10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)
[x]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDING October 31, 2004 OR

[   ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______________ TO ______________.
Commission File Number 1-7891

DONALDSON COMPANY, INC.
(Exact name of registrant as specified in its charter)

Delaware	41-0222640
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification Number)

1400 West 94th Street
Minneapolis, Minnesota 55431
(Address of principal executive offices)
(Zip Code)

Registrant’s telephone number, including area code (952) 887-3131

Not Applicable
(Former name, former address, and former fiscal year, if changed from last report)

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, and (2) has been subject to such filing requirements for the past 90 days.

Yes __X__ No _____

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 1 2b-2 of the Exchange Act).

Yes __X__ No _____

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:   Common Stock, $5 Par Value – 83,187,948 shares as of October 31, 2004

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PART I.   FINANCIAL INFORMATION

        Item 1.   Financial Statements.

DONALDSON COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Thousands of dollars, except share and per share amounts)
(Unaudited)

	Three Months Ended October 31
	2004			2003
Net sales	$	372,906		$	328,220
Cost of sales		256,477			221,643
Gross margin		116,429			106,577
Operating expenses		80,298			70,884
Operating income		36,131			35,693
Other income, net		(3,419	)		(387	)
Interest expense		2,024			1,072
Earnings before income taxes		37,526			35,008
Income taxes		10,132			9,452
Net earnings	$	27,394		$	25,556
Weighted average shares
outstanding		85,721,197			86,754,154
Diluted shares outstanding		88,038,004			90,606,700
Basic earnings per share	$	.32		$	.29
Diluted earnings per share	$	.31		$	.28
Dividends paid per share	$	.055		$	.048

See Notes to Condensed Consolidated Financial Statements.

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DONALDSON COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands of dollars, except share amounts)
(Unaudited)

	October 31, 2004			July 31, 2004
ASSETS
Current Assets
Cash and cash equivalents	$	118,741		$	99,504
Accounts receivable – net		279,531			274,120
Inventories
Materials		56,769			52,979
Work in process		22,622			21,109
Finished products		74,289			69,330
Total inventories		153,680			143,418
Prepaid and other current assets		37,335			40,338
Total current assets		589,287			557,380
Property, plant and equipment, at cost		643,179			623,488
Less accumulated depreciation		(377,013	)		(361,959	)
Property, plant and equipment, net		266,166			261,529
Goodwill		99,134			96,574
Intangible assets		19,650			19,127
Other assets		67,275			66,999
Total Assets	$	1,041,512		$	1,001,609
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Short-term debt	$	92,699		$	19,736
Current maturities of long-term debt		34,960			34,346
Trade accounts payable		127,061			124,401
Other current liabilities		106,203			97,041
Total Current Liabilities		360,923			275,524
Long-term debt		70,196			70,856
Deferred income taxes		25,023			25,981
Other long-term liabilities		80,990			79,955
Total Liabilities		537,132			452,316
SHAREHOLDERS’ EQUITY
Preferred stock, $1 par value,
1,000,000 shares authorized, no shares issued		—			—
Common stock, $5 par value, 120,000,000 shares authorized,
88,643,194 issued		443,216			443,216
Retained earnings		132,539			111,768
Deferred stock compensation		25,473			22,092
Accumulated other comprehensive income		46,976			31,558
Treasury stock, at cost – 5,285,892 and 2,361,899 shares at
October 31, 2004 and July 31, 2004, respectively		(143,824	)		(59,341	)
Total Shareholders’ Equity		504,380			549,293
Total Liabilities and Shareholders’ Equity	$	1,041,512		$	1,001,609

See Notes to Condensed Consolidated Financial Statements.

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DONALDSON COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of dollars)
(Unaudited)

	Three Months Ended October 31
	2004			2003
OPERATING ACTIVITIES
Net earnings	$	27,394		$	25,556
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization		11,041			10,974
Changes in operating assets and liabilities		4,634			(17,490	)
Other		(1,770	)		3,411
Net cash provided by operating activities		41,299			22,451
INVESTING ACTIVITIES
Net expenditures on property and equipment		(7,050	)		(13,516	)
Acquisitions, net of cash acquired and investments in
unconsolidated affiliates		—			(4,397	)
Net cash used in investing activities		(7,050	)		(17,913	)
FINANCING ACTIVITIES
Purchase of treasury stock		(86,542	)		(5,697	)
Repayments of long-term debt		(185	)		(104	)
Change in short-term borrowings		72,713			12,395
Dividends paid		(4,746	)		(4,128	)
Exercise of stock options		145			1,622
Net cash (used in) provided by financing activities		(18,615	)		4,088
Effect of exchange rate changes on cash		3,603			3,302
Increase in cash and cash equivalents		19,237			11,928
Cash and cash equivalents – beginning of year		99,504			67,070
Cash and cash equivalents – end of period	$	118,741		$	78,998

See Notes to Condensed Consolidated Financial Statements.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note A – Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of Donaldson Company, Inc. (the Company) have been prepared in accordance with accounting principles generally accepted in the United States of America and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included and are of a normal recurring nature. Operating results for the three-month period ended October 31, 2004 are not necessarily indicative of the results that may be expected for future periods. For further information, refer to the consolidated financial statements and notes thereto included in Donaldson Company, Inc. and Subsidiaries’ Annual Report on Form 10-K for the year ended July 31, 2004.

Note B – Accounting for Stock-Based Compensation

The Company accounts for stock-based compensation under the recognition and measurement principles using the intrinsic value method. Accordingly, no stock-based compensation cost related to stock options is reflected in net income because all options granted under the Company’s stock option plans have exercise prices equal to the fair value of the stock on the date of grant. The following table illustrates the effect on net earnings and earnings per share if the Company had applied the fair value-based method of accounting to measure compensation expense for its stock option plans and charged compensation cost against income over the vesting periods. Amounts are in thousands of dollars, except per share amounts:

	Three Months Ended October 31
	2004			2003
Net earnings, as reported	$	27,394		$	25,556
Less total stock-based employee
compensation expense under the fair
value-based method, net of tax		(921	)		(1,236	)
Pro forma net earnings	$	26,473		$	24,320
Basic net earnings per share
As reported	$	.32		$	.29
Pro forma	$	.31		$	.28
Diluted net earnings per share
As reported	$	.31		$	.28
Pro forma	$	.30		$	.27

Note C – Net Earnings Per Share

The Company’s basic net earnings per share is computed by dividing net earnings by the weighted average number of outstanding common shares. The Company’s diluted net earnings per share is computed by dividing net earnings by the weighted average number of outstanding common shares and dilutive shares relating to stock options, restricted stock and stock incentive plans. Certain

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outstanding options were excluded from the diluted net earnings per share calculations because their exercise prices were greater than the average market price of the Company’s common stock during those periods. For the three months ended October 31, 2004 and 2003, 1,038,040 and 110,854 options, respectively, were excluded from the diluted net earnings per share calculation.

The following table presents information necessary to calculate basic and diluted net earnings per common share (thousands of dollars, except per share amounts):

	Three Months Ended October 31
	2004		2003
Weighted average shares outstanding – basic		85,721		86,754
Diluted share equivalents		2,317		3,853
Weighted average shares outstanding – diluted		88,038		90,607
Net earnings for basic and diluted
earnings per share computation	$	27,394	$	25,556
Net earnings per share – basic	$	.32	$	.29
Net earnings per share – diluted	$	.31	$	.28

Note D – Shareholders’ Equity

The Company reports accumulated other comprehensive income as a separate item in the shareholders’ equity section of the balance sheet. Other comprehensive income consists of foreign currency translation adjustments and net gains or losses on cash flow hedging derivatives.

Total comprehensive income and its components are as follows (thousands of dollars):

	Three Months Ended October 31
	2004		2003
Net earnings	$	27,394	$	25,556
Foreign currency translation gain		15,237		10,820
Net gain on cash flow hedging derivatives		181		159
Total comprehensive income	$	42,812	$	36,535

Total accumulated other comprehensive income and its components at October 31, 2004 and July 31, 2004 are as follows (thousands of dollars):

	October 31, 2004			July 31, 2004
Foreign currency translation adjustment	$	50,846		$	35,610
Net gain (loss) on cash flow hedging derivatives		(646	)		142
Net gain from termination of fair value hedge		970			—
Additional minimum pension liability		(4,194	)		(4,194	)
Total accumulated other comprehensive income	$	46,976		$	31,558

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On September 3, 2004, the Company repurchased 3.0 million shares from Banc of America Securities LLC under an overnight share repurchase program at a total cost of approximately $86.5 million. The overnight share repurchase program permitted the Company to purchase the shares immediately, while Banc of America Securities will purchase the shares in the market over a six-to- nine-month period following the repurchase. At the end of the program, the Company may receive or be required to pay a price adjustment based on the actual cost of Banc of America Securities share purchases.

Note E – Segment Reporting

The Company has two reportable segments, Engine Products and Industrial Products, that have been identified based on the internal organization structure, management of operations and performance evaluation. Certain prior year amounts have been reclassified between the segments to conform to the current structure. Amounts reclassified in net sales and earnings before income taxes are not significant. Corporate and Unallocated includes corporate expenses determined to be non-allocable to the segments, interest income and expense and non-operating income and expenses. Segment detail is summarized as follows (thousands of dollars):

	Engine Products		Industrial Products		Corporate and Unallocated			Total Company
Three Months Ended October 31, 2004:
Net sales	$	217,585	$	155,321		—		$	372,906
Earnings before income taxes		30,873		12,694		(6,041	)		37,526
Assets		381,028		414,321		246,163			1,041,512
Three Months Ended October 31, 2003:
Net sales	$	186,739	$	141,481		—		$	328,220
Earnings before income taxes		27,931		10,361		(3,284	)		35,008
Assets		344,713		379,428		198,677			922,818

Sales to one customer accounted for 10 percent of net sales for the first quarter ended October 31, 2004. There were no customers over 10 percent of gross accounts receivable as of October 31, 2004.

Note F – Interest Rate Swaps

The Company is exposed to changes in the fair value of its fixed-rate debt resulting from interest rate fluctuations. To hedge this exposure, the Company entered into two fixed-to-variable interest rate swaps on June 6, 2001 and March 18, 2003. At July 31, 2004, these interest rate swaps were accounted for as fair value hedges and were recorded net of the underlying outstanding debt; changes in the payment of interest resulting from the interest rate swaps were recorded as an offset to interest expense. On August 2, 2004, the Company terminated these two interest rate swaps. The aggregate value of the two interest rate swaps at the termination date of $1.0 million will be amortized over the remaining life of the underlying debt.

On August 2, 2004, the Company entered into an interest rate swap to hedge its exposure to changes in the fair value of the $30.0 million senior notes that it had engaged a placement agent to issue. The interest rate on the $30.0 million senior notes offering was locked at 4.85 percent on August 2, 2004. The interest rate swap agreement has a notional amount of $30.0 million maturing on December 17, 2011. The variable rate on the swap is based on the six-month London Interbank Offered Rates “LIBOR”). Because the interest rate swap will not qualify as a hedge of the underlying debt until the debt is issued on December 17, 2004, the market value of the interest rate swap of $0.8 million as of October 31, 2004 was recorded as other income on the accompanying Condensed

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Consolidated Statement of Earnings. Upon issuance of the debt, it is the Company's current intention that the interest rate swap will be designated as a hedge to offset changes in the fair value of the debt due to interest rate fluctuations and will qualify for hedge accounting at that time.

