UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended January 31, 2007

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

For the transition period from            to

PALL CORPORATION

(Exact name of registrant as specified in its charter)

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

(516) 484-5400
(Registrant’s telephone number, including area code)

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

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

Large accelerated filer þ            Accelerated filer o            Non-accelerated filer o

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

     The number of shares of the registrant’s common stock outstanding as of March 7, 2007 was 123,002,784.

 

 

Table of Contents

		Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).
Condensed Consolidated Balance Sheets as of January 31, 2007 and July 31, 2006.			3
Condensed Consolidated Statements of Earnings for the three and six months ended January 31, 2007 and January 31, 2006.			4
Condensed Consolidated Statements of Cash Flows for the six months ended January 31, 2007 and January 31, 2006.			5
Notes to Condensed Consolidated Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.			17
Item 3. Quantitative and Qualitative Disclosures About Market Risk.			27
Item 4. Controls and Procedures.			27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.			28
Item 1A. Risk Factors.			31
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.			31
Item 4. Submission of Matters To a Vote of Security Holders.			31
Item 6. Exhibits.			32
SIGNATURES			33

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

PALL CORPORATION AND SUBSIDIARIES

		Jan. 31, 2007				July 31, 2006
ASSETS
Current assets:
Cash and cash equivalents		$	345,686			$	317,657
Accounts receivable			476,286				517,632
Inventories			434,891				408,273
Prepaid expenses			38,855				25,259
Other current assets			102,550				108,160
Total current assets			1,398,268				1,376,981
Property, plant and equipment, net			576,730				620,979
Goodwill			247,535				246,476
Intangible assets			49,536				51,477
Other non-current assets			239,777				256,945
Total assets		$	2,511,846			$	2,552,858
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Notes payable		$	28,675			$	35,821
Accounts payable and other current liabilities			401,032				399,950
Income taxes payable			53,876				67,484
Current portion of long-term debt			26,415				27,561
Total current liabilities			509,998				530,816
Long-term debt, net of current portion			533,993				640,015
Deferred taxes and other non-current liabilities			207,413				203,331
Total liabilities			1,251,404				1,374,162
Stockholders’ equity:
Common stock, par value $.10 per share			12,796				12,796
Capital in excess of par value			148,287				137,165
Retained earnings			1,195,240				1,151,044
Treasury stock, at cost			(139,310	)			(156,775	)
Stock option loans			(474	)			(1,311	)
Accumulated other comprehensive income (loss):
Foreign currency translation			114,545				107,133
Minimum pension liability			(73,084	)			(73,084	)
Unrealized investment gains			2,633				1,949
Unrealized losses on derivatives			(191	)			(221	)
			43,903				35,777
Total stockholders’ equity			1,260,442				1,178,696
Total liabilities and stockholders’ equity		$	2,511,846			$	2,552,858

See accompanying notes to condensed consolidated financial statements.

PALL CORPORATION AND SUBSIDIARIES

		Three Months Ended								Six Months Ended
		Jan. 31, 2007				Jan. 31, 2006				Jan. 31, 2007				Jan. 31, 2006
Net sales		$	544,930			$	478,436			$	1,044,218			$	909,598
Cost of sales			288,460				252,618				564,076				482,103
Gross profit			256,470				225,818				480,142				427,495
Selling, general and administrative expenses			168,203				159,136				325,578				308,843
Research and development			15,277				14,398				29,511				27,464
Restructuring and other (gains)/charges, net			(3,648	)			3,736				13,440				3,686
Interest expense, net			4,848				5,642				10,634				11,381
Earnings before income taxes			71,790				42,906				100,979				76,121
Provision for income taxes			15,987				10,470				20,742				18,575
Net earnings		$	55,803			$	32,436			$	80,237			$	57,546
Earnings per share:
Basic		$	0.45			$	0.26			$	0.65			$	0.46
Diluted		$	0.45			$	0.26			$	0.64			$	0.46
Dividends declared per share		$	0.12			$	0.11			$	0.23			$	0.21
Average shares outstanding:
Basic			123,185				125,225				122,988				125,045
Diluted			124,504				126,090				124,392				125,879

See accompanying notes to condensed consolidated financial statements.

