You should read the following discussion together with Pall’s condensed consolidated financial statements and notes thereto and other financial information included elsewhere in this Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended August 2, 2003. The discussions regarding market segments and geographies are in local currency unless indicated otherwise. As used below, “½%” indicates that we have rounded the relevant data up or down to the nearest one-half percentage point. Dollar amounts discussed below are in thousands, 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 may 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. Such risks and uncertainties include, but are not limited to: fluctuations in foreign currency exchange rates; regulatory approval and market acceptance of new technologies; changes in product mix and product pricing and in interest rates and cost of raw materials; the Company’s success in enforcing its patents and protecting its proprietary products and manufacturing techniques and its ability to achieve the savings anticipated from its cost reduction initiatives; global and regional economic conditions and legislative, regulatory and political developments; and domestic and international competition in the Company’s global markets.

Sales for the quarter increased 10% to $428,085 from $388,522 in the second quarter of last year. For the six-month period, sales increased 11½% to $802,371. Exchange rates increased reported sales in the quarter by $35,109, or 9%, and $60,407, or 8½% for the six-month period, primarily due to the strengthening of the Euro and to a lesser extent the British Pound and Japanese Yen. In local currency (i.e., had exchange rates not changed year over year), sales increased 1% and 3% in the quarter and six months, respectively. Overall, pricing was flat in the quarter and six months. Sales growth was strong in our Microelectronics segment in the quarter and six months as the semiconductor industry continued to rebound. Aerospace segment sales were down in the quarter and flat on a year-to-date basis reflecting a difficult comparison to last year’s non-recurring sales that were related to the Iraqi conflict. Sales in our Medical segment were up slightly in the quarter and on a year-to-date basis, sales were up in the mid-single digit range. BioPharmaceuticals segment sales were down slightly in the quarter and increased 1½% for the six-month period, while General Industrial segment sales were up in the low-single digits in both periods. By geography, Asia reported double-digit sales growth in the quarter and six months, while sales in the Western Hemisphere have shown solid single-digit growth. The growth in Asia and the Western Hemisphere was largely offset by a decline in sales in Europe, attributable to lower Aerospace sales and as a result of customers reducing their year-end inventories due to increased trade pressures of the strong Euro. We expect overall sales in local currency to grow mid-single digits in fiscal year 2004. For a detailed discussion of sales, refer to “Review of Market Segments and Geographies.”

Cost of sales in the quarter, as a percentage of sales, increased slightly to 51.7% from 51.5% in the second quarter of fiscal 2003, reflecting a shift in product mix to more systems business. For the six months, cost of sales improved slightly to 51.8% from 51.9% for the same period last year. We are expecting to achieve a modest improvement in cost of sales, as a percentage of sales, in fiscal year 2004.

Selling, general and administrative expenses as a percentage of sales in the quarter were 33.6% as compared to 33.2% last year. For the six-month period, selling, general and administrative expenses were 34.3% as compared to 34.1% for the same period last year. Synergies achieved related to our FSG integration efforts and the effects of our cost reduction programs were offset by increased pension and consulting costs as well as the impact of foreign exchange. Foreign exchange is estimated to have increased selling, general and administrative expenses by about $13,000 in the quarter and $22,200 for the six months. The increase in consulting costs relates to our CORE cost reduction programs as well as Sarbanes-Oxley compliance initiatives.

At the end of the third quarter of fiscal 2003 we completed and identified $30,000 in annualized cost synergies that we expect to realize by the end of fiscal year 2004 as a result of our integration of FSG. In addition, we are targeting $10 million in savings on an annualized basis for items such as freight, office supplies, parcel delivery and travel as part of our CORE cost reduction initiatives. As we are still in the startup phase, we expect net savings from the program to approximate $2,500 for this fiscal year. In fiscal 2005, our expected savings as a result of the program should approximate $10,000. In fiscal 2004, items such as pension and consulting are expected to increase approximately $8,000 above the fiscal 2003 levels; however, the net savings from our cost reduction initiatives are expected to partly offset these cost increases. As a result of these factors, combined with a higher level of sales over the second half of the year, we are expecting to achieve modest improvement in selling, general and administrative expenses, as a percentage of sales, in fiscal year 2004.