrued expenses, partly offset by the impact of the Satair transaction, which positively impacted cash flow in fiscal year 2006.
     Free cash flow, which is defined as net cash provided by operating activities less capital expenditures, was $235,165 in fiscal year 2007, as compared with $122,861 in fiscal year 2006. The increase in free cash flow reflects the increase in cash provided by operating activities as discussed above partly offset by an increase in capital expenditures. Company management believes this measure is important because it is a key element of its planning. The Company utilizes free cash flow, which is a non-GAAP measure, as one way to measure its current and future financial performance. The following table reconciles free cash flow to net cash provided by operating activities.

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    2007     2006     2005  
Net cash provided by operating activities
  $ 332,928     $ 218,828     $ 161,608  
Less capital expenditures
    97,763       95,967       86,153  
 
                 
Free cash flow
  $ 235,165     $ 122,861     $ 75,455  
 
                 
     Overall, net debt (debt net of cash and cash equivalents), as a percentage of total capitalization (net debt plus equity), was 15.2% at July 31, 2007 as compared to 29.2% at July 31, 2006. Net debt decreased by approximately $195,400 compared with July 31, 2006 primarily reflecting an increase in cash and cash equivalents of $114,300 and a reduction in gross debt of $89,300. The impact of foreign exchange rates increased net debt by about $8,200.
     As more fully described in Note 2, Audit Committee Inquiry and Restatement, and Note 11, Notes Payable and Long-Term Debt, to the accompanying consolidated financial statements, as a result of the matters underlying the restatement, the Company failed to comply with certain representations, warranties and covenants in its debt agreements, including its inability to timely file its periodic reports with the SEC. The Company entered into amendments and/or waivers of those agreements. Under the terms of those amendments and waivers, the Company was obligated to return to compliance with its reporting obligations under the federal securities laws by March 31, 2008. As of the date hereof, the Company is in compliance with its covenants under the foregoing agreements, as amended by such instruments. Such matters did not affect the Company’s compliance with the financial covenants contained in its five-year revolving credit facility with a syndicate of financial institutions, which provide that the Company may not have a consolidated net interest coverage ratio, based upon trailing four quarter results, that is less than 3.50 to 1.00, nor a consolidated leverage ratio, based upon trailing four quarter results, that is greater than 3.50 to 1.00. The Company is in compliance with these financial covenants.
     In September 2007, the Company deposited $135,000 with the Internal Revenue Service based on the estimated understatement of U.S. income tax payments including estimated interest, but not including potential penalties as more fully described in Note 2, Audit Committee Inquiry and Restatement, to the accompanying consolidated financial statements. This deposit was partially financed with approximately $90,000 of additional indebtedness.
     The Company utilizes cash flow generated from operations and its revolving credit facility referred to above to meet its short-term liquidity needs. For further discussion of the Company’s revolving credit facility, refer to Note 11, Notes Payable and Long-Term Debt, to the accompanying consolidated financial statements. Company management considers its existing lines of credit, along with the cash generated from operations, to be sufficient to meet its short-term liquidity needs.
     Capital expenditures were $97,763 in fiscal year 2007. Depreciation and amortization expense were $85,517 and $8,460, respectively. In fiscal year 2008, capital expenditures are expected to be no more than $130,000. Depreciation and amortization expense are expected to total approximately $95,000 in fiscal year 2008.
     On October 14, 2004, the Company’s board of directors authorized the expenditure of up to $200,000 for the repurchase of the Company’s common stock. On November 15, 2006, the board authorized an additional expenditure of $250,000 to repurchase shares. The Company repurchased stock of $64,246 and $100,727 in fiscal years 2005 and 2006, respectively. At July 31, 2005 and July 31, 2006, there was $260,754 and $160,027, respectively available to be expended under the current stock repurchase authorizations. In fiscal year 2007, the Company repurchased stock of $61,795 leaving $348,232 remaining at July 31, 2007 to be expended under the current stock repurchase authorizations. Net proceeds from stock plans were $39,611 in fiscal year 2007.
     The Company increased its quarterly dividend by 9%, from 11 cents to 12 cents per share, effective with the dividend declared on January 11, 2007, following an increase to 11 cents from 10 cents per share, effective with the dividend declared on January 19, 2006. In fiscal year 2007, the Company paid dividends of $56,228, an increase of 7% compared to fiscal year 2006, reflecting the increases in the quarterly dividends as discussed above partly offset by a reduction in shares outstanding due to the repurchase of shares of the Company’s common stock. 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 two dividends of $0.12 per share in the first quarter of fiscal year 2008 in September 2007 and October 2007. The board of directors declared a third $0.12 per share dividend in January 2008. In addition, the board of directors raised the dividend to $0.13 per share when it declared a dividend in March 2008.

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     The following is a summary of the Company’s contractual commitments as of July 31, 2007 (Interest on long-term debt includes the amount of interest due to be paid during the respective fiscal year based upon the amount of debt outstanding as of July 31, 2007):
                                                         
    Year Ended              
    2008     2009     2010     2011     2012     Thereafter     Total  
Long-term debt
  $ 1,771     $ 2,260     $ 78,234     $ 219,522     $ 1,814     $ 289,761     $ 593,362  
Interest on long-term debt
    30,063       30,117       29,872       27,731       17,702       11,222       146,707  
Operating leases
    21,224       13,572       9,073       4,569       2,405       1,876       52,719  
Purchase commitments
    91,550       20,423       6,795       472       356       2,903       122,499  
Employment contracts
    7,529       4,160                               11,689  
Other commitments
    3,686       1,074       305       220       220       2,522       8,027  
 
                                         
Total commitments
  $ 155,823     $ 71,606     $ 124,279     $ 252,514     $ 22,497     $ 308,284     $ 935,003  
 
                                         
Adoption of New Accounting Pronouncements
     In June 2006, the Emerging Issues Task Force (“EITF”) reached a consensus on EITF No. 06-3, How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (“EITF No. 06-3”). EITF No. 06-3 provides that taxes imposed by a governmental authority on a revenue producing transaction between a seller and a customer should be shown in the income statement on either a gross or a net basis, based on the entity’s accounting policy, which should be disclosed pursuant to APB Opinion No. 22, “Disclosure of Accounting Policies.” The Company adopted EITF No. 06-3 in the third quarter of fiscal year 2007. The Company will continue to present taxes within the scope of EITF No. 06-3 on a net basis. As such, the adoption of EITF No. 06-3 did not have any effect on the Company’s consolidated financial statements.
     As of July 31, 2007, the Company adopted the provisions of SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R) (“SFAS No. 158”). In accordance with SFAS No. 158, the Company is required to record the difference between its benefit obligations and any plan assets of its defined benefit plans. Upon adoption, SFAS No. 158 requires the recognition of previously unrecognized actuarial gains and losses, prior service costs or credits and net transition amounts within accumulated other comprehensive income (expense), net of tax. Additionally, SFAS No. 158 requires companies to measure plan assets and benefit obligations as of the date of the Company’s fiscal year-end statement of financial position, which is July 31. The Company’s defined benefit pension plans are already measured as of July 31; therefore, the measurement date provisions of SFAS No. 158 did not affect the Company’s existing valuation practices. The initial impact of adopting the provisions of SFAS No. 158 was a charge to accumulated other comprehensive income of $20,277, an increase to noncurrent deferred tax assets of $11,580 and an increase to other non-current liabilities of $31,857.
     On September 13, 2006, the SEC issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (“SAB No. 108”). SAB No. 108 provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. Under the transition provisions of SAB No. 108, if the effect of the initial adoption is determined to be material, the cumulative effect may be reported as an adjustment to retained earnings as of the beginning of the year with disclosure of the nature and amount of each individual error being corrected in the cumulative adjustment. The Company adopted the provisions of SAB No. 108 in the fourth quarter of fiscal year 2007 and recorded a cumulative effect adjustment to the opening balance of retained earnings of $5,957, an increase to noncurrent deferred tax assets of $2,982 and an increase to other non-current liabilities of $8,939, substantially all of which relates to periods prior to fiscal 2005.
     The uncorrected misstatement for consideration under SAB No. 108, which was considered immaterial to the Company’s financial position and results of operations in prior reporting periods under the income statement approach, related to an understatement of pension liabilities in a foreign subsidiary and the related understatement of pension expense which had not been recognized in accordance with SFAS No. 87, Employers’ Accounting for Pensions.
     For more details regarding the adoption of SFAS No. 158 and SAB No. 108, refer to Note 1, Accounting Policies and Related Matters, Note 3, Impact of Staff Accounting Bulletin No. 108 and Note 15, Pension and Profit Sharing Plans and Arrangements, to the accompanying consolidated financial statements.

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Recently Issued Accounting Pronouncements
     In June 2006, the FASB issued Financial Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN No. 48”). FIN No. 48 establishes a recognition threshold and measurement process for recording income tax positions in an enterprise’s financial statements in accordance with SFAS No. 109, Accounting for Income Taxes. FIN No. 48 prescribes a two-step evaluation process for income tax positions. The first step is recognition and, if the recognition threshold is met, a second step, measurement, is applied. For recognition, an enterprise judgmentally determines whether it is more-likely-than-not that an income tax position will be sustained upon examination, including resolution of related appeals or litigation processes, based on the technical merits of the position. If the income tax position meets the more-likely-than-not recognition threshold it is measured and the appropriate amount is recognized in the financial statements as the largest amount of income tax benefit that is greater than 50% likely of being realized. If an income tax position does not meet the more-likely-than-not recognition threshold, no benefit for that position is recognized in the financial statements.
     Income tax positions that meet the more-likely-than-not recognition threshold at the effective date of FIN No. 48 may be recognized or, continue to be recognized, upon adoption of FIN No. 48. The cumulative effect of applying the provisions of FIN No. 48 shall be reported as an adjustment to the opening balance of retained earnings for that fiscal year. FIN No. 48 is effective for the Company beginning in fiscal year 2008, with earlier adoption permitted. The Company has completed the process of assessing the effect of adopting FIN No. 48 and will record an increase in the opening balance of retained earnings as of August 1, 2007 in the amount of $5,583.
     In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS No. 157 is effective for the Company beginning with fiscal year 2009, except as revised by FASB Staff Position (FSP) No. 157-2, issued in February 2008. This FSP delays the effective date of SFAS No. 157 for non-financial assets and non-financial liabilities, except for items that are reorganized or disclosed at fair value in the financial statements on a periodic basis (at least annually). The Company is in the process of assessing the effect SFAS No. 157 may have on its consolidated financial statements.
     In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS No. 159”). SFAS No. 159 permits entities to elect to measure specified financial instruments and certain other items at fair value with changes in fair value recognized in earnings each reporting period. SFAS No. 159 is effective for the Company beginning with fiscal year 2009. The Company is in the process of assessing the effect SFAS No. 159 may have on its consolidated financial statements.
     In June 2007, the FASB ratified EITF No. 07-3, Accounting for Nonrefundable Advance Payments for Goods or Services Received for Use in Future Research and Development Activities (“EITF No. 07-3”). EITF No. 07-3 requires that nonrefundable advance payments for goods or services that will be used or rendered for future research and development activities be deferred and capitalized and recognized as an expense as the related goods are delivered or the related services are performed. If an entity does not expect the goods to be delivered or services to be rendered, the capitalized advance payment should be charged to expense. EITF No. 07-3 is effective, on a prospective basis, for the Company beginning with fiscal year 2009. The Company is in the process of assessing the effect EITF No. 07-3 may have on its consolidated financial statements.
     In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (“SFAS No. 141(R)”). SFAS No. 141(R) establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree, recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase, and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS No. 141(R) is effective for the Company beginning with fiscal year 2010.
     In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements–an amendment of Accounting Research Bulletin No. 51 (“SFAS No. 160”). SFAS No. 160 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest, and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. SFAS No. 160 also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS No. 160 is effective for the Company beginning with fiscal year 2010.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
     The Company’s primary market risks relate to adverse changes in foreign currency exchange rates and interest rates. The sensitivity analyses presented below assume simultaneous shifts in each respective rate, and quantify the impact on the Company’s earnings and cash flows. The changes used for these analyses reflect the Company’s view of changes that are reasonably possible over a one-year period. Actual changes that differ from the changes used for these analyses could yield materially different results.
Foreign Currency
     The Company’s reporting currency is the U.S. dollar. Because the Company operates through subsidiaries or branches in over thirty countries around the world, its earnings are exposed to translation risk when the financial statements of the subsidiaries or branches, as stated in their functional currencies, are translated into the U.S. dollar. Company management estimates that foreign exchange translation reduced earnings per share by 4 cents in fiscal year 2007.
     Most of the Company’s products are manufactured in the United States, Puerto Rico, Germany and the United Kingdom, and then sold into many countries. The primary foreign currency exposures relate to adverse changes in the relationships of the U.S. dollar to the British Pound (the “Pound”), the Euro, the Japanese Yen (the “Yen”), Swiss Franc, the Australian Dollar and the Singapore Dollar, as well as adverse changes in the relationship of the Pound to the Euro. Exposure exists when the functional currency of the buying subsidiaries weakens against the U.S. dollar, the Pound or the Euro, thus causing an increase of the product cost to the buying subsidiary or a reduction in the sales price from the selling subsidiary, which adversely affects the Company’s consolidated gross margin and net earnings. The effect of foreign exchange is partially mitigated because of the significant level of manufacturing done in Europe. In fiscal year 2007, the Pound, Euro, Swiss Franc, Australian Dollar and Singapore Dollar strengthened by approximately 9.2%, 7.5%, 3.6%, 6.8% and 5.9%, respectively, against the U.S. dollar compared with the average exchange rates in effect in fiscal year 2006. The Yen weakened against the U.S. dollar by approximately 3.1%. Additionally, the Euro weakened against the Pound by approximately 1.6%. Due to the difficulty in estimating the economic effect of foreign currency rates, particularly in periods of high volatility of such rates, Company management does not provide such estimated effects and reports only the translation effect to earnings per share disclosed above.
     The Company is also exposed to transaction risk from adverse changes in exchange rates. These short-term transaction exposures are primarily Yen, Euro, Pound, Singapore dollar and Australian dollar denominated receivables and payables. These short-term exposures to changing foreign currency exchange rates are managed by opening forward foreign exchange contracts (“forwards”) to offset the earnings and cash flow impact of non-functional currency denominated receivables and payables as well as the expeditious payment of balances. In addition, the Company enters into loans denominated in foreign currencies to offset the earnings and cash flow impact of nonfunctional currency-denominated receivables. The Company does not enter into forwards for trading purposes. At July 31, 2007, these exposures amounted to approximately $71,199 and were offset by forwards with a notional principal amount of $8,253. If a hypothetical 10% simultaneous adverse change had occurred in exchange rates, net earnings would have decreased by approximately $3,326, or approximately 3 cents per share.
Interest Rates
     The Company is exposed to changes in interest rates, primarily due to its financing and cash management activities, which include long and short-term debt as well as cash and certain short-term, highly liquid investments considered to be cash equivalents.
     The Company’s debt portfolio is comprised of both fixed and variable rate borrowings. The Company manages the composition of the portfolio, and concurrently interest rate exposure by employing interest rate swaps. Including the effect of interest rate swaps, the Company’s debt portfolio was approximately 42% variable rate at July 31, 2007, compared to 55% variable rate at July 31, 2006. As of July 31, 2007, the Company had cash flow interest rate swaps (i.e., variable to fixed rate swaps) with notional amounts aggregating $75,969 outstanding. The fair value of the interest rate swaps at July 31, 2007 was a liability of $197. The cash flows on the above mentioned interest rate swaps mirror the cash flows of the hedged underlying debt instruments. The Company does not enter into interest rate swaps for trading purposes.
     For the year ended July 31, 2007, interest expense, net of interest income, was $39,056. A hypothetical 10% shift in market interest rates for fiscal year 2007 could have an adverse affect on interest of approximately $244.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
     The financial statements required by this item are located immediately following the signature pages of this Form 10-K. See Item 15 (a)(1) for a listing of financial statements provided.
     The financial information presented below for the quarters prior to the fourth quarter of fiscal year 2007 have 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.
     QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
                                         
(In thousands,   First     Second     Third     Fourth     Full  
except per share data)   Quarter     Quarter     Quarter     Quarter     Year  
2007 (As Reported):
                                       
Net sales
  $ 499,288     $ 544,930     $ 559,347       (b)     (b)
Gross profit
    223,672       256,470       277,120       (b)     (b)
Restructuring and other charges (gains), net (a)
    17,088       (3,648 )     8,620       (b)     (b)
Earnings before income taxes
    29,189       71,790       80,907       (b)     (b)
Net earnings
    24,434       55,803       67,074       (b)     (b)
Earnings per share:
                                       
Basic
    0.20       0.45       0.54       (b)     (b)
Diluted
    0.20       0.45       0.54       (b)     (b)
 
                                       
2007 (As Restated):
                                       
Net sales
  $ 499,288     $ 544,930     $ 559,347     $ 646,340     $ 2,249,905  
Gross profit
    223,672       256,470       277,120       302,094       1,059,356  
Restructuring and other charges (gains), net (a)
    17,088       (3,648 )     8,620       292       22,352  
Earnings before income taxes
    24,279       66,879       75,996       93,375       260,529  
Net earnings
    16,001       44,347       50,371       16,778       127,497  
Earnings per share:
                                       
Basic
    0.13       0.36       0.41       0.14       1.04  
Diluted
    0.13       0.36       0.40       0.13       1.02  
 
                                       
2006 (As Reported):
                                       
Net sales
  $ 431,162     $ 478,436     $ 509,981     $ 597,251     $ 2,016,830  
Gross profit
    201,677       225,818       238,593       277,992       944,080  
Restructuring and other (gains) charges, net (a)
    (50 )     3,736       7,313       1,327       12,326  
Earnings before income taxes
    33,215       42,906       54,271       79,984       210,376  
Net earnings
    25,110       32,436       25,189       62,758       145,493  
Earnings per share:
                                       
Basic
    0.20       0.26       0.20       0.50       1.16  
Diluted
    0.20       0.26       0.20       0.50       1.16  
 
                                       
2006 (As Restated):
                                       
Net sales
  $ 431,162     $ 478,436     $ 509,981     $ 597,251     $ 2,016,830  
Gross profit
    201,677       225,818       238,593       277,992       944,080  
Restructuring and other (gains) charges, net (a)
    (50 )     3,736       7,313       1,327       12,326  
Earnings before income taxes
    31,429       41,119       52,484       78,198       203,230  
Net earnings (loss)
    19,842       26,074       (47,041 )     53,265       52,140  
Earnings (loss) per share:
                                       
Basic
    0.16       0.21       (0.37 )     0.43       0.42  
Diluted
    0.16       0.21       (0.37 )     0.43       0.41  
 
(a)   Refer to Note 5, Restructuring and Other Charges, Net, to the accompanying consolidated financial statements.
 
(b)   No financial information for the fourth quarter or full year had been reported prior to the aforementioned restatement; as such, this information is not applicable.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
     None.
ITEM 9A. CONTROLS AND PROCEDURES.
DISCLOSURE CONTROLS AND PROCEDURES
     The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s chief executive officer and chief financial officer, of the effectiveness of the Company’s disclosure controls and procedures as of July 31, 2007. Based on this evaluation and considering the material weakness in internal control over financial reporting described below relating to the Company’s accounting for income taxes, the chief executive officer and chief financial officer concluded that the Company’s disclosure controls and procedures were not effective as of such date to ensure that information required to be disclosed in the reports that it files or submits under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.
     The Company has taken remedial action with respect to such material weakness and is continuing to consider the appropriateness of other measures as more fully described below. In addition, in January 2008, the Company terminated the employment of four employees who previously had been placed on administrative leave as a result of the matter that gave rise to the restatement and who had principal responsibility for tax and treasury matters.
INTERNAL CONTROL OVER FINANCIAL REPORTING
(a) Management’s annual report on internal control over financial reporting.
     The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities and Exchange Act of 1934. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
     Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
     Management conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework in Internal Control–Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that the Company’s internal control over financial reporting was not effective as of July 31, 2007.
     A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness was identified as of July 31, 2007: the Company lacked a periodic review to ensure that the income tax impact of certain intercompany transactions were properly considered in the Company’s provision for income taxes. The Company has restated its previously issued consolidated financial statements for each of the eight fiscal years in the period ended July 31, 2006 and for each of the fiscal quarters ended October 31, 2006, January 31, 2007, and April 30, 2007 to correct reported provision for income taxes, interest expense, net, income taxes payable, and deferred income taxes in such consolidated financial statements.
     Management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of July 31, 2007 has been audited by KPMG LLP, an independent registered public accounting firm.