Note G – Goodwill and Other Intangible Assets

The Company completed its annual impairment test for goodwill during the third quarter of fiscal 2004. The results of this test showed that the fair value of the reporting units to which the goodwill is assigned was higher than the book values of those reporting units, resulting in no goodwill impairment. As of August 1, 2004, the Company transferred a component of its Engine Products segment to its Industrial Products segment along with the goodwill associated with this component. Due to this reclassification, as of August 1, 2004, the Company performed an impairment test of the reporting unit to which this goodwill is now assigned. The results of this test showed that the fair value of the reporting unit was higher than the book value of that reporting unit, resulting in no goodwill impairment.

The Company has allocated goodwill to its Industrial Products and Engine Products segments. Following is a reconciliation of goodwill for the three months ending October 31, 2004:

	Industrial Products		Engine Products			Total Goodwill
	(Thousands of dollars)
Balance as of August 1, 2004	$	72,601	$	23,973		$	96,574
Transfer of goodwill between segments		22,903		(22,903	)		—
Foreign exchange translation		2,501		59			2,560
Balance as of October 31, 2004	$	98,005	$	1,129		$	99,134

As of October 31, 2004, other intangible assets were $19.7 million, a $0.6 million increase from the balance of $19.1 million at July 31, 2004. The increase in other intangible assets is due to foreign currency translation, partially offset by amortization.

Note H – Acquisitions

On October 10, 2003, the Company acquired the assets of the LHA industrial hydraulic business of Berendsen Fluid Power, Inc., located in Marietta, Georgia, for $4.4 million in cash. LHA assembles and sells a line of industrial hydraulic filters and accessory parts. The LHA business complements the Company’s existing industrial hydraulic business and broadens the Company’s product offering and enhances its distribution network for industrial hydraulics. The financial results for LHA are included in the Company’s consolidated results from the date of acquisition. Pro forma information is not presented due to the immateriality of the operating results of LHA.

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Following is a condensed balance sheet disclosing the final purchase price allocation based on fair values of the assets acquired and liabilities assumed. All of the $0.6 million of goodwill recorded in the purchase is tax deductible. Other intangible assets consist of customer lists and customer relationships acquired.

	(Thousands of dollars)
Accounts receivable	$	652
Net inventory		1,568
Current assets		9
Property, plant and equipment		167
Goodwill		614
Other intangible assets		1,946
Total assets acquired		4,956
Accounts payable assumed		(559	)
Net assets acquired	$	4,397

Note I – Plant Restructurings and Closures

The Company had no plant closure liability recorded as of October 31, 2004 and July 31, 2004 as there were no plant closure activities in the Company’s facilities. A pretax charge relating to the Company’s plant restructurings of $0.7 million and $1.7 million was recorded in the Company’s statement of earnings for the three months ended October 31, 2004 and 2003, respectively.

Note J – Guarantees

The Company and its partner of an unconsolidated joint venture, Advanced Filtration Systems Inc., guarantee certain debt of the joint venture. As of October 31, 2004, the outstanding guaranteed debt of the joint venture was $4.3 million. The joint venture is in compliance with all of its debt covenants and the debt has not been called.

The Company estimates warranty costs using standard quantitative measures based on historical warranty claim experience and, in some cases, evaluating specific customer warranty issues. Following is a reconciliation of warranty reserves as of October 31, 2004 and 2003 (thousands of dollars):

	2004			2003
Balance at July 31	$	9,529		$	8,080
Accruals for warranties issued during the period		231			—
Accruals related to pre-existing warranties
(including changes in estimates)		319			816
Less settlements made during the period		(302	)		(738	)
Balance at October 31	$	9,777		$	8,158

At October 31, 2004, the Company had a contingent liability for standby letters of credit totaling $18.8 million that have been issued and are outstanding. The letters of credit guarantee payment to beneficial third parties in the event the Company is in breach of specified contract terms as detailed in each letter of credit. At October 31, 2004, there are no amounts drawn upon these letters of credit.

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Note K – Employee Benefit Plans

The Company, including certain of its subsidiaries, has defined benefit pension plans for substantially all hourly and salaried employees. The domestic plans provide defined benefits pursuant to a cash balance feature whereby a participant accumulates a benefit comprised of a percentage of current salary that varies with years of service, interest credits and transition credits. The international plans generally provide pension benefits based on years of service and compensation level.

Following are the components of the net periodic cost recognized for the three months ended October 31, 2004 (thousands of dollars):

	Three Months Ended October 31
	2004			2003
Service cost	$	3,237		$	3,227
Interest cost		3,369			3,061
Expected return on assets		(4,420	)		(4,065	)
Transition amount amortization		247			235
Prior service cost amortization		53			38
Actuarial loss amortization		110			388
Employee contributions		(162	)		(128	)
Total periodic benefit cost	$	2,434		$	2,756

The Company’s general funding policy for its pension plans is to make contributions as required by applicable regulations.

The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) introduced a prescription drug benefit under Medicare and, in certain circumstances, a federal subsidy to sponsors of retiree health care benefit plans. One of the Company’s post-retirement health care plans offers prescription drug benefits. In accordance with FASB Staff Position No. FAS 106-2, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” (FSP 106-2), which became effective for the Company in the first quarter fiscal 2005, any measures of the accumulated projected benefit obligation or net periodic post-retirement benefit cost should be adjusted to reflect benefits that are actuarially equivalent to Medicare Part D under the Act. The impact of this pronouncement on the Company’s post-retirement health care plan, which offers prescription drug benefits, is not material.

Note L – Commitments and Contingencies

The Company is a defendant in a lawsuit filed in November 1998 in the United States District Court for the Northern District of Iowa (Eastern Division) by Engineered Products Co. (“EPC”). EPC claims patent infringement by the Company arising out of its sales of graduated air restriction indicators in the period from 1996 through the expiration of the EPC patent in May 2001 and seeks monetary damages. EPC is also seeking damages for some period of time beyond the expiration of the patent. On May 11, 2004, the jury found in favor of EPC on its willful infringement claims against the Company and awarded damages in the amount of approximately $5.3 million. On August 12, 2004, the court ruled that EPC was entitled to enhanced damages based on the Company’s willful infringement of the EPC patent and increased damages to a total of approximately

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$16.0 million, plus an award of pre-judgment interest in the amount of $1.1 million, together with post-judgment interest. On September 20, 2004, the court granted EPC’s motion and awarded attorneys’ fees and expenses in the amount of approximately $1.9 million. The Company intends to vigorously challenge the judgment and filed its notice of appeal on September 13, 2004. EPC’s patent expired on May 1, 2001 and will not impact the Company’s ongoing business operations. The Company increased its reserve by $5.0 million for this matter in fiscal 2004, recording an expense to selling, general and administrative expenses.

The Company is currently not otherwise subject to any pending litigation other than litigation arising in the ordinary course of business, none of which is expected to have a material adverse effect on the business, results of operations, financial condition or liquidity of the Company.

Note M – New Accounting Standards

In October 2004, the U.S. Congress passed the American Jobs Creation Act of 2004 (the “Act”). The Act includes numerous provisions that may affect business practices and accounting for income taxes. The Financial Accounting Standards Board (FASB) is considering issuing guidance with respect to the accounting for one-time tax benefits on the repatriation of foreign earnings and the deduction for qualified domestic production activities. The Company is reviewing the provisions of the Act, but as of the first quarter of fiscal 2005, the Company is not able to conclude as to whether or to what extent the Company would repatriate its earnings under the provisions of the Act or what impact this would have on the Company’s Consolidated Financial Statements.

Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The Company is a worldwide manufacturer of filtration systems and replacement parts. The Company’s product mix includes air and liquid filters and exhaust and emission control products for mobile equipment; in-plant air cleaning systems; compressed air purification systems; air intake systems for industrial gas turbines; and specialized filters for such diverse applications as computer disk drives, aircraft passenger cabins and semi-conductor processing. Products are manufactured at more than thirty plants around the world and through three joint ventures.

The Company has two reporting segments engaged in the design, manufacture and sale of systems to filter air and liquid and other complementary products. The two segments are Engine Products and Industrial Products. Products in the Engine Products segment consist of air intake systems, exhaust systems, liquid filtration systems and replacement filters. The Engine Products segment sells to original equipment manufacturers (OEMs) in the construction, industrial, mining, agriculture and transportation markets and to independent distributors, OEM dealer networks, private label accounts and large private fleets. Products in the Industrial Products segment consist of dust, fume and mist collectors, compressed air purification systems, liquid filters and parts; static and pulse-clean air filter systems for industrial gas turbines; computer disk drive filter products; other specialized air filtration systems and PTFE membrane laminates. The Industrial Products segment sells to various industrial end-users, OEMs of gas-fired turbines and OEMs and end-users requiring highly purified air.

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The following discussion of the Company’s financial condition and results of operation should be read in conjunction with the Consolidated Financial Statements and Notes thereto and other financial information included elsewhere in this report.

Overview

The Company reported record sales in the first quarter of fiscal 2005 of $372.9 million, an increase of 13.6 percent from $328.2 million in the first quarter of the prior year. Net income for the quarter was a record $27.4 million, compared to $25.6 million in the first quarter of the prior year. The Company reported record diluted net earnings per share of $.31 for the first quarter of fiscal 2005, up from $.28 in the first quarter of the prior year.

Overall, strong business conditions across both of the Company’s reporting segments drove the 13.6 percent increase in net sales. All of the Company’s product lines reported double-digit increases with the exception of gas turbine, which had a decrease for the quarter. Despite these strong conditions, a new round of commodity price increases in the first quarter of fiscal 2005 impacted the Company’s results for the quarter.

Steel cost increases were the most significant increase in commodity prices. A time lag exists between the time the Company experiences commodity price increases and when these increases are recovered from customers. The Company is working on plans so that prices will fully reflect current commodity costs by the end of the second quarter. While the steel price increase was the major driver of the Company’s gross margin for the first quarter of fiscal 2005, the Company also experienced increases in other commodity, freight and packaging prices.

Absent the increases in commodity prices, the Company’s business units performed well for the first quarter of fiscal 2005. Additionally, the Company has seen more success in its PowerCore^® technology as its new programs continued to grow. Its PowerCore^® replacement filter sales increased during the quarter, reflecting the success of the Company’s first-fit sales.

Results of Operations

Sales in the United States increased $18.6 million or 11.7 percent for the first quarter of fiscal 2005 compared to the first quarter of the prior year. Total international sales in U.S. dollars increased $26.1 million, or 15.4 percent in the first quarter compared to the prior year. The growth in international sales was led by the Europe and Asia-Pacific regions, which reported increases of $14.2 million or 15.0 percent and $10.2 million or 15.9 percent, respectively. In addition, Mexico and South Africa recorded increases of $1.2 million or 31.6 percent and $0.6 million or 9.0 percent, respectively.

