DONALDSON CO INC (Form: 10-Q, Received: 12/04/2008 17:09:34)

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 ENDED OCTOBER 31, 2008 OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________________ TO _________________.

Commission File Number 1-7891

DONALDSON COMPANY, INC.

(Exact name of registrant as specified in its charter)

Delaware		41-0222640
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1400 West 94th Street
Minneapolis, Minnesota 55431
(Address of principal executive offices, including zip code)

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

Not Applicable
(Former name, former address and former fiscal year, if changed since 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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

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

Large accelerated filer x
Non-accelerated filer o (Do not check if a smaller reporting company)

Accelerated filer o
Smaller reporting company o

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

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 – 76,935,342 shares as of October 31, 2008.

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,

	2008			2007

Net sales	$	573,260		$	525,576
Cost of sales		386,557			352,712

Gross margin		186,703			172,864
Operating expenses		117,016			109,084

Operating income		69,687			63,780
Other (income) expense, net		(3,104	)		132
Interest expense		4,290			4,183

Earnings before income taxes		68,501			59,465
Income taxes		20,539			16,142

Net earnings	$	47,962		$	43,323

Weighted average shares outstanding		77,903,194			79,846,911
Diluted shares outstanding		79,631,886			81,882,599
Basic earnings per share	$	0.62		$	0.54
Diluted earnings per share	$	0.60		$	0.53
Dividends paid per share	$	.11		$	.10

See Notes to Condensed Consolidated Financial Statements.

DONALDSON COMPANY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Thousands of dollars, except share amounts)
(Unaudited)

	October 31, 2008			July 31, 2008

ASSETS
Current Assets
Cash and cash equivalents	$	69,067		$	83,357
Accounts receivable, less allowance of $6,807 and $7,509		388,177			413,863
Inventories		240,279			264,129
Prepaids and other current assets		91,556			92,408

Total current assets		789,079			853,757
Property, plant and equipment, at cost		841,467			901,746
Less accumulated depreciation		(464,978	)		(486,587	)

Property, plant and equipment, net		376,489			415,159
Goodwill		163,507			134,162
Intangible assets		68,436			46,317
Other assets		97,370			99,227

Total Assets	$	1,494,881		$	1,548,622

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Short-term borrowings	$	206,882		$	139,404
Current maturities of long-term debt		5,380			5,669
Trade accounts payable		188,264			200,967
Other current liabilities		156,091			170,667

Total current liabilities		556,617			516,707
Long-term debt		173,689			176,475
Deferred income taxes		32,907			35,738
Other long-term liabilities		74,427			79,667

Total Liabilities		837,640			808,587

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		568,052			522,476
Stock compensation plans		24,702			27,065
Accumulated other comprehensive income		12,506			112,883
Treasury stock, at cost – 11,612,644 and 11,021,619 shares at October 31, 2008 and July 31, 2008, respectively		(391,235	)		(365,605	)

Total Shareholders’ Equity		657,241			740,035

Total Liabilities and Shareholders’ Equity	$	1,494,881		$	1,548,622

See Notes to Condensed Consolidated Financial Statements.

DONALDSON COMPANY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Thousands of dollars)
(Unaudited)

	Three Months Ended October 31,

	2008			2007

OPERATING ACTIVITIES
Net earnings	$	47,962		$	43,323
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization		14,074			14,059
Changes in operating assets and liabilities		(10,436	)		(32,463	)
Tax benefit of equity plans		(1,590	)		(4,010	)
Stock compensation plan expense		957			1,270
Other, net		796			(344	)

Net cash provided by operating activities		51,763			21,835
INVESTING ACTIVITIES
Net expenditures on property and equipment		(11,459	)		(11,479	)
Acquisitions, investments and divestitures, net		(74,508	)		1,000

Net cash used in investing activities		(85,967	)		(10,479	)
FINANCING ACTIVITIES
Purchase of treasury stock		(32,773	)		(2,099	)
Proceeds from long-term debt		89			25,139
Repayments of long-term debt		(5,261	)		(5,245	)
Change in short-term borrowings		75,129			(43,733	)
Dividends paid		(8,538	)		(7,917	)
Tax benefit of equity plans		1,590			4,010
Exercise of stock options		939			1,891

Net cash provided by (used in) financing activities		31,175			(27,954	)
Effect of exchange rate changes on cash		(11,261	)		1,253

Decrease in cash and cash equivalents		(14,290	)		(15,345	)
Cash and cash equivalents - beginning of year		83,357			55,237

Cash and cash equivalents - end of period	$	69,067		$	39,892

See Notes to Condensed Consolidated Financial Statements.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note A – Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of Donaldson Company, Inc. and subsidiaries (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. Certain amounts in prior periods have been reclassified to conform to the current presentation. The reclassifications had no impact on the Company’s net earnings or shareholders’ equity as previously reported. Operating results for the three months ended October 31, 2008 are not necessarily indicative of the results that may be expected for future periods. The year-end condensed balance sheet data was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended July 31, 2008.

Note B – Inventories

The components of inventory as of October 31, 2008 and July 31, 2008 are as follows (thousands of dollars):

	October 31, 2008		July 31, 2008

Materials	$	95,094	$	110,135
Work in process		28,429		23,728
Finished products		116,756		130,266

Total inventories	$	240,279	$	264,129

Note C – Accounting for Stock-Based Compensation

Stock-based employee compensation cost is recognized using the fair-value based method for all awards. The Company determined the fair value of its option awards using the Black-Scholes option pricing model. The following assumptions were used to value the options granted during the three months ended October 31, 2008: 7 year expected life; expected volatility range of 23.0 percent to 23.1 percent; risk-free interest rate range of 3.6 percent to 3.7 percent and annual dividend yield of 1.0 percent. The expected life selected for options granted during the period represents the period of time that the options are expected to be outstanding based on historical data of option holder exercise and termination behavior. Expected volatilities are based upon historical volatility of the Company’s stock over a period at least equal to the expected life of each option grant. Option grants are priced at the fair market value of the Company’s stock on the date of grant. The weighted average fair value for options granted during the three months ended October 31, 2008 and 2007 was $12.57 per share and $1.70 per share, respectively. The fair value of options granted was lower during the three months ended October 31, 2007 due to the fact that the only options granted during that quarter were a result of exercising reloadable grants with a short remaining maturity. For the three months ended October 31, 2008, the Company recorded pretax compensation expense associated with stock options of $0.4 million and recorded $0.2 million of related tax benefit. For the three months ended October 31, 2007, the Company recorded pretax compensation expense associated with stock options of $0.3 million and recorded $0.1 million of related tax benefit.

The following table summarizes stock option activity during the three months ended October 31, 2008:

			Weighted Average Exercise Price

Outstanding at July 31, 2008	5,181,778		$	25.62
Granted	3,500		$	43.14
Exercised	(264,531	)	$	19.45
Canceled	(8,598	)	$	36.87

Outstanding at October 31, 2008	4,912,149		$	25.94

The total intrinsic value of options exercised during the three months ended October 31, 2008 and 2007 was $5.0 million and $6.8 million, respectively.

The following table summarizes information concerning outstanding and exercisable options as of October 31, 2008:

Range of Exercise Prices			Weighted Average Exercise Price			Weighted Average Exercise Price

$15 and below	752,642	1.62	$	12.19	752,642	$	12.19
$15 to $25	1,335,580	3.55	$	18.02	1,335,580	$	18.02
$25 to $35	2,176,709	5.65	$	31.15	2,008,724	$	30.92
$35 and above	647,218	8.64	$	40.78	380,500	$	41.42

	4,912,149	4.86	$	25.94	4,477,446	$	24.82

At October 31, 2008, the aggregate intrinsic value of options outstanding and exercisable was $48.9 million and $48.7 million, respectively.

The Company recorded $0.5 million and $1.0 million of compensation expense during the three months ended October 31, 2008 and 2007, respectively, related to other share based awards.

As of October 31, 2008, there was $2.4 million of total unrecognized compensation cost related to non-vested stock options granted under the 2001 Master Stock Incentive Plan. This unvested cost is expected to be recognized during the remainder of Fiscal 2009, Fiscal 2010, Fiscal 2011 and Fiscal 2012.

Note D – 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 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, 2008 and 2007 there were 250,618 and 16,655 options excluded from the diluted net earnings per share calculation, respectively.

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

	Three Months Ended October 31,

	2008		2007

Weighted average shares outstanding basic		77,903		79,847
Diluted share equivalents		1,729		2,036

Weighted average shares outstanding – diluted		79,632		81,883

Net earnings for basic and diluted earnings per share computation	$	47,962	$	43,323
Net earnings per share – basic	$	0.62	$	0.54
Net earnings per share – diluted	$	0.60	$	0.53

Note E – Shareholders’ Equity

The Company reports accumulated other comprehensive income as a separate item in the shareholders’ equity section of the balance sheet.

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

	Three Months Ended October 31,

	2008			2007

Net earnings	$	47,962		$	43,323
Foreign currency translation gain (loss)		(101,791	)		18,284
Net gain (loss) on hedging derivatives, net of deferred taxes		1,048			(793	)
Pension and postretirement liability adjustment, net of deferred taxes		366			79

Total comprehensive income (loss)	$	(52,415	)	$	60,893

Total accumulated other comprehensive income and its components at October 31, 2008 and July 31, 2007 are as follows (thousands of dollars):

	October 31, 2008			July 31, 2008


Foreign currency translation adjustment	$	36,749		$	138,540
Net gain on hedging derivatives, net of deferred taxes		1,236			188
Pension and postretirement liability, net of deferred taxes		(25,479	)		(25,845	)

Total accumulated other comprehensive income	$	12,506		$	112,883

During the first quarter of Fiscal 2009, the Company repurchased 0.8 million shares for $32.8 million at an average price of $40.86 per share. As of October 31, 2008 the Company had remaining authorization to repurchase up to 0.9 million shares pursuant to the current authorization.