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(b) Attestation report of the registered public accounting firm.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Pall Corporation:
     We have audited Pall Corporation and subsidiaries internal control over financial reporting as of July 31, 2007, based on criteria established in Internal Control–Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Pall Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s report on internal control over financial reporting (Item 9A(a)). Our responsibility is to express an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.
     We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
     A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
     Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
     A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. A material weakness related to the Company’s accounting for income taxes has been identified and included in management’s assessment.
     We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Pall Corporation and subsidiaries as of July 31, 2007 and 2006, and the related consolidated statements of earnings, stockholders’ equity, and cash flows for each of the years in the three-year period ended July 31, 2007. This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the July 31, 2007 consolidated financial statements, and this report does not affect our report dated March 28, 2008, which expressed an unqualified opinion on those consolidated financial statements.
     In our opinion, because of the effect of the aforementioned material weakness on the achievement of the objectives of the control criteria, Pall Corporation and subsidiaries has not maintained effective internal control over financial reporting as of July 31, 2007, based on criteria established in Internal Control–Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
         
     
  /s/ KPMG LLP    
       KPMG LLP   
     
 
Melville, New York
March 28, 2008

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(c) Changes in internal control over financial reporting.
     There was no change in the Company’s internal control over financial reporting during the fourth quarter of fiscal year 2007 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
     During the quarter ended October 31, 2007, the Company implemented additional controls and procedures as listed below:
    Changes in the resources and technical expertise of the Tax and Treasury functions, including the termination of the employment of four employees discussed above.
 
    Additional processes requiring the monthly review of intercompany transactions to determine if balances are being settled in accordance with applicable intercompany settlement policies and to ensure that exceptions are given appropriate income tax consideration. In addition, a quarterly review of income in foreign subsidiaries that may be subject to U.S. income tax for inclusion in the Company’s forecasted effective tax rate to be applied in its interim periods was implemented.
     The Company is planning training initiatives for all employees affected by revisions to its policies and procedures, as well as specialized training with respect to tax considerations for relevant employees.
     The above listed remediation actions were tested and deemed to be effective as of January 31, 2008, therefore, the Company has remediated its material weakness in internal control over financial reporting.
     The Company believes that as a result of the actions it has taken to date, including the implementation of the additional controls and procedures outlined above, the information contained in this annual report fairly presents, in all material respects, the financial condition and results of operations of the Company for the periods presented.
ITEM 9B. OTHER INFORMATION.
     On March 25, 2008, the Company entered into the Third Amendment and Waiver to the Five-Year Credit Agreement, dated as of June 21, 2006, among Pall Corporation, the subsidiaries of the Company named on the signature pages thereto, the lenders from time to time party thereto, JPMorgan Chase Bank, N.A., as facility agent for the Lenders, and J.P. Morgan Europe Limited, as London agent for the Lenders. The Third Amendment and Waiver clarified certain matters with respect to the conditions applicable to the continued effectiveness of the amendments and waivers effected thereunder, which were originally necessitated by the Company’s failure to comply with certain of its representations, warranties and covenants under its Five-Year Credit Agreement as a result of the matters that gave rise to the restatement. A copy of the Third Amendment and Waiver is filed as an exhibit to this report.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
(a) Identification of directors:
MEMBERS OF THE BOARD OF DIRECTORS OF THE REGISTRANT
     Daniel J. Carroll, Jr., age 63, was the CEO of Telcordia Technologies from September 2005 until May 2007. He continues to serve on the Telcordia board. Telcordia is a global provider of telecommunications network software and services for internet protocol, wireline, wireless and cable customers. Mr. Carroll held a number of executive positions with AT&T Corp. until its spin-off of Lucent Technologies Inc. He retired from his employment as an officer of Lucent in 2000. He has been a director of the Company since 1999.

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     Cheryl W. Grisé, age 55, was executive vice president of Northeast Utilities, a public utility holding company, from December 2005 until her retirement in July 2007. Prior to that time, Ms. Grisé had served in various senior management positions at Northeast Utilities since 1998. Ms. Grisé was a director of Dana Corporation until February 1, 2008 and currently serves on the board of MetLife, Inc. She also serves as chairperson of the board of the University of Connecticut Foundation and as a member of the board of Kingswood-Oxford School. Ms. Grisé has been a director of the Company since August 2007.
     John H. F. Haskell, Jr., age 76, was for more than the past five years, until his retirement on March 31, 2004, an investment banker and advisor with the investment banking firm of UBS Securities LLC, New York, New York, and its predecessors. From March 31, 2004 until May 31, 2005, he was a non-employee advisor for UBS. Mr. Haskell is co-chair of the board of the French Institute Alliance Française and serves as a board director of other not-for-profit organizations. Mr. Haskell has been a director of the Company since 1998.
     Ulric S. Haynes, Jr., age 76, was the U.S. Ambassador to Algeria from 1977 to 1981. He was executive dean for university international relations at Hofstra University, Hempstead, New York, from September 1996 until his retirement in 2003. Prior to September 1996, Mr. Haynes was dean of the Business School at Hofstra University. He serves as a director of the Council of American Ambassadors. He has been a director of the Company since 1994.
     Eric Krasnoff, age 56, has been chairman and chief executive officer of the Company since July 1994. He has also been a director of the Company since 1994. He serves on the board of three not-for-profit organizations.
     Dennis N. Longstreet, age 62, was from 1998 until his retirement in late 2005 company group chairman of Johnson & Johnson Medical Devices, culminating a 36-year career in operational and sales management roles with Johnson & Johnson, a manufacturer of health care products and provider of related services for the consumer, pharmaceutical and medical devices and diagnostic markets. He is a former chairman of the AdvaMed Industry Foundation and serves on the board of trustees, the board of governors and the board of other not-for-profit organizations. Mr. Longstreet also serves on the board of Avalign Technologies, Inc. He has been a director of the Company since 2006.
     Edwin W. Martin, Jr., age 76, was associate and deputy U.S. commissioner of education from 1969 to 1979 and assistant secretary of education from 1979 to 1981. Dr. Martin was president and chief executive officer of the National Center for Disability Services until November 1994 and since then has been president-emeritus and a trustee. Dr. Martin is a member of the Roslyn Bank Divisional Advisory Board to the New York Community Bank. In 2007, Dr. Martin was also elected mayor of Venice, Florida for a term lasting until 2010. He has been a director of the Company since 1993.
     Katharine L. Plourde, age 56, was a principal and analyst at the investment banking firm of Donaldson, Lufkin & Jenrette, Inc., New York, New York, until November 1997. Since that time, she has engaged in private investing and is currently serving on the board of one not-for-profit organization. Since February 2002, she has also served on the board of OM Group Inc. Ms. Plourde has been a director of the Company since 1995.
     Heywood Shelley, age 80, has been a practicing attorney with the firm of Carter Ledyard & Milburn LLP, New York, New York since 1951. This firm has in the past acted and may in the future act as legal counsel to the Company in some matters. Mr. Shelley has been a director of the Company since 1990.
     Edward L. Snyder, age 61, is professor of laboratory medicine and associate chair for clinical affairs of the Department of Laboratory Medicine at Yale University School of Medicine. He is also director of Blood Bank/Apheresis Service and assistant chief/associate chair for clinical affairs at the Department of Laboratory Medicine at Yale-New Haven Hospital. Dr. Snyder has “appointed consultant” status with the Food and Drug Administration Medical Devices Advisory Committee–Hematology and Pathology Devices Panel, and is a past president of the American Association of Blood Banks. He is the chair-elect of the volunteer board, National Marrow Donor Program. Dr. Snyder also serves on the Company’s Medical Advisory Board and has been a director of the Company since 2000.

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     Edward Travaglianti, age 59, has been since February 2004 the president of Commerce Bank, Long Island, which is part of Commerce Bancorp. Mr. Travaglianti was president of Commercial Markets at Citibank, N.A. from July 2001, when Citibank acquired European American Bank (EAB), until his retirement in October 2002. Prior to that acquisition, Mr. Travaglianti was, from July 1995, chairman and chief executive officer of EAB. Mr. Travaglianti serves as the chairman of the board and a director of several not-for-profit and health-related organizations. He has been a director of the Company since 2001.
Section 16(a) Beneficial Ownership Reporting Compliance
     Section 16(a) of the Exchange Act and the rules thereunder require the Company’s directors and executive officers to file reports of their ownership and changes in ownership of common stock with the SEC. Personnel of the Company generally prepare these reports on the basis of information obtained from each director and executive officer. Based on such information, the Company believes that all reports that were required by Section 16(a) of the Exchange Act to be filed by directors and executive officers of the Company during the fiscal year ended July 31, 2007, were filed on time.
(b) Identification of executive officers:
EXECUTIVE OFFICERS OF THE REGISTRANT
                     
                First Appointed an
Name   Age(1)   Current Positions Held   Executive Officer
Eric Krasnoff(2)
    56     Chairman and Chief Executive Officer     1986  
 
                   
Lisa McDermott
    42     Chief Financial Officer and Treasurer     2006  
 
                   
Donald B. Stevens
    62     Chief Operating Officer and President, Industrial     1994  
 
                   
Roberto Perez
    58     Group Vice President and President, Life Sciences     2003  
 
                   
Mary Ann Bartlett
    62     Senior Vice President and General Counsel     1997  
 
(1)   Age as of March 21, 2008.
 
(2)   Mr. Krasnoff is a director of the Company and member of the board’s executive committee.
     None of the persons listed above is related.
     For more than the past five years, the principal occupation of persons listed above has been their employ by the registrant.
     None of the above persons has been involved in those legal proceedings required to be disclosed by Item 401(f) of Regulation S-K during the past five years.
* * *
     The Company has adopted a code of ethics applicable to its chief executive officer, chief financial officer, controller and other employees with important roles in the financial reporting process, which code was adopted by the audit committee of the board of directors during its meeting in July 2003, in accordance with the requirements of the Sarbanes-Oxley Act of 2002. The code of ethics has been filed as exhibit 14 to this report and is also available on the Company’s website located at www.pall.com/policies. In addition, the Company will provide to any person, without charge, upon request, a copy of the code of ethics, by addressing your request in writing to the Corporate Compliance and Ethics Officer, Pall Corporation, 2200 Northern Boulevard, East Hills, New York 11548.
     The Company intends to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding an amendment to, or waiver from, a provision of this code of ethics by posting such information on the website specified above.
     The board of directors has an audit committee, a compensation committee, an executive committee and a nominating/governance committee. The board of directors has adopted a written charter for each of these committees and a corporate governance policy. In addition, the Company has codes of conduct that apply to every employee and its directors. The charters, corporate governance policy, and codes of conduct are available, without charge, on the Company’s website located at www.pall.com or by sending your request in writing to the Corporate Secretary, Pall Corporation, 2200 Northern Boulevard, East Hills, New York 11548.

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The Audit Committee
          Daniel J. Carroll, Jr., John H.F. Haskell, Jr. and Katharine L. Plourde are members and Edward Travaglianti is the chair of the Company’s audit committee.
          The audit committee assists the board in fulfilling its oversight responsibility relating to the integrity of the Company’s financial statements and the financial reporting process, the systems of internal accounting and financial controls, the adequecy of the Company’s information technology and systems, the performance of the Company’s internal audit function, the annual independent audit of the Company’s financial statements, the performance, qualifications and independence of its independent registered public accounting firm, and the Company’s compliance and ethics program.
          Each member of the audit committee meets the independence requirements of the NYSE, Rule 10A-3 under the Exchange Act and the Company’s corporate governance policy. The board of directors has determined that each member of the audit committee is an “audit committee financial expert” as defined in the rules of the SEC.
ITEM 11. EXECUTIVE COMPENSATION.
EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
Compensation Philosophy
          The Company’s compensation philosophy has been driven by its goals:
    to reward its executive officers for sustained individual and Company performance
 
    to provide for a stable group of highly qualified executive officers
 
    to provide a compensation package that is competitive with its peer companies in order to promote the first two goals
          Given the rapidly changing technological landscape and marketplace relevant to the filtration business, the Company values stability in its senior management as it provides for continuity of experience and vision. Through its approach to compensation, the Company encourages its executive officers to dedicate themselves to improving the Company’s long-term prospects and financial results. The Company’s compensation program also encourages increased focus on performance among its executive officers by relating a significant portion of their total compensation to Company performance. In order to satisfy these goals, the Company has developed a systematic approach to implementation of its executive compensation philosophy. The Company periodically reviews and revises its approach to align its compensation program with the evolution of compensation practices generally and to reflect changes in its management structure.
          The following discussion describes the Company’s executive compensation program principally as it relates to the “named executive officers” or “NEOs.” The named executive officers are the chief executive officer, the chief financial officer and three other most highly compensated executive officers for fiscal year 2007. As required by SEC rules, the named executive officers also include one individual who would have been one of the three most highly compensated executive officers had he remained an executive officer at fiscal year-end. The named executive officers have been with the Company from eight to 39 years.
Focus on Performance
          Cash Compensation
          Peer Group Review. To aid the Company in ensuring that its executive compensation program is in step with its peers and competitors in respect of both types and amounts of compensation, the Company has relied upon Watson Wyatt. The compensation committee is responsible for Watson Wyatt’s engagement and its reports regarding compensation of our executive officers are submitted to the compensation committee and to the chief executive officer at the same time. Management has engaged Watson Wyatt separately from time to time to produce market studies regarding compensation for employees other than the executive officers of the Company.
          Since 1994, Watson Wyatt has been asked to evaluate on a biennial basis the cash compensation levels of the Company’s executive officers. Watson Wyatt uses published compensation survey data to assess competitiveness of the Company’s compensation program relative to identified companies and to determine whether actual compensation paid fairly reflects the goals of the Company’s compensation philosophy.

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          Watson Wyatt’s most recent cash compensation report covered cash compensation as of July 2006 (the “Cash Compensation Report”). In keeping with the compensation philosophy and in consultation with the chief executive officer, Watson Wyatt developed a report methodology that allowed the compensation committee to evaluate, based on the report, the Company’s compensation of its named executive officers relative to the following targets:
    base salaries at the peer group median (50th percentile)
 
    total cash compensation (base salary plus annual bonus) at the 75th percentile of the peer group when maximum bonuses are earned
 
    total cash compensation (base salary plus annual bonus) at the 50th percentile of the peer group when midpoint bonuses (50% of maximum) are earned.
          In producing the Cash Compensation Report, Watson Wyatt used data from Watson Wyatt Data Services, Mercer Human Resources Consulting and two proprietary surveys. The Cash Compensation Report compared the cash compensation of the named executive officers to the cash compensation paid to officers with comparable positions and responsibilities at manufacturing and general industrial companies of similar scope and complexity to the Company with corporate revenues of approximately $2 billion (or, for positions tied to business segments, companies with revenues of approximately $1.2 billion for Industrial and $800 million for Life Sciences) (the “peer group”).
          The Cash Compensation Report disclosed that base salaries were slightly above (4.2%) the peer group median with the base salary of one of the named executive officers (Mr. Stevens) exceeding the peer group median for his position by more than 15% and the base salary of another named executive officer (Ms. Bartlett) being more than 15% below the peer group median for her position. Watson Wyatt advised the compensation committee that it considers compensation within plus or minus 15% of the peer group median to approximate competitive norms for base salaries. Targeted total cash compensation (base salary plus bonus) assuming a 50% bonus was slightly below (2%) peer group median and targeted total cash compensation assuming a 100% bonus was within 1% of the 75% percentile of the peer group.
          Individual Performance. While looking to peer group practices, the compensation committee is also mindful of the Company’s position as a unique and highly complicated business demanding specialized knowledge and experience of its executive officers. In addition, in its overall assessment of compensation, the compensation committee takes into account each named executive officer’s individual performance. However, no one element of compensation is determined directly by reference to individual performance (although the compensation committee has the discretion to raise base salaries by taking into account individual performance). The chief executive officer reports to the compensation committee the results of his performance assessments of the other named executive officers. With respect to Mr. Krasnoff, the compensation committee sets, and the board approves, specific personal goals. For fiscal year 2007, Mr. Krasnoff’s goals were as follows:
    complete integrated business structure
 
    meet goals for facilities rationalization program
 
    improve and broaden analyst coverage of the Company
 
    achieve business plan results within the model
 
    present updated five-year strategy plan for board approval
 
    achieve the infrastructure rationalization program for EuroPall and institute a comparable program for the Western Hemisphere.
          The compensation committee determined that Mr. Krasnoff had substantially achieved the personal goals outlined above in fiscal year 2007.
          2007 Annual Base Salaries. The Company has an employment contract with each of the named executive officers. Each of the employment contracts contains provisions with respect to base salary (including a mandatory increase for annual changes in the U.S. consumer price index).
          The compensation committee has the discretion to raise base salaries above the mandatory minimum and in evaluating any increases generally takes into account recommendations made by the chief executive officer for all officers other than himself, internal relationships and peer group practices as shown in the data supplied by Watson Wyatt in its reports.

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     For fiscal year 2007, after a review by the chief executive officer of the performance of the other named executive officers and review of the performance of the chief executive officer by the compensation committee and in light of the chief executive officer’s recommendations for the other named executive officers, the compensation committee increased the base salary for all but one of its named executive officers by the minimum mandatory increase based on the consumer price index required under their employment contracts (5.6%) and increased Ms. Bartlett’s base salary by 26% in order to align her salary with the 50th percentile for her comparable officer position as shown in the Cash Compensation Report. Details regarding base salary paid in 2007 may be found in the “Summary Compensation Table.”
     2007 Annual Incentive Bonuses. Each named executive officer’s employment contract contains provisions with respect to annual bonus, primarily payable under the 2004 Executive Incentive Bonus Plan (the “Bonus Plan”). The Bonus Plan is the Company’s short-term incentive vehicle and was approved by the Company’s shareholders at the 2004 Annual Meeting of Shareholders. In fiscal year 2007, it was the principal means by which total cash compensation of the Company’s named executive officers was tied to the Company’s financial performance.
     Under the Bonus Plan, the first element used to determine the annual bonus payable to an executive under the Bonus Plan is the executive’s “target bonus percentage,” which is the maximum bonus payable to that executive for the year, expressed as a percentage of his or her base salary. This percentage is specified in the executive’s employment contract, although the compensation committee has the ability to increase it. Based upon the recommendation of the chief executive officer, the compensation committee did not change the target bonus percentages for the named executive officers for fiscal year 2007 from those of fiscal year 2006:
     
Eric Krasnoff
  150%
Lisa McDermott
  105%
Donald Stevens
  105%
Mary Ann Bartlett
  105%
Roberto Perez
 
105% (42% under the Bonus Plan based on Company performance and 63% based upon performance of Pall Life Sciences (of which he is president))
Marcus Wilson
  112.5%
     While Mr. Stevens is president of Pall Industrial, his entire annual bonus is tied to Company performance because he is also the Company’s chief operating officer.
     Under the Bonus Plan, the second element used to determine the annual bonus payable to an executive is the “minimum R.O.E. target,” “maximum R.O.E. target” and, in some fiscal years, appropriate intermediate R.O.E. targets. These targets are set annually by the compensation committee for the succeeding fiscal year. The minimum R.O.E. target is the “return on equity” that must be exceeded in order for any bonus to be paid to an executive for that year. The maximum R.O.E. target is the return on equity that must be achieved in order for an executive to receive a maximum bonus equal to his or her target bonus percentage. In September 2006, the compensation committee fixed the targets for fiscal 2007 as follows:
         
Minimum R.O.E. target
    12.1 %
Maximum R.O.E. target
    16.1 %
     “Return on equity” means the percentage determined by dividing “net earnings” for a fiscal year by “average equity” for that year, using the following definitions:

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    Net earnings for any fiscal year is the after-tax consolidated net earnings of the Company, either (i) as certified by the Company’s independent auditors or (ii) as reported to such auditors by our chief financial officer at a meeting of the audit committee held prior to the date on which the Company’s annual report is filed with the SEC, and accepted by the independent auditors at such meeting, subject to events occurring after that meeting and prior to the date of the auditors’ certification of the financial statements. In either case, net earnings are adjusted to eliminate the effects of foreign currency translation, any acquisitions, divestitures, discontinuance of business operations, restructuring or any other special charges, the cumulative effect of accounting changes, and “extraordinary items” as determined under U.S. generally accepted accounting principles insofar as these items are separately disclosed in the Company’s annual report.
 