The impact of foreign currency translation during the first quarter of fiscal 2005 increased sales by $10.6 million. This was primarily due to the continued strengthening of the Euro and the British pound sterling against the U.S. dollar, which increased sales by $8.1 million. In addition, the strengthening of the Japanese yen and the Australian dollar resulted in increased sales due to foreign currency translation of $1.2 million and $0.5 million, respectively. Worldwide sales for the first quarter of fiscal 2005, excluding the impact of foreign currency translation, increased 10.4 percent from the first quarter of the prior year. Excluding the impact of foreign currency translation, first quarter sales outside the United States increased 9.2 percent, primarily reflecting strong sales growth

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in Asia. The impact of foreign currency translation during the first quarter of fiscal 2005 increased net income by $1.1 million; the continued strengthening of the Euro and the British pound sterling against the U.S. dollar accounted for $0.9 million of this increase.

Although net sales excluding foreign currency translation and net earnings excluding foreign currency translation are not measures of financial performance under GAAP, the Company believes they are useful in understanding its financial results. Both measures enable the Company to obtain a more clear understanding of the operating results of its foreign entities without the varying effects that changes in foreign currency exchange rates may have on those results. A shortcoming of these financial measures is that they do not reflect the Company’s actual results under GAAP. Management does not intend these items to be considered in isolation or as a substitute for the related GAAP measures.

Following is a reconciliation to the most comparable GAAP financial measure of this non-GAAP financial measure (thousands of dollars):

	Three Months Ended October 31
	2004		2003
Net sales, excluding foreign currency
translation	$	362,349	$	309,605
Foreign currency translation		10,557		18,615
Net sales	$	372,906	$	328,220
Net earnings, excluding foreign currency
translation	$	26,305	$	23,931
Foreign currency translation		1,089		1,625
Net earnings	$	27,394	$	25,556

Gross margin for the first quarter of fiscal 2005 was 31.2 percent compared to 32.5 percent for the first quarter in the prior year. The increase in steel prices and the time lag in recovering these increased prices impacted the Company’s gross margin for the quarter. The Company expects to be recovering these material cost increases by the end of the second quarter. In addition to the increased steel prices, other costs including plastic, packaging and freight costs increased during the first quarter of fiscal 2005 resulting in the lower gross margin compared to the first quarter of the prior year. Plant rationalization costs totaled $0.7 million in the first quarter compared to prior year plant rationalization costs of $1.7 million. Operating expenses during the first quarter of fiscal 2005 were $80.3 million, or 21.5 percent of sales, consistent with $70.9 million, or 21.6 percent of sales in the first quarter of the prior year and in line with the Company’s expectations. The Company continued its efforts to control its operating expenses as in fiscal 2004.

Other income for the first quarter of fiscal 2005 totaled $3.4 million, up from $0.4 million in the first quarter of the prior year. Other income for the first quarter of fiscal 2005 consisted of income from unconsolidated affiliates of $1.3 million, foreign exchange gain of $0.9 million, interest income of $0.4 million and income of $0.8 million related to an interest rate swap. For the first quarter of fiscal 2005, interest expense was $2.0 million, up from $1.1 million in the first quarter of the prior year, reflecting the increase in debt during the quarter to fund the Company’s repurchase of 3.0 million shares under its previously announced overnight share repurchase program and the termination of two interest rate swaps.

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The income tax rate as of October 31, 2004 remained at 27.0 percent, consistent with the income tax rate for the first quarter of the prior year.

Total backlog at October 31, 2004 was $409 million, up 20 percent, or $69 million, compared to the prior year. In the Engine Products segment, total backlog increased 27 percent from the prior year. In the Industrial Products segment, total backlog increased 10 percent from the prior year.

The 90-day backlog, which consists of goods scheduled for delivery in 90 days, was $225 million at October 31, 2004, up 20 percent or $38 million from the prior year and 9 percent or $19 million from the prior quarter. In the Engine Products segment, the 90-day order backlog increased 15 percent from the prior year. In the Industrial Products segment, the 90-day order backlog increased 27 percent from the prior year as the industrial economy in Asia continues to grow and the North American rebound continues.

Following is financial information for the Company’s Engine Products and Industrial Products segments. Certain prior year amounts have been reclassified between the segments to conform to the current structure. Amounts reclassified in net sales and earnings before income taxes are not significant. Corporate and Unallocated includes corporate expenses determined to be non-allocable to the segments, interest income and expense and non-operating income and expenses (thousands of dollars).

	Engine Products		Industrial Products		Corporate and Unallocated			Total Company
Three Months Ended October 31, 2004:
Net sales	$	217,585	$	155,321		—		$	372,906
Earnings before income taxes		30,873		12,694		(6,041	)		37,526
Three Months Ended October 31, 2003:
Net sales	$	186,739	$	141,481		—		$	328,220
Earnings before income taxes		27,931		10,361		(3,284	)		35,008

Following are net sales by product within the Engine Products and Industrial Products segment (thousands of dollars):

	Three Months Ended October 31
	2004		2003
Engine Products Segment:
Off-road products	$	63,272	$	52,816
Transportation products		43,906		37,288
Aftermarket products		110,407		96,635
Total Engine Products segment		217,585		186,739
Industrial Products segment:
Industrial filtration solutions products		99,630		86,153
Gas turbine products		23,876		28,236
Special application products		31,815		27,092
Total Industrial Products segment		155,321		141,481
Total Company	$	372,906	$	328,220

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Engine Products Segment   For the first quarter of fiscal 2005, worldwide sales in the Engine Products segment continue to be very strong, reporting year-over-year increases across all products within that segment. Engine Product sales were a record $217.6 million in the first quarter of fiscal 2005, an increase of 16.5 percent from $186.7 million in the first quarter of the prior year. Total first quarter international Engine Product sales were up 14.6 percent compared to the same period in the prior year while sales in the United States increased by 17.9 percent.

Worldwide sales of off-road products in the first quarter of fiscal 2005 were $63.3 million, an increase of 19.8 percent from $52.8 million in the first quarter of the prior year. North American sales in off-road products increased 14.0 percent due to continued improvement in new construction, agriculture and mining equipment demand. International sales were up 28.8 percent from the first quarter of the prior year with increases in both Asia and Europe of 36.0 percent and 24.9 percent, respectively. The Company’s off-road business is strong globally and conditions remained favorable as the agriculture, construction and mining end markets remain robust around the world.

Worldwide sales in transportation products in the first quarter of fiscal 2005 were $43.9 million, an increase of 17.7 percent from $37.3 million in the first quarter of the prior year. North American transportation sales increased 27.9 percent from the first quarter of the prior year from growing truck build rates and strong diesel emission sales. Transportation sales in Europe increased 34.3 percent as build rates improved in that market while transportation sales in Asia decreased 15.5 percent as emission sales spiked in Japan last year in advance of new emissions regulations.

Worldwide sales of aftermarket products in the first quarter of fiscal 2005 were $110.4 million, an increase of 14.3 percent from $96.6 million in the first quarter of the prior year. North American aftermarket sales grew 16.3 percent as equipment utilization rates continued to improve and sales of diesel emission retrofit equipment ramped up. International sales were up 12.3 percent from the first quarter of the prior year with increases in all countries but most notably in Europe, South Africa and Mexico of 14.0 percent, 23.2 percent and 25.6 percent, respectively. Sales in the Company’s replacement part filters for its PowerCore^® products increased 45 percent, showing the success of its PowerCore^® first fit sales.

Industrial Products Segment   Worldwide Industrial Products sales in the first quarter of fiscal 2005 were $155.3 million, an increase of 9.8 percent from $141.5 million in the first quarter of the prior year. Total first quarter international Industrial Product sales were up 16.1 percent compared to the same period in the prior year while sales in the United States decreased by 1.8 percent. Increased sales in industrial filtration solution products and special applications products were somewhat offset by a decrease in gas turbine products reflecting the conditions in the markets that this segment serves.

Worldwide sales of industrial filtration solutions products in the first quarter of fiscal 2005 were $99.6 million, an increase of 15.6 percent from $86.2 million in the first quarter of the prior year. North American sales increased 18.5 percent as the manufacturing economy remains stronger than a year ago. International sales increased 13.9 percent in the first quarter of fiscal 2005 over the prior year with sales in Europe showing an increase of 9.7 percent on improved industrial air filtration sales and Asia sales increased 34.1 percent due to continued growth in China and Japan.

Worldwide sales of gas turbine products in the first quarter of fiscal 2005 were $23.9 million, a decrease of 15.4 percent from sales of $28.2 million in the first quarter of the prior year. The overall

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decrease was mostly due to two customer shipments scheduled for the first quarter that were delayed by the customers until the second quarter. North American gas turbine sales declined 46.2 percent. International sales in gas turbine products grew 13.2 percent as demand remains strong in both Europe and Asia. Despite the overall decrease in the first quarter, the gas turbine market appears to be slightly stronger. In particular, the oil and gas related applications for gas turbines are showing some strength in the Middle-East, Asia and Europe.

Worldwide sales of special application products in the first quarter of fiscal 2005 were $31.8 million, an increase of 17.4 percent from $27.1 million in the first quarter of the prior year. Disk drive filter sales were up 9.2 percent, reflecting a continued strong market and market share gains. Membrane sales increased 35.7 percent due to strong sales in both Europe and Asia. International sales in special application products increased 23.3 percent in the first quarter of fiscal 2005 over the prior year with increases in Europe and Asia of 94.6 percent and 16.9 percent, respectively.

Liquidity and Capital Resources

The Company generated $41.3 million of cash and cash equivalents from operations during the first quarter of fiscal 2005. Operating cash flows increased by $18.8 million from the same period in the prior year. These cash flows, plus borrowings from the Company’s credit facility, were used during the first three months of fiscal 2005 to support $7.1 million in capital additions, the repurchase of $86.5 million of treasury stock and the payment of $4.7 million in dividends. For additional information regarding share repurchase see Part II. Item 2., “Unregistered Sales of Equity Securities and Use of Proceeds.”

At the end of the first quarter, the Company held $118.7 million in cash and cash equivalents, up from $99.5 million at July 31, 2004. Short-term debt totaled $92.7 million, up from $19.7 million at July 31, 2004. The higher short-term debt balance at October 31, 2004 was used in the repurchase of 3.0 million shares from Banc of America Securities LLC under an overnight share repurchase program at a total cost of approximately $86.5 million. The amount of unused lines of credit as of October 31, 2004 was approximately $100.4 million. Long-term debt of $70.2 million at October 31, 2004 was virtually unchanged from $70.9 million at July 31, 2004 and represented 12.2 percent of total long-term capital, compared to 11.4 percent at July 31, 2004. The slight decrease in long-term debt is due to an increase in foreign exchange translation. The Company believes that it will generate sufficient cash from operations to meet its short-term debt obligations.

The Company and its partner of an unconsolidated joint venture, Advanced Filtration Systems Inc., guarantee certain debt of the joint venture. As of October 31, 2004, the outstanding guaranteed debt of the joint venture was $4.3 million.

At October 31, 2004, the Company had a contingent liability for standby letters of credit totaling $18.8 million that have been issued and are outstanding. The letters of credit guarantee payment to beneficial third parties in the event the Company is in breach of specified contract terms as detailed in each letter of credit. At October 31, 2004, there are no amounts drawn upon these letters of credit.