At October 31, 2008, the fair market value of forward contract assets and liabilities was $5.4 million and $3.7 million, respectively.

Note F – 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. Corporate and Unallocated includes corporate expenses determined to be non-allocable to the segments and interest income and expense. Segment detail is summarized as follows (thousands of dollars):

	Engine Products		Industrial Products				Total Company

Three Months Ended October 31, 2008:
Net sales	$	308,777	$	264,483	—		$	573,260
Earnings before income taxes		36,145		34,568	(2,212	)		68,501
Assets		659,690		593,135	242,056			1,494,881
Three Months Ended October 31, 2007:
Net sales	$	293,155	$	232,421	—		$	525,576
Earnings before income taxes		42,389		24,015	(6,939	)		59,465
Assets		586,276		559,136	247,867			1,393,279

Sales to one Customer accounted for 10 percent of net sales for the three months ended October 31, 2008 and 2007, respectively. There were no Customers over 10 percent of gross accounts receivable as of October 31, 2008 and 2007.

Note G – Goodwill and Other Intangible Assets

The Company’s most recent annual impairment assessment for goodwill was completed during the third quarter of Fiscal 2008. The results of this assessment showed that the fair values of the reporting units to which goodwill is assigned continue to be higher than the book values of the respective reporting units, resulting in no goodwill impairment. The Company has allocated goodwill to its Industrial Products and Engine Products segments. The current year addition to the Engine Products segment is a result of the preliminary purchase price allocation for the acquisition of 100 percent of the stock of Western Filter Corporation on October 15, 2008. The allocation is preliminary until the working capital adjustment is finalized. Goodwill associated with this acquisition is tax deductible. Pro forma financial results are not presented as the results of the acquisition are not material to the Company’s financial results. The current year disposition in the Industrial Products segment is a result of the sale of the air dryer business in Maryville, Tennessee on October 31, 2008. Following is a reconciliation of goodwill for the three months ending October 31, 2008 (thousands of dollars):

	Engine Products			Industrial Products			Total Goodwill

Balance as of August 1, 2008	$	19,126		$	115,036		$	134,162
Acquisition activity		43,741			—			43,741
Disposition activity		—			(1,089	)		(1,089	)
Foreign exchange translation		(1,802	)		(11,505	)		(13,307	)

Balance as of October 31, 2008	$	61,065		$	102,442		$	163,507

As of October 31, 2008, other intangible assets were $68.4 million, a $22.1 million increase from the balance of $46.3 million at July 31, 2008. The increase in other intangible assets is due to the acquisition of Western Filter Corporation partially offset by amortization, foreign exchange and disposition activity.

Note H – Guarantees

The Company and its partner, Caterpillar, Inc., in an unconsolidated joint venture, Advanced Filtration Systems Inc., guarantees certain debt of the joint venture. As of October 31, 2008, the joint venture had $21.7 million of outstanding debt of which the Company guarantees half.

The Company estimates warranty costs using standard quantitative measures based on historical warranty claim experience and evaluation of specific Customer warranty issues. Following is a reconciliation of warranty reserves for the three months ended October 31, 2008 and 2007 (thousands of dollars):

	October 31, 2008			October 31, 2007

Beginning balance	$	11,523		$	8,545
Accruals for warranties issued during the reporting period		1,011			2,433
Accruals related to pre-existing warranties (including changes in estimates)		323			1,598
Less settlements made during the period		(480	)		(318	)

Ending balance	$	12,377		$	12,258

At October 31, 2008, the Company had a contingent liability for standby letters of credit totaling $18.5 million that have been issued and are outstanding. The letters of credit guarantee payment to third parties in the event the Company is in breach of specified bond financing agreement and insurance contract terms as detailed in each letter of credit. At October 31, 2008, there were no amounts drawn upon these letters of credit.

Note I – Employee Benefit Plans

The Company and certain of its subsidiaries have defined benefit pension plans for many of their hourly and salaried employees. The domestic plans include plans that provide defined benefits as well as a plan for salaried workers that provides 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.

Net periodic pension costs for the Company’s pension plans include the following components (thousands of dollars):

	Three Months Ended October 31,

	2008			2007

Service cost	$	3,913		$	3,651
Interest cost		4,649			3,619
Expected return on assets		(7,092	)		(5,899	)
Transition amount amortization		38			37
Prior service cost amortization		106			107
Actuarial (gain)/loss amortization		54			(25	)

Total periodic benefit cost	$	1,668		$	1,490

The Company’s general funding policy for its pension plans is to make at least the minimum contributions as required by applicable regulations. Additionally, the Company may elect to make additional contributions up to the maximum tax deductible contribution. For the three months ended October 31, 2008, the Company made $1.0 million in contributions to its non-U.S. pension plans. The Company has not made and does not anticipate making any contributions to its U.S. pension plans in the current year and estimates that it will contribute up to an additional $4.0 million to its non-U.S. pension plans during the remainder of Fiscal 2009.

Note J – Commitments and Contingencies

probable and estimable outcomes. Any recorded liabilities were not material to the Company’s financial position, results of operation and liquidity and the Company does not believe that any of the currently identified claims or litigation will materially affect its financial position, results of operation and liquidity.

Note K – Income Taxes

The effective tax rate for the quarter was 30.0 percent compared to 27.1 percent for the prior year first quarter. The higher rate this quarter was primarily due to a $2.1 million decrease in discrete tax benefits recognized this quarter compared to $3.9 million in tax benefits occurring in the prior year related to enacted foreign tax rate changes and the expiration of statutes on unrecognized tax benefits. The current year tax rate benefited from $1.8 million related to the reinstatement of the Research and Experimentation Credit for Fiscal 2008 and an adjustment to an income tax reserve related to foreign tax audit exposure.

The Company’s uncertain tax positions are affected by the tax years that are under audit or remain subject to examination by the relevant taxing authorities. The following tax years, in addition to the current year, remain subject to examination, at least for certain issues, by the major tax jurisdictions indicated:

Major Jurisdictions		Open Tax Years

Belgium		2005 through 2008
China		1999 through 2008
France		2004 through 2008
Germany		2004 through 2008
Italy		2003 through 2008
Japan		2006 through 2008
Mexico		2003 through 2008
United Kingdom		2007 through 2008
United States		2004 through 2008

At October 31, 2008 the total unrecognized tax benefits were $32.4 million, and accrued interest and penalties on these unrecognized tax benefits were $5.5 million. The Company recognizes interest accrued related to unrecognized tax benefits in income tax expense. If the Company were to prevail on all unrecognized tax benefits recorded, substantially all of the unrecognized tax benefits would benefit the effective tax rate. With an average statute of limitations of about 5 years, up to $4.4 million of the unrecognized tax benefits could potentially expire in the next 12 month period, unless extended by audit. It is reasonably possible that an additional reduction in unrecognized tax benefits may occur within the fiscal year due to settlement of several worldwide tax disputes; however, quantification of an estimated range and timing cannot be made at this time.

Note L – New Accounting Standards

In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R) (SFAS 158). The portion of the statement that requires recognition of the overfunded or underfunded status of defined benefit postretirement plans as an asset or liability in the statement of financial position was adopted in Fiscal 2007 with minimal impact. SFAS 158 also requires measurement of the funded status of a plan as of the date of the statement of financial position. That provision will require the Company to change its measurement date from April 30 to July 31 beginning with Fiscal 2009.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). This statement defines fair value, establishes a framework for measuring fair value in U.S. generally accepted accounting principles and expands disclosures about fair value measurements. SFAS 157 applies whenever another standard requires (or permits) assets or liabilities to be measured at fair value, except for the measurement of share-based payments. SFAS 157 does not expand the use of fair value to any new circumstances, and was effective for the Company for its Fiscal 2009 year beginning August 1, 2008. The

adoption of SFAS 157 in Fiscal 2009 did not have a material impact on the Company’s financial statements. On February 12, 2008, the FASB issued FASB Staff Position (FSP) FAS 157-2, Effective Date of FASB Statement No. 157 (FSP FAS 157-2). FSP FAS 157-2 delays by one year the effective date of SFAS 157 for certain non-financial assets and non-financial liabilities. The Company is currently evaluating the impact the standard will have on the determination of fair value related to non-financial assets and non-financial liabilities in Fiscal 2010.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS 159 is effective for fiscal years beginning after November 15, 2007 and was adopted by the Company on August 1, 2008. The adoption of SFAS 159 did not have a material impact on the Company’s financial statements.

In December 2007, the FASB issued SFAS No. 141(R), Business Combinations (SFAS 141(R)), which changes the accounting for business combinations and their effects on the financial statements. SFAS 141(R) will be effective for the Company at the beginning of Fiscal 2010. The adoption of SFAS 141(R) is not expected to have a material impact on the Company’s consolidated financial statements.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133 (SFAS 161). SFAS 161 requires enhanced disclosures about an entity’s derivative and hedging activities, including (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities , and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. SFAS 161 is effective for the Company beginning in the third quarter of Fiscal 2009. The adoption of SFAS 161 only requires additional disclosures about the Company’s derivatives and thus will not affect the Company’s consolidated financial statements.

Note M – Subsequent Event

On November 14, 2008, the Company issued an $80 million senior unsecured note. The note is due on November 14, 2013. The debt was issued at face value and bears interest payable semi-annually at a rate of 6.59 percent. The proceeds from the note will be used to refinance existing debt or for general corporate purposes.