    Average equity for any fiscal year means the average of shareholders’ equity as shown in the consolidated balance sheets of the Company for each of the two most recently completed fiscal years, excluding amounts recorded as “accumulated other comprehensive” income or loss and adjusted by items eliminated in the calculation of net earnings.
          The compensation committee chose return on equity as the financial performance measure under the Bonus Plan in order to reward Company performance that is directly tied to shareholder interests. The committee determined the maximum R.O.E. target for fiscal year 2007 based upon a year over year increase in net earnings, as defined by the Plan, of 15.9% over fiscal year 2006 that equated to earnings per share for fiscal year 2007 of $1.59, reflecting a demanding and realistic objective for earnings growth for fiscal year 2007 over fiscal year 2006. (This determination was made in September 2006 and therefore was based upon the Company’s consolidated financial statements for fiscal year 2006 prior to restatement. See “Audit Committee Report.”) Details regarding the minimum, target and maximum awards produced under the Bonus Plan formula may be found in “Grants of Plan-Based Awards for Fiscal Year 2007.”
          All of the named executive officers receive their annual bonus solely pursuant to the Bonus Plan except for Mr. Perez. As president of Pall Life Sciences, 42% of Mr. Perez’s annual bonus is determined under the Bonus Plan and 63% is determined by reference to targets specific to the performance of Pall Life Sciences. In December 2006, the chief executive officer set the targets for the Pall Life Sciences portion of Mr. Perez’s annual bonus based upon:
         
Operating Profit* of Life Sciences Line of Business for Fiscal Year 2007
 
Minimum target
  $141 million
Maximum target
  $154 million
 
*   Operating Profit set by reference to spot rates of exchange as of July 31, 2005.
          The compensation committee approved these targets prior to the calculation of the amount of Mr. Perez’s bonus for fiscal year 2007. The chief executive officer calculated the payout under the formula in accordance with the performance of Pall Life Sciences, which exceeded its maximum operating profit target for fiscal year 2007, and determined that 100% of the maximum bonus amount should be paid (63% of base salary, or $211,663). While the chief executive officer has the discretion to reduce (but not increase) the amount calculated pursuant to the formula, he exercised no discretion with respect to the resulting bonus amount. The compensation committee ratified the amount and payment of Mr. Perez’s bonus.
          The compensation committee has the ability to exercise discretion to reduce (but not increase) any bonus amount otherwise payable to any named executive officer as calculated in accordance with the Bonus Plan formula:
    to reflect any decreases in or charges to earnings that were eliminated in determining net earnings
 
    to reflect any credits to earnings for extraordinary items of income or gain that were taken into account in determining net earnings
 
    to reflect the committee’s evaluation of the executive’s individual performance
 
    to reflect any other events, circumstances or factors that the committee believes to be appropriate in determining the amount of the bonus to be paid to the executive for the year.
          The compensation committee has no discretion to increase the amount of the bonus amount otherwise payable to any named executive officer as calculated in accordance with the Bonus Plan formula described above.

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     Although bonuses under the Bonus Plan are typically determined in early October following the end of the Company’s fiscal year, the Bonus Plan formula for calculation of the bonuses relies upon audited financial information. As a result, fiscal year 2007 bonuses for the named executive officers were not calculated until March 2008 upon the completion of the Company’s restatement.
     As described above, under the Bonus Plan formula, in determining return on equity (and in particular the “net earnings” component), the after-tax consolidated net earnings of the Company are adjusted to eliminate the effect of certain decreases in or charges to earnings, including restructuring charges and any other special charges as well as any positive or negative effect of foreign currency translation. Also as described above, the committee has the ability to override any such adjustments in determining final bonuses under the Bonus Plan. For purposes of fiscal year 2007, the committee adjusted the Company’s results to eliminate the impact of restructuring charges, net of pro forma tax effect, and foreign currency translation, consistent with prior practice; however, the committee determined not to make an adjustment to eliminate the impact of a special tax-related charge recorded in 2007 unrelated to the matters underlying the Company’s restatement of prior period financial statements. As a result, based on the Bonus Plan formula, the Company’s R.O.E. for fiscal year 2007 was 14.7%. As the minimum R.O.E. target and maximum R.O.E. target for fiscal year 2007 fixed by the committee in September 2006 was 12.1% and 16.1%, respectively, under the Bonus Plan formula, the named executive officers would receive 64.7% of their respective target bonus percentages. The committee approved final bonuses for fiscal year 2007 to the named executive officers under the Bonus Plan in accordance with the formula as follows:
                 
Named Executive Officer   Percentage of Base Salary   Bonus Amount
Eric Krasnoff
  97.05%       $ 836,676  
Lisa McDermott
  67.94%       $ 236,863  
Donald Stevens
  67.94%       $ 344,537  
Roberto Perez
  27.17% (the remainder of Mr. Perez’s annual bonus is paid outside of the Bonus Plan based upon performance of Pall Life Sciences)   $ 91,298  
Mary Ann Bartlett
  67.94%       $ 197,202  
Marcus Wilson
  72.79%       $ 372,212  
     In determining the bonus awards to be paid to the named executive officers, the committee solicited the views of the non-management directors and took into account a variety of considerations. The principal considerations were the Company’s performance in fiscal year 2007 relative to restated prior period results, including compensation paid to the named executive officers in those periods, and senior management’s implementation of major business initiatives, notably the completion in the first quarter of fiscal year 2007 of Pall’s business reorganization into two operating segments and the continued success throughout fiscal year 2007 of the Company’s cost reduction initiatives (especially its EuroPall program). The final bonus awards also reflected the committee’s recognition of the significant individual and group efforts involved in completing the restatement by March 31 (as required by waivers and amendments the Company obtained under its debt and other agreements) and the importance to the Company and its shareholders of retaining the named executive officers.
     Equity-Based Compensation
     The 2005 Stock Compensation Plan (the “Stock Plan”) and the Management Stock Purchase Plan (the “Management Plan”) were designed to complement the Bonus Plan and to provide long-term equity-based incentive compensation to the Company’s executive officers. These Plans reflect the compensation committee’s view that equity-based compensation provides executive officers with opportunities for capital accumulation at favorable tax rates, promotes long-term executive retention and, by fostering a proprietary interest in the Company, further aligns the interests of our executive officers with those of the Company’s shareholders.
     2007 Grants under the Stock Plan. The purpose of the Stock Plan is to attract and retain individuals of outstanding ability to serve in positions of responsibility by providing an opportunity to acquire or increase their proprietary interest in the Company and by providing incentives and awards to motivate their efforts towards the growth and success of the Company.

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          Since January 2004, the Company has used a mix of nonqualified stock options and restricted stock units (generally, weighted 55% options and 45% units, although reviewed annually to determine the most appropriate split) in its annual equity grants to executive officers. In January 2007, with the approval of the chairman of the compensation committee, the Company requested Watson Wyatt to produce a report regarding the market competitiveness of total direct compensation (base salary, annual bonus, stock options and restricted stock units) of the named executive officers. For this report, Watson Wyatt revised the companies comprising the peer group against which it benchmarked the Company’s compensation program in light of the Company’s growth, especially in the global market, to include a more closely matched set of companies and competitors. Watson Wyatt’s methodology and selection were reviewed with the chief executive officer and the chairman of the compensation committee. The revised peer group was determined based on:
    similar revenue (greater than $1 billion and less than $4 billion)
 
    historical precedent (companies included in the peer group in the past)
 
    considerations relating to business strategy and model (companies with product lines and target markets significantly overlapping with those of the Company’s).
          The peer group companies were:
                 
 
          Bio-Rad    
Ametek Inc.   Bard (C.R.)   Beckman Coulter   Laboratories   Donaldson Co.
 
Flowserve Corp.   Millipore Corp.   Mueller Industries   Pentair Inc.   PerkinElmer Inc.
 
SPX Corp.   Steris Corp.   Teleflex Inc.   Waters Corp.   Zimmer Holdings
          Watson Wyatt based its findings upon public proxy statement data of the peer group companies and compared long-term equity grants made to the named executive officers in 2006 against the three-year average equity grants of the peer group companies. According to Watson Wyatt’s report (the “Total Direct Compensation Report”), the target and actual total direct compensation of the named executive officers for 2006 were both below the peer group median. One of the reasons for this result stated in the Total Direct Compensation Report was that the long-term equity compensation of the named executive officers awarded in 2006 was below the median for comparable officer positions, ranging in peer group percentile rank from 1% to 31%. Watson Wyatt recommended to the compensation committee an increase in the number of stock options and restricted stock units granted to the named executive officers and indicated in the Total Direct Compensation Report the award sizes that would place the named executive officers in the 25th, median and 75th percentile of its peer group with respect to target total direct compensation. (In determining these award sizes, Watson Wyatt assumed that annual bonuses would be paid at a percentage of maximum based on a seven-year historic average.)
          Based on the information in the Total Direct Compensation Report, the compensation committee granted stock options and restricted stock units to the named executive officers in the amounts recommended by Watson Wyatt to bring target total direct compensation up to the peer group median. Details about the stock option and restricted stock unit grants made in 2007 may be found in “Grants of Plan-Based Awards for Fiscal Year 2007.”
          Each of the stock options granted under the Stock Plan vests and becomes exercisable in four equal cumulative installments on each of the first, second, third and fourth anniversaries of the date of grant and expires on the seventh anniversary of its grant date. Any unexercised and unvested stock options are forfeited on termination of employment under the Stock Plan unless the instrument evidencing the grant provides otherwise. Each of the restricted stock units granted under the Stock Plan vests and is settled on the fourth anniversary of the date of grant. Under the Stock Plan, the restricted stock units are forfeited on termination of employment prior to the expiration of the restricted period, unless the instrument evidencing the grant provides otherwise, and the termination of the participant’s employment was not for cause. Pending the vesting of restricted stock units, participants also receive dividend equivalent units. Pursuant to their terms, the stock options and restricted stock units may vest earlier under certain circumstances. Details regarding early vesting may be found in “Potential Termination or Change in Control Payments.”
          Management Plan. The purpose of the Management Plan is to encourage key employees of the Company to increase their ownership of the Company’s common stock. Under the Management Plan, key employees:

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    may allocate portions of their cash compensation, using both pretax and after-tax dollars, to purchase restricted stock units, each representing the right to receive one share of common stock upon vesting or later delivery if deferred
 
    receive additional units from the Company to match on a one-for-one basis the units they purchase under the Plan (such match is subject to vesting)
 
    receive additional units equal to the dollar amount of dividends paid on common stock during the vesting period (or deferral period, if any) with respect to units credited to their accounts (“dividend equivalent units”).
          The restricted stock units are not taxed until they are settled in shares of common stock, permitting U.S. taxpayer participants to defer taxation on compensation earned in a given year (base salary and annual bonus) and on compensation received in the form of the matching units.
          The Company believes that the following substantial benefits accrue to the Company from the Management Plan:
    The Management Plan encourages management to elect to receive all or part of their annual bonuses in the form of restricted stock units, and to acquire additional units through either pretax payroll deductions from base salary (up to 50%) or after-tax lump sum payments. In this way, senior management invests in the future performance of the Company and their interests in the Company are aligned more closely with those of shareholders.
 
    The Management Plan encourages the retention of talented management personnel through its vesting provisions. Upon a voluntary termination of employment by a participant (other than retirement) or termination by the Company for cause, in either case prior to the fourth anniversary of the date the units were credited to the participant’s account, any units granted by the Company will be forfeited and any units purchased by the participant will be settled by delivery of a number of shares of common stock based upon the lower of the value of common stock on the date the units were credited or the date of settlement. By participating in the Management Plan, an executive officer has “skin in the game,” risking earned money on a belief in a rising stock price and continued employment.
 
    The Management Plan assists management in reaching their target ownership levels set under the Company’s common stock ownership guidelines described below.
          Details about grants of restricted stock units (including Company matching units) in 2007 under the Management Plan may be found in “Grants of Plan-Based Awards for Fiscal Year 2007.”
Focus on Stability
          The Company achieves stability among its executive officers and promotes executive concentration on developing the Company’s business and building long-term shareholder value primarily through its equity-based compensation, employment contracts and the provision of supplemental retirement benefits. The employment contracts and supplemental retirement arrangements also provide protection with respect to the Company’s intellectual property through a variety of restrictive covenants applicable to the executives. Mr. Krasnoff’s employment contract contains additional benefits to him and additional protections for the Company, reflecting the importance of his leadership to the growth and prospects of the Company.
          Employment Contracts
          Each of the employment contracts provides for notice of termination from the named executive officer or the Company to be given either one or two years in advance of the specified termination date. During the period following a notice of termination, the executive will continue to be fully compensated under his or her contract until the specified termination date, although, if it is the party giving notice, the Company may require the individual not to perform any further services. Mr. Krasnoff’s contract also provides him with severance payments in the event of his voluntary termination following a demotion or change in control of the Company or upon involuntary termination by the Company. Mr. Krasnoff is also entitled to accelerated vesting of his stock options at the start of the 30-day period preceding the end of his employment (other than as a result of death) and may exercise those options in full any time during that period or thereafter until they expire by their terms. The employment contracts also provide for termination upon death, disability, upon the executive reaching age 65 (unless the parties agree otherwise) and upon less than one year’s notice by the executive following a change in control.

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     Details regarding the possible payments under the employment contracts discussed above upon termination of employment or change in control of the Company may be found in “Potential Payments upon Termination or Change in Control.”
     The Company’s business is highly dependent on proprietary intellectual property, including patents, trademarks, copyrights and trade secrets. The Company uses its employment contracts to reinforce limitations on inappropriate sharing of its intellectual property and to ensure that executives who have access to such proprietary intellectual property do not compete with the Company’s businesses either during or after employment with the Company. Each employment contract provides that during employment (including any period following notice of termination whether or not services are being performed) and for 12 to 18 months after termination of employment (other than following a change in control of the Company and with the length depending upon the circumstances of the termination), executive officers may not engage in any activity that is competitive to any material extent with the business of the Company. The employment contracts also contain trade secret, confidentiality and invention and patent covenants that apply during and subsequent to employment.
     Supplemental Retirement Benefits
     Krasnoff Contract Pension. Mr. Krasnoff’s employment contract provides for an annual pension payment beginning at the termination of his employment contract and continuing for ten years, conditioned, while Mr. Krasnoff is alive, upon his being available for advisory services to the Company upon request of the board for up to 15 hours a month and not engaging in any activity competitive to any material extent with Company business without prior Company consent (other than upon a termination of employment by the Company following a change in control).
     Supplementary Pension Plan. In addition to providing a tax-qualified profit-sharing plan and cash balance pension plan for all of its employees, including its named executive officers, the Company maintains supplementary plans for its executive officers that are not tax-qualified. The Company’s Supplementary Pension Plan is available to certain key officers, including the named executive officers, and provides lifetime pension payments that will, when added to primary Social Security benefits and payments from the Company’s tax-qualified Cash Balance Pension Plan, on an annual basis equal 50% of a participant’s average of the three highest of the participant’s last five years’ cash compensation (salary and bonus) prior to termination. Payments under the Supplementary Pension Plan are conditioned upon the participants, both before and after termination of employment, abiding by secrecy and invention agreements and certain non-compete provisions set forth in the plan. Payments under the plan are forfeited if the participant is fired by the Company for gross negligence or willful misconduct. Details regarding pension benefits under Mr. Krasnoff’s contract and the Supplementary Pension Plan may be found in “Pension Benefits for Fiscal Year 2007.”
     Supplementary Profit-Sharing Plan. The Company’s Supplementary Profit-Sharing Plan provides a benefit to U.S.-based executives to make up for contributions that cannot be made to the executives’ accounts by law under the tax-qualified Pall Corporation 401(k) Plan (the “401(k) Plan”, formerly known as the Pall Corporation Profit-Sharing Plan) and for earnings that could have been earned on such contributions. In fiscal year 2007, no contributions were made to the Supplementary Profit-Sharing Plan on behalf of any participants, including the named executive officers.
     Benefits Protection Trust. The Company has established a Benefits Protection Trust to which it makes voluntary contributions to help meet its obligations under the Supplementary Pension Plan and the Supplementary Profit-Sharing Plan, as well as any severance payable to Mr. Krasnoff under his employment contract described above and the Company’s obligation to pay Mr. Krasnoff’s contract pension. In the event of a “change in control” of the Company (as defined in the trust agreement), the trust fund must thereafter be used to satisfy these obligations other than in the event of an insolvency of the Company when such amounts will be available to its general creditors. The balance in the Benefits Protection Trust at the end of fiscal year 2007 was $57,693,354.
     Perquisites and Welfare Benefits
     Generally, the Company does not provide many perquisites to its named executive officers. Each named executive officer receives a car allowance (the amount of which is determined by Mr. Krasnoff) and certain executives have received tax and estate planning, sporting and concert tickets, home office equipment and airline club memberships. In the case of executives who relocate on behalf of the Company, such as Mr. Wilson, relocation and housing costs are also provided. Mr. Perez has an interest free loan from the Company that was made in connection with his purchase of a home upon his relocation on behalf of the Company. Mr. Stevens has an interest free loan from the Company that was made in connection with his exercise of Company stock options. Both loans were made prior to the adoption of the Sarbanes-Oxley Act. See “Summary Compensation Table.” Named executive officers receive the same welfare benefits, consisting of medical, dental, life and disability insurance, on the same terms as all other employees of the Company. The named executive officers are not entitled to receive any welfare benefits as a retiree, other than Mr. Krasnoff whose contract provides for lifetime medical coverage for him and his spouse and minor children, consisting of the same coverage and benefits as are provided under the hospitalization, medical and dental plans maintained by the Company for its nonunionized U.S. employees.

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Equity-Based Compensation Grant Policy
     On January 10, 2007, the compensation committee adopted a written policy for the issuance of grants of equity-based compensation to officers and employees. Under the policy, the committee will make all grants to individuals who may be “covered employees” for purposes of Section 162(m) of the Internal Revenue Code of 1986, as amended, (the “Code”) and to all board-elected officers of the Company. At its regularly scheduled committee meeting held in July of each year, the committee will approve the total aggregate amount of shares available for the following fiscal year’s annual grant to all employees, including named executive officers. In addition, at that meeting, based upon recommendations of the Company’s chief executive officer and any other relevant factors, the committee will approve the total annual equity grants for each non-executive employee based on a schedule listing the name and position of the employee and the type and amount of the applicable award. At its regularly scheduled committee meeting held in January of each year occurring during an open trading window, based upon recommendations of the Company’s chief executive officer and any other relevant factors, the committee will approve the total annual equity grants for each “covered employee” and elected officer. The committee also will approve at a regular or special meeting held on or prior to the contemplated grant date all equity-based grants to newly hired or promoted employees or similar special grants not made at these meetings. All stock options will be granted at fair market value on the grant date as defined under the relevant plan (i.e., the NYSE closing price for the Stock Plan). The director of employee benefits (or, if such position does not exist, the chief financial officer) is charged with ensuring compliance with the grant policy.
Common Stock Ownership Guidelines
     The compensation committee has established common stock ownership guidelines for the Company’s officers and other key employees. The current target ownership levels are 500% of annual base salary for the Company’s chief executive officer, 300% of base salary for any executive officer whose annual base salary exceeds $300,000, and 150% of base salary for any other executive officer whose annual base salary exceeds $150,000. Target ownership levels of common stock for other officers and key employees have been established based on annual base salary ranges. For these purposes, a person’s base salary includes the amount of salary that he or she elects to receive in the form of restricted stock units under the Management Plan. Those persons who began participating in the Management Plan after its inception have six years from the dates of their participation to reach 100% of their target ownership levels. Participants with increased target ownership levels due to promotion are entitled to an additional two years to satisfy the new requirement. In calculating shares owned, each restricted stock unit (whether vested or unvested) held for the account of an employee under the Management Plan or the Stock Plan is counted as one share.
     The compensation committee has determined that, barring mitigating circumstances, any participant in the Management Plan who does not meet the target stock ownership level will not be eligible to receive further grants of stock options until the target is met.
     Each of the named executive officers still in office has met his or her target level or is in a grace period due to promotion. Total stock ownership as a percentage of the target ownership goal by each of the named executive officers who has met his or her target level ranges from 143% to 361%.
Taxes
     The Code limits the deductibility for federal income tax purposes of executive compensation paid by public companies to certain of their executive officers. Under Section 162(m) of the Code, the Company is not permitted to deduct compensation of the chief executive officer and the three other most highly paid executive officers (other than the chief financial officer) in excess of $1,000,000 for any fiscal year except to the extent that the compensation in excess of that amount meets the statutory definition of “performance-based compensation.”
     The Company intends that cash bonuses and certain equity grants (including stock options) granted under the Bonus Plan and the Stock Plan meet the statutory definition of “performance-based compensation.” However, the Company may from time to time award certain bonuses and equity grants that are not deductible under Section 162(m). For example, restricted stock units granted under the Stock Plan and matching units credited under the Management Plan and any dividend equivalents on such units do not qualify as performance-based compensation. Nonetheless, the Company believes that the potential loss of a tax deduction is justified by the rationale for these awards.