The Company has a five-year multi-currency revolving facility with a group of banks under which the Company may borrow up to $150.0 million. As of October 31, 2004, borrowings under these facilities were $80.0 million. This facility expires on September 2, 2009.

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The Company is required to meet various debt covenant tests for its debt agreements. As of October 31, 2004, the Company was in compliance with these debt covenants.

The Company believes that the combination of present capital resources, internally generated funds and unused financing sources are adequate to meet cash requirements for the next twelve-month period.

Critical Accounting Policies

There have been no material changes to the Company’s critical accounting policies as disclosed in the Company’s Annual Report on Form 10-K for the year ended July 31, 2004.

Outlook

Overall, the Company expects low-teens sales growth for the Engine Products segment in fiscal 2005. The Company expects continued growth in North American heavy-duty truck build rates throughout fiscal 2005 with business conditions remaining strong in Europe and Asia. Sales in off-road products are expected to remain strong in Asia and North America as conditions in construction, agriculture and mining equipment markets are robust. Both North American and international aftermarket sales are expected to continue growing as increasing equipment utilization spurs replacement filter sales. Diesel emission retrofit sales in North America are anticipated to continue increasing as the company’s technology solution gains acceptance.

The Company expects improving conditions for its Industrial Products segment to generate low-teens sales growth in fiscal 2005. Globally, business conditions for gas turbine products are expected to be stable. Full-year sales are expected to be unchanged compared to fiscal 2004. Industrial filtration solutions sales are expected to be strong in fiscal 2005. American and European industrial air and compressed air filtration markets are expected to continue improving near-term, as order trends are stronger than last year’s levels. Business conditions in Asia remain strong. Special applications products showed continued strength in orders and backlogs for disk drive filters and membranes.

Forward-Looking Statements

From time to time, the Company, through its management, may make forward-looking statements reflecting the Company’s current views with respect to future events and financial performance. These forwarding-looking statements, which may be in reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), in press releases and in other documents and materials as well as in written or oral statements made by or on behalf of the Company, are subject to certain risks and uncertainties, including those discussed below, which could cause actual results to differ materially from historical results or those anticipated. The words or phrases “will likely result,” “are expected to,” “will continue,” “estimate,” “project,” “believe,” “expect,” “anticipate,” “forecast,” and similar expressions are intended to identify forward-looking statements within the meaning of Section 21e of the Exchange Act and Section 27A of the Securities Act of 1933, as amended, as enacted by the Private Securities Litigation Reform Act of 1995 (“PSLRA”). In particular the Company desires to take advantage of the protections of the PSLRA in connection with the forward-looking statements made in this Quarterly Report to Shareholders.

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Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date such statements are made. In addition, the Company wishes to advise readers that the factors listed below, as well as other factors, could affect the Company’s financial or other performance and could cause the Company’s actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods or events in any current statement. This discussion of factors is not intended to be exhaustive, but rather to highlight important risk factors that impact results. General economic and political conditions and many other contingencies that may cause the Company’s actual results to differ from those currently anticipated are not separately discussed. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Risks Associated with Currency Fluctuations   The Company maintains international subsidiaries and operations in many countries, and the results of operations and the financial position of each of the Company’s subsidiaries is reported in the relevant foreign currency and then translated into United States (“U.S.”) dollars at the applicable foreign currency exchange rate for inclusion in the Company’s consolidated financial statements. As exchange rates between these foreign currencies and the U.S. dollar fluctuate, the translation effect of such fluctuations may have an adverse effect on the Company’s results of operations or financial position as reported in U.S. dollars.

Risks Associated with International Operations   The Company does business and has manufacturing operations in numerous countries and regions, including China, Hong Kong, India, Indonesia, Japan, Korea, Malaysia, Philippines, Singapore and other Asia-Pacific countries, Western and Eastern Europe, the Middle East, Africa, Canada, Mexico, Central America and South America. The stability, growth and profitability of this portion of the Company’s business may be affected by changes in political and military events, trade, monetary and fiscal policies and the laws and regulations of the United States and other trading nations. In addition, the Company’s international operations are subject to the risk of new and different political and military events, legal and regulatory requirements in local jurisdictions, tariffs and trade barriers, potential difficulties in staffing and managing local operations, credit risk of local customers and distributors, potential difficulties in protecting intellectual property, risk of nationalization of private enterprises, potential imposition of restrictions on investments, potentially adverse tax consequences, including imposition or increase of withholding and other taxes on remittances and other payments by subsidiaries, and local economic political and social conditions, including the possibility of hyper-inflationary conditions, in certain countries. If for whatever reason, the United States were to enter a recession, then demand for Company products would be negatively impacted in North America and throughout the rest of the world.

Competition and Technology Issues   The markets in which the Company operates are highly competitive and fragmented both geographically and by application. As a result, the Company competes with numerous regional or specialized competitors, many of which are well established in their respective markets. The Company has, from time to time, experienced price pressures from competitors in certain product lines and geographic markets. The Company’s competitors and new entrants into the Company’s lines of business can be expected to continue to improve the design and performance of their products and to introduce new products with competitive price and performance characteristics. Competition in the Company’s lines of business may limit its ability to recover future increases in labor and raw material expenses. Although the Company believes that it has certain technological and other advantages over its competitors, realizing and maintaining these advantages will require continued productive investment by the Company in research and

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development, sales and marketing and customer service and support. There can be no assurance that the Company will be successful in maintaining such advantages. Successful product innovation by competitors that reach the market prior to comparable innovation by the Company or that are amenable to patent protection may adversely affect the Company’s financial performance.

A number of the Company’s major OEM customers manufacture products for their own use that compete with the Company’s products. Although these OEM customers have indicated that they will continue to rely on outside suppliers, the OEMs could elect to manufacture products for their own use and in place of the products now supplied by the Company. In addition, customers of the Company’s engine filtration and exhaust products business line could decide to meet their filtration requirements through alternative methods, such as engine design modifications, rather than rely on the Company’s products.

Risks Relating to Acquisitions   The Company has in the past and may in the future pursue acquisitions of complementary product lines, technologies or businesses. It also completed the acquisition of Ultrafilter at the end of fiscal 2002. Acquisitions by the Company may result in potentially dilutive issuance’s equity securities, the incurrence of debt and contingent liabilities and amortization expenses related to goodwill and other intangible assets, which could adversely affect the Company’s profitability. In addition, acquisitions involve numerous risks, including difficulties in the assimilation of the operations, technologies and products of the acquired companies, corporate culture conflicts, the diversion of management’s attention from other business concerns, assumption of unanticipated legal liabilities and the potential loss of key employees of the acquired company. There can be no assurance that the Company will be able to identify and successfully complete and integrate acquisitions. There can be no assurance as to the effect of acquisitions on the Company’s business or operating results.

Environmental Matters    The Company is subject to various environmental laws and regulations in the jurisdictions in which it operates, including those relating to air emissions, wastewater discharges, the handling and disposal of solid and hazardous wastes and the remediation of contamination associated with the use and disposal of hazardous substances. The Company, like many of its competitors, has incurred and will continue to incur, capital and operating expenditures and other costs in complying with such laws and regulations in both the United States and abroad.

Product Demand Considerations   Demand for certain of the Company’s products tends to be cyclical, responding historically to varying levels of construction, agricultural, heavy equipment manufacturing, mining and industrial activity in the United States and in other industrialized nations. Other factors affecting demand include the availability and cost of financing for equipment purchases and the market availability of used equipment.

Sales to each of Caterpillar, Inc. and its subsidiaries and General Electric and its subsidiaries have accounted for greater than 10 percent of the Company’s net sales in one or more of the last five fiscal years. An adverse change in Caterpillar’s or General Electric’s financial performance, condition or results of operations or a material reduction in sales to these customers for any other reason could negatively impact the Company’s operating results.

Availability and Cost of Product Components   The Company obtains raw material and certain manufactured components from third-party suppliers, including significant purchases of steel. The Company maintains limited raw material inventories, and as a result, even brief unanticipated delays in delivery or increases in prices by suppliers, including those due to capacity constraints, labor disputes, tariffs, impaired financial condition of suppliers, weather emergencies or other natural

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disasters, may adversely affect the Company’s ability to satisfy its customers on delivery and pricing and thereby affect the Company’s financial performance.

Changes in the Mix of Products Comprising Revenue    The Company’s products constitute various product lines, which have varying profit margins. A change in the mix of products sold by the Company from that currently experienced could adversely affect the Company’s financial performance.

Research and Development    The Company makes significant annual investment in research and development activities to develop new and improved products and manufacturing processes. There can be no assurance that research and development activities will yield new or improved products or products which will be purchased by the Company’s customers, or new and improved manufacturing processes.

Other Factors    The Company wishes to caution investors that other factors may in the future prove to be important in affecting the Company’s results of operations. New factors emerge from time to time and it is not possible for management to predict all such factors, nor can it assess the impact of each such factor on the business or the extent to which any factor, or a combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

Investors are further cautioned not to place undue reliance on such forward-looking statements as they speak only to the Company’s views as of the date the statement is made. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Item 3.   Quantitative and Qualitative Disclosures about Market Risk

There have been no material changes in the reported market risk of the Company since July 31, 2004. See further discussion of these market risks in the Donaldson Company, Inc. Annual Report on Form 10-K for the year ended July 31, 2004.

Item 4.   Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures: As of the end of the period covered by this report (the “Evaluation Date”), the Company carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures were adequately designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in applicable rules and forms.

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(b) Changes in Internal Control over Financial Reporting: No change in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) identified in connection with such evaluation during the fiscal quarter ended October 31, 2004, has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II.   OTHER INFORMATION

Item 1.   Legal Proceedings

The Company is a defendant in a lawsuit filed in November 1998 in the United States District Court for the Northern District of Iowa (Eastern Division) by Engineered Products Co. (“EPC”). EPC claims patent infringement by the Company arising out of its sales of graduated air restriction indicators in the period from 1996 through the expiration of the EPC patent in May 2001 and seeks monetary damages. EPC is also seeking damages for some period of time beyond the expiration of the patent. On May 11, 2004, the jury found in favor of EPC on its willful infringement claims against the Company and awarded damages in the amount of approximately $5.3 million. On August 12, 2004, the court ruled that EPC was entitled to enhanced damages based on the Company’s willful infringement of the EPC patent and increased damages to a total of approximately $16.0 million, plus an award of pre-judgment interest in the amount of $1.1 million, together with post-judgment interest. On September 20, 2004, the court granted EPC’s motion and awarded attorneys’ fees and expenses in the amount of approximately $1.9 million. The Company intends to vigorously challenge the judgment and filed its notice of appeal on September 13, 2004. EPC’s patent expired on May 1, 2001 and will not impact the Company’s ongoing business operations. The Company increased its reserve by $5.0 million for this matter in fiscal 2004, recording an expense to selling, general and administrative expenses.

The Company is currently not otherwise subject to any pending litigation other than litigation arising in the ordinary course of business, none of which is expected to have a material adverse effect on the business, results of operations, financial condition or liquidity of the Company.

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Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds

(c) Repurchases of Equity Securities

The following table sets forth information in connection with purchases made by, or on behalf of, the Company or any affiliated purchaser of the Company, of shares of the Company’s common stock during the quarterly period ended October 31, 2004.