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 filtration systems and exhaust and emission control products. Products are manufactured at 39 plants around the world and through three joint ventures.

The Company has two reporting segments: Engine Products and Industrial Products. Products in the Engine Products segment consist of air filtration systems, exhaust and emissions systems, liquid filtration systems and replacement parts. The Engine Products segment sells to original equipment manufacturers (OEMs) in the construction, mining, agriculture and transportation markets and to independent distributors, OEM dealer networks, private label accounts and large equipment fleets. Products in the Industrial Products segment consist of dust, fume and mist collectors, compressed air purification systems, liquid filtration systems, intake air filtration systems for gas turbines, and specialized air filtration systems for diverse applications including computer disk drives. The Industrial Products segment sells to various industrial end-users, OEMs of gas-fired turbines and OEMs and end users requiring clean air, and liquids.

The following discussion of the Company’s financial condition and results of operations 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 diluted net earnings per share of $0.60 for the first quarter of Fiscal 2009, up from $0.53 in the first quarter of the prior year. Net income for the quarter was $48.0 million, up 10.7 percent from $43.3 million in the first quarter of the prior year. The impact of foreign currency translation had minimal impact on net earnings in the quarter. The Company reported record sales in the first quarter of Fiscal 2009 of $573.3 million, an increase of 9.1 percent from $525.6 million in the first quarter of the prior year. The impact of foreign currency translation increased reported sales by 0.7 percent in the quarter.

Overall, the Company’s globally-diversified portfolio of filtration businesses provided the foundation to deliver another quarter of growth. Continued strength in the aerospace and defense, industrial filtration, and gas turbine businesses helped to offset weakness in our other end markets. Geographically, sales grew 14 percent in Asia, 11 percent in the Americas, and 4 percent in Europe. The Company experienced higher raw material costs in the first quarter and worked to offset a portion of the impact through a combination of pricing actions with Customers and internal cost reduction efforts. The Company has been proactively managing its business and working aggressively to reduce expense levels to help offset the challenging global economic environment it expects to face this year, and the progress is evident as operating expenses decreased to 20.4 percent of sales this quarter compared to 22.0 percent in fourth quarter of Fiscal 2008.

Results of Operations

Sales in the United States increased $20.5 million or 9.5 percent for the first quarter of Fiscal 2009 compared to the first quarter of the prior year. Total international sales in U.S. dollars increased $27.2 million or 8.8 percent in the first quarter compared to the prior year. In U.S. dollars, Europe sales increased $6.9 million or 4.0 percent, Asia sales increased $16.1 million or 14.1 percent and other international sales increased $4.2 million or 16.9 percent for the first quarter of Fiscal 2009 as compared to the prior year period. Translated at constant exchange rates, total international sales increased 7.6 percent over the prior year quarter.

The impact of foreign currency translation during the first quarter of Fiscal 2009 increased sales by $3.6 million, or 0.7 percent. Worldwide sales for the first quarter of Fiscal 2009, excluding the impact of foreign currency translation, increased 8.4 percent from the first quarter of the prior year. The impact of foreign currency translation decreased net income by $0.3 million for the three month period of Fiscal 2009.

For the past several years the Company benefited from a positive impact from foreign exchange – more specifically the weaker U.S. Dollar versus the Euro. However, during the first quarter of Fiscal 2009, that changed dramatically with a resurgence in the strength of the U.S. Dollar. Based on exchange rate levels in effect in November 2008, the Company anticipates that the resurgence in the strength of the U.S. Dollar will decrease Fiscal 2009 full year sales by approximately $133 million, or 6 percent, from Fiscal 2008. Including this foreign currency translation assumption, the Company expects full year sales in both the Engine and Industrial Products’ segments to be flat or slightly down and for total Company sales to be between $2.15 billion and $2.23 billion for the full year. In local currency, the Company expects low single-digit percentage sales growth in both segments and for the total Company.

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 clearer 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,

	2008			2007

Net sales, excluding foreign currency translation	$	569,669		$	504,964
Foreign currency translation		3,591			20,612

Net sales	$	573,260		$	525,576

Net earnings, excluding foreign currency translation	$	48,304		$	40,071
Foreign currency translation		(342	)		3,252

Net earnings	$	47,962		$	43,323

Gross margin for the first quarter of Fiscal 2009 was 32.6 percent compared to 32.9 percent for the first quarter in the prior year. The primary drivers for the change in the quarter include a $7.0 million unfavorable impact due to the delay in recovery of material cost increases from several major Engine Customers, partially offset by a $1.3 million favorable impact due to higher sales in our Industrial businesses (which deliver a higher gross margin) and a $3.4 million favorable impact due to product cost reductions and manufacturing productivity improvements. Plant rationalization and start-up costs were $1.0 million in the first quarter, which includes a loss associated with the sale of the air dryer business in Maryville, Tennessee, compared to prior year quarter costs of $0.3 million. Operating expenses during the first quarter of Fiscal 2009 were $117.0 million, or 20.4 percent of sales, compared to $109.1 million, or 20.8 percent of sales, in the prior year period. This decrease as a percent of sales was driven by a focus on cost containment efforts, including a global hiring freeze, targeted restructuring within some businesses and functions, a reduction of contractors and temporary workers and other discretionary spending cuts.

Other income for the first quarter of Fiscal 2009 totaled $3.1 million, compared to $0.1 million of other expense in the first quarter of the prior year. Other income for the first quarter of Fiscal 2009 consisted of income from unconsolidated affiliates of $0.7 million, royalty income of $2.0 million, interest income of $0.3 million, foreign exchange gains of $0.2 million, and other expenses of $0.1 million. For the first quarter of Fiscal 2009, interest expense was $4.3 million, a slight increase as compared to the first quarter of the prior year, due to higher debt levels.

Operations by Segment

Following is financial information for the Company’s Engine Products and Industrial Products segments. Corporate and Unallocated includes corporate expenses determined to be non-allocable to the segments and interest income and expense. Segment detail is summarized as follows (thousands of dollars):

	Engine Products		Industrial Products				Total Company

Three Months Ended October 31, 2008:
Net sales	$	308,777	$	264,483	—		$	573,260
Earnings before income taxes		36,145		34,568	(2,212	)		68,501
Assets		659,690		593,135	242,056			1,494,881
Three Months Ended October 31, 2007:
Net sales	$	293,155	$	232,421	—		$	525,576
Earnings before income taxes		42,389		24,015	(6,939	)		59,465
Assets		586,276		559,136	247,867			1,393,279

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

	Three Months Ended October 31,

	2008		2007

Engine Products segment:
Off-road Products*	$	114,824	$	104,624
Transportation Products		27,722		30,089
Aftermarket Products**		166,231		158,442

Total Engine Products segment	$	308,777	$	293,155

Industrial Products segment:
Industrial Filtration Solutions Products	$	155,207	$	136,294
Gas Turbine Products		59,885		48,936
Special Applications Products		49,391		47,191

Total Industrial Products segment	$	264,483	$	232,421

Total Company	$	573,260	$	525,576

*	Includes Aerospace and Defense products.

**	Includes replacement part sales to the Company’s original equipment manufacturers Customers.

Engine Products Segment For the first quarter of Fiscal 2009, worldwide Engine Products sales were $308.8 million, an increase of 5.3 percent from $293.2 million in the first quarter of the prior year. Total first quarter Engine Products sales in the United States increased by 6.5 percent compared to the same period in the prior year and international sales increased by 4.2 percent as discussed below. Earnings before income taxes as a percentage of Engine Products segment sales of 11.7 percent decreased from 14.5 percent in the prior year. The Engine Products segment has been negatively impacted by deteriorating global economic conditions, specifically in Transportation Products.

Worldwide sales of Off-road Products in the first quarter of Fiscal 2009 were $114.8 million, an increase of 9.7 percent from $104.6 million in the first quarter of the prior year. Domestic sales in Off-road Products increased 12.9 percent as strong aerospace and defense, agriculture and non-residential construction markets more than offset a decrease in residential construction. Spending in the U.S. residential construction market is down more than 20 percent over prior year. Strong demand for replacement filters for Black Hawk helicopters, along with retrofit sales for these helicopters, increased sales by $6.5 million in the quarter. International sales were up 6.1 percent from the first quarter of the prior year with increases in Europe and Asia of 4.6 percent and 11.0 percent, respectively. Sales to the European agriculture end market were strong in the quarter, offset by a decline in sales to construction end markets.

Worldwide sales in Transportation Products in the first quarter of Fiscal 2009 were $27.7 million, a decrease of 7.9 percent from $30.1 million in the first quarter of the prior year. International Transportation Products sales increased by 7.6 percent driven by increased sales in Asia of 10.1 percent while other regions remained relatively flat. Sales decreased in the United States by 19.5 percent primarily as a result of a 31 percent drop in medium duty build rates by the Company’s Customers over the prior year quarter.

Worldwide sales of Aftermarket Products in the first quarter were $166.2 million, an increase of 4.9 percent from $158.4 million in the first quarter of the prior year. Despite U.S. truck utilization rates decreasing two percent over prior year, the Company’s U.S. Aftermarket Products sales grew 7.6 percent driven by increases in retrofit emissions sales of $4.3 million in the quarter. International sales were up 2.5 percent from the prior year quarter, driven by a sales increase in Asia of 9.5 percent. Sales volumes increased in Asia as a result of the Company’s focus on expanding its sales and distribution presence across the region.