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     The Company is reviewing its compensation agreements and plans to ensure compliance with Section 409A of the Code. One result of Section 409A will be the delay of any payments made upon an executive officer’s separation from service to the date six months after the end of employment, in which event any such payments that would otherwise have been made during such period will be paid at the end of the six-month period in a lump sum with interest.
Post-Fiscal Year End Events
     Wilson Departure. As of November 14, 2006, the Company notified Marcus Wilson, the Company’s former President and board member, of its intention to exercise its right to terminate his employment in accordance with his employment contract. The Company entered into a separate letter agreement with Mr. Wilson dated on December 11, 2006, which amended his employment contract and provided certain additional termination benefits to him in exchange for a general release and waiver of claims against the Company. Pursuant to his contract and the letter agreement, Mr. Wilson will continue to be compensated as an employee of the Company through November 14, 2008 whether or not the Company requires him to provide further services. To date, the Company has not required any services from Mr. Wilson. Details about Mr. Wilson’s post-termination compensation may be found in and following the “Summary Compensation Table.” As of November 14, 2006, Mr. Krasnoff assumed Mr. Wilson’s position as president. The Company did not increase Mr. Krasnoff’s compensation as a result of his assumption of this additional role.
COMPENSATION COMMITTEE REPORT
     The compensation committee reviewed and discussed the Company’s Compensation Discussion and Analysis with management. Based on this review and discussion, the compensation committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Annual Report and the Company’s Proxy Statement.
     This report by the compensation committee is not to be deemed filed under the Securities Act of 1933 or the Securities Exchange Act of 1934, both as amended, and is not to be incorporated by reference into any other filing of the Company under those statutes except to the extent that the Company may expressly refer to this report for incorporation by reference in a particular instance.
     The undersigned, being all the members of the compensation committee, submit this report to the Company’s shareholders.
Compensation Committee
Daniel J. Carroll, Jr. (Chair)
Ulric S. Haynes, Jr.
Edwin W. Martin, Jr.
Edward L. Snyder
Cheryl W. Grisé (appointed to the
committee on January 17, 2008)
Compensation Committee Interlocks and Insider Participation
     During fiscal year 2007, Mr. Daniel J. Carroll, Jr. (Chair), Mr. Ulric S. Haynes, Jr., Edwin W. Martin, Ph.D. and Edward L. Snyder, M.D. served on the compensation committee of the board. None of the persons who served on the compensation committee are, or have been, an employee or officer of the Company or had any relationship requiring disclosure under Item 404 of Regulation S-K under the Exchange Act. In addition, none of the Company’s executive officers serves, or has served during the last completed fiscal year, as a member of the board or compensation committee of any other entity that has or has had one or more of its executive officers serving as a member of the Company’s board.

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Summary Compensation Table
     The following table sets forth the compensation of each of the named executive officers for the fiscal year ended July 31, 2007.
                                                                 
                                            Change in        
                                            Pension Value        
                                            and Nonqualified        
                                    Non-Equity   Deferred        
                    Stock   Option   Incentive Plan   Compensation   All Other    
Name and           Salary   Awards   Awards   Compensation   Earnings   Compensation    
Principal Position   Year   (1)   (2)   (3)   (4)   (5)   (6)   Total
Eric Krasnoff
(Chairman, Chief Executive Officer & President)
    2007     $ 862,108     $ 685,658     $ 574,616     $ 836,676     $ 1,215,057     $ 48,977     $ 4,223,092  
 
                                                               
Lisa McDermott
(Chief Financial Officer & Treasurer)
    2007     $ 348,660     $ 119,270     $ 97,396     $ 236,863     $ 291,335     $ 24,936     $ 1,118,460  
 
                                                               
Donald Stevens
(Chief Operating Officer & President-Industrial)
    2007     $ 507,156     $ 381,150     $ 212,394     $ 344,537     $ 216,234     $ 35,321     $ 1,696,792  
 
                                                               
Roberto Perez
(President-Life Sciences)
    2007     $ 335,972     $ 221,451     $ 164,633     $ 302,961     $ 525,498     $ 33,661     $ 1,584,176  
 
                                                               
Mary Ann Bartlett
(Senior Vice President & General Counsel)
    2007     $ 290,279     $ 103,799     $ 59,955     $ 197,202     $ 399,554     $ 22,806     $ 1,073,595  
 
                                                               
Marcus Wilson
(Former President) (7)
    2007     $ 137,676     $ 877,097     $ 373,002           $ 246,730     $ 905,977     $ 2,540,482  

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(1)   Base salary is paid in accordance with each named executive officer’s employment contract. Includes amounts deferred into restricted stock units under the Company’s Management Plan by Ms. Bartlett ($22,507) and Mr. Perez ($82,103).  See “Grants of Plan-Based Awards” for further information.
 
(2)   Reflects the expense recognized for financial statement reporting purposes under SFAS 123R for each NEO for the Company’s fiscal year ended July 31, 2007 for restricted stock units granted to the NEO both in fiscal year 2007 and in prior years under the Stock Plan and Management Plan. Pursuant to SEC rules, the amounts shown exclude the impact of estimated forfeitures related to service-based conditions. For additional information regarding the assumptions made in calculating these amounts, see Note 17, Common Stock, to the accompanying consolidated financial statements with respect to the grants made in fiscal year 2007 and the corresponding note to consolidated financial statements for prior fiscal years for grants made in such years. The amount shown for Mr. Wilson reflects additional expense recognized as a result of the terms of Mr. Wilson’s separation. These amounts reflect the Company’s accounting expense for these awards and do not correspond to the actual value, if any, that may be realized by the NEO.
 
(3)   Reflects the expense recognized for financial statement reporting purposes under SFAS 123R for each NEO for the Company’s fiscal year ended July 31, 2007 for stock options granted to the NEO both in fiscal year 2007 and in prior years under the Stock Plan and prior Company stock option plans. Pursuant to SEC rules, the amounts shown exclude the impact of estimated forfeitures related to service-based conditions. For additional information regarding the assumptions made in calculating these amounts, see Note 17, Common Stock, to the accompanying consolidated financial statements with respect to the grants made in fiscal year 2007 and the corresponding note to consolidated financial statements for prior fiscal years for grants made in such years. The amount shown for Mr. Wilson reflects additional expense recognized as a result of the terms of Mr. Wilson’s separation. These amounts reflect the Company’s accounting expense for these awards and do not correspond to the actual value, if any, that may be realized by the NEO.
 
(4)   Reflects annual bonus paid to the NEO under the Company’s Bonus Plan for fiscal year 2007. Includes amounts deferred into restricted stock units under the Company’s Management Plan by Ms. McDermott ($207,000) and Mr. Perez ($75,740) in fiscal year 2008. See the description of the Executive Incentive Bonus Plan and the Management Plan in “Compensation Discussion and Analysis” for further information about these awards.
 
(5)   Represents the aggregate increase in the actuarial present value of accumulated benefits under the Company’s tax-qualified Cash Balance Pension Plan, nonqualified Supplementary Pension Plan and, in the case of Mr. Krasnoff, his contract pension and, in the case of Mr. Wilson, the Pall U.K. Pension Fund, from the plan measurement date used for financial statement reporting purposes with respect to fiscal year 2006 to the plan measurement date used for financial statement reporting purposes with respect to fiscal year 2007. See “Pension Benefits for Fiscal Year 2007” for further information.
 
(6)   The amounts reported in All Other Compensation represent the aggregate incremental cost to the Company in fiscal year 2007 of the following:
     
Eric Krasnoff
 
      Company contributions to the 401(k) Plan
 
 
      Company car allowance
 
 
      Fees for estate planning
 
 
      Sporting and concert tickets
 
 
      Fees for tax return preparation
 
 
      Club memberships
 
 
      Home office expenses
 
   
Lisa McDermott
 
      Company contributions to the 401(k) Plan
 
 
      Company car allowance
 
 
      Sporting and concert tickets
 
 
      Home office expenses
 
   
Donald Stevens
 
      Company contributions to the 401(k) Plan
 
 
      Company car allowance
 
 
      Imputed interest for outstanding loan to the Company
 
 
      Fees for estate planning
 
 
      Home office expenses

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Roberto Perez
 
      Company contributions to 401(k) Plan
 
 
      Company car allowance
 
 
      Imputed interest for outstanding loan to the Company
 
 
      Sporting and concert tickets
 
 
      Home office expenses
 
   
Mary Ann Bartlett
 
      Company contributions to 401(k) Plan
 
 
      Company car allowance
 
 
      Sporting and concert tickets
 
   
Marcus Wilson
 
      Company contributions to 401(k) Plan
 
 
      Company car allowance (while still employed)
 
 
      Housing allowance (while still employed)
 
 
      Fees for tax return preparation
 
 
      Payments under separation agreement (See “Wilson Separation Agreement” for  more information)
 
 
°      Eight months’ car allowance    ($12,480)
 
 
°      Salary continuation ($373,692)
 
 
°      Housing allowance ($12,968)
 
 
°      Equivalent of 401(k) Plan contributions ($6,750)
 
 
°      Annual bonus ($372,212)
 
 
°      Legal and broker fees in connection with house sale ($98,925)
 
 
°      Reimbursement for legal fees in connection with separation agreement ($12,242)
 
(7)   Mr. Wilson resigned as an officer and director of the Company effective as of November 14, 2006.
For further information regarding the compensation set forth in the Summary Compensation Table, see “Compensation Discussion and Analysis” and “Pension Benefits for Fiscal Year 2007.”
Wilson Separation Agreement
     Marcus Wilson resigned as an officer and director of the Company effective as of November 14, 2006. In connection with his resignation, the Company entered into a letter agreement with Mr. Wilson that sets forth the Company’s severance obligations. Pursuant to the letter agreement, and conditioned on Mr. Wilson’s execution of a general release and waiver of claims, for a period of two years following November 14, 2006 (the “Notice Period”), Mr. Wilson is entitled to receive continued base salary of $511,368 per annum, an annual bonus under the Bonus Plan (with a target bonus of 112.5% of his base salary), continued coverage under the Company’s group medical insurance, a car allowance of $18,720 per year, a housing allowance of $17,700 per year for as long as Mr. Wilson remains in his U.S. residence, reimbursement for tax advice and reimbursement up to $15,000 for legal advice in connection with his resignation, outplacement services of up to $15,000, continued participation in the Supplementary Profit-Sharing Plan and the Supplementary Pension Plan and immediate pro rata vesting in a portion of his Management Plan account. As of November 14, 2006, Mr. Wilson ceased participation in the 401(k) Plan and the Cash Balance Plan, and, in lieu of such continued participation, Mr. Wilson will be entitled to a cash payment equal to the amount of Company contributions that would have otherwise been made to his accounts under such plans.
     Upon Mr. Wilson’s repatriation to the United Kingdom, he will become entitled to repatriation costs of up to $30,000, and payment of a broker commission of up to 5% and attorney fees of up to 0.5% of the sale price of his U.S. residence. In addition, stock options and restricted stock units granted pursuant to Stock Plan or the 1998 Employee Stock Option Plan not vested as of November 14, 2006 will continue to vest and be exercisable or settled, respectively, in accordance with their terms until the expiration of the Notice Period. At the end of the Notice Period, any unvested stock options under such plans will vest in full at such time and will remain outstanding until expiration in accordance with their terms and any unvested restricted stock units will continue to vest and be settled in accordance with their terms.

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     In consideration for the foregoing arrangements, Mr. Wilson is not permitted to accept employment with another employer until the expiration of the Notice Period without written confirmation from the Company that such employment will not compete with Company. If Mr. Wilson does accept employment during the Notice Period, provided he has received confirmation from the Company that his new employment will not compete with the Company, from the date of his new employment until the end of the Notice Period, Mr. Wilson will receive monthly payments equivalent to 50% of his base salary and bonus compensation, continued vesting in his restricted stock units, and acceleration of his stock options.
Grants of Plan-based Awards for Fiscal Year 2007
     The following table provides information concerning equity and non-equity incentive awards granted to the named executive officers under the Bonus Plan, the Stock Plan and the Management Plan during fiscal year 2007. There can be no assurance that the grant date fair value of stock and option awards reported below will ever be realized by the named executive officers.
                                                                         
                                    All Other                
                Stock   All Other            
            Estimated   Awards:   Option            
            Future Payouts   Number   Awards:   Exercise   Grant Date Fair
            Under Non-Equity   of Shares   Number of   or Base   Value of Stock and
            Incentive Plan Awards   of Stock   Securities   Price of   Option Awards (8)  
            Threshold   Target   Maximum   or Units   Underlying   Option   ($)  
            (1)   (2)   (2)   (5)   Options (6)   Awards (7)   Option   Stock
Name   Grant Date   ($)   ($)   ($)   (#)   (#)   ($/Sh)   Awards   Awards
Eric Krasnoff
    1/10/2007                               29,000  (3)     121,000     $ 34.07     $ 1,073,270     $ 988,030  
 
    1/31/2007                               8,631  (4)                             300,000  
 
          $ 32,329     $ 1,293,162     $ 1,293,162                                          
 
                                                                       
Lisa McDermott
    1/10/2007                               10,000  (3)     44,000       34.07       390,280       340,700  
 
            9,152       366,093       366,093                                          
 
                                                                       
Donald Stevens
    10/3/2006                               11,586  (4)                             356,169  
 
    1/10/2007                               10,000  (3)     42,000       34.07       372,540       340,700  
 
    1/31/2007                               10,472  (4)                             364,000  
 
            13,313       532,514       532,514                                          
 
                                                                       
Roberto Perez
    10/3/2006                               3,362  (4)                             103,361  
 
    1/10/2007                               8,000  (3)     35,000       34.07       310,450       272,560  
 
    1/31/2007                               2,307  (4)                             80,200  
 
    7/31/2007                               2,023  (4)                             84,006  
 
            8,819       352,771       352,771                                          
 
                                                                       
Mary Ann Bartlett
    9/29/2006                               5,178  (4)                             159,545  
 
    1/10/2007                               8,000  (3)     35,000       34.07       310,450       272,560  
 
    1/31/2007                               626  (4)                             21,770  
 
    7/31/2007                               560  (4)                             23,244  
 
            7,620       304,793       304,793                                          
 
                                                                       
Marcus Wilson
    10/3/2006                               7,510  (4)                             230,876  
 
            14,382       575,289       575,289                                          
 
(1)   Represents the bonus payable to the named executive officer under the Bonus Plan if the threshold, or lowest possible achievement that would yield a bonus payment, is obtained.
 
(2)   Represents the bonus payable to the NEO under the Bonus Plan if the performance target is obtained. The amounts disclosed under target and maximum are identical as full bonus is paid if the performance target is achieved.

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(3)   Represents the number of restricted stock units granted to the NEO under the Stock Plan on January 10, 2007. These restricted stock units will vest in full and be settled in stock on the fourth anniversary of the date of grant or, if occurring prior to that date, upon termination of employment as a result of death or disability or upon a change in control of the Company. A pro rated portion of any unvested restricted stock units will vest upon a termination of employment for eligible retirement (at or over age 65). Upon a termination of employment for any reason other than death, disability or eligible retirement, all unvested restricted stock units will be forfeited.
 
(4)   Represents the number of restricted stock units granted to the NEO under the Management Plan. The number of restricted stock units shown as granted on September 29, 2006, and October 3, 2006 resulted from pretax deferrals of bonus paid for fiscal year 2006 and the number of restricted stock units shown as granted on January 31, 2007 and July 31, 2007 resulted from pretax base salary deferrals by the named executive officer ($22,507 for Ms. Bartlett and $82,103 for Mr. Perez), as well as employer matching units granted with respect to units acquired by the named executive officer with all pretax and after-tax contributions. These restricted stock units will vest in full on the fourth anniversary of the date of grant or, if occurring prior to that date, upon termination of employment as a result of death or disability or upon a change in control of the Company. Upon a termination of employment for eligible retirement (at or over age 62) or upon a termination by the Company without cause, a pro rated portion of any unvested employer matching units will vest and all unvested units acquired by the named executive officer through pretax and after-tax contributions will vest. Upon a termination of employment for any reason other than death, disability, eligible retirement or by the Company without cause, all unvested employer matching units will be forfeited and all unvested units acquired by the named executive officer through pretax and after-tax contributions will vest but will be settled by delivery of a number of shares based upon the lower of the value of common stock on the date the units were credited to the NEO’s account or the date of settlement.
 
(5)   Dividend equivalent units are earned on all restricted stock units outstanding at the time the Company’s quarterly dividend is paid, based on the closing stock price on the dividend payment date, and vest at the same time as the restricted stock units to which they relate.
 
(6)   Represents the number of non-qualified stock options granted to the NEO on January 10, 2007 under the Stock Plan. The options granted vest 25% on each of the first four anniversaries of the date of grant while employed by the Company and after a termination for disability or retirement at or after age 65. Upon a termination for any reason other than disability or retirement, all unvested stock options will be forfeited on the date of termination, except in the case of Mr. Krasnoff whose options will vest 30 days prior to any termination of employment (other than as a result of death) pursuant to his employment contract. All stock options will vest in full upon a change in control of the Company. All stock options will expire on the seventh anniversary of the date of grant.
 
(7)   Exercise price is based upon the closing price of a share of common stock as reported in the NYSE Composite Transactions on the date of grant.
 
(8)   Represents the grant date fair value under SFAS 123R of the restricted stock units and stock option awards granted to the named executive officer.
For a description of the material terms of the Company’s Bonus Plan, Stock Plan and Management Plan, see “Compensation Discussion and Analysis” and “Potential Payments upon Termination or Change in Control.”