	Total Number of Shares Purchased (1)		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
August 1 – August 31, 2004		—		—		—		6,485,600 shares
September 1 – September 30, 2004		3,000,000	$	28.85		3,000,000		3,485,600 shares
October 1 – October 31, 2004		—		—		—		3,485,600 shares
Total		3,000,000	$	28.85		3,000,000		3,485,600 shares

(1) On January 17, 2003, the Company announced that the Board of Directors authorized the repurchase of up to 8.0 million common shares. This repurchase authorization, which is effective until terminated by the Board of Directors, replaces the existing authority that expired at the end of March 2003. There were no repurchases of common stock made outside of the Company’s current repurchase authorization during the quarter ended October 31, 2004.

Item 6.   Exhibits

3-A – Restated Certificate of Incorporation of Registrant as currently in effect

*3-B – By-laws of Registrant as currently in effect (Filed as Exhibit 3-B to 2003 Form 10-K Report)

*4 – **

*4-A – Preferred Stock Amended and Restated Rights Agreement (Filed as Exhibit 4.1 to Form 8-K Report Dated January 12, 1996)

10-A – Form of Officer Stock Option Award Agreement under the 2001 Master Stock Incentive Plan

10-B – Form of Non-Employee Director Non-Qualified Stock Option Agreement under the 2001 Master Stock Incentive Plan

31-A – Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31-B – Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32 – Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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  *   Exhibit has previously been filed with the Securities and Exchange Commission and is incorporated herein by reference as an exhibit.

**   Pursuant to the provisions of Regulation S-K Item 601(b)(4)(iii)(A) copies of instruments defining the rights of holders of certain long-term debts of the Company and its subsidiaries are not filed and in lieu thereof the Company agrees to furnish a copy thereof to the Securities and Exchange Commission upon request.

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SIGNATURES

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

		DONALDSON COMPANY, INC.
		(Registrant)
Date	December 8, 2004	By	/s/   William M. Cook
			William M. Cook
			Chief Executive Officer
Date	December 8, 2004	By	/s/   Thomas R. VerHage
			Thomas R. VerHage
			Vice President,
			Chief Financial Officer
Date	December 8, 2004	By	/s/   James F. Shaw
			James F. Shaw
			Controller

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EX-3.A

Exhibit 3-A

RESTATED CERTIFICATE OF INCORPORATION

OF

DONALDSON COMPANY, INC.

        FIRST.   The name of this corporation is “DONALDSON COMPANY, INC.”

        SECOND.   The registered office of the corporation in the State of Delaware is 4305 Lancaster Pike, City of Wilmington, County of New Castle; and the name of its registered agent at such address is Corporation Service Company.

        THIRD.   The nature of the business and the objects and purposes proposed to be transacted, promoted and carried on are to do any and all of the things herein mentioned as fully and to the same extent as natural persons might or could do, viz.:

        To manufacture, buy, sell, distribute, market and in any manner deal in and with, as manufacturer, jobber, distributor, agent, or otherwise, air cleaners for gas engines, spark-arresting mufflers, breathers, crank-case ventilating systems, all kinds of automotive and mechanical devices, accessories, appliances, parts, tools, products and supplies, and all kinds of products, articles, and things used or useful in connection with automobiles, tractors, trucks, buses, motorcycles, motor vehicles of any kind, boats, airplanes, or airships.

        To carry on a general manufacturing and jobbing business and any business incidental thereto or useful in connection therewith.

        To purchase, lease, hire or otherwise acquire real and personal property, improved and unimproved, of every kind and description and to sell, dispose of, lease, convey and mortgage said property, or any part thereof; to acquire, hold, lease, manage, operate, develop, control, build, erect, maintain for the purpose of said corporation, construct, reconstruct or purchase, either directly or through ownership of stock in any corporation, any lands, buildings, offices, stores, warehouses, mills, shops, factories, plants, machinery, rights, easements, permits, privileges, franchises and licenses, and all other things which may at any time be necessary or convenient for the purposes of the corporation; to sell, lease, hire or otherwise dispose of the lands, buildings or other property of the corporation, or any part thereof.

        To purchase or otherwise acquire, hold, use, sell, or in any manner dispose of and to grant licenses or other rights therein and in any manner deal with patents, inventions, improvements, processes, formulas, trade-marks, trade-names, rights and licenses secured under letters patent, copyrights or otherwise; to enter into any and all license agreements and to pay royalties thereunder.

        To subscribe or cause to be subscribed for, and to purchase and otherwise acquire, hold, sell, assign, transfer, mortgage, pledge, exchange, distribute and otherwise dispose of the whole

or any part of the shares of the capital stock, bonds, coupons, mortgages, deeds of trust, debentures, securities, obligations, evidences of indebtedness, notes, good will, rights, assets and property of any and every kind or any part thereof of any other corporation or corporations, association or associations, now or hereafter existing and whether created by the laws of the State of Delaware, or of any other State, Territory or Country, and to operate, manage and control such properties, or any of them, either in the name of such other corporation or corporations or in the name of this corporation, and while owners of any of said shares of capital stock to exercise all the rights, powers and privileges of ownership of every kind and description including the right to vote thereon, with power to designate some person for that purpose from time to time to the same extent as natural persons might or could do.

        To manufacture, purchase, lease or otherwise acquire, hold, own, repair, mortgage, pledge or otherwise hypothecate, sell, assign and transfer, or otherwise dispose of, to invest, trade, deal in and deal with goods, wares and merchandise, and real, personal and mixed property of every class and description, wherever situate; and in particular lands, buildings, business concerns and undertakings, book debts and claims, and any interest in real or personal property, and any claims against such property, or against any person or company, and to carry on any business, concern or undertaking so acquired.

        To acquire the good will, rights and property and to undertake the whole or any part of the assets and liabilities, of any person, firm, association or corporation; to pay for the same in cash, the stock of this company, bonds or otherwise; to hold or in any manner to dispose of the whole or any part of the property so purchased; to conduct in any lawful manner the whole or any part of any business so acquired and to exercise all the powers necessary or convenient in and about the conduct and management of such business.

        To borrow money from and to lend money to any other corporation, or any firm, association, or individual, including corporations in which this corporation is interested as a stockholder or otherwise.

        To enter into, make and perform contracts of every kind for any lawful purpose, without limit as to amount, with any person, firm, association or corporation, town, city, county, state, territory or government.

        To draw, make, accept, endorse, discount, execute and issue promissory notes, drafts, bills of exchange, warrants, debentures and other negotiable or transferable instruments.

        To issue bonds, debentures or obligations and to secure the same by mortgage, pledge, deed of trust or otherwise.

        To purchase, hold and reissue the shares of its capital stock.

        To carry on any or all of its operations and business and to promote its objects within the State of Delaware or elsewhere, without restriction as to place or amount.

        To carry on any other business in connection therewith.

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        To do all and everything necessary, suitable, convenient or proper for the accomplishment of any of the purposes, or the attainment of any one or more of the objects herein enumerated or incidental to the powers herein named, or which shall at any time appear conducive or expedient for the protection or benefit of the corporation.

        To do any or all of the things herein set forth to the same extent as natural persons might or could do and in any part of the world, as principals, agents, contractors, trustees or otherwise, alone or in company with others.

        The foregoing clauses shall be construed both as objects and powers, and it is hereby expressly provided that the foregoing enumeration of specific powers shall not be held to limit or restrict in any manner the powers of this corporation, and are in furtherance of, and in addition to, and not in limitation of the general powers conferred by the laws of the State of Delaware.

        It is the intention that the purposes, objects and powers specified in this Article Third and all sub-divisions thereof shall, except as otherwise expressly provided, in nowise be limited or restricted by reference to or inference from the terms of any other clause or paragraph of this article, and that each of the purposes, objects and powers specified in this Article Third shall be regarded as independent purposes, objects and powers.

        FOURTH.   The total number of shares of stock of all classes which the Corporation shall have authority to issue is 121,000,000 divided into 1,000,000 shares of Preferred Stock of the par value of $1.00 each and 120,000,000 shares of Common Stock of the par value of $5.00 each.

        The designations and the powers, preferences and rights, and the qualifications, limitations or restrictions thereof, of each class of stock are as follows:

        The Board of Directors is expressly authorized at any time, and from time to time, to provide for the issuance of shares of Preferred Stock in one or more series, with such voting powers, full or limited, or without voting powers and with such designations, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof, as shall be stated and expressed in the resolution or resolutions providing for the issue thereof adopted by the Board of Directors, subject to the limitations prescribed by law and in accordance with the provisions hereof, including (but without limiting the generality thereof) the following:

        (a)   The designation of the series and the number of shares to constitute the series.

        (b)   The dividend rate of the series, the conditions and dates upon which such dividends shall be payable, the relation which such dividends shall bear to the dividends payable on any other class or classes of stock, and whether such dividends shall be cumulative or non-cumulative.

        (c)   Whether the shares of the series shall be subject to redemption by the corporation and, if made subject to such redemption, the times, prices and other terms and conditions of such redemption.

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        (d)   The terms and amount of any sinking fund provided for the purchase or redemption of the shares of the series.

        (e)   Whether or not the shares of the series shall be convertible into or exchangeable for shares of any other class or classes or of any other series of any class or classes of stock of the corporation, and, if provision be made for conversion or exchange, the times, prices, rates, adjustments and other terms and conditions of such conversion or exchange.

        (f)   The extent, if any, to which the holders of the shares of the series shall be entitled to vote with respect to the election of directors or otherwise.

        (g)   The restrictions, if any, on the issue or reissue of any additional Preferred Stock.

        (h)   The rights of the holders of the shares of the series upon the dissolution, liquidation, or winding up of the corporation.

        Subject to the prior or equal rights, if any, of the Preferred Stock of any and all series stated and expressed by the Board of Directors in the resolution or resolutions providing for the issuance of such Preferred Stock, the holders of Common Stock shall be entitled (i) to receive dividends when and as declared by the Board of Directors out of any funds legally available therefor, (ii) in the event of any dissolution, liquidation or winding up of the corporation, to receive the remaining assets of the corporation, ratably according to the number of shares of Common Stock held, and (iii) to one vote for each share of Common Stock held. No holder of Common Stock shall have any pre-emptive right to purchase or subscribe for any part of any issue of stock or of securities of the corporation convertible into stock of any class whatsoever, whether now or hereafter authorized.

        FIFTH.   The minimum amount of capital with which it will commence business is one Thousand Dollars ($1,000.00).

        SIXTH.   The name and place of residence of each of the incorporators are as follows:

NAME	RESIDENCE
S.L. MACKEY	WILMINGTON, DELAWARE
J. SKRIVAN	WILMINGTON, DELAWARE
M. C. PALMATARY	WILMINGTON, DELAWARE

        SEVENTH.   The existence of this corporation is to be perpetual.

        EIGHTH.   The private property of the stockholders of this corporation shall not be subject to the payment of corporate debts to any extent whatever.

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        NINTH.   In furtherance and not in limitation of the powers conferred by the laws of the State of Delaware, the board of directors is expressly authorized:

        To make, alter, amend and repeal the by-laws;

        To set apart out of any of the funds of the corporation available for dividends a reserve or reserves for any proper purpose and to alter or abolish any such reserve; to authorize and cause to be executed mortgages and liens upon the property and franchises of this corporation.