PALL CORPORATION AND SUBSIDIARIES

		Six Months Ended
		Jan. 31, 2007				Jan. 31, 2006
Operating activities:
Net earnings		$	80,237			$	57,546
Adjustments to reconcile net earnings to net cash provided by operating activities:
Restructuring and other charges, net			12,323				3,686
Depreciation and amortization of long-lived assets			46,976				47,298
Non-cash stock compensation			7,294				5,717
Excess tax benefits from stock-based compensation arrangements			(2,919	)			(308	)
Other			13,919				993
Changes in operating assets and liabilities, net of effects of acquisitions and dispositions			(8,955	)			10,088
Net cash provided by operating activities			148,875				125,020
Investing activities:
Capital expenditures			(32,210	)			(52,021	)
Proceeds from sale of retirement benefit assets			14,864				22,494
Purchases of retirement benefit assets			(14,018	)			(39,351	)
Proceeds from sale of strategic investments			—				7,387
Disposals of long lived assets			43,968				3,227
Acquisitions of businesses, net of disposals and cash acquired			(406	)			(75	)
Other			(2,252	)			(1,273	)
Net cash provided (used) by investing activities			9,946				(59,612	)
Financing activities:
Notes payable			(8,080	)			2,500
Dividends paid			(26,885	)			(24,885	)
Net proceeds from stock plans			24,840				14,553
Purchase of treasury stock			(11,800	)			(5,750	)
Long-term borrowings			618				10,055
Repayments of long-term debt			(113,819	)			(904	)
Excess tax benefits from stock-based compensation arrangements			2,919				308
Net cash used by financing activities			(132,207	)			(4,123	)
Cash flow for period			26,614				61,285
Cash and cash equivalents at beginning of year			317,657				164,928
Effect of exchange rate changes on cash and cash equivalents			1,415				1,785
Cash and cash equivalents at end of period		$	345,686			$	227,998
Supplemental disclosures:
Interest paid		$	18,242			$	14,097
Income taxes paid (net of refunds)			13,064				25,487
Non-cash transactions:
Note receivable			—				2,560

See accompanying notes to condensed consolidated financial statements.

PALL CORPORATION AND SUBSIDIARIES

NOTE 1 — BASIS OF PRESENTATION

     The condensed consolidated financial information included herein is unaudited. Such information reflects all adjustments of a normal recurring nature, which are, in the opinion of Company management, necessary to present fairly the Company’s consolidated financial position, results of operations and cash flows as of the dates and for the periods presented herein. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes set forth in the Company’s Annual Report on Form 10-K for the fiscal year ended July 31, 2006 (“2006 Form 10-K”).

     Segment operating profit for fiscal year 2006 has been restated to conform to the current year presentation. Refer to the Segment Information note (Note 12) for further discussion.

NOTE 2 — ADOPTION OF NEW ACCOUNTING PRONOUNCEMENT

     In June 2005, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 154, Accounting Changes and Error Corrections (“SFAS No. 154”), which requires entities that voluntarily make a change in accounting principle to apply that change retrospectively to prior periods’ financial statements, unless this would be impracticable. SFAS No. 154 supersedes Accounting Principles Board Opinion No. 20, Accounting Changes (“APB No. 20”), which previously required that most voluntary changes in accounting principle be recognized by including in the current period’s net earnings the cumulative effect of changing to the new accounting principle. SFAS No. 154 also makes a distinction between “retrospective application” of an accounting principle and the “restatement” of financial statements to reflect the correction of an error. Another significant change in practice under SFAS No. 154 is that if an entity changes its method of depreciation, amortization, or depletion for long-lived, non-financial assets, the change must be accounted for as a change in accounting estimate. Under APB No. 20, such a change would have been reported as a change in accounting principle. SFAS No. 154 was effective for the Company beginning with its first quarter of fiscal year 2007. The adoption of SFAS No. 154 did not have a material impact on the Company’s condensed consolidated financial statements.

NOTE 3 — BALANCE SHEET DETAILS

     The following tables provide details of selected balance sheet items:

		Jan. 31, 2007				July 31, 2006
Accounts receivable:
Billed		$	448,780			$	483,205
Unbilled			40,165				46,329
Total			488,945				529,534
Less: Allowances for doubtful accounts			(12,659	)			(11,902	)
		$	476,286			$	517,632

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

		Jan. 31, 2007				July 31, 2006
Inventories:
Raw materials and components		$	123,829			$	130,731
Work-in-process			80,735				66,259
Finished goods			230,327				211,283
		$	434,891			$	408,273

PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
(Unaudited)

		Jan. 31, 2007				July 31, 2006
Property, plant and equipment:
Property, plant and equipment (a)		$	1,306,609			$	1,341,906
Less: Accumulated depreciation and amortization (a)			(729,879	)			(720,927	)
		$	576,730			$	620,979

NOTE 4 — GOODWILL AND INTANGIBLE ASSETS

     The following table presents goodwill, net of accumulated amortization recorded prior to adopting SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS No. 142”), allocated by reportable segment, in accordance with SFAS No. 142. For a discussion regarding a change in the Company’s reportable segments, refer to the Segment Information note (Note 12).