Industrial Products Segment For the first quarter of Fiscal 2009, worldwide sales in the Industrial Products segment were $264.5 million, an increase of 13.8 percent from $232.4 million in the first quarter of the prior year. Total first quarter international Industrial Products sales were up 12.8 percent compared to the same period in the prior year, while sales in the United States increased by 16.1 percent. Earnings before income taxes as a percentage of Industrial Products segment sales of 13.1 percent increased from 10.3 percent in the prior year. This earnings improvement over the prior year was driven by an increase in plant utilization due to higher volumes in the Industrial Filtration Solutions Products business, the impact of cost control measures and the non-recurrence of low margin large projects shipped in Fiscal 2008.

Worldwide sales of Industrial Filtration Solutions Products in the quarter were $155.2 million, an increase of 13.9 percent from $136.3 million in the prior year. International sales grew 15.4 percent over the prior year with sales in Europe and Asia showing increases of 9.7 percent and 30.8 percent, respectively. Although general economic conditions in Europe declined, demand remained strong for the Company’s Industrial Filtration Solutions products. The increase in Asia was partially due to the shipment of a large project in the quarter, which totaled $2.0 million. Domestic sales increased 11.0 percent over the prior year quarter. Machine tool consumption in the U.S. increased over a year ago, which contributed to healthy demand for the Company’s products. The impact of the recent acquisition of LMC West, Inc. also contributed approximately three percent of the Company’s U.S. sales increase.

Worldwide sales of the Company’s Gas Turbine Products in the first quarter were $59.9 million, an increase of 22.4 percent from sales of $48.9 million in the first quarter of the prior year. Growth continued to be good in both the power generation and oil and gas end markets. The Gas Turbine Products sales are typically large systems and as a result the shipments and revenues fluctuate from quarter to quarter.

Worldwide sales of Special Application Products in the quarter were $49.4 million, an increase of 4.7 percent from $47.2 million in the prior year period. Domestic Special Application Products sales increased 11.8 percent. International sales of Special Application Products increased 3.7 percent over the prior year, primarily in Europe which increased 32.6 percent due to sales of PTFE membranes, while sales in Asia decreased 1.0 percent due to a slowdown in demand for disk drive filters.

Liquidity and Capital Resources

The Company generated $51.8 million of cash and cash equivalents from operations during the first three months of Fiscal 2009. Operating cash flows increased by $30.0 million from the same period in the prior year primarily as a result of an increase in net earnings of $4.6 million and slower growth in accounts receivable balances which resulted in $19.8 million of additional cash flow from operations as compared to the prior year. Operating cash flows, additional borrowings and cash on hand were used to support $11.5 million in capital additions, the acquisition of Western Filter Corporation for $78.5 million, the repurchase of 0.8 million outstanding shares of the Company’s common stock for $32.8 million and the payment of $8.5 million in dividends. For additional information regarding share repurchases see Part II Item 2, “Unregistered Sales of Equity Securities and Use of Proceeds.”

At the end of the first quarter, the Company held $69.1 million in cash and cash equivalents, down from $83.4 million at July 31, 2008. Short-term debt totaled $206.9 million, up from $139.4 million at July 31, 2008, primarily due to the acquisition of Western Filter Corporation. The amount of unused lines of credit as of October 31, 2008 was approximately $373.0 million. Long-term debt of $173.7 million at October 31, 2008 decreased from $176.5 million at July 31, 2008, due to payments made on long-term debt, and represented 20.9 percent of total long-term capital, defined as long-term debt plus total shareholders’ equity, compared to 19.3 percent at July 31, 2008. The Company has not made and does not anticipate making any contributions to its U.S. pension plans and estimates that it will contribute up to an additional $4.0 million to its non-U.S. pension plans during the remainder of Fiscal 2009.

The following table summarizes the Company’s contractual obligations as of October 31, 2008 (in thousands):

Contractual Obligations	Payments Due by Period

	Total		Less than 1 year		1 – 3 years		3 – 5 Years		More than 5 years

Long-term debt obligations	$	178,309	$	5,120	$	5,334	$	42,598	$	125,257
Capital lease obligations		760		306		222		130		102
Interest on long-term obligations		63,305		8,587		16,021		13,116		25,581
Operating lease obligations		25,347		9,960		10,444		4,268		675
Purchase obligations ⁽¹⁾		161,726		154,472		6,237		1,017		—
Pension and deferred compensation ⁽²⁾		29,025		2,723		3,286		3,142		19,874

Total ⁽³⁾	$	458,472	$	181,168	$	41,544	$	64,271	$	171,489

(1)	Purchase obligations consist primarily of inventory, tooling, contract employment services and capital expenditures. The Company’s purchase orders for inventory are based on expected Customer demand, and quantities and dollar volumes are subject to change.

(2)

Pension and deferred compensation consists of long-term pension liabilities and salary and bonus deferrals elected by certain executives under the Company’s deferred compensation plan. Deferred compensation balances earn interest based on a treasury bond rate as defined by the plan and are payable at the election of the participants.

(3)

In addition to the above contractual obligations, the Company may be obligated for additional cash outflows of $32.4 million of potential tax obligations. The payment and timing of any such payments is affected by the ultimate resolution of the tax years that are under audit or remain subject to examination by the relevant taxing authorities.

At October 31, 2008, the Company had a contingent liability for standby letters of credit totaling $18.5 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 financing agreement and insurance contract terms as detailed in each letter of credit. At October 31, 2008, there were 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 $250 million. This facility expires on April 2, 2013. As of October 31, 2008, there was $175.0 million of borrowings under this facility.

Certain note agreements contain debt covenants related to working capital levels and limitations on indebtedness. As of October 31, 2008, the Company was in compliance with all debt covenants.

During the first quarter of Fiscal 2009, the global credit market began to experience a significant tightening of credit availability and interest rate volatility. This crisis resulted in reduced funding available for commercial banks and corporate debt issuers. As a result, capital market financing became

more expensive and less available. The Company has assessed the implications of these factors on its current business and believes that its current financial resources are sufficient to continue financing its operations. There can be no assurance, however, that the cost or availability of future borrowings will not be impacted by ongoing capital market disruptions.

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.

The Company does not have any off-balance sheet arrangements, with the exception of the guarantee of 50 percent of certain debt of its joint venture, Advanced Filtration Systems, Inc., as further discussed in Note H of the Company’s Notes to Condensed Consolidated Financial Statements.

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, 2008.

Outlook

Based on exchange rates in effect in November 2008, the Company anticipates that the resurgence in the strength of the U.S. Dollar will decrease Fiscal 2009 full year sales by approximately $133 million, or 6 percent, from Fiscal 2008. Including this foreign currency translation assumption, the Company expects full year sales in both the Engine and Industrial Products’ segments to be flat or slightly down and for total Company sales to be between $2.15 billion and $2.23 billion for the full year. In local currency, the Company expects low single-digit percentage sales growth in both segments and for the total company.

Engine Products Segment

	•	In NAFTA Transportation Products, the Company no longer expects a pre-buy in advance of the 2010 diesel emission regulations and as a result anticipates NAFTA Class eight truck builds by its Customers will remain flat through the remainder of Fiscal 2009. The Company also expects a decline in NAFTA class five to seven build rates and for new truck build rates to decline in Europe and Japan.
	•	The Company expects the NAFTA and Western European residential construction markets to remain weak. However, demand for coal and farm commodities, along with global infrastructure projects, is expected to generate year-over-year sales growth in the Company’s mining, heavy construction, and agriculture equipment end markets. The Company expects demand in the aerospace and defense end markets to remain strong and also to benefit from the recent acquisition of Western Filter.
	•	Aftermarket sales are expected to continue growing due to the Company’s ongoing expansion into new geographies and solid off-road equipment utilization. The Company also expects to continue benefiting from the increasing amount of equipment in the field with its PowerCore™ technology as well as the Company’s other new proprietary filtration systems.

Industrial Products Segment

	•	The Company’s Industrial Filtration Solutions’ sales are now projected to decrease due to the impact of foreign currency translation. The Company expects growing demand for new products to offset softening global manufacturing investment conditions.
	•	The Gas Turbine industry is expecting demand for gas turbines to continue growing through the remainder of Fiscal 2009. While the Company still anticipates unit volume growth in its gas turbine business from the demand for new power generation projects, the Company expects its overall gas turbine filter sales to decrease due to the impact of foreign currency translation.
	•	Special Applications Products’ sales are also expected to decrease due to the impact of foreign currency translation. Excluding this impact, the Company expects flat unit sales with lower disk drive filter sales being offset by growth in its membrane products’ sales.

Other

	•	The Company continues to expect to achieve its long-term gross margin target of 32.0 percent in Fiscal 2009 as we have seen lessening of the upward pressure in raw material costs and are benefiting from product cost reduction initiatives.
	•	The Company expects its operating margin will exceed the long-range target of 11 percent for the full year.
	•	The Company expects operating income to increase between 3 to 8 percent.
	•	The Company has several tax contingencies that may be concluded this fiscal year and could reduce its full year tax rate if resolved favorably. Due to the wide range of outcomes, the Company’s full year tax rate is now expected to be between 25 and 31 percent.
	•	The Company now expects capital expenditures to be between $60 and $70 million for the full year.

Forward-Looking Statements and Risk Factors

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 forward-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 in Item 1A of the Company’s Annual Report on Form 10-K for the year ended July 31, 2008, which could cause actual results to differ materially from historical results or those anticipated. These uncertainties and other risk factors include, but are not limited to risks associated with currency fluctuations, commodity prices, world economic factors, political factors, the company’s international operations, highly competitive markets, governmental laws and regulations, the implementation of our new information systems, and other factors listed in our Annual Report on Form 10-K and our reports on Form 10-Q.