        To designate, by resolution passed by a majority of the whole board, one or more committees, each to consist of two or more directors, which committees, to the extent provided in such resolution or in the by-laws of the corporation, shall have and may exercise any or all of the powers of the board of directors in the management of the business and affairs of this corporation and have power to authorize the seal of this corporation to be affixed to all papers which may require it.

        From time to time to determine whether and to what extent and at what times and places and under what conditions and regulations the books and accounts of this corporation, or any of them other than the stock ledger, shall be open to the inspection of the stockholders, and no stockholder shall have any right to inspect any account or book or document of the corporation, except as conferred by law or authorized by resolution of the directors or of the stockholders.

        To sell, lease or exchange all of its property and assets, including its good will and its corporate franchises, upon such terms and conditions and for such consideration, which may be in whole or in part shares of stock in, and/or other securities of, any other corporation or corporations, when and as authorized by the affirmative vote of the holders of a majority of the stock issued and outstanding having voting power given at a stockholders’ meeting duly called for that purpose.

        Directors need not be elected by ballot.

        TENTH.   In the absence of fraud, no contract or transaction between this corporation and any other association or corporation shall be affected by the fact that any of the directors or officers of this corporation are interested in or are directors or officers of such other association or corporation, and any director or officer of this corporation individually may be a party to, or may be interested in, any such contract or transaction of this corporation; and no such contract or transaction of this corporation with any person or persons, firm, association or corporation shall be affected by the fact that any director or officer of this corporation is a party to, or interested in, such contract or transaction, or in any way connected with such person or persons, firm, association or corporation; and each and every person who may become a director or officer of this corporation is hereby relieved from any liability that might otherwise exist from thus contracting with this corporation for the benefit of himself or any person, firm, association or corporation in which he may be in any way interested; provided, however, that in any such case the fact of such interests shall be disclosed to the other directors or stockholders acting upon or in reference to such contract or transaction.

        ELEVENTH.   This corporation may in its By-Laws make any other provision or requirements for the management or conduct of the business of this corporation, provided the

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same be not inconsistent with the provisions of this certificate or contrary to the laws of the State of Delaware, or of the United States.

        TWELFTH.   This corporation reserves the right to amend, alter, change, add to or repeal any provision contained in this Certificate of Incorporation in the manner now or hereafter prescribed by statute, and all rights conferred upon officers, directors, and stockholders herein are granted subject to this reservation. Any action required or permitted to be taken by the stockholders of this corporation must be effected at an annual or special meeting of stockholders and may not be effected by any consent in writing by such stockholders.

        THIRTEENTH.

        1.   In addition to any affirmative vote required by law or this Certificate of Incorporation, and except as otherwise expressly provided in paragraph 2 of this Article Thirteenth:

        (a)   any merger, consolidation or share exchange of the corporation or any Subsidiary (as hereinafter defined) with any Interested Stockholder (as hereinafter defined) or any other corporation (whether or not itself an Interested Stockholder) which is, or after such merger, consolidation or share exchange would be, an Affiliate (as hereinafter defined) of an Interested Stockholder; or

        (b)   any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions) to or with any Interested Stockholder or any Affiliate of any Interested Stockholder of any assets of the corporation or any Subsidiary having an aggregate Fair Market Value (as hereinafter defined) of $10,000,000 or more; or

        (c)   the issuance or transfer by the corporation or any Subsidiary (in one transaction or a series of transactions) of any securities of the corporation or any Subsidiary to any Interested Stockholder or any Affiliate of any Interested Stockholder in exchange for cash, securities or other property (or a combination thereof) having an aggregate Fair Market Value of $5,000,000 or more; or

        (d)   the adoption of any plan or proposal for the liquidation or dissolution of the corporation proposed by or on behalf of an Interested Stockholder or any Affiliate of any Interested Stockholder; or

        (e)   any reclassification of securities (including any reverse stock split), or recapitalization of the corporation, or any merger or consolidation of the corporation with any of its Subsidiaries or any other transaction (whether or not with or into or otherwise involving an Interested Stockholder) which has the effect, directly or indirectly, of increasing the proportionate share of the outstanding shares of any class of equity or convertible securities of the corporation or any Subsidiary which is directly or indirectly owned by any Interested Stockholder or any Affiliate of any Interested Stockholder;

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shall require the affirmative vote of the holders of at least 75% of the then outstanding shares of capital stock of the corporation entitled to vote in the election of directors (the “Voting Stock”), voting together as a single class (each share of Voting Stock having the number of votes granted to it pursuant to Article Fourth of this Certificate of Incorporation). Such affirmative vote shall be required notwithstanding the fact that no vote may be required, or that a lesser percentage may be specified, by law or in any agreement with any national securities exchange or otherwise.

        The term “Business Combination” as used in this Article Thirteenth shall mean any transaction which is referred to in any one or more of sub-paragraphs (a) through (e) of this paragraph 1.

        2.   The provisions of paragraph 1 of this Article Thirteenth shall not be applicable to any particular Business Combination, and such Business Combination shall require only such affirmative vote as is required by law and any other provision of this Certificate of Incorporation, if all of the conditions specified in either of the following sub-paragraphs (a) or (b) are met:

        (a)   The Business Combination shall have been approved by a majority of the Disinterested Directors (as hereinafter defined).

        (b)   All of the following conditions shall have been met:

        (i)   The aggregate amount of cash and the Fair Market Value as of the date of the consummation of the Business Combination of consideration other than cash to be received per share by holders of Common Stock in such Business Combination shall be at least equal to the highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers’ fees) paid by the Interested Stockholder for any share of Common Stock acquired by it within the two year period immediately prior to the first public announcement of the proposal of the Business Combination (the “Announcement Date”) or in the transaction in which it became an Interested Stockholder, whichever is higher, after giving effect to any appropriate adjustment for stock dividends, stock splits and similar recapitalizations.

        (ii)   The aggregate amount of cash and the Fair Market Value as of the date of the consummation of the Business Combination of consideration other than cash to be received per share by holders of shares of any class of outstanding Preferred Stock (as hereinafter defined) shall be at least equal to the higher of (A) the highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers’ fees) paid by the Interested Stockholder for any shares of such class of Preferred Stock acquired by it (i) within the two-year period immediately prior to the Announcement Date or (ii) in the transaction in which it became an Interested Stockholder, whichever is higher; or (B) the highest preferential amount per share to which the holders of shares of such class of Preferred

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Stock would be entitled in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the corporation, regardless of whether the Business Combination to be consummated constitutes such an event. The provisions of this sub-paragraph (b)(ii) shall be required to be met with respect to every class of outstanding Preferred Stock, whether or not the Interested Stockholder has previously acquired any shares of a particular class of Preferred Stock.

        (iii)   The consideration to be received by holders of a particular class of outstanding Voting Stock shall be in cash or in the same form as the Interested Stockholder has previously paid for shares of such class of Voting Stock. If the Interested Stockholder has paid for shares of any class of Voting Stock with varying forms of consideration, the form of consideration for such class of Voting Stock shall be either cash or the form used to acquire the largest number of shares of such class of Voting Stock previously acquired by it.

        (iv)   A Proxy or information statement describing the proposed Business Combination and complying with the requirements of the Securities Exchange Act of 1934 and the rules and regulations thereunder (or any subsequent provisions replacing such Act, rules or regulations) shall be mailed by the Company to public stockholders of the corporation at least 30 days prior to the consummation of such Business Combination (whether or not such proxy or information statement is required to be mailed pursuant to such Act or subsequent provisions).

        3.   For the purposes of this Article Thirteenth.

        (a)   “Person” shall mean any individual, firm, corporation or other entity.

        (b)   “Interested Stockholder” shall mean any person (other than the corporation or any Subsidiary) who:

        (i)   is the beneficial owner (as hereinafter defined) of more than 10% of the voting power of the outstanding Voting Stock; or

        (ii)   is an Affiliate of the corporation and at any time within the two-year period immediately prior to the date in question was the beneficial owner of 10% or more of the voting power of the then outstanding Voting Stock; or

        (iii)   is an assignee of or has otherwise succeeded to any shares of Voting Stock which were at any time within the two-year period immediately prior to the date in question beneficially owned by any Interested Stockholder, if such assignment or succession shall have occurred in the course of a transaction or series of transactions not

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involving a public offering within the meaning of the Securities Act of 1933.

        (c)   A person shall be a “beneficial owner” of any voting Stock:

        (i)   which such person or any of its Affiliates or Associates beneficially owns, directly or indirectly; or

        (ii)   which such person or any of its Affiliates or Associates has, directly or indirectly, (A) the right to acquire (whether such right is exercisable immediately or only after the passage of time), pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise, or (B) the right to vote pursuant to any agreement, arrangement or understanding; or

        (iii)   which are beneficially owned, directly or indirectly, by any other person with which such person or any of its Affiliates or Associates has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of any shares of Voting Stock.

        (d)   For the purposes of determining whether a person is an Interested Stockholder pursuant to sub-paragraph (b) of this paragraph 3, the number of shares of Voting Stock deemed to be outstanding shall include shares deemed owned through application of sub-paragraph (c) of this paragraph 3 but shall not include any other shares of Voting Stock which may be issuable pursuant to any agreement, arrangement or understanding, or upon exercise of conversion rights, warrants or options, or otherwise.

        (e)   “Affiliate” or “Associate” shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as in effect on August 13, 1985.

        (f)   “Subsidiary” means any corporation of which a majority of any class of equity security is owned, directly or indirectly, by the corporation; provided, however, that for the purposes of the definition of Interested Stockholder set forth in sub-paragraph (b) of this paragraph 3, the term “Subsidiary” shall mean only a corporation of which a majority of each class of equity security is owned, directly or indirectly, by the corporation.

        (g)   The term “Disinterested Director” means any member of the Board of Directors of the corporation (the “Board”) who is unaffiliated with the Interested Stockholder and was a member of the Board prior to the time that the Interested Stockholder became an Interested Stockholder, and any successor of a Disinterested Director who is unaffiliated with the Interested Stockholder and is recommended to succeed a Disinterested Director by a majority of Disinterested Directors then on the Board.

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        (h)   The term “Fair Market Value” means: (i) in the case of stock, the highest closing sale price during the 30-day period immediately preceding the date in question of a share of such stock on the Composite Tape for New York Stock Exchange-Listed Stocks, or, if such stock is not quoted on the Composite Tape, on the New York Stock Exchange, or, if such stock is not listed on such Exchange, on the principal United States securities exchange registered under the Securities Exchange Act of 1934 on which such stock is listed, or, if such stock is not listed on any such exchange, the highest closing bid quotation with respect to a share of such stock during the 30-day period preceding the date in question on the National Association of Securities Dealers, Inc. Automated Quotations System or any system then in use, or if no such quotations are available, the fair market value on the date in question of a share of such stock as determined by the Board in good faith; and (ii) in the case of property other than cash or stock, the fair market value of such property on the date in question as determined in good faith by a majority of Disinterested Directors.

        (i)   The term “Preferred Stock’ shall mean the Preferred Stock, Preference Stock and Cumulative Preferred Stock and any other class of preferred stock which may from time to time be authorized in or by the Certificate of Incorporation of the Corporation and which by the terms of its issuance is specifically designated “Preferred Stock” for purposes of this Article Thirteenth.