		Jan. 31, 2007				July 31, 2006
Life Sciences		$	68,355			$	67,554
Industrial			179,180				178,922
		$	247,535			$	246,476

     The change in the carrying amount of goodwill is primarily attributable to additional consideration paid related to a prior acquisition in India as well as changes in foreign exchange rates used to translate the goodwill contained in the financial statements of foreign subsidiaries using the rates at each respective balance sheet date.

     Intangible assets, net, consist of the following:

		Jan. 31, 2007
						Accumulated
		Gross				Amortization				Net
Patents and unpatented technology		$	80,437			$	33,715			$	46,722
Trademarks			4,715				2,454				2,261
Other			3,353				2,800				553
		$	88,505			$	38,969			$	49,536

		July 31, 2006
						Accumulated
		Gross				Amortization				Net
Patents and unpatented technology		$	78,579			$	30,232			$	48,347
Trademarks			4,648				2,261				2,387
Other			3,361				2,618				743
		$	86,588			$	35,111			$	51,477

     Amortization expense for intangible assets for the three and six months ended January 31, 2007 was $2,041 and $4,063, respectively. Amortization expense for intangible assets for the three and six months ended January 31, 2006 was $2,594 and $4,402, respectively. Amortization expense is estimated to be approximately $4,133 for the remainder of fiscal 2007, $7,274 in 2008, $6,877 in 2009, $6,881 in 2010, $6,974 in 2011 and $7,131 in 2012.

PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
(Unaudited)

NOTE 5 — TREASURY STOCK

     On October 17, 2003, the Board of Directors (the “Board”) authorized the expenditure of $200,000 to repurchase shares of the Company’s common stock and on October 14, 2004, authorized an additional expenditure of $200,000 to repurchase shares. At July 31, 2006, there was $160,027 available to be expended under these authorizations. On November 15, 2006, the Board authorized an additional expenditure of $250,000 to repurchase shares. During the six months ended January 31, 2007, the Company purchased 375 shares in open-market transactions at an aggregate cost of $11,800 with an average price per share of $31.50. At January 31, 2007, approximately $398,227 remained available to be expended under the current stock repurchase programs. The Company’s shares may be purchased over time, as market and business conditions warrant. There is no time restriction on these authorizations. Repurchased shares are held in treasury for use in connection with the Company’s stock-based compensation plans and for general corporate purposes.

     During the six months ended January 31, 2007, 1,082 shares were issued under the Company’s stock-based compensation plans. At January 31, 2007, the Company held 5,093 treasury shares.

NOTE 6 — CONTINGENCIES AND COMMITMENTS

     The Company’s condensed consolidated balance sheet at January 31, 2007 includes liabilities for environmental matters of approximately $19,520, which relates primarily to the previously reported environmental proceedings involving a Company subsidiary, Gelman Sciences Inc., pertaining to groundwater contamination. In the opinion of management, the Company is in substantial compliance with applicable environmental laws and its current accruals for environmental remediation are adequate. However, because regulatory standards under environmental laws are becoming increasingly stringent, there can be no assurance that future developments, additional information and experience gained will not cause the Company to incur material environmental liabilities or costs beyond those accrued in its condensed consolidated financial statements.

NOTE 7 — RESTRUCTURING AND OTHER (GAINS)/CHARGES, NET

     The following tables summarize the restructuring and other (gains)/charges (“ROTC”) recorded for the three and six months ended January 31, 2007 and January 31, 2006:

		Three Months Ended Jan. 31, 2007												Six Months Ended Jan. 31, 2007
						Other												Other
						Charges												Charges
		Restructuring				/(Gains)								Restructuring				/(Gains)
		(1)				(2)				Total				(1)				(2)				Total
Severance		$	6,914			$	—			$	6,914			$	14,725			$	—			$	14,725
Gain on sale and impairment of assets, net			(10,886	)			—				(10,886	)			(5,114	)			—				(5,114	)
Other exit costs			167				—				167				821				—				821
Environmental matters (2a)			—				217				217				—				2,561				2,561
Other			1,117				(188	)			929				1,117				975				2,092
			(2,688	)			29				(2,659	)			11,549				3,536				15,085
Reversal of excess reserves			(989	)			—				(989	)			(1,645	)			—				(1,645	)
		$	(3,677	)		$	29			$	(3,648	)		$	9,904			$	3,536			$	13,440
Cash		$	(1,154	)		$	29			$	(1,125	)		$	6,655			$	3,536			$	10,191
Non-cash			(2,523	)			—				(2,523	)			3,249				—				3,249
		$	(3,677	)		$	29			$	(3,648	)		$	9,904			$	3,536			$	13,440

PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
(Unaudited)

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

     In connection with the acquisition of the Filtration and Separations Group (“FSG”) in fiscal year 2002, Company management began formulating integration plans and identifying synergistic opportunities. The study led to a much broader initiative to examine the overall structure of the Company and the manner in which it conducted business activities with the objective of increasing revenue growth and achieving cost reduction. This resulted in a series of restructuring activities that have been ongoing since that time, including the realignment of the overall business structure as described in the Segment Information note (Note 12), which commenced at the end of fiscal year 2004, and the Company’s facilities rationalization initiative and European cost reduction (“EuroPall”) initiative, which commenced in fiscal year 2006.

     Three and Six Months Ended January 31, 2006:

•

The Company continued its realignment plan and cost reduction initiatives. As a result, the Company recorded severance liabilities for the termination of certain employees worldwide as well as other costs related to these initiatives.

     Three and Six Months Ended January 31, 2007:

	•		The Company continued its cost reduction initiatives, including its facilities rationalization and EuroPall initiatives. As a result, the Company recorded severance liabilities for the termination of certain employees worldwide as well as other costs related to these initiatives.
	•		In the three months ended January 31, 2007, the Company sold its corporate headquarters and recorded a gain on the sale of $10,886.
	•		In the three months ended October 31, 2006, the Company recorded an impairment charge of $5,772 related to the planned disposal of a building in Europe and the early retirement of certain long-lived assets, as part of the Company’s facilities rationalization initiative.

PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
(Unaudited)

     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)		$	14,172			$	821			$	14,993
Utilized			(2,184	)			(743	)			(2,927	)
Other changes (b)			4				7				11
Balance at Jan. 31, 2007		$	11,992			$	85			$	12,077
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			(1,442	)			(89	)			(1,531	)
Reversal of excess reserves (c)			(924	)			(31	)			(955	)
Other changes (b)			87				1				88
Balance at Jan. 31, 2007		$	4,017			$	33			$	4,050
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			(1,914	)			—				(1,914	)
Reversal of excess reserves (c)			(690	)			—				(690	)
Other changes (b)			15				—				15
Balance at Jan. 31, 2007		$	1,326			$	13			$	1,339

PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
(Unaudited)

NOTE 8 — COMPONENTS OF NET PERIODIC PENSION COST

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

		Three Months Ended
		U.S. Plans								Foreign Plans								Total
		Jan. 31,				Jan. 31,				Jan. 31,				Jan. 31,				Jan. 31,				Jan. 31,
		2007				2006				2007				2006				2007				2006
Service cost		$	1,952			$	1,878			$	905			$	2,079			$	2,857			$	3,957
Interest cost			2,760				2,368				4,079				3,215				6,839				5,583
Expected return on plan assets			(2,124	)			(1,572	)			(3,250	)			(2,477	)			(5,374	)			(4,049	)
Amortization of prior service cost			275				238				153				113				428				351
Amortization of net transition asset			(11	)			(11	)			—				—				(11	)			(11	)
Recognized actuarial loss			579				714				2,152				1,970				2,731				2,684
Net periodic benefit cost		$	3,431			$	3,615			$	4,039			$	4,900			$	7,470			$	8,515

		Six Months Ended
		U.S. Plans								Foreign Plans								Total
		Jan. 31,				Jan. 31,				Jan. 31,				Jan. 31,				Jan. 31,				Jan. 31,
		2007				2006				2007				2006				2007				2006
Service cost		$	3,904			$	3,756			$	1,802			$	4,216			$	5,706			$	7,972
Interest cost			5,520				4,736				8,027				6,498				13,547				11,234
Expected return on plan assets			(4,248	)			(3,144	)			(6,389	)			(5,006	)			(10,637	)			(8,150	)
Amortization of prior service cost			550				476				304				230				854				706
Amortization of net transition asset			(22	)			(22	)			—				—				(22	)			(22	)
Recognized actuarial loss			1,158				1,428				4,230				3,982				5,388				5,410
Net periodic benefit cost		$	6,862			$	7,230			$	7,974			$	9,920			$	14,836			$	17,150

NOTE 9 — STOCK-BASED PAYMENT

     The Company applies the provisions of SFAS No. 123(R), Share-Based Payment, which establishes the accounting for employee stock-based awards. The Company currently has four stock-based employee and directors compensation plans (Stock Option Plans, Management Stock Purchase Plan (“MSPP”), Employee Stock Purchase Plan (“ESPP”) and Restricted Stock Unit Plans) which are described under the caption “Stock Plans” in the Accounting Policies and Related Matters footnote of the Company’s 2006 Form 10-K.

PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
(Unaudited)

     The detailed components of stock-based compensation expense recorded in the condensed consolidated statements of earnings for the three and six months ended January 31, 2007 and January 31, 2006 are illustrated in the table below.

		Three Months Ended								Six Months Ended
		Jan. 31,				Jan. 31,				Jan. 31,				Jan. 31,
		2007				2006				2007				2006
Stock options		$	935			$	1,526			$	2,408			$	3,021
Restricted stock units			1,809				541				2,824				1,053
ESPP			143				590				760				973
MSPP			891				362				1,302				670
Total		$	3,778			$	3,019			$	7,294			$	5,717

     The following table illustrates the income tax effects related to stock-based compensation.

		Three Months Ended								Six Months Ended
		Jan. 31,				Jan. 31,				Jan. 31,				Jan. 31,
		2007				2006				2007				2006
Excess tax benefit in cash flows from financing activities		$	2,323			$	191			$	2,919			$	308
Tax benefit recognized related to total stock-based compensation expense			869				533				1,418				1,020
Actual tax benefit realized for tax deductions from option exercises of stock-based payment arrangements			3,587				3,293				4,375				4,905

     A summary of option activity for all stock option plans during the six months ended January 31, 2007 is presented below:

						Weighted-				Weighted-
						Average				Average				Aggregate
						Exercise				Remaining				Intrinsic
Options		Shares				Price				Contractual Term				Value
Outstanding at August 1, 2006			3,794			$	21.39
Granted			3				26.59
Exercised			(196	)			19.39
Forfeited or Expired			(31	)			21.16
Outstanding at October 31, 2006			3,570				21.50				5.7			$	27,553
Granted			310				34.03
Exercised			(572	)			18.17
Forfeited or Expired			(14	)			20.93
Outstanding at January 31, 2007			3,294			$	23.26				5.5			$	37,878
Expected to vest at January 31, 2007			937			$	29.75				6.2			$	4,697
Exercisable at January 31, 2007			2,294			$	20.49				5.1			$	32,730

     As of January 31, 2007, there was $6,515 of total unrecognized compensation cost related to nonvested stock options, which is expected to be recognized over a weighted-average period of 2.9 years. The total intrinsic value of options exercised during the three and six months ended January 31, 2007 was $8,939 and $11,171, respectively. The total intrinsic value of options exercised during the three and six months ended January 31, 2006 was $2,308 and $3,419, respectively.

PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
(Unaudited)

The following weighted average assumptions were used in estimating the fair value of stock options granted during the three and six months ended January 31, 2007 and January 31, 2006:

		Three Months Ended								Six Months Ended
		Jan. 31, 2007				Jan. 31, 2006				Jan. 31, 2007				Jan. 31, 2006
Average fair value of stock-based compensation awards granted		$	8.86			$	7.41			$	8.84			$	7.43
Valuation assumptions:
Expected dividend yield			1.9	%			1.9	%			1.9	%			1.9	%
Expected volatility			26.0	%			27.0	%			26.0	%			27.0	%
Expected life (years)			5.0				5.0				5.0				5.0
Risk-free interest rate			4.7	%			4.3	%			4.7	%			4.3	%

     The fair value of the options is estimated using a Black-Scholes-Merton option-pricing formula and amortized to expense over the options’ service periods. The Company has placed exclusive reliance on historical volatility in its estimate of expected volatility. The Company used a sequential period of historical data equal to the expected term (or expected life) of the options using a simple average calculation based upon the daily closing prices of the aforementioned period.

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

     The purpose of the MSPP is to encourage key employees of the Company to increase their ownership of shares of the Company’s common stock by providing such employees with an opportunity to elect to have portions of their total annual compensation paid in the form of restricted units, to make cash purchases of restricted units and to earn additional matching restricted units which vest over a three year period for matches prior to August 1, 2003 and vest over a four year period for matches made thereafter. Such restricted units aggregated 819 and 780 as of January 31, 2007 and January 31, 2006, respectively. As of January 31, 2007, there was $5,205 of total unrecognized compensation cost related to nonvested restricted stock units granted under the MSPP, which is expected to be recognized over a weighted-average period of 3.1 years.