In particular the Company desires to take advantage of the protections of the Private Securities Litigation Reform Act of 1995 in connection with the forward-looking statements made in this Quarterly Report on Form 10-Q. 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, 2008. See further discussion of these market risks in the Company’s Annual Report on Form 10-K for the year ended July 31, 2008.

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 Exchange Act). Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in applicable rules and forms, and (ii) accumulated and communicated to the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosure.

(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, 2008, 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

In accordance with SFAS No. 5, “Accounting for Contingencies,” (SFAS No. 5), the Company records provisions with respect to identified claims or lawsuits when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Claims and lawsuits are reviewed quarterly and provisions are taken or adjusted to reflect the status of a particular matter. The Company believes the recorded reserves in its consolidated financial statements are adequate in light of the probable and estimable outcomes. Any recorded liabilities were not material to the Company’s financial position, results of operation and liquidity and the Company does not believe that any of the currently identified claims or litigation will materially affect its financial position, results of operation and liquidity.

Item 1A. Risk Factors

There are inherent risks and uncertainties associated with our global operations that involve manufacturing and sale of products for highly demanding Customer applications throughout the world. These risks and uncertainties could adversely affect our operating performances or financial condition. The “Risk Factors” section in the Company’s Annual Report on Form 10-K for the year ended July 31, 2008 includes a discussion of these risks and uncertainties. There have been no material changes from the risk factors disclosed in the Company’s Annual Report on Form 10-K for the year ended July 31, 2008.

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

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, 2008.

Period		Average Price Paid per Share

August 1 – August 31, 2008	—		—	—	1,732,210 shares
September 1 – September 30, 2008	859,718	$	41.28	802,000	930,210 shares
October 1 – October 31, 2008	18,465	$	32.69	—	930,210 shares
Total	878,183	$	41.10	802,000	930,210 shares

(1)

On March 31, 2006, 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, replaced the existing authority that was authorized on January 17, 2003. There were no repurchases of common stock made outside of the Company’s current repurchase authorization during the quarter ended October 31, 2008. However, the “Total Number of Shares Purchased” column of the table above includes 76,183 previously owned shares tendered by option holders in payment of the exercise price of options during the quarter. While not considered repurchases of shares, the Company does at times withhold shares that would otherwise be issued under equity-based awards to cover the withholding taxes due as a result of exercising stock options or payment of equity-based awards.

Item 6. Exhibits

*3-A – Restated Certificate of Incorporation of Registrant as currently in effect (Filed as Exhibit 3-A to Form 10-Q Report for the First Quarter ended October 31, 2004)

*3-B – Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock of Registrant, dated as of March 3, 2006 (Filed as Exhibit 3-B to Form 10-Q Report for the First Quarter ended October 31, 2006)

*3-C – Amended and Restated Bylaws of Registrant (as of January 25, 2008) (Filed as Exhibit 3.1 to Form 8-K Report filed January 31, 2008)

*4 – **

*4-A – Preferred Stock Amended and Restated Rights Agreement between Registrant and Wells Fargo Bank, N.A., as Rights Agent, dated as of January 27, 2006 (Filed as Exhibit 4.1 to Form 8-K Report filed February 1, 2006)

10-A – 1980 Master Stock Compensation Plan as Amended

10-B – Form of Performance Award Agreement under 1991 Master Stock Compensation Plan

10-C – Deferred Compensation Plan for Non-employee Directors as amended

10-D – Independent Director Retirement and Benefit Plan as amended

10-E – 1991 Master Stock Compensation Plan as amended

10-F – Form of Restricted Stock Award under 1991 Master Stock Compensation Plan

10-G – Form of Agreement to Defer Compensation for certain Executive Officers

10-H – Stock Option Program for Non-employee Directors

10-I – Note Purchase Agreement among Donaldson Company, Inc. and certain listed Insurance Companies Dated as of July 15, 1998

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

________________________

*	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.

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 4, 2008	By:	/s/ William M. Cook
		William M. Cook Chairman, President and Chief Executive Officer (duly authorized officer)
Date: December 4, 2008	By:	/s/ Thomas R. VerHage
		Thomas R. VerHage Vice President, Chief Financial Officer (principal financial officer)
Date: December 4, 2008	By:	/s/ James F. Shaw
		James F. Shaw Controller (principal accounting officer)

Exhibit 10.A

DONALDSON COMPANY, INC.
1980 MASTER STOCK COMPENSATION PLAN

I. GENERAL

Section 1.01 Purposes of the Plan.

The purposes of the 1980 Master Stock Compensation Plan are to further the long-term growth earnings of Donaldson by offering stock options and performance awards as long-term incentives in addition to current compensation to those officers and key employees of Donaldson who will be largely responsible for such growth and to aid Donaldson in attracting and retaining persons of outstanding ability.

Section 1.02 Definitions.

For all purposes of the Plan, the following terms shall have the meanings assigned to them, unless the context otherwise requires:


	(a)	“Plan” means this 1980 Master Stock Compensation Plan.

	(b)	“Donaldson” means Donaldson Company, Inc. and its subsidiaries.

	(c)	“Common Stock” means the Common Stock of Donaldson, par value $5.00 per share.

	(d)	“Market Value” of Common Stock as of any date means the closing sales price on such date on the New York Stock Exchange, or if there was no sale on that date, on the next preceeding date on which a sale occurred.

	(e)	“Committee” means the subcommittee of the Human Resources Committee of the Board of Directors appointed to administer the Plan.

	(f)	“Change in Control”. 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 stockholders 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 25% or more of the combined voting power of Donaldson’s then outstanding securities or purchases shares of Common Stock pursuant to a tender offer or exchange offer other than an offer by Donaldson (“Offer”) for all, or any part of, the outstanding shares of


		Common Stock, (ii) during any period of two consecutive years (not including any period prior to the execution of this Agreement), 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, (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 25% 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 (the date upon which an event described in clause (i), (ii), (iii) or (iv) of this paragraph 1 (d) occurs shall be referred to herein as an “Acceleration Date”).

		Notwithstanding the foregoing, if an event first giving rise to a “potential change in control” involves a transaction proposed by the employee, and such proposed transaction results in a Change in Control hereunder (whether or not the transaction constituting such Change in Control is the same transaction the announcement of which first gave rise to a “potential change in control”), then such Change in Control shall be deemed to have not occurred with respect to the employee. For purposes of the Plan, a “potential change in control of Donaldson” shall be deemed to have occurred if (i) Donaldson enters into an agreement, the consummation of which would result in the occurrence of a Change in Control of Donaldson, (ii) any person (including Donaldson) publicly announces an intention to take or to consider taking actions which if consummated would constitute a Change in Control of Donaldson, (iii) Donaldson receives any written communication from any third party or parties, acting as principal or as authorized representative of a disclosed principal, which is publicly disclosed and proposes (or indicates a desire to engage in discussions relating to the possibility of or with a view toward) a transaction the consummation of which would result in the occurrence of a Change in Control, (iv) any person, other than a trustee or other fiduciary holding securities under an employee benefit plan of Donaldson (or a company owned, directly or indirectly, by the stockholders of Donaldson in


		substantially the same proportions as their ownership of stock of Donaldson), who is or becomes the beneficial owner, directly or indirectly, of securities of Donaldson representing 9.5% or more of the combined voting power of Donaldson’s then outstanding securities, increases his beneficial ownership of such securities by 5% or more over the percentage so owned by such person on the date hereof, or (v) the Board adopts a resolution to the effect that, for purposes of this Plan a potential change in control of Donaldson has occurred.

Section 1.03 Shares Subject to the Plan.

Subject to adjustments authorized by Section 1.05, an aggregate of 900,000 shares of Common Stock shall be subject to issuance under the Plan. The shares to be delivered under the Plan may be either authorized but unissued shares or shares held in the treasury of Donaldson.

In the event any options granted under the Plan shall terminate or expire for any reason without having been exercised in full, the shares not purchased under such options shall again be available under the Plan.

In the event restricted shares issued pursuant to a performance award shall be forfeited to Donaldson pursuant to the Plan, such shares shall again be available under the Plan.

Section 1.04 Administration of the Plan.

The Plan shall be administered by the Committee, consisting of not less than three directors of Donaldson. No director shall be eligible to be a member of the Committee if he is, or was at any time within one year prior to appointment to the Committee, eligible to participate in the Plan.

Subject to the provisions of the Plan, the Committee shall have full authority to:


	(1)	Select the employees to participate in the Plan.

	(2)	Determine the number of shares to be covered by options granted under the Plan and the terms of such options.

	(3)	Determine the size and terms of performance awards, the performance periods and objectives, and range of achievement percentages.

	(4)	Interpret, construe and implement the Plan.

All determinations of the Committee shall be by a majority of its members. Decisions and determinations by the Committee shall be final.

Section 1.05 Adjustments Upon Changes in Capitalization.

In the event of any change in the outstanding shares of Common Stock by reason of any stock dividend or split, recapitalization, merger, consolidation, combination

of shares or other corporate structure change, then, if the Committee shall determine in its sole discretion that such change equitably requires an adjustment in the maximum number of shares of Common Stock which may be distributed under the Plan, the number of shares subject to outstanding options and the option price, the number of Common Stock then subject to restrictions, the performance objectives, or any other feature of the Plan, then such adjustments shall be made by the Committee. Any shares issued on account of outstanding restricted shares shall be subjected to the same restrictions as the shares originally issued under the Plan.

Section 1.06 Effective Date.

The effective date of the Plan shall be the date upon which the Plan shall be approved by the shareholders of Donaldson.

Section 1.07 Termination of the Plan.