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Outstanding Equity Awards at end of Fiscal Year 2007
     The following table provides information regarding unexercised options and unvested restricted stock units outstanding for each named executive officer as of the end of fiscal year 2007.
                                                                 
    Option Awards (1)   Stock Awards (1)
                                                Market    
                                    Number   Value of    
    Number of   Number of                       of Shares   Shares    
    Securities   Securities                       or Units of   or Units of    
    Underlying   Underlying       Option           Stock That   Stock That    
    Unexercised   Unexercised   Option   Exercise   Option   Have Not   Have Not   Schedule
    Options   Options   Grant   Price   Expiration   Vested   Vested (3)   Vesting
Name   (#) Exercisable   (#) Unexercisable   Date (2)   ($)   Date   (#)   ($)   Date
Eric Krasnoff
    170,948                   $ 22.09       3/18/2011       25,898  (4)   $ 1,075,285       1/19/2009  
 
    83,000                     16.13       10/2/2012       25,529  (4)     1,059,964       1/19/2010  
 
    47,500       47,500       1/19/2005       27.00       1/19/2012       29,181  (4)     1,211,595       1/10/2011  
 
    23,750       71,250       1/19/2006       28.68       1/19/2013       47,149  (5)     1,957,626       9/30/2009  
 
          121,000       1/10/2007       34.07       1/10/2014       8,685  (5)     360,601       1/31/2011  
 
                                                               
Lisa McDermott
    3,850                   $ 16.13       10/2/2012       1,645  (4)   $ 68,300       7/27/2009  
 
    1,200       1,200       7/27/2005       30.83       7/27/2012       5,106  (4)     212,001       1/19/2010  
 
    4,500       13,500       1/19/2006       28.68       1/19/2013       10,062  (4)     417,774       1/10/2011  
 
          44,000       1/10/2007       34.07       1/10/2014       1,738  (5)     72,162       9/11/2007  
 
                                            1,600  (5)     66,432       9/17/2008  
 
                                            5,317  (5)     220,762       9/30/2009  
 
                                                               
Donald Stevens
    35,051                   $ 16.13       10/2/2012       7,251  (4)   $ 301,062       1/19/2009  
 
    12,500       6,250       8/4/2003       22.74       8/3/2013       7,148  (4)     296,785       1/19/2010  
 
    13,500       13,500       1/19/2005       27.00       1/19/2012       10,062  (4)     417,774       1/10/2011  
 
    6,750       20,250       1/19/2006       28.68       1/19/2013       14,482  (5)     601,293       9/11/2007  
 
          42,000       1/10/2007       34.07       1/10/2014       1,585  (5)     65,809       1/31/2008  
 
                                            1,754  (5)     72,826       7/31/2008  
 
                                            16,014  (5)     664,901       9/17/2008  
 
                                            18,457  (5)     766,335       9/30/2009  
 
                                            1,844  (5)     76,563       1/31/2010  
 
                                            2,177  (5)     90,389       7/31/2010  
 
                                            11,699  (5)     485,742       10/3/2010  
 
                                            10,537  (5)     437,496       1/31/2011  
 
                                                               
Roberto Perez
          5,250       8/1/2003     $ 22.65       7/31/2013       5,698  (4)   $ 236,581       1/19/2009  
 
          3,750       1/19/2005       27.00       1/19/2012       512  (4)     21,258       8/29/2009  
 
          9,375       8/29/2005       28.33       8/29/2012       7,148  (4)     296,785       1/19/2010  
 
          20,250       1/19/2006       28.68       1/19/2013       8,050  (4)     334,236       1/10/2011  
 
          35,000       1/10/2007       34.07       1/10/2014       3,810  (5)     158,191       1/31/2008  
 
                                            4,555  (5)     189,124       7/31/2008  
 
                                            2,064  (5)     85,697       1/31/2009  
 
                                            2,101  (5)     87,234       7/31/2009  
 
                                            8,734  (5)     362,636       9/30/2009  
 
                                            3,364  (5)     139,673       1/31/2010  
 
                                            2,263  (5)     93,960       7/31/2010  
 
                                            3,395  (5)     140,960       10/3/2010  
 
                                            2,322  (5)     96,409       1/31/2011  
 
                                            2,023  (5)     83,995       7/31/2011  

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    Option Awards (1)   Stock Awards (1)
                                                Market    
                                    Number   Value of    
    Number of   Number of                       of Shares   Shares    
    Securities   Securities                       or Units of   or Units of    
    Underlying   Underlying       Option           Stock That   Stock That    
    Unexercised   Unexercised   Option   Exercise   Option   Have Not   Have Not   Schedule
    Options   Options   Grant   Price   Expiration   Vested   Vested (3)   Vesting
Name   (#) Exercisable   (#) Unexercisable   Date (2)   ($)   Date   (#)   ($)   Date
Mary Ann Bartlett
    2,500                   $ 22.09       3/18/2011       1,450  (4)   $ 60,204       1/19/2009  
 
    3,250                     16.13       10/2/2012       1,025  (4)     42,558       8/29/2009  
 
    1,000       1,000       1/19/2005       27.00       1/19/2012       2,553  (4)     106,001       1/19/2010  
 
    300       900       8/29/2005       28.33       8/29/2012       8,050  (4)     334,236       1/10/2011  
 
    800       2,400       1/19/2006       28.68       1/19/2013       471  (5)     19,556       9/11/2007  
 
          35,000       1/10/2007       34.07       1/10/2014       261  (5)     10,837       1/31/2008  
 
                                            288  (5)     11,958       7/31/2008  
 
                                            129  (5)     5,356       1/31/2009  
 
                                            384  (5)     15,944       1/31/2009  
 
                                            132  (5)     5,481       7/31/2009  
 
                                            559  (5)     23,210       9/30/2009  
 
                                            82  (5)     3,405       1/31/2010  
 
                                            630  (5)     26,158       7/31/2010  
 
                                            5,229  (5)     217,108       9/29/2010  
 
                                            630  (5)     26,158       1/31/2011  
 
                                            560  (5)     23,251       7/31/2011  
 
                                                               
Marcus Wilson
    15,000                   $ 16.13       10/2/2012       8,287  (4)   $ 344,076       1/19/2009  
 
    20,625       6,875       8/4/2003       22.74       8/3/2013       8,169  (4)     339,177       1/19/2010  
 
    15,000       15,000       1/19/2005       27.00       1/19/2012       12,157  (5)     504,759       9/11/2007  
 
    7,500       22,500       1/19/2006       28.68       1/19/2013       12,717  (5)     528,010       9/17/2008  
 
                                            5,770  (5)     239,570       1/31/2009  
 
                                            16,752  (5)     695,543       9/30/2009  
 
                                            7,584  (5)     314,888       10/3/2010  
 
(1)   Stock options were granted under the Stock Plan, the 1998 Employee Stock Option Plan, and the 1995 Employee Stock Option Plan. Restricted stock units were granted under the Stock Plan and the Management Plan and include any associated dividend equivalent units.
 
(2)   Stock options are scheduled to vest 25% on each of the first four anniversaries of the date of grant.
 
(3)   Represents the number of shares multiplied by the closing price of Pall stock on July 31, 2007 ($41.52) (with rounding of fractional restricted stock units).
 
(4)   Represents restricted stock units (including associated dividend equivalent units) granted to the NEO pursuant to the Stock Plan.
 
(5)   Represents restricted stock units (including associated dividend equivalent units) granted to the NEO under the Management Plan as a result of pretax base salary and bonus deferrals and employer matching units granted with respect to restricted stock units acquired by the named executive officer with pretax and after-tax contributions.

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Option Exercises And Stock Vested For Fiscal Year 2007
     The following table sets forth information regarding the shares acquired upon the exercise of stock options and the value realized from these option exercises by the named executive officers during fiscal year 2007. None of the named executive officers had any restricted stock units vest during fiscal year 2007.
                 
    Option Awards
    Number of Shares   Value Realized
    Acquired on   on Exercise
Name   Exercise (#)   ($) (1)
Eric Krasnoff
    124,052     $ 2,279,436  
Lisa McDermott
           
Donald Stevens
    38,397       526,823  
Roberto Perez
    23,000       307,783  
Mary Ann Bartlett
    2,250       48,897  
Marcus Wilson
    85,000       1,925,173  
 
(1)   Value based on per share sale price if shares were sold at the time of exercise; otherwise, value based on the average of high and low stock price as reported in the NYSE Consolidated Transactions on the date of exercise.
Pension Benefits For Fiscal Year 2007
     The following table sets forth the present value as of July 31, 2007 of accumulated benefits under each plan that provides for pension benefits to the named executive officers at, following, or in connection with retirement.
                     
        Number of   Present
        Years   Value of
        Credited   Accumulated
        Service (1)   Benefit (2)
Name   Plan Name   (#)   ($)
Eric Krasnoff
  Employment Contract Pension     32     $ 7,264,940  
 
  Supplementary Pension     32       7,411,300  
 
  Cash Balance Pension     32       106,643  
Lisa McDermott
  Supplementary Pension     8     $ 853,219  
 
  Cash Balance Pension     8       29,729  
Donald Stevens
  Supplementary Pension     39     $ 4,372,807  
 
  Cash Balance Pension     39       284,434  
Roberto Perez
  Supplementary Pension     8     $ 2,944,981  
 
  Cash Balance Pension     8       52,808  
Mary Ann Bartlett
  Supplementary Pension     22     $ 2,002,090  
 
  Cash Balance Pension     22       209,031  
Marcus Wilson
  Supplementary Pension     29     $ 1,574,333  
 
  Cash Balance Pension     29       39,480  
 
  U.K. Pension Fund     25       1,421,766  
 
   
 
(1)   The number of years of credited service and actual service do not differ for any NEO for any plan.

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(2)   “Present value of accumulated benefit” is a calculation that estimates the cash value as of July 31, 2007 of the pension benefit that has been earned by each named executive officer. It is based on various assumptions, including assumptions about future interest rates, inflation, mortality and retirement dates as follows:
    Discount rate: 6.25%
 
    Mortality: Combined healthy white collar RP2000 generational table for males and females
 
    Assumed retirement/commencement of benefits date:
  °   Supplementary Pension Plan: 60
 
  °   Cash Balance Pension Plan: 65
 
  °   Mr. Krasnoff’s employment contract pension: July 31, 2007
 
  °   U.K. Pension Fund: 65
    Inflation: 2.5% (applicable to U.K. Pension Fund only).
U.S. Pension Benefits
     Cash Balance Pension Plan
     Eligible employees may participate in the Pall Corporation Cash Balance Pension Plan on August 1st after completing 6 months of service and attaining age 201/2. Eligible compensation under this plan includes the total compensation received by a participant for the plan year, including overtime pay and bonuses, subject to a limit under Section 401(a)(17) of the Code (which limit was $220,000 for fiscal year 2007).
     Under the cash balance plan formula, pension benefits are based on a participant’s hypothetical account balance. Each year the account balance is increased by compensation credits and interest credits. The compensation credit is added to the cash balance account on the last day of the plan year (or end of month of termination, if earlier) and is calculated by multiplying eligible compensation by a percentage. This percentage is determined by “points” which are equal to the sum of age and years of service as of the first day of each plan year. For less than 45 points, the credit is 2.5%; for 45-54 points, it is 3%; for 55-64 points, it is 4%; and for 65 or more points, it is 5%. In addition, the balance for those participants who were participants as of August 1, 1999 and who were age 50 with at least 10 years of service, will receive an additional compensation credit of 2% for each plan year that the participant remains an employee. Interest credits are added to the cash balance account on the last day of each plan year based on the average of the constant maturity one-year Treasury Bill rate for the month of June preceding the plan year in which the account is to be credited. In addition, interest credits on one half of the compensation credit earned during the plan year are also added to the account balance at the end of the plan year. Interest credits continue to be added to the account balance until the benefit is paid.
     If the participant is married, the normal form of payment is a joint and 50% survivor annuity. If the participant is not married, the normal form is a life annuity. The annuity is determined by converting the cash balance account to the actuarial equivalent monthly retirement benefit. In addition to the normal forms of payment described above, there are other optional forms of payment (lump sum and annuity) all of which are actuarially equivalent to the life annuity. A participant who terminates prior to age 55 may elect to receive a lump sum distribution equal to the participant’s account balance at his or her benefit commencement date or the normal form of payment described above.
     A participant becomes 100% vested in his or her benefits after five years of service.
     Supplementary Pension Plan
     The Company maintains the Supplementary Pension Plan which provides a retirement pension benefit, payable monthly commencing on the first day of the month following the normal retirement date (the last day of the month coinciding with or immediately following attainment of age 65) equal to 1/12 of 50% of the member’s final average compensation, reduced by the sum of the total annual pension payable under all other Company pension programs and the participant’s primary social security benefit. Final average compensation means one third of the participant’s aggregate compensation for the three years in which his or her compensation was the highest out of the last five years in which he or she participated in the plan. Compensation includes salary and bonus payments but does not include fringe benefits, equity awards or Company contributions to any retirement plans, including the 401(k) Plan and Supplementary Profit-Sharing Plan.

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     A participant is vested in his or her benefit under the plan if (i) he or she is employed by the Company on either his or her 60th birthday or, if later, the fifth anniversary of his or her participation in the plan, or (ii) he or she has been employed by the Company for a period of at least 25 years, or (iii) he or she holds the position of Executive Vice President of the Company. Payments under the Supplementary Pension Plan are conditioned upon the participant, both before and after termination of employment, abiding by secrecy and invention agreements and certain non-compete provisions set forth in the plan. Payments under the plan are also forfeited if the participant is fired by the Company for gross negligence or willful misconduct.
     Upon a change in control (see note 4 to “Potential Payments Upon Termination or Change in Control”), each plan participant whose employment with the Company terminates for any reason (other than death) and who was a member of the Company’s Operating Committee at any time during the 30-day period immediately preceding the change in control, shall be fully vested in his or her account. All of the named executive officers other than Ms. McDermott and Mr. Perez were already fully vested in his or her account on July 31, 2007.
     A participant will receive his or her benefit payments under the plan upon retirement at or after age 60 with no reduction in benefits. A participant who retires as a result of disability will receive his or her benefit payments beginning six months after such disability (regardless of the participant’s age) and continuing only during the period of such disability; provided that if a participant ceases to suffer a disability after he or she has attained age 65, his or her benefit payments will continue during his or her lifetime with no reduction in benefits. If a participant retires after age 65, his or her benefit payments will be calculated using the higher of (i) the amount under the plan’s regular formula or (ii) the amount under the formula using the participant’s final average compensation based upon the year in which the participant turned 65 (and looking back over his or her four years prior to that year) and multiplying the result by the percentage increase in the consumer price index for the month immediately preceding the commencement of benefit payments over the month in which the participant turned 65.
     Although the benefit under the plan is calculated in terms of lifetime monthly payments, a participant may elect to take the actuarial equivalent in any form of payment offered under the Cash Balance Plan (or other retirement plan) other than a single lump sum.
     The purpose of the Supplementary Pension Plan is to assure executives a specified level of retirement benefit over and above what would be payable under the Company’s tax-qualified Cash Balance Pension Plan.
     U.K. Pension Fund
     U.K. employees hired prior to August 1, 1997 are entitled to a pension payable at age 65 in the amount of one-sixtieth of Pensionable Salary for each year of service as a contributory member. “Pensionable salary” is the average of the highest three consecutive years of salary out of the last ten years prior to the date of retirement. Members of the plan currently pay contributions to the plan at the rate of 7.75% of annual salary (excluding bonus, commissions and overtime). Pension payments accrued after April 5, 1997 are increased for cost of living up to a maximum of 5% per year.
     Each participant may elect to commence receiving a reduced pension benefit prior to the normal retirement date of age 65. Benefit reductions are based on when service was provided to the Company.

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Krasnoff Contract Pension
     Mr. Krasnoff’s employment contract provides for a pension amount to be paid to him, or his estate, for each of the ten years following the termination of his employment. Such annual amount will be determined by taking the average of the total cash compensation (salary and bonus) paid to him for the three full fiscal years out of the last five fiscal years prior to his termination in which he received the highest total cash compensation, adjusting it for changes in the consumer price index (for years other than the first year of payment), multiplying the result by 60% and subtracting the amount which is the maximum annual benefit payable under Section 415(b)(1)(A) of the Code as of the date of termination. The payment of the contract pension is conditioned upon Mr. Krasnoff being available for advisory services to the Company upon request of the board for up to 15 hours a month and Mr. Krasnoff’s not engaging in any activity competitive to any material extent with Company business without prior Company consent (other than upon a termination of employment by the Company following a change in control).
Nonqualified Deferred Compensation For Fiscal Year 2007
     The following table summarizes transactions and balances with respect to each NEO’s account under the Company’s nonqualified deferred compensation plans, other than defined benefit arrangements, for the fiscal year ended July 31, 2007.
                                             
                        Aggregate           Aggregate
        Executive   Registrant   Earnings in   Aggregate   Balance at
        Contributions   Contributions   Last FY   Withdrawals/   Last FYE
        in Last FY   in Last FY   (1)(2)   Distributions   (3)(4)
Name   Plan Name   ($)   ($)   ($)   ($)   ($)
Eric Krasnoff  
Supplementary Profit-Sharing
              $ 72,913           $ 687,883  
   
Management Stock Purchase
                964,474             2,535,377  
   
 
                                       
Lisa McDermott  
Supplementary Profit-Sharing
              $ 273           $ 2,913  
   
Management Stock Purchase
                22,647             59,498  
   
 
                                       
Donald Stevens  
Supplementary Profit-Sharing
              $ 12,421           $ 108,942  
   
Management Stock Purchase
                142,400             374,303  
   
 
                                       
Roberto Perez  
Supplementary Profit-Sharing
              $ 3,055           $ 28,817  
   
Management Stock Purchase
                -0-             -0-  
   
 
                                       
Mary Ann Bartlett  
Supplementary Profit-Sharing
              $ 775           $ 9,857  
   
Management Stock Purchase
                111,325             292,633  
   
 
                                       
Marcus Wilson  
Supplementary Profit-Sharing
              $ 5,248           $ 39,678  
   
Management Stock Purchase
                42,329             111,232  
 
(1)   Includes (i) interest, dividend, and unrealized gain income earned on the named executive officer’s account balance under the Supplementary Profit-Sharing Plan; and (ii) dividend equivalent units and appreciation earned on deferred vested restricted stock units under the Management Plan. With regard to the Management Plan, when dividend equivalent units are first earned and allocated, they are calculated based on the closing price of Pall common stock on the dividend payment date.
 
(2)   The amounts listed in this column are not included in the “Summary Compensation Table.”
 
(3)   Includes (i) the value of the NEO’s account balance under the Supplementary Profit-Sharing Plan and (ii) the dollar value of the NEO’s deferred vested restricted stock units under the Management Plan (including associated dividend equivalent units), based on the closing price of Pall common stock on July 31, 2007 ($41.52).
 
(4)   Certain contributions by the Company under the Supplementary Profit-Sharing Plan may have been included in the Summary Compensation Table in proxy statements for prior years.

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Supplementary Profit-Sharing Plan
     Each named executive officer participates in the Supplementary Profit-Sharing Plan, pursuant to which the Company may contribute an additional amount equal to the sum of the base salary and bonus of the named executive officer for the taxable year that is in excess of the limitations on compensation provided in Section 401(a)(17) of the Code, multiplied by the ratio, for the year, of the Company’s aggregate profit-sharing contributions under the 401(k) Plan to the aggregate of all compensation of all tax-qualified 401(k) Plan participants (as limited by the Code). As there was no profit-sharing contribution made under the 401(k) Plan for fiscal year 2007, the Company did not make a contribution to the Supplementary Profit-Sharing Plan for fiscal year 2007. No employee contributions are permitted under the Supplementary Profit-Sharing Plan. The plan credits participants with earnings on their account balances based on participant-directed hypothetical investments in the range of Fidelity mutual funds offered under the 401(k) Plan. Participants vest in the Company’s contributions to their account as follows: 0%, 20%, 40%, 60%, for less than two, three, four and five years of service, and become 100% vested following five years of service. If a participant’s employment with the Company is terminated prior to 100% vesting in the Company contributions, the unvested portion of the individual’s account will be forfeited. All named executive officers are 100% vested in their accounts. The purpose of the Supplementary Profit-Sharing Plan is to provide to executive officers affected by the limitations under the tax-qualified 401(k) Plan a capital accumulation, on a percentage of compensation basis, equal to that provided to other employees of the Company. Based upon their hypothetical investments, the named executive officers were credited with the following annual rate of return with respect to their Supplementary Profit-Sharing Plan accounts for fiscal year 2007:
         
Eric Krasnoff
    11.9 %
Lisa McDermott
    10.3  
Donald Stevens
    12.9  
Roberto Perez
    11.9  
Mary Ann Bartlett
    8.5  
Marcus Wilson
    15.2  
Management Plan
     For information regarding the Management Plan, see “Compensation Discussion and Analysis and “Grants of Plan-based Awards for Fiscal Year 2007.”
Potential Payments Upon Termination or Change in Control
     The following table sets forth the payments and benefits that would be received by each named executive officer in the event a termination of employment or a change in control of the Company had occurred on July 31, 2007, over and above any payments or benefits he or she otherwise would already have been entitled to or vested in on such date under any employment contract or other plan of the Company. The named executive officers would receive other payments and benefits as well upon termination of employment to which they were already entitled or vested in on such date, including amounts under the Company’s retirement programs and nonqualified deferred compensation plans in accordance with their terms. In addition, Mr. Krasnoff would receive his annual contract pension amount as set forth in “Pension Benefits for Fiscal Year 2007” and lifetime medical coverage for him and his dependents (estimated at a cost of $521,301 if terminated as of July 31, 2007) upon his termination of employment.
     Mr. Wilson was not serving as an executive officer as of July 31, 2007 and so is not included below. For more information regarding the terms of Mr. Wilson’s separation, see “Summary Compensation Table” and “Wilson Separation Agreement.”