     The following is a summary of MSPP activity during the three and six months ended January 31, 2007 and January 31, 2006:

		Three Months Ended								Six Months Ended
		Jan. 31,				Jan. 31,				Jan. 31,				Jan. 31,
		2007				2006				2007				2006
Deferred compensation and cash contributions		$	1,112			$	439			$	2,967			$	3,165
Fair value of restricted stock units vested		$	147			$	230			$	155			$	497
Vested units distributed			73				32				74				58

     The ESPP enables participants to purchase shares of the Company’s common stock through payroll deductions at a price equal to 85% of the lower of the market price at the beginning or end of each semi-annual stock purchase period. The semi-annual offering periods end in April and October. A total of 233 and 207 shares were issued under the ESPP during the semi-annual stock purchase periods ended October 31, 2006 and October 31, 2005, respectively. Shares for the current semi-annual stock purchase period will be purchased on April 30, 2007, the end of the aforementioned current stock purchase period.

PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
(Unaudited)

     A summary of restricted stock unit activity, related to employees, for the 2005 Stock Plan during the six months ended January 31, 2007, is presented below:

						Weighted-
						Average
						Grant-Date
		Shares				Fair Value
Nonvested at August 1, 2006			513			$	28.15
Granted			2				26.59
Exercised			—				—
Forfeited			(9	)			28.73
Nonvested at October 31, 2006			506				28.14
Granted			65				34.07
Exercised			—				—
Forfeited			(5	)			28.11
Nonvested at January 31, 2007			566				28.81

     As of January 31, 2007, there was $12,657 of total unrecognized compensation cost related to nonvested restricted stock units granted under the 2005 Stock Plan, which is expected to be recognized over a weighted-average period of 3.1 years. None of the restricted stock units vested during the six months ended January 31, 2007.

     Non-employee directors of the Company were granted 19 annual award units of restricted stock during the three and six months ended January 31, 2007, with a weighted-average fair market value of $33.65 per share.

     The Company currently uses treasury shares that have been repurchased through the Company’s stock repurchase program to satisfy share award exercises.

NOTE 10 — EARNINGS PER SHARE

     The condensed consolidated statements of earnings present basic and diluted earnings per share. Basic earnings per share is determined by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share considers the potential effect of dilution on basic earnings per share assuming potentially dilutive shares that meet certain criteria, such as those issuable upon exercise of stock options, were outstanding. The treasury stock method reduces the dilutive effect of potentially dilutive securities as it assumes that cash proceeds (from the issuance of potentially dilutive securities) are used to buy back shares at the average share price during the period. Employee stock options and units aggregating 404 and 890 shares were not included in the computation of diluted shares for the three months ended January 31, 2007 and January 31, 2006, respectively, because their effect would have been antidilutive. For the six months ended January 31, 2007 and January 31, 2006, 389 and 906 antidilutive shares were excluded. The following is a reconciliation between basic shares outstanding and diluted shares outstanding:

		Three Months Ended								Six Months Ended
		Jan. 31, 2007				Jan. 31, 2006				Jan. 31, 2007				Jan. 31, 2006
Basic shares outstanding			123,185				125,225				122,988				125,045
Effect of stock plans			1,319				865				1,404				834
Diluted shares outstanding			124,504				126,090				124,392				125,879

PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
(Unaudited)

NOTE 11 — COMPREHENSIVE INCOME

		Three Months Ended								Six Months Ended
		Jan. 31, 2007				Jan. 31, 2006				Jan. 31, 2007				Jan. 31, 2006
Net income		$	55,803			$	32,436			$	80,237			$	57,546
Unrealized translation adjustment			4,572				10,714				7,244				6,395
Income taxes			—				179				168				(360	)
Unrealized translation adjustment, net			4,572				10,893				7,412				6,035
Change in unrealized investment gains			309				860				2,101				2,066
Income taxes			(1,417	)			—				(1,417	)			—
Change in unrealized investment (losses) gains, net			(1,108	)			860				684				2,066
Unrealized (losses) gains on derivatives			(93	)			(282	)			10				(205	)
Income taxes			7				14				20				(13	)
Unrealized (losses) gains on derivatives, net			(86	)			(268	)			30				(218	)
Total comprehensive income		$	59,181			$	43,921			$	88,363			$	65,429

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

		Three Months Ended								Six Months Ended
		Jan. 31, 2007				Jan. 31, 2006				Jan. 31, 2007				Jan. 31, 2006
Unrealized gains arising during the period		$	267			$	860			$	1,782			$	3,872
Income taxes			(1,417	)			—				(1,417	)			—
Net unrealized (losses) gains arising during the period			(1,150	)			860				365				3,872
Reclassification adjustment for losses (gains) included in net earnings			42				—				319				(1,806	)
Change in unrealized investment (losses) gains, net		$	(1,108	)		$	860			$	684			$	2,066

NOTE 12 — SEGMENT INFORMATION

     During fiscal year 2005, the Company undertook to reorganize its 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 current 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 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. Senior management of the Company, including the Company’s chief executive officer, manage the Company and make 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.