Unless sooner terminated pursuant to the terms hereof no options may be granted under the Plan after November 1, 1998 and the last year which may be used to calculate a performance award shall be the fiscal year ending on July 31, 1998.

Section 1.08 Amendment of Plan.

The Board of Directors of Donaldson may at any time terminate the Plan or from time to time amend or revise the terms of the Plan or any part thereof without further action of the shareholders; provided, however, that the Board of Directors may not, without shareholder approval, adopt an amendment which would:


	(a)	Increase the total number of shares which may be issued under the Plan except in connection with an adjustment pursuant to Section 1.05;

	(b)	Permit the granting of any option at a purchase price less than 100% of market value on date of grant or reduce the valuation to be assigned to shares issued pursuant to a performance award.

	(c)	Change the class of employees eligible to receive options or performance awards under the Plan; or

	(d)	Extend the term of the Plan or any option granted thereunder.

No termination or amendment of the Plan may impair an outstanding option or performance award except pursuant to Section 1.05 or deprive any employee of shares acquired through the Plan.

Section 1.09 No Registration Requirements.

Donaldson shall not be deemed by reason of issuance of any Common Stock under the Plan to have any obligation to register such shares under the Securities Act of 1933, as amended, or maintain in effect any registration of such shares. In addition, unless shares have been so registered, all options and performance awards granted under the Plan shall be on the condition that the acquisition of shares thereunder shall be

for investment purposes only and the employees acquiring the shares must bear the economic risk of the investment for an indefinite period of time since the shares so acquired cannot be sold unless they are subsequently registered or an exemption from such registration is available.

Section 1.10 Employment.

Nothing in the Plan and no grant of an option or performance award shall be deemed to grant any right of continued employment to a participating employee or to limit or waive any rights of Donaldson to terminate such employment at any time, with or without cause.

Section 1.11 Rights as Shareholders.

A participating employee shall have no rights whatsoever as a shareholder of Donaldson with respect to any shares covered by an option or performance award until the date of issuance of a stock certificate pursuant to the terms of such option or performance award.

Section 1.12 Withholding of Tax.

Each participant, as a condition precedent to the issuance of shares hereunder, shall make arrangements with Donaldson for payment or withholding of the amount of any tax required by any government authority to be withheld and paid by Donaldson to such government authority for the account of the participant.

Section 1.13 Reorganization.

In the event of a reorganization, merger or consolidation of Donaldson with one or more corporations in which Donaldson is not the surviving corporation, the Committee or the Board of Directors shall take the appropriate action described in (a) or (b) or both:


	(a)	Make appropriate provision for the equitable protection of outstanding options, performance awards and Restricted Performance Shares which are still subject to restrictions granted under the Plan by the substitution on an equitable basis of the securities of the corporation surviving the reorganization, merger or consolidation which will be issued with respect to Common Stock.

	(b)	Provide that all outstanding options and performance awards shall be immediately exercisable in full and that all restrictions with respect to Restricted Performance Shares shall lapse.

Section 1.14 Change in Control.

In the event of a Change in Control of Donaldson:


	(a)	any outstanding options granted under the Plan 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;

	(b)	performance objectives applicable to Awards granted under the Plan shall be deemed to have been met; and

	(c)	the restrictions applicable to any Restricted Performance Shares awarded under the Plan shall lapse and such shares shall become fully vested.

Without limiting the foregoing, as soon as practicable following the occurrence of a Change in Control, with the prior consent of the participant, the Committee shall pay to such participant the value of his outstanding options, Awards and Restricted Performance Shares, in the form of cash or shares of Common Stock (as determined by the Committee), based upon the Market Value of Common Stock on the date on which the Change in Control occurs.

II. STOCK OPTIONS

Section 2.01 Grant of Stock Options.

Any employee (including officers and employee directors) regularly employed on a salaried basis by Donaldson who shall be earning compensation in excess of $30,000 shall be eligible to receive options hereunder. No option may be granted to any employee who owns more than 5% of the Common Stock. Any employee who has been granted a performance award or option under this Plan or under any other stock option plan of Donaldson may be granted additional options hereunder.

Options shall be evidenced by written stock option agreements consistent with the terms of the Plan which shall be executed by Donaldson and the employee. The agreements, in such form as the Committee shall from time to time approve, shall contain the following terms and conditions:


	(a)	Time of Exercise. An employee may exercise an option at such time or times as determined by the Committee at the time of the grant; provided, however, that all rights to exercise an option shall expire not less than ten years after the date such option is granted.

	(b)	Purchase Price. The purchase price per share of Common Stock deliverable upon the exercise of an option shall be determined by the Committee at the time of grant, but shall not be less than 100% of the Market Value of the shares on the date the option is granted.

In addition, each employee shall agree to such other terms, provisions and conditions consistent with the Plan as may be determined by the Committee.

Section 2.02 Exercise of Options.

To exercise an option in whole or in part, the employee shall give written notice to Donaldson’s Treasurer at the principal offices of Donaldson of the exercise of the option, stating the number of shares with respect to which the employee is so


		upon the exercise of the option shall be determined by the Committee at the time of grant, but may not be less than 100% of the fair market value of the stock on the date the option is granted.

	(c)	Prior Options. Incentive stock options granted under the Plan shall not be exercisable while there is outstanding (within the meaning of the subsection (c) (7) of Section 422A of the Internal Revenue Code) any incentive stock option which was granted by Donaldson (or any parent or predecessor corporation thereof) to the employee before the granting of the option in question.

	(d)	Such other terms, provisions and conditions consistent with the Plan and not in conflict with Section 422A of the Internal Revenue Code as may be determined by the Committee.

In the case of an incentive stock option granted after December 31, 1980, the aggregate fair market value (determined as of the time the option is granted) of the stock for which any employee may be granted incentive stock options in any calendar year (under all such plans of Donaldson and any parent corporation) shall not exceed $100,000 plus any unused limit carryover to such year within the meaning of subsection (c)(4) of Section 422A of the Internal Revenue Code.

Section 2.06 Restoration (“Reload”) Options.

The Committee may grant “reload” options pursuant to which, subject to the, terms and conditions established by the Committee and any applicable requirements of Rule 16b-3 or any other applicable law, the employee would be granted a new option when the payment of the exercise price of a previously granted option is made by the delivery or attestation to ownership of Common Stock owned by the employee, as described in Section 2.02 hereof, which new option (i) would be an option to purchase the number of shares provided as consideration for, or withheld to pay taxes upon, the exercise of the previously granted option and (ii) would have a per share exercise price equal to the Market Value as of the date of grant of the new option. “Reload” options may be granted with respect to options previously granted under the Plan or in connection with any option at the time of grant of such option.

III. PERFORMANCE AWARDS

Section 3.01 Grant of Performance Awards.

The Committee will select as participants for performance awards under the Plan (the “Award”), from key executive full time salaried employees, a limited number of persons who are in a position to enhance the growth and profitability of Donaldson operations directly and significantly. No performance award may be granted to any employee who owns more than 5% of the Common Stock. Awards shall be granted in terms of dollars, to such participants in such amounts as the Committee shall determine in its sole discretion. At the time of granting an Award, the Committee shall select a performance period, which shall be one or more fiscal years of the Company, and shall select a performance objective for such period. The performance objective shall be

exercising and accompanying such notice with full payment of the exercise price for such number of shares. Payment of the exercise price may be made in cash or, with the consent of the Committee, in whole or in part in Common Stock valued at the Market Value on the day preceding the date of exercise. Subject to rules established by the Committee, the amount of any tax required to be paid or withheld pursuant to Section 1.12 may be satisfied by Donaldson withholding shares of Common Stock issued on exercise having a Market Value on the day preceding the date of exercise equal to such taxes; provided, that the number of shares so withheld shall be rounded up to avoid the necessity of issuing fractional shares.

Section 2.03 Effect of Termination of Employment or Death on an Option.

If the holder of an option shall cease to be employed by Donaldson for any reason other than death, he may, but only within the five years next succeeding such cessation of employment in the case of retirement or within the one year next succeeding such cessation of employment in any other case, exercise the option but only to the extent of the exercise rights which had accrued at the date of cessation of employment. In the event the holder of an option dies while employed by Donaldson or within an extended period following cessation of employment as provided in the preceding sentence, such option may be exercised within two years after the date of death, but only to the extent of the number of shares purchasable by such employee at the time such employee ceased to be an employee whether by death or otherwise, by such employee’s estate or by the person or persons who acquire the right to exercise such option by bequest, inheritance or otherwise by reason of such death. The foregoing provisions of this Section 2.03 are limited in the respect that no option shall be exercisable after the expiration of the stated term of the option.

Section 2.04 Non-Transferability of Options.

Stock options are not transferable by an employee other than by will or the laws of descent and distribution. During the employee’s lifetime, stock options may be exercised only by such employee.

Section 2.05 Incentive Stock Options.

At the discretion of the Committee, it is intended that options granted under the Plan may be incentive stock options in compliance with Section 422A of the Internal Revenue Code.

Incentive stock options shall be evidenced by written agreements consistent with the terms of the Plan which shall be executed by Donaldson and by the employee. The agreements, in such form as the Committee shall from time to time approve, shall contain the following terms and conditions.


	(a)	Time of Exercise. An employee may exercise the option at such time or times as determined by the Committee at the time of the grant; provided, however, that all rights to exercise the option shall expire 10 years after the date such option is granted.