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Eric Krasnoff
                                                 
                                    Notice of        
                                    Termination        
                                    of Employment     “Good Reason”  
                            Change in     Given by     Termination  
            Disability     Retirement     Control     Company     by Executive  
Benefit (1)   Death     (2)     (3)     (4)     (5)     (6)  
Salary Continuation
    -0-       -0-       N/A       -0-     $ 1,648,153       -0-  
Annual Bonus
    -0-       -0-       N/A       -0-       1,565,478       -0-  
401(k) Plan (7)
    -0-       -0-       N/A       -0-       12,465       -0-  
Supplementary Profit-Sharing Plan
    -0-       -0-       N/A       -0-       80,778       -0-  
Supplementary Pension Plan
    -0-     $ 3,137,852 (8)     N/A       -0-       270,623       -0-  
Annual Contract Pension
    -0-       -0-       N/A       -0-       -0-       -0-  
Management Plan Restricted Stock Units
  $ 1,339,435       1,339,435       N/A     $ 1,339,435       1,183,817       -0-  
Stock Options
    -0-       2,506,000       N/A       2,506,000       2,506,000     $ 2,506,000  
Restricted Stock Units
    3,346,844       3,346,844       N/A       3,346,844       1,075,285       -0-  
Severance
    N/A       N/A       N/A       4,067,747 (9)     4,067,747       4,067,747  
 
                                     
Total
  $ 4,686,279     $ 10,330,131       N/A     $ 11,260,026     $ 12,410,346     $ 6,573,747  
 
                                     
Lisa McDermott
                                         
                                    Notice of  
                                    Termination of  
                                    Employment  
                            Change in     Given by  
            Disability     Retirement     Control     Company  
Benefit (1)   Death     (2)     (3)     (4)     (5)  
Salary Continuation
  $ 174,330     $ 174,330       N/A       -0-     $ 340,708  
Annual Bonus
    183,047       183,047       N/A       -0-       226,533  
401(k) Plan (7)
    -0-       -0-       N/A       -0-       6,353  
Supplementary Profit-Sharing Plan
    -0-       -0-       N/A       -0-       10,179  
Supplementary Pension Plan
    -0-       -0-       N/A       -0-       -0-  
Management Plan
    156,530       156,530       N/A     $ 156,530       126,180  
Options
    -0-       513,968       N/A       513,968       146,144  
Restricted Stock Units
    698,076       698,076       N/A       698,076       -0-  
 
                               
Total
  $ 1,211,983     $ 1,725,951       N/A     $ 1,368,574     $ 856,097  
 
                               

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Donald Stevens
                                         
                                    Notice of  
                                    Termination of  
                                    Employment  
                            Change in     Given by  
            Disability     Retirement     Control     Company  
Benefit (1)   Death     (2)     (3)     (4)     (5)  
Salary Continuation
  $ 253,578     $ 253,578       N/A       -0-     $ 969,566  
Annual Bonus
    266,257       266,257       N/A       -0-       644,652  
401(k) Plan (7)
    -0-       -0-       N/A       -0-       12,465  
Supplementary Profit-Sharing Plan
    -0-       -0-       N/A       -0-       34,349  
Supplementary Pension Plan
    -0-       -0-       N/A       -0-       -0-  
Management Plan
    1,615,294       1,615,294     $ 709,805     $ 1,615,294       1,356,330  
Options
    -0-       886,336       N/A       886,336       643,216  
Restricted Stock Units
    1,015,621       1,015,621       N/A       1,015,621       301,062  
 
                             
Total
  $ 3,150,750     $ 4,037,086     $ 709,805     $ 3,517,251     $ 3,961,640  
 
                             
Roberto Perez
                                         
                                    Notice of  
                                    Termination of  
                            Change in     Employment  
            Disability     Retirement     Control     Given by Company  
Benefit (1)   Death     (2)     (3)     (4)     (5)  
Salary Continuation
  $ 167,986     $ 167,986       N/A       -0-     $ 642,302  
Annual Bonus
    176,386       176,386       N/A       -0-       566,861  
401K Plan (7)
    -0-       -0-       N/A       -0-       12,465  
Supplementary Profit-Sharing Plan
    -0-       -0-       N/A       -0-       22,688  
Supplementary Pension Plan
    -0-       -0-       N/A       -0-       400,301  
Management Plan
    632,184       632,184       N/A     $ 632,184       548,300  
Options
    -0-       797,960       N/A       797,960       539,696  
Restricted Stock Units
    888,860       888,860       N/A       888,860       236,581  
 
                               
Total
  $ 1,865,416     $ 2,663,376       N/A     $ 2,319,004     $ 2,969,194  
 
                               

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Mary Ann Bartlett
                                         
                                    Notice of  
                                    Termination of  
                            Change in     Employment  
            Disability     Retirement     Control     Given by Company  
Benefit (1)   Death     (2)     (3)     (4)     (5)  
Salary Continuation
  $ 145,140     $ 145,140       N/A       -0-     $ 554,947  
Annual Bonus
    152,397       152,397       N/A       -0-       368,978  
401(k) Plan (7)
    -0-       -0-       N/A       -0-       12,465  
Supplementary Profit-Sharing Plan
    -0-       -0-       N/A       -0-       14,387  
Supplementary Pension Plan
    -0-       -0-       N/A       -0-       270,111  
Management Plan
    204,901       204,901       N/A     $ 204,901       160,823  
Options
    -0-       317,957       N/A       317,957       173,353  
Restricted Stock Units
    542,999       542,999       N/A       542,999       60,204  
 
                   
Total
  $ 1,045,437     $ 1,363,394       N/A     $ 1,065,857     $ 1,615,268  
 
                               
 
(1)   For purposes of the calculations in the table, payments that would be made over time have been presented as a present value lump sum using certain assumptions (salary continuation and annual bonus – 4.56% discount rate; 401(k) Plan – 6.25%; Supplementary Profit-Sharing Plan – 3% contribution and 6.25% discount rate; Supplementary Pension Plan – 6.25% discount rate; Krasnoff annual contract pension – 6.25% discount rate). For purposes of the annual bonus, 2007 bonus amounts were assumed, although actual bonus would depend upon performance of the Company in the relevant year. In addition, the closing price on July 31, 2007 ($41.52) was used for all equity-based compensation calculations. The amounts shown relating to stock options were calculated by multiplying each stock option whose vesting would be accelerated or that would vest during the notice period, as the case may be, by the excess of $41.52 over the exercise price of such stock option. The amounts shown related to restricted stock units were calculated by multiplying each restricted stock unit whose vesting would be accelerated or that would vest during the notice period, as the case may be, by $41.52.
 
(2)   Each of the employment contracts defines “disability” as the executive’s inability, by reason of physical or mental disability, to perform his or her principal duties under his or her employment contract for an aggregate of 130 working days out of any period of 12 consecutive months.
 
(3)   None of the NEOs is currently eligible for retirement under their employment contracts or other plans of the Company other than Mr. Stevens with respect to the Management Plan.
 
(4)   Each of the employment contracts, the Stock Plan, the Management Plan and the Supplementary Pension Plan defines “change in control” as the occurrence of any of the following:
    the earlier to occur of (i) 10 days after a person or group of affiliated or associated persons (other than the Company or any subsidiary or employee benefit plan of the Company or subsidiary) has acquired beneficial ownership of 20% or more of the outstanding common stock (together, an “Acquiring Person”) or (ii) 10 business days (or such later date as may be determined by the board) following the commencement of, or announcement of an intention to make, a tender offer or exchange offer the consummation of which would result in the beneficial ownership by an Acquiring Person of 20% or more of the outstanding common stock
 
    during such time as there is an Acquiring Person, any reclassification of securities or reincorporation or reorganization or other transaction which, directly or indirectly, increases by more than 1% the proportionate share of common stock beneficially owned by any Acquiring Person

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    any direct or indirect (i) consolidation or merger of the Company into another person, (ii) consolidation or merger of another company into the Company in which the Company survives and all or part of the common stock is changed into or exchanged for securities of another person (or the Company) or cash or any other property or (iii) sale or transfer of assets or earning power aggregating 50% or more of the assets or earning power of the Company as a whole (other than to the Company or a subsidiary)
 
    any date on which the number of duly elected and qualified directors of the Company who were not either elected by the board or nominated by the board or its nominating committee for election by the shareholders shall equal or exceed one-third of the total number of directors of the Company as fixed by its by-laws
 
    provided, however, that no change in control will be deemed to have occurred to the extent that the board so determines by resolution adopted prior to the event.
 
(5)   For purposes of these tables, we have assumed that, upon a notice of termination of employment given by the Company under an employment contract, the Company would continue to pay salary and bonus and provide for additional accruals under retirement plans, vesting of equity awards and continuation in the Company’s medical plans during the two-year (or, in the case of Ms. McDermott, one-year) notice period even if the Company required the NEO not to perform any further services. In light of this assumption, the amounts set forth represent the value on July 31, 2007 of such future payments and benefits assuming that notice was given by the Company on such date. (As the NEO would still be paying premiums for medical plans, no amount has been included in the tables for continued coverage.) However, in the case of a notice of termination of employment under an employment contract given by the named executive officer, we have assumed that the Company would not continue to make such payments or provide such benefits during the notice period unless the NEO continued to perform services. In light of this assumption, a named executive officer would not be entitled to any additional payments or benefits solely as a result of giving notice of termination of employment and so we have not included a column with respect to such terminations in these tables. The one exception relates to Mr. Krasnoff who is entitled to have all unvested stock options vest 30 days prior to any termination of employment (other than as a result of death). The value of unvested stock options held by Mr. Krasnoff as of July 31, 2007 is set forth in the table above.
 
(6)   Mr. Krasnoff’s employment contract permits him to terminate his employment with the Company upon 30 days’ notice upon the occurrence of the following events (i) failure of the board to elect Mr. Krasnoff as, or his removal from, office as chief executive officer of the Company or (ii) amendment of the by-laws of the Company in such a way that, or action by the board such that, Mr. Krasnoff no longer has the title, authority and duties which are customarily possessed by and assigned to a chief executive officer (“Good Reason”).
 
(7)   Represents the equivalent of the Company match under the 401(k) Plan assuming that the named executive officer would have contributed at least 3% of pay on a pretax basis under the plan for each year in the notice period.
 
(8)   Represents the increase in the accumulated present value as of July 31, 2007 over the amount disclosed in the “Pension Benefits for Fiscal Year 2007” (calculated in the same manner) resulting from the acceleration of payment as a result of disability.
 
(9)   Mr. Krasnoff may terminate his employment for any reason following a change in control of the Company and receive the severance payment under his employment contract.
Employment Contracts
     As noted in “Compensation Discussion and Analysis,” the Company has entered into employment contracts with each of the NEOs. The following describes each NEO’s entitlement under his or her employment contract to the payments and benefits upon termination of employment reported in the tables.
     Death/Disability
     Upon her death or disability, Ms. McDermott or her estate, as applicable, will be entitled to an amount equal to her base salary and prorated bonus compensation to the end of the month in which death or disability occurs, and for each month during the period from the end of month in which death or disability occurs until the earliest of (i) first anniversary of the date of termination and (ii) date on which the term of employment would have ended but for her death or disability, Ms. McDermott or her estate will be entitled to monthly payments equal to 1/12 of 102.5% of base salary (i.e., 50% of base salary and 50% of target bonus percentage of 105% of base salary).

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     Upon his death or disability, Mr. Stevens or his estate, as applicable, will be entitled to his base salary and prorated bonus compensation to the end of the month in which death or disability occurs, and for each month during the period from the end of month in which death or disability occurs until the earliest of (i) first anniversary of the date of termination and (ii) date on which the term of employment would have ended but for his death or disability, Mr. Stevens or his estate will be entitled to monthly payments equal to 1/12 of 102.5% of base salary (i.e., 50% of base salary and 50% of target bonus percentage of 105% of base salary).
     Upon his death or disability, Mr. Perez or his estate, as applicable, will be entitled to his base salary and prorated bonus compensation to the end of the month in which death or disability occurs, and for each month during the period from the end of month in which death or disability occurs until the earliest of (i) first anniversary of the date of termination and (ii) date on which the term of employment would have ended but for his death or disability, monthly payments equal to 1/12 of 102.5% of base salary (i.e., 50% of base salary and 50% of his aggregate target bonus percentage of 105% of base salary).
     Upon her death or disability, Ms. Bartlett will be entitled to her base salary and prorated bonus compensation to the end of the month in which death or disability occurs, and for each month during the period from the end of month in which death or disability occurs until the earliest of (i) first anniversary of the date of termination and (ii) date on which the term of employment would have ended but for her death or disability, Ms. Bartlett or her estate will be entitled to monthly payments equal to 1/12 of 102.5% of base salary (i.e., 50% of base salary and 50% of target bonus percentage of 105% of base salary).
     Resignation Following Change in Control
     Under their contracts, after a change in control of the Company, the NEOs may give less than one year’s notice of termination of employment.
     Upon his resignation following a change in control, Mr. Krasnoff will be entitled to acceleration of all of his stock options 30 days prior to the date of termination and a severance amount, payable in a single lump sum equal to the present value, as of his date of termination, of (i) his base salary that would have been paid for 24 months following termination (the “base salary severance component”) and (ii) 150% of the base salary severance component (together, the “Severance Amount”). For the purpose of present value calculations, it will be assumed that the base salary severance component is payable in equal period installments in accordance with the normal payroll, and the 150% of the base salary severance component is payable in two equal installments at the end of the 12th month and the 24th month. If any amounts payable to Mr. Krasnoff upon his termination of employment would be subject to excise tax under Section 4999 of the Code, then such payment will be reduced or deferred to the extent required to avoid application of Section 4999 only if such reduction or deferral would result in Mr. Krasnoff being in a better after-tax economic position (the “Excise Tax Cutback”). For purposes of the table above, no such Excise Tax Cutback has been calculated or effected.
     Notice of Termination of Employment Given by Executive
     According to the terms of the contract, NEOs must give one year’s (in the case of Ms. McDermott) or two years’ (in the case of Messrs. Krasnoff, Stevens and Perez and Ms. Bartlett) notice to the Company (each, a “Notice Period”) if he or she wishes not to terminate employment. Messrs. Stevens and Perez and Mss. McDermott and Bartlett would not be entitled to any compensation upon voluntary termination of employment, whether or not they gave the required notice under their employment contracts.
     Upon Mr. Krasnoff’s voluntary separation from service, under his employment contract, Mr. Krasnoff would be entitled to acceleration of his stock options 30 days prior to the conclusion of the Notice Period.
     Notice of Termination of Employment Given by Company
     The Company may terminate employment of an NEO under his or her employment contract by giving one year’s (in the case of Ms. McDermott) or two years’ (in the case of Messrs. Krasnoff, Stevens and Perez and Ms. Bartlett) notice to the NEO. During the applicable Notice Period, each of Messrs. Krasnoff, Stevens and Perez and Mss. McDermott and Bartlett will be entitled to continued salary continuation, bonus compensation, continued participation in the Company’s benefit plans, and continued vesting of equity. In addition, Mr. Krasnoff will be entitled to the Severance Amount and the acceleration of his stock options 30 days prior to the conclusion of his Notice Period.
     Good Reason Termination by Mr. Krasnoff
     Following the occurrence of events constituting Good Reason, Mr. Krasnoff may terminate his employment upon 30 days’ notice to the Company. Upon such termination, Mr. Krasnoff will be entitled to the Severance Amount and immediate acceleration of his stock options. None of the employment contracts with our other named executive officers provide any additional payments or benefits upon a termination for good reason.

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Equity Plans
     The following describes each NEO’s entitlement under the Company’s equity plans upon termination of employment or change in control reported in the tables.
     Under the Stock Plan and all prior equity plans under which stock options have been granted (the “Stock Option Plans”) and under the Management Plan, all outstanding unvested stock options and restricted stock units will vest in full upon a change in control of the Company.
     Under the Stock Option Plans, upon a termination of employment, all stock options (vested and unvested) are forfeited except that upon a termination by reason of disability or retirement under an approved retirement program of the Company or a subsidiary, all options will remain in full force and effect and may be exercised in accordance with their terms until they expire by their terms. “Retirement under an approved retirement program of the Company or a subsidiary thereof” means retirement at or after age 65 unless the compensation committee determines, for reasons satisfactory to it, that retirement at an earlier age shall be deemed an “approved” retirement for purposes of a participant’s options. Upon termination by reason of death, all unvested stock options will be forfeited but the participant’s estate or heir may continue to exercise any options that had vested prior to death for one year.
     Under the Stock Plan, upon a termination of employment for any reason other than death, disability or eligible retirement, all restricted stock units will be forfeited, except to the extent otherwise determined by the compensation committee. Upon termination of employment by reason of death or disability, all restricted stock units will vest and become payable in full. Upon termination of employment by reason of eligible retirement, a pro rata portion of unvested restricted stock units will vest and the remainder will be forfeited. The portion of the restricted stock units that will vest is equal to the percentage of the total number of restricted stock units held on the date of termination determined by dividing the number of days in the period beginning on the grant date and ending on date of termination by 1460. “Eligible retirement” means retirement upon age 65 with eligibility to receive a retirement benefit under the Pall Corporation Cash Balance Pension Plan or, for non-U.S. residents, eligibility to receive a similar type of benefit under any pension plan or program maintained by the Company or any of its affiliated companies.
     Under the Management Plan, upon a voluntary termination of employment by a named executive officer (other than retirement) or termination by the Company for cause, any units granted by the Company will be forfeited and any units purchased by the named executive officer will be settled by delivery of a number of shares of common stock based upon the lower of the value of common stock on the date the units were credited or the date of settlement. Upon a termination of employment by the Company without cause or upon retirement (at or after age 62), any units purchased by the named executive officer will vest in full and a pro rata portion of unvested matching restricted stock units granted by the Company will vest and the remainder will be forfeited. The portion of the restricted stock units that will vest is equal to the percentage of the total number of restricted stock units held on the date of termination determined by dividing the number of months in the period beginning on the grant date and ending on date of termination by the number of months in the vesting period (either 36 or 48, depending upon the grant).
Supplementary Pension Plan
     Under the Supplementary Pension Plan, a participant will receive his or her benefit payments under the plan upon retirement at or after age 60 with no reduction in benefits. A participant who retires as a result of disability will receive his or her benefit payments beginning six months after such disability (regardless of the participant’s age) and continuing only during the period of such disability; provided that if a participant ceases to suffer a disability after he or she has attained age 65, his or her benefit payments will continue during his or her lifetime with no reduction in benefits.
     Under the Supplementary Pension Plan, each plan participant whose employment with the Company terminates for any reason (other than death) and who was a member of the Company’s Operating Committee at any time during the 30-day period immediately preceding the change in control, shall be fully vested in his or her account. All of the named executive officers other than Ms. McDermott and Mr. Perez were already fully vested in their accounts on July 31, 2007.