        (j)   In the event of any Business Combination in which the corporation survives, the phrase “consideration other than cash” as used in sub-paragraphs (b)(i) and (ii) of paragraph 2 of this Article Thirteenth shall include the shares of Common Stock and/or the shares of any other class of Voting Stock retained by the holders of such shares.

        4.   Nothing contained in this Article Thirteenth shall be construed to relieve any Interested Stockholder from any fiduciary obligation imposed by law.

        5.   A majority of the Disinterested Directors shall have the power to interpret all of the terms and provisions of this Article Thirteenth and to make any other factual determination as is necessary.

        6.   Notwithstanding any other provisions of this Certificate of Incorporation, the By-Laws of the corporation (and notwithstanding the fact that a lesser percentage may be specified by law, this Certificate of Incorporation or the By-Laws of the corporation), the affirmative vote of the holders of 75% or more of the shares of Voting Stock, voting together as a single class, shall be required to amend or repeal, or adopt any provisions inconsistent with, this Article Thirteenth; provided, however, that this paragraph 6 shall not apply to, and such 75% vote shall not be required for, any amendment, repeal or adoption unanimously recommended by the Board of Directors if all such directors are persons who would be eligible to serve as Disinterested Directors within the meaning of this Article Thirteenth.

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        FOURTEENTH.   No director of the corporation shall be personally liable to the corporation or its stockholders for monetary damage for breach of fiduciary duty as a director, except for liability (i) for any breach of the director’s duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived an improper personal benefit.

Dated:	November 23, 2004	/s/ Norman C. Linnell
		Norman C. Linnell Vice President and Secretary

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EX-10.A

Exhibit 10-A

2001 MASTER STOCK INCENTIVE PLAN
STOCK OPTION AWARD AGREEMENT

        This Stock Option Award Agreement (the “Agreement”) is made as of this xx day of xxxx, by and between Donaldson Company, Inc., a Delaware corporation (together with its subsidiaries, “Donaldson”) and «FIRSTNAME» «INITIAL» «LASTNAME», an employee of Donaldson (“Employee”).

        Donaldson has adopted the 2001 Master Stock Incentive Plan (the “Plan”) which permits issuance of stock options for the purchase of shares of Common Stock of Donaldson. Donaldson is now granting this option under the Plan, and in consideration of the Employee’s and Donaldson’s covenants in this Agreement. Capitalized terms not defined below should have the meaning defined for such term in the Plan.

        1.   Grant of Option.   Donaldson grants Employee the right and option (the “Option”) to purchase all or any part of an aggregate of «NUMBER» («SHARES») shares of Donaldson’s Common Stock, par value $5.00 per share (“Shares”), at the Option purchase price of $xx.xx per share subject to the terms and conditions in this Agreement and in the Plan. A copy of the Plan will be furnished upon request of Employee. The date of grant is xxxx. The Option terminates at the close of business ten (10) years from the date of grant or at an earlier time period specified in this Agreement.

        2.   Vesting of Option Rights.   The Option is fully vested and may be exercised by Employee from and after the date of grant as to any or all of the Shares.

        3.   Exercise of Option after Death or Termination of Employment.   The Option shall terminate and may no longer be exercised if Employee ceases to be employed by Donaldson, except that:

        (a)   If Employee’s employment is terminated for any reason, voluntary or involuntary, other than for Employee’s death or disability (as set forth in Section 3(b)) or normal retirement (as set forth in Section 3(c)), Employee may at any time within a period of one (1) month after such termination exercise the Option to the extent the Option was exercisable by Employee on the date of the termination of Employee’s employment.

        (b)   If Employee shall die while the Option is still exercisable according to its terms and Employee shall not have fully exercised the Option, such Option may be exercised at any time within thirty-six (36) months after Employee’s death by the personal representatives or administrators of Employee, as applicable, or by any person or persons to whom the Option is transferred by will or the applicable laws of descent and distribution, to the extent of the full number of shares Employee was entitled to purchase under the Option on the date of death.

        (c)   If employment is terminated because Employee has become disabled (within the meaning of Section 22(e)(3) of the Internal Revenue Code of 1986, as amended (the “Code”)) while in the employ of Donaldson and Employee shall not have fully exercised the Option, such Option may be exercised at any time within thirty-six (36) months after Employee’s date of termination of employment for disability by Employee, personal representatives or administrators, or guardians of Employee, as applicable, to the extent of the full number of shares Employee is entitled to purchase under the Option. Employee shall continue to have exercise rights accrue during such thirty-six (36) month period according to the vesting schedule set forth in Section 2.

        (d)   Employee, in the event of normal retirement on or after age 55, shall continue to have the ten (10) year term to exercise this Option set forth in Section 1 and shall continue to have exercise rights accrue according to the vesting schedule set forth in Section 2.

        4.   Method of Exercise of Option.   The Option may be exercised only within the Option period by serving written notice of exercise on Donaldson at its principal office which is as of this date located at 1400 W. 94^th Street, Bloomington, Minnesota, Attention: Treasurer. The notice must state the number of shares being exercised and include payment in full of the purchase price. Payment of the purchase price shall be made in cash or, with the approval of Donaldson (which may be given in its sole discretion), in Common Stock of Donaldson having a fair market value equal to the full purchase price of the shares being acquired or a combination of cash and such shares. For these purposes, the fair market value of Donaldson’s Common Stock as of any date shall be as reasonably determined by Donaldson.

        5.   Donaldson’s Repurchase Right During Initial Three-Year Period.   If Employee’s employment with Donaldson is terminated for any reason whatsoever prior to xxxx (other than for death, disability or normal retirement as defined in Section 3 or a termination resulting from a Change in Control as defined in Section 7), then, in the event that Employee exercises this Option within the period beginning six (6) months prior to such termination and ending on xxxx (the “Repurchase Period”), Donaldson shall have the right and option in its sole discretion to repurchase from Employee, and Employee agrees to sell to Donaldson the Shares purchased by Employee upon the exercise of this Option within the Repurchase Period for a purchase price equal to the price paid by Employee for the Shares. Donaldson shall notify Employee of its election to repurchase the Shares within ninety (90) days following Employee’s termination of employment within the Repurchase Period. Within thirty (30) days of demand by Donaldson, Employee shall deliver to Donaldson either (i) the stock certificates representing the number of Shares that Donaldson has elected to repurchase and, in that event, Donaldson shall pay to Employee the purchase price as provided above, or (ii) at the election of Donaldson, in lieu of repurchasing such shares, Donaldson shall have the right to collect from Employee any gain received by Employee pursuant to the exercise of this Option during the Repurchase Period. The gain on any exercise of the Option shall be determined by multiplying the number of shares purchased pursuant to the Option times the excess of the fair market value of a Share on the date of exercise (without regard to any subsequent increase or decrease in the fair market value) over the exercise price. The fair market value of Donaldson’s Common Stock as of any date shall be as reasonably determined by Donaldson. Donaldson also shall have the right to set-off any amounts due to the Employee by Donaldson

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under any plan, contract or arrangement against the Employee’s obligations to deliver cash or Shares under this Section 5.

        6.   Forfeiture of Option and Option Gain Resulting from Certain Activities.

        (a)   If, at any time that (i) is within two (2) years after the date that Employee has exercised the Option or (ii) within two (2) years after the date of the termination of Employee’s employment with Donaldson for any reason whatsoever while an option agreement under the Plan is in effect, whichever is longer, Employee engages in any Forfeiture Activity (as defined below) then (A) the Option shall immediately terminate effective as of the date any such activity first occurred, and (B) any gain received by Employee pursuant to the exercise of this Option must be paid to Donaldson within thirty (30) days of demand by Donaldson. The gain on any exercise of the Option shall be determined by multiplying the number of shares purchased pursuant to the Option times the excess of the fair market value of a share of Donaldson’s Common Stock on the date of exercise (without regard to any subsequent increase or decrease in the fair market value) over the exercise price. The fair market value of Donaldson’s Common Stock as of any date shall be as reasonably determined by Donaldson.

        (b)   Employee shall be deemed to have engaged in a Forfeiture Activity if Employee (i) directly or indirectly engages in any business activity on his or her own behalf or as a partner, shareholder, director, trustee, principal, agent, employee, consultant or otherwise of any person or entity which is in any respect in competition with or competitive with Donaldson, or solicits, entices or induces any employee or representative of Donaldson to engage in any such activity, (ii) directly or indirectly solicits, entices or induces (or assists any other person or entity in soliciting, enticing or inducing) any customer or potential customer (or agent, employee or consultant of any customer or potential customer) with whom Employee had contact in the course of his or her employment with Donaldson to deal with a competitor of Donaldson, or (iii) fails to hold in a fiduciary capacity for the benefit of Donaldson all confidential information, knowledge and data, including customer lists and information, business plans and business strategy (“Confidential Data”) relating in any way to the business of Donaldson for so long as such Confidential Data remains confidential.

        (c)   If any court of competent jurisdiction shall determine that this forfeiture provision is invalid in any respect, the court so holding may limit such covenant either or both in time, in area or in any other manner which the court determines such that the covenant shall be enforceable against Employee. Employee shall acknowledge that the remedy of law for any breach of this covenant not to compete will be inadequate, and that Donaldson shall be entitled, in addition to any remedy of law, to preliminary and permanent injunctive relief.

        7.   Exercisability upon Change in Control.   In the event of a “Change in Control” of Donaldson, any outstanding Options granted under this Agreement shall no longer be subject to Section 5 and shall remain exercisable thereafter until they are either exercised or expire by their terms. The term “Change in Control” shall have the following meaning assigned to it in this Agreement. A “Change in Control” of Donaldson shall have occurred if (i) any “person” as such

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term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) (other than Donaldson, any trustee or other fiduciary holding securities under an employee benefit plan of Donaldson or any corporation owned, directly or indirectly, by the shareholders of Donaldson in substantially the same proportions as their ownership of stock of Donaldson), either is or becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of Donaldson representing 30% or more of the combined voting power of Donaldson’s then outstanding securities, (ii) during any period of two (2) consecutive years, individuals who at the beginning of such period constitute the Board of Directors of Donaldson (the “Board”), and any new director (other than a director designated by a person who has entered into an agreement with Donaldson to effect a transaction described in clause (i), (iii) or (iv) of this subparagraph) whose election by the Board or nomination for election by Donaldson’s shareholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority thereof, unless the approval of the election or nomination for election of such new directors was in connection with an actual or threatened election or proxy contest, (iii) the shareholders of Donaldson approve a merger or consolidation of Donaldson with any other corporation, other than (A) a merger or consolidation which would result in the voting securities of Donaldson outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 80% of the combined voting power of the voting securities of Donaldson or such surviving entity outstanding immediately after such merger or consolidation or (B) a merger or consolidation effected to implement a recapitalization of Donaldson (or similar transaction) in which no “person” (as hereinabove defined) acquires more than 30% of the combined voting power of Donaldson’s then outstanding securities or (iv) the shareholders of Donaldson approve a plan of complete liquidation of Donaldson or an agreement for the sale or disposition of Donaldson of all or substantially all of Donaldson’s assets or any transaction having a similar effect.