PALL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
(Unaudited)

     Consistent with the new corporate structure, management has determined that the Company’s reportable segments, that 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.

     The following table presents sales and operating profit by segment for the three and six months ended January 31, 2007 and January 31, 2006.

		Three Months Ended								Six Months Ended
		Jan. 31,				Jan. 31,				Jan. 31,				Jan. 31,
		2007				2006				2007				2006
SALES:
Life Sciences		$	211,935			$	187,867			$	404,937			$	356,814
Industrial			332,995				290,569				639,281				552,784
Total		$	544,930			$	478,436			$	1,044,218			$	909,598
OPERATING PROFIT (a):
Life Sciences		$	37,036			$	27,549			$	66,224			$	50,116
Industrial			48,373				34,146				81,662				60,927
Total operating profit			85,409				61,695				147,886				111,043
General corporate expenses			(10,330	)			(9,216	)			(20,317	)			(19,349	)
Earnings before ROTC, interest expense, net and income taxes (b)			75,079				52,479				127,569				91,694
ROTC (b)			1,559				(3,931	)			(15,956	)			(4,192	)
Interest expense, net			(4,848	)			(5,642	)			(10,634	)			(11,381	)
Earnings before income taxes		$	71,790			$	42,906			$	100,979			$	76,121

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

Forward-Looking Statements and Risk Factors

     You should read the following discussion together with the condensed consolidated financial statements and notes thereto and other financial information in this Form 10-Q and in the Company’s Annual Report on Form 10-K for the fiscal year ended July 31, 2006. The discussions regarding sales under the subheading “Review of Operating Segments” below are in local currency unless otherwise indicated. Company management considers local currency growth an important measure because by excluding the volatility of exchange rates, underlying volume growth 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 Quarterly Report on Form 10-Q contain “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. These statements are based on current Company 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, events or developments are forward-looking statements. Such risks and uncertainties include, but are not limited to: changes in product mix and product pricing particularly as we expand our systems business in which we experience significantly longer sales cycles and less predictable revenue with no 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 cost reduction and margin improvement initiatives including the timing of completion of the facilities rationalization initiative; fluctuations in foreign currency exchange rates and interest rates; regulatory approval and market acceptance of new technologies; changes in business relationships with key customers and suppliers including delays or cancellations in shipments; success in enforcing patents and protecting proprietary products and manufacturing techniques; successful completion or integration of acquisitions; domestic and international competition in the Company’s global markets; and global and regional economic conditions, and legislative, regulatory and political developments. The Company makes these statements as of the date of this report and undertakes no obligation to update them.

Business Reorganization

     During fiscal year 2005, the Company undertook to reorganize its 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 current 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 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. Senior management of the Company, including the Company’s chief executive officer, manage the Company and make 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.

Results of Operations

Review of Consolidated Results

     Sales in the quarter increased 13.9% to $544,930 from $478,436 in the second quarter of fiscal year 2006. For the six months, sales increased 14.8%, to $1,044,218. Exchange rates increased reported sales by $22,626 and $31,457 in the quarter and six months, respectively, 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 9.2% and 11.3% in the quarter and six months, respectively. Overall, pricing was flat in the quarter and six months, however, the Company achieved increased pricing in the General Industrial and BioPharmaceuticals markets.

     Life Sciences segment sales increased 8.1% and 10.1% (in local currency) in the quarter and six months, respectively, attributable to growth in both the BioPharmaceuticals and Medical markets. Industrial segment sales increased 9.8% and 12.2% (in local currency) in the quarter and six months, respectively. Within Industrial, growth was particularly strong in the Microelectronics market, where sales increased 17.7% and 24.2% in the quarter and six months, respectively, as the Company continues to benefit from strength in the consumer electronics market. The General Industrial market achieved double-digit growth for the six months and just under double-digit growth for the quarter. Systems sales increased 36.4% and 47.4% in the quarter and six months, respectively, driven by strong sales in the General Industrial and BioPharmaceuticals markets. For a detailed discussion of sales, refer to the section “Review of Operating Segments” below.