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DIRECTOR COMPENSATION FOR FISCAL YEAR 2007
     The following table sets forth the compensation of the Company’s non-employee directors for the fiscal year ended July 31, 2007 (“fiscal year 2007”). Neither Mr. Krasnoff nor Mr. Wilson received any additional compensation for service as a director in fiscal year 2007. Ms. Grisé was not a director during fiscal year 2007 and so is not included in the table below.
                                         
    Fees Earned                    
    or Paid in           Option   All Other    
    Cash   Stock Awards   Awards   Compensation   Total
Name   ($)   ($)(1)(2)   ($)(3)(4)   ($)   ($)
Daniel J. Carroll
  $ 91,000     $ 79,400     $ 85,998             $ 256,398  
John H.F. Haskell
    62,500       79,400       60,251               202,151  
Ulric S. Haynes
    63,500       79,400       60,251               203,151  
Dennis Longstreet
    50,000       90,923       8,100               149,023  
Edwin W. Martin, Jr.
    70,250       79,400       60,251               209,901  
Katharine L. Plourde
    78,500       79,400       85,998               243,898  
Heywood Shelley
    50,500       79,400       60,251     $ 636 (5)     190,787  
Edward L. Snyder
    63,500       59,063       26,430       1,750 (6)     150,743  
Edward Travaglianti
    67,500       79,400       63,964               210,864  
James D. Watson(7)
    36,500       79,400       85,998               201,898  
 
(1)   Reflects the expense recognized for financial statement reporting purposes under Statement of Financial Accounting Standards 123R (“SFAS 123R”) for each non-employee director for the Company’s fiscal year ended July 31, 2007 for annual awards of restricted stock units granted both in fiscal year 2007 and in prior years by the Company under its 2005 Stock Compensation Plan (the “Stock Plan”). For additional information regarding the assumptions made in calculating these amounts, see Note 17, Common Stock, to the accompanying consolidated financial statements. These amounts reflect our accounting expense for these awards and do not correspond to the actual value, if any, that may be realized by the non-employee director.
 
    The grant date fair value of restricted stock units granted to each non-employee director in fiscal year 2007 was $59,063 other than Mr. Longstreet whose awards had an agregate grant date fair value of $90,923.
 
(2)   The following table reflects the number of restricted stock units held by each non-employee director at the end of fiscal year 2007:
         
Daniel J. Carroll
    4,584  
John H.F. Haskell
    4,584  
Ulric S. Haynes
    4,584  
Dennis Longstreet
    2,771  
Edwin W. Martin, Jr.
    4,584  
Katharine L. Plourde
    4,584  
Heywood Shelley
    4,584  
Edward L. Snyder
    1,761  
Edward Travaglianti
    4,584  
James D. Watson
    4,584  

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(3)   Reflects the expense recognized for financial statement reporting purposes under SFAS 123R for each non-employee director for the Company’s fiscal year ended July 31, 2007 for stock options granted both in fiscal year 2007 and in prior years by the Company under its 2001 Stock Option Plan for Non-Employee Directors. For additional information regarding the assumptions made in calculating these amounts, see Note 17, Common Stock, to the accompanying consolidated financial statements. These amounts reflect our accounting expense for these awards and do not correspond to the actual value, if any, that may be realized by the non-employee director. Each stock option was granted with an exercise price of $39.07 per share.
 
    The grant date fair value of stock options granted to each non-employee director in fiscal year 2007 was $26,430 other than Mr. Longstreet whose awards had an aggregate grant date fair value of $51,060.
 
(4)   The following table reflects the number of stock options held by each non-employee director at the end of fiscal year 2007.
         
Daniel J. Carroll
    24,000  
John H.F. Haskell
    24,000  
Ulric S. Haynes
    24,000  
Dennis Longstreet
    6,000  
Edwin W. Martin, Jr.
    10,875  
Katharine L. Plourde
    24,000  
Heywood Shelley
    24,000  
Edward L. Snyder
    3,000  
Edward Travaglianti
    28,500  
James D. Watson
    24,000  
 
(5)   Represents compensation imputed to Mr. Shelley that is equivalent to a per annum interest rate of 4.53% on his $120,400 loan from the Company. On September 11, 2006, Mr. Shelley repaid his loan in full to the Company.
 
(6)   Represents a meeting fee Dr. Snyder received as a member of the Pall Corporation Medical Advisory Board.
 
(7)   James D. Watson resigned from the board on November 3, 2007.
Cash Fees
     Non-employee directors of the Company were paid the following in cash for their services on the board in fiscal year 2007:
    $2,000 per month
  °   Each member of the audit committee received an additional $500 per month
 
  °   Mr. Shelley and Dr. Martin were each paid an additional $750 per month for service on the executive committee
    $2,500 for each meeting of the board and board committees personally attended
 
    $2,500 for telephone participation in one regularly scheduled board meeting per year
 
    $2,500 for telephone participation in one regularly scheduled committee meeting per year
 
    $1,000 for participation in each meeting of the board or a board committee held by telephone conference call
 
    $10,000 annual retainer for presiding independent director
 
    $5,000 annual retainer for the chairpersons of the audit, compensation and nominating/governance committees.

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Equity Awards
     The non-employee directors received restricted stock unit grants pursuant to the Stock Plan and stock option grants pursuant to the 2001 Stock Option Plan for Non-Employee Directors.
     Under the 2001 Stock Option Plan for Non-Employee Directors, on January 5th of each year, each director who is not an employee of the Company automatically receives:
    3,000 options with an exercise price equal to the arithmetic mean of the highest and lowest sales price as reported in the NYSE Consolidated Transactions of a share of common stock on the grant date
  °   Options become exercisable in four equal installments on each of the first four anniversaries of the grant date and expire on the seventh anniversary.
  °   Upon leaving the board (other than a removal for cause), a director may exercise any options vested as of the date of departure for up to one year after such date and any unvested options will be forfeited; provided, however, that if a director had served two full three-year terms prior to his or her departure, all of the director’s options will continue to vest and be exercisable in accordance with their terms as if the director still served on the board.
     A new non-employee director, on the date on which he or she is elected at an annual meeting of shareholders for the first time, is granted an option for 3,000 shares, in addition to and on the same terms as outlined above.
     Under the Stock Plan, on January 5th of each year, each director who is not an employee of the Company automatically receives:
    1,750 restricted stock units
  °   Restricted stock units are converted into 1,750 shares of common stock promptly following the date on which the director leaves the board (for any reason except removal for cause)
 
  °   On each date on which dividends are paid to shareholders, the account of each non-employee director is credited with “dividend equivalent units.” The Company calculates these “dividend equivalent units” by taking the number of restricted stock units outstanding on the day prior to the dividend payment date, multiplying this number by the amount of the cash dividend per share to arrive at the total cash dividend. The Company then divides the total cash dividend by the closing stock price on the dividend payment date to arrive at the number of dividend equivalent units.
     A new non-employee director, on the date on which he or she is elected at an annual meeting of shareholders for the first time, receives 1,000 restricted stock units, in addition to and on the same terms as outlined above.
     All restricted stock units and stock options granted to non-employee directors vest in full upon a change in control of the Company (as defined in note 4 to “Potential Payments Upon Termination or Change in Control”).
D&O Insurance
     The Company and its officers and directors are insured under four insurance policies with respect to liabilities arising from their service as officers and directors. These four policies, all effective August 1, 2007, are written by Vigilant Insurance Company, Federal Insurance Company (“Chubb”), Illinois National Insurance Company and Allied World Assurance Company. The Company pays the annual premium for each of these policies, which totaled $865,889 for fiscal year 2007 and totals $1,339,000 for fiscal year 2008.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
     The following table sets forth information regarding the Company’s equity compensation plans as of July 31, 2007, the end of the Company’s most recently completed fiscal year:
                         
                    Number of securities remaining  
    Number of securities to     Weighted-average     available for future issuance  
    be issued upon exercise     exercise price of     under equity compensation plans  
    of outstanding options,     outstanding options,     (excluding securities reflected in  
    warrants and rights     warrants and rights     column (a))  
Plan category   (a)     (b)     (c)  
Equity compensation plans approved by security holders
    4,392,906 (1)   $ 25.29       4,068,975 (2)
Equity compensation plans not approved by security holders
                 
 
                 
Total
    4,392,906     $ 25.29       4,068,975  
 
                 
 
(1)   Consists of 2,828,756 shares of common stock issuable upon exercise of outstanding options, and 1,564,150 shares issuable upon conversion of outstanding restricted or deferred units under the Management Stock Purchase Plan and the 2005 Stock Compensation Plan. Since the aforementioned outstanding restricted and deferred units have no exercise price, they are not included in the weighted average exercise price calculation in column (b).
 
(2)   Consists of 3,493,105 shares of common stock available for future grants of options and/or restricted stock units under the Management Stock Purchase Plan, the 2005 Stock Compensation Plan and the 2001 Stock Option Plan for Non-Employee Directors, and 575,870 shares remaining available for issuance under the Employee Stock Purchase Plan, a plan intended to qualify under section 423 of the Code (of the 4,068,975 shares of common stock available for future grants, 200,278 shares of common stock were issued under the Employee Stock Purchase Plan on October 31, 2007).
BENEFICIAL OWNERSHIP OF COMMON STOCK
AND RESTRICTED STOCK UNITS
.
     The following table sets forth information as of March 3, 2008 with respect to the beneficial ownership of common stock, and restricted stock units acquired under the Management Stock Purchase Plan (the “Management Plan”) and the Stock Plan, by (a) each shareholder who, to the Company’s knowledge, is the beneficial owner of more than 5% of the outstanding shares of common stock, (b) each current director of the Company, (c) each current and former executive officer included in the Summary Compensation Table, and (d) all current directors and executive officers of the Company as a group as of March 3, 2008. The percentages in the third column are based on the 122,872,069 shares outstanding on March 3, 2008. In each case, (1) except as otherwise indicated in the notes to the table, the shares shown in the second column are owned directly by the individuals or members of the group named in the first column, with sole voting and dispositive power, and (2) the restricted stock units shown in the fourth column are owned directly by the individuals or members of the group named in the first column, but cannot be voted or disposed of by them. For purposes of this table, beneficial ownership is determined in accordance with the federal securities laws and regulations; inclusion in the table of shares not owned directly by the named director or executive officer does not constitute an admission that such shares are beneficially owned by the director or executive officer for any other purpose.

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    Common Stock
Name of   No. of   Percent   Restricted
beneficial owner   shares(1)   of class(2)   stock units(3)
ClearBridge Advisors, LLC
    15,285,210  (a)     12.44 %      
Smith Barney Fund Management LLC
Batterymarch Financial Management, Inc.
399 Park Avenue
New York, NY 10022
                       
Mary Ann Bartlett
    18,370             30,452  
Daniel J. Carroll, Jr.
    25,500             6,383  
Cheryl W. Grisé
                1,755  
John H.F. Haskell, Jr.
    26,500             6,383  
Ulric S. Haynes, Jr.
    19,500             6,383  
Eric Krasnoff
    489,887  (b)     0.40 %     208,148  
Dennis Longstreet
    1,500             4,552  
Edwin W. Martin, Jr.
    12,207             6,383  
Lisa McDermott
    25,050             27,381  
Roberto Perez
    28,235             52,725  
Katharine L. Plourde
    20,500             6,383  
Heywood Shelley
    29,500  (c)           6,383  
Edward L. Snyder
    750             3,533  
Donald Stevens
    143,078       0.12 %     108,161  
Edward Travaglianti
    35,520             6,383  
Marcus Wilson
    80,133               66,905  
15 current directors and executive officers of the Company as a group
    876,097       0.71 %     481,388  
 
(1)   Includes shares covered by stock options currently exercisable or becoming exercisable within 60 days of March 3, 2008, as follows: Ms. Bartlett–18,200 shares; Mr. Carroll–19,500 shares; Mr. Haskell–19,500 shares; Mr. Haynes–19,500 shares; Mr. Krasnoff–402,948 shares; Mr. Longstreet–1,500 shares; Dr. Martin–6,375 shares; Ms. McDermott–25,050 shares; Mr. Perez–25,750 shares; Ms. Plourde–19,500 shares; Mr. Shelley–19,500 shares; Dr. Snyder–750 shares; Mr. Stevens–98,051 shares; Mr. Travaglianti–24,000 shares; Mr. Wilson– 80,000; and the 15 current directors and executive officers of the Company as a group–700,124 shares.
 
(2)   Percentages are shown only for shareholders owning at least one-tenth of one percent of the class.
 
(3)   With respect to executives, each restricted stock unit is converted, when it vests, into one share of common stock unless the holder elects to defer conversion, as permitted by the Management Plan and the Stock Plan. With respect to each non-employee director, each restricted unit is converted into one share of common stock upon the director’s termination of board membership for any reason other than removal for cause.
 
(a)   In an amended Schedule 13G filed with the Commission on February 14, 2008, ClearBridge Advisors, LLC (“ClearBridge Advisors”), Smith Barney Fund Management LLC (“Smith Barney”) and Batterymarch Financial Management LLC (“Batterymarch”) filing as a group (the “ClearBridge Group”) in accordance with Rule 13d-1(b)(1)(ii)(J) of the Exchange Act, pursuant to a joint filing agreement, reported beneficial ownership of such 15,285,210 shares. The ClearBridge Group, as a group, reported shared power to vote or direct the voting of 12,099,736 shares and shared power to dispose or to direct the disposition of 12,099,736 shares. ClearBridge Advisors reported shared power to vote or direct the voting of 11,777,775 shares and shared power to dispose or to direct the disposition of 14,879,339 shares. Smith Barney reported shared power to vote or direct the voting of 124,300 shares and shared power to dispose or to direct the disposition of 124,300 shares. Batterymarch reported shared power to vote or direct the voting of 197,661 shares and shared power to dispose or to direct the disposition of 281,571 shares.

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(b)   Includes 12,966 shares owned by trusts established for the benefit of Mr. Krasnoff’s children. Mr. Krasnoff is trustee of these trusts and as such has sole voting and dispositive power with respect to the shares owned by the trusts. Also includes 1,436 shares owned by Mr. Krasnoff’s wife and as to which Mr. Krasnoff disclaims voting or dispositive power. Does not include 10,000 shares beneficially owned by a trust of which Mr. Krasnoff is one of the three trustees, along with Mr. Shelley. The trustees of this trust have sole voting power, but no dispositive power, with respect to these shares. U.S. Trust, now part of Bank of America, is the investment manager for the trust’s investment account and has complete investment discretion with respect to the trust. The trustees have limited the investment power of the trust by instructing U.S. Trust not to engage in any transaction with respect to Company stock during any period in which Company officials are prohibited by Company policy to engage in transactions in the Company’s common stock.
 
(c)   Does not include 10,000 shares beneficially owned by a trust of which Mr. Shelley is one of the three trustees, along with Mr. Krasnoff. The trustees of this trust have sole voting power, but no dispositive power, with respect to these shares. U.S. Trust, now part of Bank of America, is the investment manager for the trust’s investment account and has complete investment discretion with respect to the trust. The trustees have limited the investment power of the trust by instructing U.S. Trust not to engage in any transaction with respect to Company stock during any period in which Company officials are prohibited by Company policy to engage in transactions in the Company’s common stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
Policies and Procedures for Related Person Transactions
     The board is responsible for the oversight and approval (or ratification) of any transaction, relationship or arrangement in which the Company is a participant and that involves board members, Company executive officers, beneficial owners of more than 5% of Company common stock, their immediate family members, any individual (other than tenants and employees) who shares that person’s home and companies they control or in which they have a substantial beneficial ownership interest. We refer to these as related person transactions and to the persons or entities involved as related persons.
     The board has adopted a written policy that sets out procedures for the reporting, review and ratification of related person transactions. The policy operates in conjunction with other aspects of the Company’s compliance program, such as its codes of ethics, which require directors and employees to report any circumstances that may create or appear to create a conflict between the interests of the related person and those of the Company, regardless of the amount involved. The Company’s directors and executive officers must also periodically confirm information about related person transactions, and management reviews its books and records and makes other inquiries as appropriate to confirm the existence, scope and terms of related person transactions.
     Under the board’s policy, the audit committee evaluates related person transactions for purposes of recommending to the disinterested members of the board that the transactions are fair, reasonable and within Company policies and practices and should be approved or ratified.
     The board has considered certain types of potential related person transactions and pre-approved them as not presenting material conflicts of interest. Those transactions include (a) compensation paid to directors and executive officers that has been approved by the board or the compensation committee, as applicable, (b) certain Company contributions made in limited amounts to charitable or not-for-profit organizations and otherwise in accordance with the Company’s Policy on Charitable Contributions and (c) transactions in which the related person’s interest arises solely from ownership of the Company’s common stock and all holders of the common stock receive the same benefit on a pro rata basis. The audit committee considers the appropriateness of any related person transaction not within these pre-approved classes in light of all relevant factors and the controls implemented to protect the interests of the Company and its shareholders, including:

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    the benefits of the transaction to the Company;
 
    the terms of the transaction and whether they are on arm’s-length and in the ordinary course of the Company’s business;
 
    the direct or indirect nature of the related person’s interest in the transaction;
 
    the size and expected term of the transaction; and
 
    other facts and circumstances that bear on the materiality of the related person transaction under applicable law and listing standards.
     Related person transactions involving directors are also subject to board approval or ratification when so required under New York law.
Related Person Transactions
     Mr. Shelley, a director of the Company, is counsel to Carter Ledyard & Milburn LLP. The Company paid $101,811 to Carter Ledyard for legal services performed in fiscal year 2007 and paid Carter Ledyard $131,303 in fiscal year 2007 for services performed in the fourth quarter of fiscal year 2006. A material part of Mr. Shelley’s compensation during fiscal year 2007 from Carter Ledyard was attributable to these fees. The Company may employ Carter Ledyard as legal counsel in the future.
     Under certain of the Company’s stock option plans, employees and directors had the right to defer payment of a portion of the exercise price, thereby becoming indebted to the Company. By the terms of the option plans, this indebtedness did not bear interest; however, under the Code, taxable interest is imputed to the optionee at interest rates determined by law and the amount of such imputed interest is deemed compensation to the optionee and is deductible by the Company. Both Heywood Shelley and Donald Stevens had outstanding indebtedness to the Company pursuant to these option plan provisions. As of August 1, 2006 (the start of fiscal year 2007), Heywood Shelley had outstanding indebtedness to the Company of $120,400, which he repaid in full on September 11, 2006. During fiscal year 2007, Donald Stevens had outstanding indebtedness to the Company in the amount of $131,389. No principal was repaid on Mr. Stevens’ indebtedness during fiscal year 2007 (by the terms of the option plans, no payment was required). Pursuant to law, interest was imputed to each of Messrs. Shelley and Stevens in an amount equivalent to a per annum rate of 4.53% and 4.71%, respectively, and deemed compensation to them. These loans were grandfathered pursuant to Section 402 of the Sarbanes-Oxley Act. Executive officers and directors are no longer permitted to utilize the deferred payment provisions of the plans.
     During fiscal year 2007, Roberto Perez had outstanding indebtedness to the Company in the amount of $207,000 in connection with his relocation. No principal has been repaid on Mr. Perez’s indebtedness subsequent to July 31, 2006. Pursuant to law, interest was imputed to Mr. Perez in an amount equivalent to a per annum rate of 4.71% and deemed compensation to him. This loan was incurred prior to the enactment of the Sarbanes-Oxley Act.
Corporate Governance Policy
     The board has adopted a corporate governance policy that provides the framework for the governance of the Company. The governance rules for companies listed on the NYSE and those contained in the Sarbanes-Oxley Act of 2002 and related regulations are reflected in the policy. The board reviews these principles and other aspects of governance periodically.
Director Independence
     The Company’s corporate governance policy provides for director independence standards consistent with those of the NYSE. These standards require the board to affirmatively determine that each director has no material relationship with the Company (either directly or as a partner, shareholder or officer of an organization that has a relationship with the Company) other than as a director. The board has adopted director independence standards for its evaluation of the materiality of director relationships with the Company. The board considers relationships involving directors and their immediate family members that may implicate any of these standards or the listing standards of the NYSE and relies on information derived from Company records, questionnaires completed by directors and inquiries of other relevant parties.
     The relationships reviewed by the board as part of its most recent independence determination consisted principally of donations made by the Company to not-for-profit organizations, including educational and health organizations (such as hospitals, laboratories and blood centers), with which board members were affiliated by service as employees, directors or trustees. The board also reviewed commercial relationships between the Company and the directors of organizations with which directors were affiliated by service as outside directors (Mss. Grisé and Plourde) or trustees (Mr. Travaglianti), or from which they received compensation (Mr. Shelley). The relationships with these organizations involved the Company’s sale or purchase of products or services in the ordinary course of business that were made on arm’s-length terms in amounts and under other circumstances that did not affect the relevant directors’ independence (other than in the case of Mr. Shelley) under the Company’s director independence standards or under applicable law and listing standards.
     The board has determined that the following directors are “independent” as required by the NYSE listing standards and the Company’s corporate governance policy: Daniel J. Carroll, Jr., Cheryl W. Grisé, John H. F. Haskell, Jr., Ulric S. Haynes, Jr., Dennis N. Longstreet, Edwin W. Martin, Jr., Katharine L. Plourde, Edward L. Snyder, Edward Travaglianti and James D. Watson. Dr. Watson resigned from the board of directors on November 3, 2007.