	(b)	Purchase Price. The purchase price per share of common stock deliverable

expressed in terms of consolidated primary net earnings per share of Donaldson. When granting an Award, the Committee shall establish a range of percentage payments to be applied to the Award based on relative achievement of the performance objective over the performance period. The Award shall be subject to increase, or decrease through forfeiture, depending upon the percentage achievement of the performance objective over the performance period (the “Adjusted Award”). The Committee may confer and consult with Donaldson management in selecting performance objectives, but the Committee has the sole and final discretion in such selection. The Committee may select a performance period which commences prior to the date of the Award.

Section 3.02 Form and Timing of Payment of Performance Awards.

Payments to the participants shall normally be one-half in cash and one-half in shares of Common Stock. However, the Committee may authorize payments in other combinations of cash and shares or all in cash or all in shares.

The number of shares of Common Stock representing the stock portion of 100% achievement of the performance objective may be issued as Restricted Performance Shares at the time of the Award. For purposes of this Section 3.02, Restricted Performance Shares shall be valued at the Market Value on the date of the Award. No cash portion of an Award shall be paid until after the performance period and the determination of the Adjusted Award.

Promptly after the audited financial statements for the last fiscal year of the performance period are available, the Committee shall determine the percentage achievement of the performance objective and any adjustments to be made to the amount of the Award. As soon as practicable thereafter, the cash portion of the Adjusted Award shall be determined and paid. The final number of shares of Common Stock included in the Adjusted Award shall be determined and the restrictions shall lapse on the Restricted Performance Shares covered by the Adjusted Award. Any Restricted Performance Shares issued in excess of the stock portion of the Adjusted Award shall be forfeited to the Company. Any additional shares of Common Stock required by the Adjusted Award shall be issued, valued at the Market Value on the last day of the performance period.

Section 3.03 Restricted Performance Shares.

Restricted Performance Shares issued pursuant to the Performance Share Plan shall be subject to such restrictions as shall be determined by the Committee. The shares may not be sold, pledged, assigned or otherwise transferred until the restrictions imposed by the Committee shall have been lifted or shall have expired by their terms. Participants will be entitled to receive any cash dividends paid on and to vote Restricted Performance Shares registered in their names. The Committee may impose such other restrictions on any shares issued pursuant to the Plan as it may deem advisable; provided that no such restriction will retroactively affect shares already issued. All certificates evidencing Restricted Performance Shares shall bear an appropriate legend restricting transfer during the applicable restriction period and shall be held by Donaldson until such restrictions lapse.

Section 3.04 Determination of Consolidated Primary Net Earnings Per Share.

Consolidated primary net earnings per share to be used in setting performance objectives and measuring achievement thereof shall be based on the consolidated primary net earnings per share of the Company and its consolidated subsidiaries as reported in the audited consolidated statement of earnings for the applicable fiscal year(s). However, for such purpose, the Committee may make adjustments in the consolidated primary net earnings per share to adjust for the effect of extraordinary items on earnings per share during a performance period.

Section 3.05 Effect of Termination of Employment on a Performance Award.

In the event a participant voluntarily ceases to perform executive duties for Donaldson during the performance period, any right or entitlement to or in the Award, including Restricted Performance Shares which are still subject to restrictions, shall be forfeited upon such termination and returned to Donaldson. If a participant ceases to perform executive duties by reason of death, disability, retirement after age 65 or discharge otherwise than for cause, the Award shall be adjusted and settled on the basis of the number of full calendar months elapsed since the start of the performance period divided by the total number of months in the start of the performance period divided by the total number of months in the performance period times the performance percentage based upon a projection of the rate at which the performance objective has been met as of the date on which the participant ceases to perform such duties. Such rate shall be determined from Donaldson’s financial statements through the fiscal quarter immediately preceding or ending on the date of such cessation of duties.

“Cause” is defined to mean gross negligence, willful misconduct, refusal to carry out an order of a superior or any disloyal action inimical to Donaldson.

rfv1189
10/93

Exhibit 10.B

DONALDSON COMPANY, INC.

Performance Award Agreement

This Agreement is made as of the _____ day of _____, 19___, between Donaldson Company, Inc., a Delaware corporation (the “Company”) and _______________________ (the “Participant”) pursuant to the Donaldson Company, Inc. 1991 Master Stock Compensation Plan (the “Plan”).

WITNESSETH:

WHEREAS, the Human Resources Committee of the Board of Directors of the Company have decided to enter into agreements with key executives to provide for long term performance awards, and

WHEREAS, the Plan contemplates that an award should be evidenced by a written agreement, executed by the Company and the Participant, containing such restrictions, terms and conditions as may be required by the Plan or the Committee.

NOW, THEREFORE, in consideration of the mutual agreements hereinafter set forth and of other good and valuable consideration, the Participant and the Company hereby agree as follows:

1. Definitions. Participant acknowledges receipt of a copy of the Plan and reference is made to the Plan for definition of certain terms used in this Agreement.


	(a)	“Award Delivery Date” means a date no more than 60 days nor less than 45 days after the end of an Incentive Cycle or such earlier date as hereinafter provided.

	(b)	“Incentive Cycle” is the three consecutive year period set forth in the attached Exhibit A.

	(c)	“Award Split” means Award split between business/corporate Performance Objectives for each Participant as determined by the Committee and set forth in the attached Exhibit A.

	(d)	“Performance Objective” means the primary net earnings per share resulting from the Return on Investment and Compound Sales Growth determined by the Committee and set forth in Exhibit A.

	(e)	“Return on Investment” and “Sales” for purposes of this Plan shall have the meaning and value set forth separately for each operating group and corporate in the monthly operating reports published by the Company’s Accounting Department.

	(f)	“Vesting Date” shall be July 31, 19____.

2. Award. The Company hereby grants to the Participant an award (the “Award”) based on the number of shares of Common Stock of the Company as set forth in the attached Exhibit A (“Performance Units”) subject to the restrictions, terms and conditions set forth below and in the Plan.

3. Award Delivery. Except as provided in Paragraphs 5 and 6 below, the Award will be received only if the Performance Objectives set forth in Exhibit A have been achieved by the end of the Incentive Cycle. The Award shall be calculated by multiplying the Performance Units times a point, in an interpolation of the Award Value Matrix, that coincides with the intersection of the respective Performance Objectives’ results. The Award shall be increased for Earnings Per Share consistency as set forth in Exhibit A. If applicable, other Award characteristics have also been referenced in Exhibit A. To avoid the necessity of issuing fractional shares, fractional amounts will be applied to tax withholding requirements.

4. Performance Objectives Alteration. The Performance Objectives may not be changed. Provided, however, that in the event of an acquisition, disposition or other change which, in the judgment of the Committee, may have a significant effect on particular Performance Objectives, the Committee may adopt such changes in the applicable Performance Objectives as it shall, in its sole discretion, deem equitable and appropriate to achieve the purpose of the Plan.

5. Termination and Transfer.


	(a)	If the Plan is terminated or Participant ceases to be an employee by reason of retirement (as defined in the Company’s Employee Retirement Plan), disability (as determined under the Company’s Long Term Disability Plan), or death prior to the Vesting Date, the Award earned will be based on actual results compared to the Performance Objectives at the end of the Incentive Cycle and multiplied by a fraction whose numerator is the number of months completed in the cycle and


		denominator is thirty-six with delivery on the Award Delivery Date.

	(b)	If Participant ceases to be an employee for any other reason than stated in (a) above, participation in the Plan will cease and the Award shall be immediately and irrevocably forfeited.

	(c)	If a participant transfers to an ineligible position, the Award earned will be based on actual results compared to the Performance Objectives at the end of the Incentive Cycle and multiplied by a fraction whose numerator is the number of months completed in the cycle and denominator is thirty-six with delivery on the Award Delivery Date.

6. Reorganization. In the event of a reorganization, merger or consolidation of the Company with one or more Corporations in which the Company is not the surviving Corporation or in the event a Change in Control shall have occurred, the Performance Objectives shall be deemed to have been met for the period ending, respectively, on a date prior to such reorganization, merger or consolidation, as determined by the Committee or on the date on which the Change in Control occurs and, the Award shall be calculated in the same manner as provided under Section 5(a).

7. Miscellaneous.


	(a)	The rights and interest under this Agreement or the Plan may not be assigned, pledged or transferred except by will or the laws of descent and distribution.

	(b)	The Company shall have the right to deduct from all Awards any taxes required by law to be withheld.

	(c)	Nothing in the Plan or in this Agreement shall be deemed to grant any right of continued employment to Participant or to limit or waive any rights of the Company to terminate such employment at any time, with or without cause.

	(d)	The Plan shall be unfunded. The Company shall not be required to establish any special or separate fund or to make any other segregation of assets or assure delivery of the Award under this Agreement. Any liability of the Company to Participant with respect to the Award shall be based solely upon any contractual obligations of this Agreement or that may be created by the Plan; no such obligation shall be deemed to be secured by any pledge or any encumbrance on any property of the Company.

	(e)	The Company, the Company’s Board of Directors, the Committee, the officers and other employees and agents of the Company shall be fully protected in relying in good faith on the computations and reports made pursuant to or in connection with the Plan by the Company’s accountants or independent public accountants.

	(f)	This Agreement is subject to the requirement that, if at any time the Committee determines, in its sole discretion, that the consent or approval of any governmental regulatory body is necessary or desirable as a condition of, or in connection with, the Award or delivery of the Award, no delivery shall be made unless such consent or approval has been obtained free of any conditions not acceptable to the Committee.

	(g)	Participant may elect to defer receipt of the award delivery until January of the year following the Award Delivery Date by executing an Award Delivery Deferral form prior to the Vesting Date.

IN WITNESS WHEREOF, Donaldson and the Participant have duly executed Exhibit A to this Agreement effective the day and year first above written.