     Cost of sales, as a percentage of sales, was 52.9% in the quarter compared to 52.8% in the second quarter of fiscal year 2006. In the quarter, cost of sales, as a percentage of sales stabilized despite the significant increase in systems sales, which are typically at lower margins. The stabilization of cost of sales reflects an improving profitability trend on systems driven by pricing controls and discipline, outsourcing, improved labor productivity and material costs, through the Company’s facilities rationalization initiative, as well as the rationalization of unprofitable products. Furthermore, the Company’s manufacturing cost reduction programs, including lean initiatives, procurement focus and continuous improvement activities, such as scrap reduction, are favorably impacting cost of sales. These factors largely offset the negative impact of product mix in the quarter as well as the impact of incremental costs related to the facilities rationalization initiative. Such costs include incremental depreciation (on assets to be retired earlier than originally estimated) and training. For the six months, cost of sales, as a percentage of sales, increased to 54% from 53% in the same period last year reflecting the factors discussed above. The facilities rationalization initiative is expected to reduce the Company’s footprint by over 20% and result in a 10% global manufacturing headcount reduction. In the six months ended January 31, 2007, the Company completed the outsourcing and closure of two plants in Germany and has also announced the closure of a plant in Waldstetten, Germany and a plant in Ternay, France. 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. The facilities rationalization initiative is expected to be substantially complete by the end of fiscal year 2008. Company management expects increased sales and the impact of its cost reduction initiatives, such as the facilities rationalization initiative, to offset other negative impacts in the second half of fiscal year 2007 to contribute to the stabilization of gross margin for the full fiscal year.

     Selling, general and administrative (“SG&A”) expenses in the quarter increased by $9,067, or about 5.7% (1% in local currency). As a percentage of sales, SG&A expenses decreased to 30.9% from 33.3% in the second quarter of fiscal year 2006 reflecting cost controls combined with increasing sales. For the six months, SG&A expenses increased by $16,735, or about 5.4% (2% in local currency) and as a percentage of sales, SG&A expenses decreased to 31.2% from 34% in the same period last year reflecting the same factors discussed above. The Company continued to make progress on a major initiative, begun in fiscal year 2006, to optimize its European operations (“EuroPall”) with the objective of delivering improvements in profitability. The Company plans to launch the equivalent of this program in the Western Hemisphere (“AmeriPall”) later this fiscal year. Based on these factors, Company management is expecting SG&A expenses, as a percentage of sales, to decrease approximately 50-80 basis points for the full fiscal year 2007.

     Research and development expenses were $15,277 in the quarter compared to $14,398 in the second quarter of fiscal year 2006. As a percentage of sales, research and development expenses were 2.8% as compared with 3% in the same period last year. For the six months, research and development expenses were $29,511, or 2.8% of sales compared to $27,464, or 3% of sales in the same period last year. Company management expects research and development expenses to be about 3% of sales for the full fiscal year 2007.

     In the second quarter of fiscal year 2007, the Company recorded a net gain of $3,648 in restructuring and other (gains)/charges (“ROTC”) primarily related to the Company’s on-going cost reduction initiatives (including its facilities rationalization and EuroPall initiatives). The ROTC in the quarter was primarily comprised of a gain on the sale of the Company’s corporate headquarters and the reversal of excess restructuring reserves recorded in the consolidated statements of earnings in fiscal years 2005 and 2006, partly offset by severance costs. In the first six months of fiscal year 2007, the Company recorded ROTC of $13,440 primarily related to the Company’s on-going cost reduction initiatives. The charges in the six months were primarily comprised of severance liabilities and an impairment charge recorded in the first quarter related to the planned disposal of a building and early retirement of certain long-lived assets. Additionally, the charges in the six months 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 and the reversal of excess restructuring reserves recorded in the consolidated statements of earnings in fiscal years 2005 and 2006.

     In the second quarter and six months of fiscal year 2006, the Company recorded ROTC of $3,736 and $3,686, respectively. The ROTC is comprised of severance and other costs in connection with the Company’s on-going cost reduction programs and divisional realignment, partly offset by the reversal of excess restructuring reserves recorded in the consolidated statements of earnings in fiscal year 2005. In addition, ROTC included a gain on the sale of the Company’s stock rights in Satair, which was recorded in the second quarter, as well as a gain on the sale of the Company’s investment in Panacos Pharmaceuticals, Inc., formerly known as V.I. Technologies, Inc. (“VITEX”), that was recorded in the first quarter of fiscal year 2006.

     The details of ROTC for the quarter and six months ended January 31, 2007 and January 31, 2006 can be found in the Restructuring and Other (Gains)/Charges, Net note (Note 7) accompanying the condensed 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)		$	14,172			$	821			$	14,993
Utilized			(2,184	)			(743	)			(2,927	)
Other changes (b)			4				7				11
Balance at Jan. 31, 2007		$	11,992			$	85			$	12,077
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			(1,442	)			(89	)			(1,531	)
Reversal of excess reserves (c)			(924	)			(31	)			(955	)
Other changes (b)			87				1				88
Balance at Jan. 31, 2007		$	4,017			$	33			$	4,050