        8.   Miscellaneous.

        (a)   Neither the Plan nor this Agreement shall (i) be deemed to give any individual a right to remain an employee of Donaldson, (ii) restrict the right of Donaldson to discharge any employee, with or without cause, or (iii) be deemed to be a written contract of employment. Employee shall have none of the rights of a shareholder with respect to shares subject to the Option until such shares shall have been issued to Employee upon exercise of the Option.

        (b)   The exercise of all or any parts of the Option shall only be effective at such time that the sale of shares of Common Stock pursuant to such exercise will not violate any state or federal securities or other laws.

        (c)   The Option may not be transferred, except by will or the laws of descent and distribution to the extent provided in subsection 3(b), and during Employee’s lifetime the Option is exercisable only by Employee, provided, however, that notwithstanding the above, this Option shall be transferable by Employee to immediate family members and

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related estate planning entities designated in a stock transfer form approved by Donaldson and delivered to Donaldson as provided in Section 4 for written notice.

        (d)   It is understood and agreed that the Option price is the per share fair market value of such shares on the date of this Agreement. The Option is not intended to be an Incentive Stock Option within the meaning of Section 422 of the Code. The Option is issued pursuant to the Plan and is subject to its terms.

        (e)   If there shall be any change in the Common Stock subject to the Option through merger, consolidation, reorganization, recapitalization, dividend or other distribution, stock split or other similar corporate transaction or event of Donaldson, appropriate adjustments shall be made by Donaldson in the number of shares and the price per share of the shares subject to the Option in order to prevent dilution or enlargement of the Option rights granted hereunder; provided, however, that the number of shares subject to the Option shall always be a whole number.

        (f)   In order to provide Donaldson with the opportunity to claim the benefit of any income tax deduction which may be available to it upon the exercise of the Option and in order to comply with all applicable federal or state income tax laws or regulations, Donaldson may take such action as it deems appropriate to insure that, if necessary, all applicable federal or state payroll, withholding, income or other taxes are withheld or collected from Employee.

        (g)   Donaldson, in its sole and absolute discretion, may allow Employee to satisfy Employee’s federal and state income tax withholding obligations (including FICA) upon exercise of the Option by (i) having Donaldson withhold a portion of the shares of Common Stock otherwise to be delivered upon exercise of the Option having a fair market value equal to the amount of federal and state income tax required to be withheld upon such exercise, in accordance with such rules as Donaldson may from time to time establish, or (ii) delivering to Donaldson shares of its Common Stock other than the shares issuable upon exercise of the Option with a fair market value equal to such taxes, in accordance with such rules.

        (h)   This Option grant shall be effective only after signature by both parties and delivering a signed original copy to the Company at the address in Section 4. Employee shall not disclose either the contents or any of the terms and conditions of the Option to any other person and agrees that Donaldson shall have the right in its sole discretion to immediately terminate the Option without the right to exercise any part thereof in the event of such disclosure by Employee.

        (i)   This Agreement shall be construed and enforced in accordance with the laws of the State of Minnesota, except with respect to its rules relating to conflicts of law. Employee consents to the exclusive jurisdiction of the state and federal courts of the State of Minnesota in connection with any controversies relating to or arising out of this Agreement, and agrees that any and all litigation relating to or arising out of this Agreement shall be venued in Hennepin County, Minnesota.

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        IN WITNESS WHEREOF, Donaldson and Employee have duly executed this Agreement as of the date set forth in the first paragraph.

DONALDSON COMPANY, INC.
By:
Its:	President and Chief Executive Officer
EMPLOYEE:
‹‹FIRST NAME››   ‹‹INITIAL››   ‹‹LAST NAME››
Date:

6

EX-10.B

Exhibit 10-B

NON-EMPLOYEE DIRECTOR
NON-QUALIFIED STOCK OPTION AGREEMENT

        OPTION AGREEMENT made this xxx day of xxx, xxxx, by and between Donaldson Company, Inc., a Delaware corporation (hereinafter, together with its subsidiaries, called “Donaldson”), and «FirstName» «Initial» «LastName», a non-employee Director of Donaldson (hereinafter called “Participant”).

        In consideration of the mutual covenants hereinafter set forth and for other good and valuable consideration, the parties agree as follows:

        1.   Donaldson irrevocably grants to the Participant the right and option to purchase all or any part of an aggregate of xxx shares of Common Stock, par value of $5.00 per share, of Donaldson together with a restoration option (“Reload”). This option is granted pursuant to the Donaldson Company Non-Qualified Stock Option Program for Non-Employee Directors (the “Plan”). A Reload shall be automatically granted if Participant exercises this option when the market value of Common Stock exceeds the purchase price, in paragraph 2, by 25%. The Reload is applicable only on the exercise by Participant while a Director. The Reload provision shall not be applicable if Participant transfers the option grant as provided for in paragraph 4, except that the Reload provision shall continue to apply to a transfer to a revocable trust where the Participant retains beneficial ownership and control. Participant acknowledges receipt of a copy of the Plan.

        2.   The purchase price of the shares of Common Stock subject to this option is xx.xx per share. The date of grant is xxxx.

        3.   The term of this option is for the period of ten years from and after the date of grant, or such shorter period as may be provided by the provisions of the Plan. The option may be exercised during the period from and after the date of grant. Subject to the limitations herein and to the extent not exercised in prior years, the right to exercise this option shall be cumulative and may be exercised at any time or from time to time during the term as to any or all full shares which may be purchasable under the provisions of this Agreement.

        4.   This option shall not be transferable otherwise than by will or the laws of descent and distribution and may be exercised during the lifetime of the Participant only by Participant; provided, however, that notwithstanding the above, this option shall be transferable by Participant to immediate family members and related estate planning entities.

        5.   Participant may exercise this option in whole or in part at any time during the term as specified above but not after ten years from the date of grant; provided, that if Participant dies, this option may be exercised within three years after death, but not after ten years from the date granted, by Participant’s estate or by the person or persons who acquire the right to exercise this option by bequest, inheritance or otherwise by reason of such death. Donaldson and Participant

recognize that this Agreement in no way restricts the right of Donaldson to terminate Participant’s membership consistent with applicable Delaware laws.

        6.   Subject to the terms and conditions of this Agreement, this option may be exercised by written notice to the Company at its principal office, which is now located at 1400 West 94th Street, Bloomington, Minnesota, Attention: Treasurer. Such notice shall state the election to exercise the option and the number of shares in respect of which it is being exercised, shall be signed by the person or persons so exercising the option. Such notice shall be accompanied by payment in full of the purchase price of the shares purchased. Payment of the exercise price may be made in cash or in whole or in part in Common Stock of the Company valued at the Market Value (as defined in the Master Plan) on the day preceding the date of exercise. The Company will issue and deliver a certificate or certificates representing the shares to be received as soon as practicable after completion of these requirements. In the event the option shall be exercised pursuant to paragraphs 4 or 5 by any person or persons other than the Participant such notice shall be accompanied by appropriate proof of the right of such person or persons to exercise the option.

        7.   In the event of a Change in Control of Donaldson (as defined below), any outstanding options granted under this Agreement not previously vested and exercisable shall become fully vested and exercisable and shall remain exercisable thereafter until they are either exercised or expire by their terms. The term “Change in Control” shall have the following meaning assigned to it in this Agreement. A “Change in Control” of Donaldson shall have occurred if (i) any “person” as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) (other than Donaldson, any trustee or other fiduciary holding securities under an employee benefit plan of Donaldson or any corporation owned, directly or indirectly, by the shareholders of Donaldson in substantially the same proportions as their ownership of stock of Donaldson), either is or becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of Donaldson representing 30% or more of the combined voting power of Donaldson’s then outstanding securities, (ii) during any period of two consecutive years (not including any period prior to the effective date of this Master Plan), individuals who at the beginning of such period constitute the Board of Directors of Donaldson (the “Board”), and any new director (other than a director designated by a person who has entered into an agreement with Donaldson to effect a transaction described in clause (i), (iii) or (iv) of this subparagraph) whose election by the Board or nomination for election by Donaldson’s shareholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority thereof, unless the approval of the election or nomination for election of such new directors was in connection with an actual or threatened election or

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proxy contest, (iii) the shareholders of Donaldson approve a merger or consolidation of Donaldson with any other corporation, other than (A) a merger or consolidation which would result in the voting securities of Donaldson outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 80% of the combined voting power of the voting securities of Donaldson or such surviving entity outstanding immediately after such merger or consolidation or (B) a merger or consolidation effected to implement a recapitalization of Donaldson (or similar transaction) in which no “person” (as hereinabove defined) acquires more than 30% of the combined voting power of Donaldson’s then outstanding securities or (iv) the shareholders of Donaldson approve a plan of complete liquidation of Donaldson or an agreement for the sale or disposition by Donaldson of all or substantially all of Donaldson’s assets or any transaction having a similar effect.

        8.   If all or any portion of the option is exercised subsequent to any stock dividend or split, recapitalization, consolidation, or the like, occurring after the date hereof, as a result of which securities of any class shall be issued in respect of outstanding shares of Common Stock, or shares of Common Stock shall be changed into the same or a different number of shares or other securities of the same or other class or classes, then the Board of Directors shall determine if any equitable adjustment is necessary to protect the Participant against dilution and shall determine the terms of such adjustment, if any. In the case of any stock dividend or split effected after the date hereof, the number of shares to be granted hereunder shall be automatically adjusted to prevent dilution of the potential benefits intended to be made available hereunder.

        IN WITNESS WHEREOF, Donaldson and the Participant have duly executed this Agreement as of the day and year first above written.

DONALDSON COMPANY, INC.		PARTICIPANT
By:
	William M. Cook	‹‹FIRST NAME››   ‹‹INITIAL››   ‹‹LAST NAME››
Its:	President and Chief Executive Officer

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EX-31.A

Exhibit 31A

Certification of Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, William M. Cook, certify that:

        I have reviewed this quarterly report on Form 10-Q of Donaldson Company, Inc.;

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:	December 8, 2004	/s/   William M. Cook
		William M. Cook
		Chief Executive Officer

EX-31.B

Exhibit 31B

Certification of Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Thomas R. VerHage, certify that:

I have reviewed this quarterly report on Form 10-Q of Donaldson Company, Inc.;

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:	December 8, 2004	/s/   Thomas R. VerHage
		Thomas R. VerHage
		Chief Financial Officer

EX-32

Exhibit 32

Pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the following certifications are being made to accompany the Form 10-Q for the quarter ended October 31, 2004 for Donaldson Company, Inc.:

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, William M. Cook, Chief Executive Officer of Donaldson Company, Inc., certify, that:

1. The Form 10-Q of Donaldson Company, Inc. for the quarter ended October 31, 2004 (the “Report”), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Donaldson Company, Inc.

Date:	December 8, 2004	/s/   William M. Cook
		William M. Cook
		Chief Executive Officer

CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, Thomas R. VerHage, Chief Financial Officer of Donaldson Company, Inc., certify, that:

1. The Form 10-Q of Donaldson Company, Inc. for the quarter ended October 31, 2004 (the “Report”), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Donaldson Company, Inc.

Date:	December 8, 2004	/s/   Thomas R. VerHage
		Thomas R. VerHage
		Chief Financial Officer