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     All members of the audit committee, the compensation committee and the nominating/governance committee are independent directors under applicable listing standards and the Company’s director independence standards. The Company’s director independence standards are available on the Company’s website at www.pall.com under the “Investor Information” tab.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
Audit and Non-Audit Fees
     The following table presents fees billed or expected to be billed for professional audit services rendered by KPMG LLP for the audit of the Company’s annual consolidated financial statements for its 2007 and 2006 fiscal years, and fees billed or expected to be billed for other services rendered to the Company by KPMG LLP:
                 
    Fiscal  
    2007     2006  
Audit fees (1)
  $ 8,594,000     $ 6,670,000  
Audit-related fees (2)
    226,000       170,000  
Tax fees (3)
    937,000       1,000,000  
All other fees
           
 
           
Total
  $ 9,757,000     $ 7,840,000  
 
           
 
(1)   Audit fees include fees for the audit of management’s assessment of the effectiveness of its internal controls over financial reporting as required by Section 404 of the Sarbanes-Oxley Act, review of the consolidated financial statements in the Company’s quarterly reports on Form 10-Q, and fees for services that are normally provided by an independent registered public accounting firm in connection with a statutory audit.
 
(2)   Audit-related fees consisted principally of fees for audits of financial statements of certain employee benefit plans that are not included in audit fees above.
 
(3)   Tax fees consisted of fees for tax compliance and related services.
Policy on Audit Committee Pre-Approval of Audit and Permitted Non-Audit Services
     The audit committee has implemented a policy for the pre-approval of all audit and permitted non-audit services proposed to be provided to the Company by KPMG LLP, the Company’s independent registered public accounting firm. Under the policy, each engagement to provide audit or non-audit services must be documented in writing and the scope and terms of the engagement, including any fees payable, are subject to pre-approval by the audit committee. Services are generally subject to budgets, and fee overages in excess of $5,000 require specific audit committee approval. All audit and permitted non-audit services provided by KPMG LLP during fiscal year 2007 were pre-approved in accordance with the Company’s policy.
     For purposes of the policy, services are categorized as either “recurring” or “non-recurring.” Recurring services are reviewed periodically by the audit committee at regularly scheduled meetings and include services such as the annual audit of the Company’s financial statements and the financial statements of certain employee benefit plans, statutory audits for certain subsidiaries and services relating to the Company’s tax returns. Non-recurring non-audit services must be pre-approved on a case-by-case basis. Non-recurring services for which fees are expected to be less than $100,000 may be pre-approved by the chairperson of the audit committee and must be ratified by the full audit committee at its next regularly scheduled meeting. Services for which fees are expected to be at least $100,000 must be pre-approved by the full audit committee.
     The Company’s chief financial officer is responsible for confirming that individual proposals for audit and non-audit services comply with the Company’s policy.

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     PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
(a) Documents filed as part of the Form 10-K:
(1) The following items are filed as part of this report:
 Report of Independent Registered Public Accounting Firm
 Consolidated Balance Sheets – July 31, 2007 and July 31, 2006
 Consolidated Statements of Earnings – years ended July 31, 2007, July 31, 2006 and July 31, 2005
 Consolidated Statements of Stockholders’ Equity – years ended July 31, 2007, July 31, 2006 and July 31, 2005
 Consolidated Statements of Cash Flows – years ended July 31, 2007, July 31, 2006 and July 31, 2005
 Notes to consolidated financial statements
(2) The following financial statement schedule is filed as part of this report:
 Schedule II — Valuation and Qualifying Accounts
     All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or in the notes thereto.
(3) Exhibits:
The exhibits listed in the accompanying Exhibit Index are filed or incorporated by reference as part of this report.
Exhibit Index
     
Exhibit    
Number   Description of Exhibit
 
   
3.1(i)*
  Restated Certificate of Incorporation of the Registrant as amended through November 23, 1993, filed as Exhibit 3(i) to the Registrant’s 1994 Form 10-K.
 
   
3.1(ii)*
  By-Laws of the Registrant as amended effective January 17, 2008, filed as Exhibit 3(ii) to the Registrant’s Form 8-K filed on January 18, 2008.
 
   
4.1(i)*
  Indenture dated as of August 1, 2002, by and among the Registrant, as Issuer, the Guarantors named therein, as Guarantors, and The Bank of New York, as Trustee, relating to the Registrant’s 6% Senior Notes due August 1, 2012 filed as Exhibit 4(iii) to the Registrant’s 2002 Form 10-K.
 
   
4.1(ii)*
  First Supplemental Indenture, dated as of October 9, 2007, to the Indenture, dated as of August 1, 2002, by and among the Registrant, the guarantors named therein and The Bank of New York, as trustee, filed as Exhibit 4.1 to the Registrant’s Form 8-K filed on October 11, 2007.
 
   
4.2(i)*
  Rights Agreement dated as of November 17, 1989, between the Registrant and United States Trust Company of New York, as Rights Agent, filed as an Exhibit to the Registrant’s Form 8-A filed on September 10, 1992.
 
   
4.2(ii)*
  Amendment No. 1, dated as of April 20, 1999, to the Rights Agreement dated as of November 17, 1989, between the Registrant and United States Trust Company of New York, as Rights Agent, filed as Exhibit II to the Registrant’s Form 8-A/A filed on April 22, 1999.
 
   
 
  The exhibits filed herewith do not include other instruments with respect to long-term debt of the Registrant and its subsidiaries, inasmuch as the total amount of debt authorized under any such instrument does not exceed 10% of the total assets of the Registrant and its subsidiaries on a consolidated basis. The Registrant agrees, pursuant to Item 601(b) (4) (iii) of Regulation S-K, that it will furnish a copy of any such instrument to the Securities and Exchange Commission upon request.
 
   
10.1(i)*
  Credit Agreement dated June 21, 2006, between the Registrant and JPMorgan Chase Bank and the Other Lenders Party Thereto, filed as Exhibit 4(ii) to the Registrant’s Form 8-K filed on June 27, 2006.

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Exhibit    
Number   Description of Exhibit
 
   
10.1(ii)*
  First Amendment and Waiver, dated as of August 16, 2007 to the Five-Year Credit Agreement, dated as of June 21, 2006, among Pall Corporation, the subsidiaries of the Company named on the signature pages thereto, the lenders from time to time party thereto, JPMorgan Chase Bank, N.A., as facility agent for the Lenders, and J.P. Morgan Europe Limited, as London agent for the Lenders, filed as Exhibit 10 to the Registrant’s Form 8-K filed on August 20, 2007.
 
   
10.1(iii)*
  Second Amendment and Waiver, dated as of December 7, 2007 to the Five-Year Credit Agreement, dated as of June 21, 2006, among the Registrant, the subsidiaries of the Registrant named on the signature pages thereto, the lenders from time to time party thereto, JPMorgan Chase Bank, N.A., as facility agent for the Lenders, and J.P. Morgan Europe Limited, as London agent for the Lenders, filed as Exhibit 10 to the Registrant’s Form 8-K filed on December 11, 2007.
 
   
10.1(iv)†
  Third Amendment and Waiver, dated as of March 25, 2008 to the Five-Year Credit Agreement, dated as of June 21, 2006, among the Registrant, the subsidiaries of the Registrant named on the signature pages thereto, the lenders from time to time party thereto, JPMorgan Chase Bank, N.A., as facility agent for the Lenders, and J.P. Morgan Europe Limited, as London agent for the Lenders.
 
   
10.2*‡
  Employment Agreement dated January 21, 2004, as amended and restated effective July 20, 2005, between the Registrant and Eric Krasnoff, filed as Exhibit 10.5 to the Registrant’s Form 8-K filed on July 25, 2005.
 
   
10.3*‡
  Employment Agreement dated May 1, 2003 between the Registrant and Marcus Wilson, filed as Exhibit 10.2 to the Registrant’s 2003 Form 10-K.
 
   
10.4*‡
  Amendment dated August 30, 2005 to Employment Agreement dated May 1, 2003 between the Registrant and Marcus Wilson, filed as Exhibit 10.2 to the Registrant’s Form 8-K filed on September 2, 2005.
 
   
10.5*‡
  Employment Agreement dated November 15, 2001, between the Registrant and Donald B. Stevens, filed as Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended January 26, 2002.
 
   
10.6*‡
  Employment Agreement dated September 12, 2005 between the Registrant and Roberto Perez, filed as Exhibit 10.7 to the 2006 Form 10-K.
 
   
10.7*‡
  Employment Agreement dated June 1, 2004 between the Registrant and Lisa McDermott, filed as Exhibit 10.11 to the Registrant’s 2005 Form 10-K.
 
   
10.8†‡
  Employment Agreement dated August 1, 2005 between the Registrant and Mary Ann Bartlett.
 
   
10.9*‡
  Pall Corporation Supplementary Profit-Sharing Plan as amended effective July 19, 2005, filed as Exhibit 10.3 to the Registrant’s Form 8-K filed on July 25, 2005.
 
   
10.10*‡
  Pall Corporation Profit-Sharing Plan as amended and restated as of July 1, 1998, filed as Exhibit 10.15 to the Registrant’s 2002 Form 10-K.
 
   
10.11*‡
  Pall Corporation Profit-Sharing Plan amended pursuant to provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001, filed as Exhibit 10.17 to the Registrant’s 2003 Form 10-K.
 
   
10.12*‡
  Pall Corporation Supplementary Pension Plan as amended effective August 29, 2005, filed as Exhibit 10.1 to the Registrant’s Form 8-K filed on September 2, 2005.
 
   
10.13*‡
  Pall Corporation 2004 Executive Incentive Bonus Plan, as amended effective January 18, 2006, filed as Exhibit 10.15 to the Registrant’s 2006 Form 10-K.
 
   
10.14*‡
  Pall Corporation 1991 Stock Option Plan, as amended effective April 17, 2002, filed as Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended April 27, 2002.
 
   
10.15*‡
  Pall Corporation 1993 Stock Option Plan, as amended effective April 17, 2002, filed as Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended April 27, 2002.
 
   
10.16*‡
  Pall Corporation 1995 Stock Option Plan, as amended effective April 17, 2002, filed as Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended April 27, 2002.

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Exhibit    
Number   Description of Exhibit
 
   
10.17*‡
  Pall Corporation 1998 Stock Option Plan, as amended effective April 17, 2002, filed as Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended April 27, 2002.
 
   
10.18*‡
  Form of Notice of Grant of Restricted Stock Units Under Pall Corporation 2005 Stock Compensation Plan, filed as Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended January 31, 2005.
 
   
10.19*‡
  Form of Notice of Grant of Annual Award Units Under Pall Corporation 2005 Stock Compensation Plan, filed as Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended January 31, 2005.
 
   
10.20†‡
  Form of Notice of Grant of Stock option Grant Agreement Under Pall Corporation 2005 Stock Compensation Plan.
 
   
10.21*‡
  Pall Corporation 2005 Stock Compensation Plan, as amended effective January 19, 2006, filed as Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended January 31, 2006.
 
   
10.22*‡
  Pall Corporation Stock Option Plan for Non-Employee Directors, as amended effective November 19, 1998, filed as Exhibit 10.5 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended October 31, 1998.
 
   
10.23*‡
  Pall Corporation 2001 Stock Option Plan for Non-Employee Directors, as amended September 17, 2004, filed as Exhibit 10.25 to the Registrant’s 2004 Form 10-K.
 
   
10.24*‡
  Pall Corporation Management Stock Purchase Plan as amended effective July 19, 2005, filed as Exhibit 10.4 to the Registrant’s Form 8-K filed on July 25, 2005.
 
   
10.25*‡
  Pall Corporation Employee Stock Purchase Plan as amended effective October 17, 2003, filed as Exhibit 10.27 to the Registrant’s 2003 Form 10-K.
 
   
10.26*‡
  Principal Rules of the Pall Supplementary Pension Scheme, filed as Exhibit 10.25 to the Registrant’s 1995 Form 10-K.
 
   
10.27*‡
  Amendment dated May 3, 2006 to Employment Agreement dated January 21, 2004, as amended and restated effective July 20, 2005, between the Registrant and Eric Krasnoff, filed as Exhibit 10.28 to the Registrant’s 2006 Form 10-K.
 
   
10.28*‡
  Amendment dated July 18, 2006 to Employment Agreement dated January 21, 2004, as amended and restated effective July 20, 2005, between the Registrant and Eric Krasnoff, filed as Exhibit 10.29 to the Registrant’s 2006 Form 10-K.
 
   
10.29*‡
  Amendment dated May 3, 2006 to Employment Agreement dated May 1, 2003 between the Registrant and Marcus Wilson, filed as Exhibit 10.30 to the Registrant’s 2006 Form 10-K.
 
   
10.30*‡
  Amendment dated July 18, 2006 to Employment Agreement dated May 1, 2003 between the Registrant and Marcus Wilson, filed as Exhibit 10.31 to the 2006 Form 10-K.
 
   
10.31*‡
  Amendment dated May 3, 2006 to Employment Agreement dated November 15, 2001, between the Registrant and Donald B. Stevens, filed as Exhibit 10.32 to the Registrant’s 2006 Form 10-K.
 
   
10.32*‡
  Amendment dated July 18, 2006 to Employment Agreement dated November 15, 2001, between the Registrant and Donald B. Stevens, filed as Exhibit 10.33 to the Registrant’s 2006 Form 10-K.
 
   
10.33*‡
  Amendment dated May 3, 2006 to Employment Agreement dated September 12, 2005, between the Registrant and Roberto Perez, filed as Exhibit 10.36 to the Registrant’s 2006 Form 10-K.
 
   
10.34*‡
  Amendment dated July 18, 2006 to Employment Agreement dated September 12, 2005, between the Registrant and Roberto Perez, filed as Exhibit 10.37 to the Registrant’s 2006 Form 10-K.
 
   
10.35*‡
  Amendment dated May 3, 2006 to Employment Agreement dated June 1, 2004 between the Registrant and Lisa McDermott, filed as Exhibit 10.38 to the Registrant’s 2006 Form 10-K.
 
   
10.36*‡
  Amendment dated July 18, 2006 to Employment Agreement dated June 1, 2004 between the Registrant and Lisa McDermott, filed as Exhibit 10.39 to the Registrant’s 2006 Form 10-K.
 
   
10.37†‡
  Amendment dated May 3, 2006 to Employment Agreement dated August 1, 2005 between the Registrant and Mary Ann Bartlett.

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Exhibit    
Number   Description of Exhibit
 
   
10.38*‡
  Letter Agreement, as amended, dated December 11, 2006 between the Registrant and Marcus Wilson summarizing the terms of the termination of employment of Mr. Wilson, filed as Exhibit 10 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended October 31, 2006.
 
   
10.39†‡
  Amendment dated July 18, 2006 to Employment Agreement dated August 1, 2005 between the Registrant and Mary Ann Bartlett.
 
   
14*
  Pall Corporation Code of Ethics applicable to its Chief Executive Officer, Chief Financial Officer, Controller and other employees with important roles in the financial reporting process, filed as Exhibit 99.1 to the Registrant’s 2004 Form 10-K.
 
   
21†
  Subsidiaries of the Registrant.
 
   
23†
  Consent of Independent Registered Public Accounting Firm.
 
   
31.1†
  Certification of Chief Executive Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
 
   
31.2†
  Certification of Chief Financial Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
 
   
32.1†
  Certification of Chief Executive Officer furnished pursuant to 18 U.S.C. Section 1350 as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
 
   
32.2†
  Certification of Chief Financial Officer furnished pursuant to 18 U.S.C. Section 1350 as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
 
*   Incorporated herein by reference. The Registrant’s SEC file number is 001- 04311.
 
  Filed herewith.
 
  Denotes management contract or compensatory plan or arrangement.

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SIGNATURES
     Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
                 
    Pall Corporation    
 
               
March 28, 2008
  By:   /s/   LISA MCDERMOTT
 
Lisa McDermott,
   
 
          Chief Financial Officer and Treasurer    
 
               
 
      /s/   FRANCIS MOSCHELLA    
 
               
 
          Francis Moschella,    
 
          Vice President — Corporate Controller    
 
          Chief Accounting Officer    
     Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
             
/s/
  ERIC KRASNOFF
 
     Eric Krasnoff
 
Chairman of the Board,
Chief Executive Officer and President
  March 28, 2008
 
           
/s/
  LISA MCDERMOTT
 
     Lisa McDermott
  Chief Financial Officer and Treasurer    March 28, 2008
 
           
/s/
  FRANCIS MOSCHELLA
 
     Francis Moschella
 
Vice President — Corporate Controller
Chief Accounting Officer
  March 28, 2008
 
           
/s/
  DANIEL J. CARROLL, JR.
 
     Daniel J. Carroll, Jr.
  Director    March 28, 2008
 
           
/s/
  CHERYL W. GRISÉ
 
     Cheryl W. Grisé
  Director    March 28, 2008
 
           
/s/
  JOHN H. F. HASKELL, JR.
 
     John H. F. Haskell, Jr.
  Director           .   March 28, 2008
 
           
/s/
  ULRIC S. HAYNES, JR.
 
     Ulric S. Haynes, Jr.
  Director    March 28, 2008
 
           
/s/
  DENNIS N. LONGSTREET
 
     Dennis N. Longstreet
  Director    March 28, 2008
 
           
/s/
  EDWIN W. MARTIN
 
     Edwin W. Martin
  Director    March 28, 2008
 
           
/s/
  KATHARINE L. PLOURDE
 
     Katharine L. Plourde
  Director    March 28, 2008
 
           
/s/
  HEYWOOD SHELLEY
 
     Heywood Shelley
  Director    March 28, 2008
 
           
/s/
  EDWARD L. SNYDER
 
     Edward L. Snyder
  Director    March 28, 2008
 
           
/s/
  EDWARD TRAVAGLIANTI
 
     Edward Travaglianti
  Director    March 28, 2008

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Pall Corporation:
     We have audited the accompanying consolidated balance sheets of Pall Corporation and subsidiaries as of July 31, 2007 and 2006, and the related consolidated statements of earnings, stockholders’ equity, and cash flows for each of the years in the three-year period ended July 31, 2007. In connection with our audits of the consolidated financial statements, we also have audited the accompanying financial statement schedule. These consolidated financial statements and the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and the financial statement schedule based on our audits.
     We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
     In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Pall Corporation and subsidiaries as of July 31, 2007 and 2006, and the results of their operations and their cash flows for each of the years in the three-year period ended July 31, 2007, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
     As discussed in Note 2, the consolidated financial statements as of July 31, 2006 and for each of the years ended July 31, 2006 and 2005 have been restated.
     As discussed in the notes to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment” as of August 1, 2005, Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” as of July 31, 2007, and Securities and Exchange Commission Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements” as of July 31, 2007.
     We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Pall Corporation and subsidiaries internal control over financial reporting as of July 31, 2007, based on criteria established in Internal Control–Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 28, 2008 expressed an adverse opinion on the effective operation of internal control over financial reporting.
             
 
  /s/   KPMG LLP
 
KPMG LLP
   
Melville, New York
March 28, 2008

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PALL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
                 
    July 31, 2007     July 31, 2006  
            (As Restated)  
ASSETS
               
Current assets:
               
Cash and cash equivalents
  $ 443,036     $ 317,657  
Accounts receivable
    551,393       517,632  
Inventories
    471,467       408,273  
Other current assets
    140,481       90,553  
 
           
Total current assets
    1,606,377       1,334,115  
Property, plant and equipment, net
    607,900       620,979  
Goodwill
    260,205       246,476  
Intangible assets
    47,933       51,477  
Other non-current assets
    186,431       208,239  
 
           
Total assets
  $ 2,708,846     $ 2,461,286  
 
           
 
               
LIABILITIES AND STOCKHOLDERS’ EQUITY