EXHIBIT A

DONALDSON COMPANY, INC.

INCENTIVE CYCLE: August 1, 19__ to July 31, 19__

PARTICIPANT: __________________________

PERFORMANCE UNITS: ________

PERFORMANCE OBJECTIVES:


		Compound Sales Growth Per Year	Return on Investment

	Maximum	___________	___________
Corporate	Target	___________	___________
Performance	Threshold	___________	___________

	Maximum	___________	___________
Group	Target	___________	___________
Performance	Threshold	___________	___________

AWARD SPLIT: Corporate __________% Group _________%


AWARD VALUE MATRIX:

COMPOUND	Maximum	1.00	1.25	1.50
SALES GROWTH	Target	.75	1.00	1.25
	Threshold	.50	.75	1.00
		Threshold	Target	Maximum

RETURN ON INVESTMENT


CONSISTENCY BONUS:	If Earnings per Share increase by at least 5% each year of the Incentive Cycle and the threshold Corporate Performance Objectives are achieved, the Award value shall be increased by 25%.

OTHER AWARD CHARACTERISTICS:


		Accepted _____________, 19___.


PARTICIPANT		DONALDSON COMPANY, INC.

Exhibit 10.C

DONALDSON COMPANY, INC.

COMPENSATION PLAN FOR NON-EMPLOYEE DIRECTORS


1.	PURPOSE

	The purpose of the Plan is to enable non-employee Directors of Donaldson Company, Inc., (the “Company”) to elect to receive their fees as members of the Board of Directors and Committees of the Board in the form most advantageous to them. The Plan permits an election to defer such compensation and accumulate it with interest at the same rate as the Company has obtained for the Fixed Income Option of its Salaried Retirment Savings (401(k)) Plan.

2.	EFFECTIVE DATE

	November 1, 1985

3.	ELIBIBILITY

	All members of the Board of Directors who are not employees of the Company.

4.	COMPENSATION COVERED BY THE PLAN

	The compensation covered by the Plan will be fees paid to members of the Board of Directors for their services as such. Special compensation for services to the Company as part of their business or professional activities, such as legal, investment advisory and like services, will not be compensation for purposes of this Plan.

5.	ELECTION TO DEFER

	Each Director may, in lieu of receiving current compensation, elect to defer:

		A.	All compensation;

		B.	A designated percentage of the compensation; (in 10% increments)

6.	ACCOUNTING FOR DEFERRED COMPENSATION

	The Company will establish an account (“Deferral Account”) for each Director who has elected to defer compensation and will credit said account on the last day of each month with the amount of deferred compensation earned during that month.


		A.	The Company shall also include interest, quarterly, on the average monthly balance held in the Deferral Account. The rate of interest to be credited shall be the same rate of interest as applied in the Fixed Income Option of the Company’s Salaried Retirement Savings (401(k)) Plan.

		B.	The Company may provide other ways for ascertaining the applicable interest and allow the Director to elect which of such ways shall apply to his account.

7.	FUNDING OF THE DEFERRAL ACCOUNT

	The amounts credited to each Director in the Deferral Account shall not be held by the Company in a trust, escrow or similar fiduciary capacity, and neither the Director, nor any legal representative, shall have any right against the Company with respect to any portion of the account except as a general unsecured creditor of the Company.

8.	DISTRIBUTION OF DEFERRAL COMPENSATION

	At the time of the election to defer, each Director shall elect the time and manner in which the value of his Deferral Account shall be distributed. Such election shall be irrevocable when made with respect to the current plan year. The Director shall be entitled to receive, or to commence receiving, distributions from the Deferral Account as follows:

		A.	On a date set by the Director;

		B.	Upon the attainment of an age determined by the Director;

		C.	On the occurrence of a stated event, such as his death, retirement from his principal business activity, termination of services as a Director, disability or any other event or occurrence stipulated by him and approved by the Administrator.

	Each Director shall be entitled to receive distributions from the Deferral Account in any one of the following forms:

		D.	In a lump sum;

		E.	In approximately equal quarterly installments over a period of years stipulated by him;

		F.	In approximately equal quarterly installments with a value stipulated by him until the Deferral Account is exhausted; or

		G.	Any other form or manner of distribution determined by him and approved by the Administrator.

	Notwithstanding any other provision of this Plan, upon the occurrence of a change in control, all elections to defer compensation under this Plan shall immediately terminate, all Deferral Accounts shall be


	adjusted for contributions, distributions and interest credits through to the date of the change in control and all Deferral Accounts shall be distributed to the Director (or the Beneficiary of a deceased Director) in a single lump sum cash payment within thirty (30) days of the date of the change in control. For this purpose, change in control shall have the meaning specified in the “1989 Amendment to Donaldson Company, Inc. 1980 Master Stock Compensation Plan” as the same may be amended from time to time.

9.	MANNER OF ELECTION

	On or before March 1, 1986 and thereafter prior to December 1 of each year, each Director shall be entitled to file an instrument with the Administrator exercising his election under the Plan. Such election may be revoked or amended at any time, pursuant to a written notice sent to the Plan Administrator. The revocation or amendment will become effective as of the following December 1. If a Director does not file an instrument under this plan, his compensation shall be paid to him in cash on a non-deferral basis.

10.	DISTRIBUTION IN EVENT OF DEATH

	In the event of Death, distribution of the account will be made to the Beneficiary named by the Director. If no such Beneficiary has been named, to that person who would have a right to receive such distribution by will or by the applicable laws of descent and distribution.

11.	ADMINISTRATION OF THE PLAN

	The Administrator of the Plan shall be the Secretary of the Company. The Administrator shall interpret the Plan and make all decisions with respect to the rights of Directors hereunder. The Company shall at least annually (August 31 of each year) supply each participating director with a statement of their account.

12.	AMENDMENT OR TERMINATION

	This Plan may be amended or terminated at any time by the Board of Directors; provided, however, that the rights of a Director or former Directors theretofore accrued under the Plan shall not thereby be affected without their consent.

rfv1311

Exhibit 10.D

DONALDSON COMPANY, INC.

INDEPENDENT DIRECTOR RETIREMENT AND DEATH BENEFIT PLAN

This Independent Director Retirement and Death Benefit Plan (the “Plan”) has been adopted by the Board of Directors (the “Board”) of Donaldson Company, Inc. (the “Company”) as of August 1, 1987 (the “Effective Date”).


1.	ELIGIBILITY

	Persons who were directors of the Company on the Effective Date, or who become directors of the Company after the Effective Date, and are neither employees of the Company or its subsidiaries nor former employees of the Company or its subsidiaries (“Participants”) will become eligible to receive benefits as and to the extent provided under Sections 2 and 3 of the Plan.

2.	RETIREMENT OR OTHER TERMINATION: ELIGIBILITY

	When a Participant ceases to be a director of the Company because of (i) retirement, (ii) resignation, (iii) failure to be reelected to a succeeding term as a director following expiration of the director’s term of office; (iv) involuntary termination other than removal for cause, (v) death or (vi) disability, (in each of which events the directorship of the Participant is herein said to “Terminate”), the Participant shall be eligible to receive benefits hereunder, under the following conditions:

	(a)	Before Participant has Completed five (5) full years of Service as a Director

	Benefits will be payable only in the event of the Participants’s death while serving as a member of the Board.

	(b)	After Participant has completed five (5) full years of Service as a Director

	Benefits will be payable under the following conditions:

		(1)	Retirement Under Terms of the Donaldson Company, Inc. Directors’ Retirement Policy

			Participant Terminates as a result of retirement as required under the terms of the Donaldson Company, Inc. Directors’ Retirement Policy then in effect.

		(2)	Resignation

			Participant Terminates as a result of a voluntary resignation.

		(3)	Failure to be Reelected

			Participant Terminates by reason of his/her failure to be reelected to a succeeding term as a director when the Participant’s term as director expires.


		(4)	Involuntary Termination

			Participant Terminates otherwise than by Participant’s voluntary act, and otherwise than be removal for cause (i.e., proven dishonesty, gross misconduct or dereliction of duty) due to conflicts of interest such as outlined in the Company’s Code of Conduct. A Participant may be required to Terminate because of the Company’s entry into a new business, market, activity or relationship which, as determined by that Participant with the concurrence of the Board, creates a conflict between the pre-existing interests of the Participant and the interests of the Company.

		(5)	Death

			Participant Terminates by reason of death.

		(6)	Disability

			Participant Terminates following a determination by the Company’s Board of Directors that Participant is unable to fulfill the duties of a director of the Company by reason of disability, however caused.


3.	BENEFIT AMOUNT AND PAYMENTS

	(a)	Benefit Amount

		A Participant who becomes eligible to receive benefits under the Plan shall be entitled to a benefit equal to the final annual director retainer fee paid to that participant.

	(b)	Benefit Payments

		Payments of benefits (“Benefit Payments”) to a Participant shall be made in equal annual installments over a period equal to the number of years of the Participant’s service as a director of the Company or its subsidiaries up to a maximum of ten (10) years (for directors retiring after December 1, 1992 fifteen (15) years). Provided that if a Participant has completed five (5) full years of service, a partial year of service will be credited as a full year if .50 or greater.

		If the Participant elects, in writing at least one year prior to termination, a lump sum amount equal to the then present value of Benefit Payments determined in the same manner as set forth in sub section (iv) of this Section 3 but as of Participant’s commencement date as hereinafter provided, shall be paid within sixty (60) days after the commencement date. The election may be made or changed anytime while a director; provided, that the election shall be irrevocable after a date one year prior to termination.

		Exception:

		A Participant who terminates because of death shall be credited with a full fifteen (15) years of service regardless of that Participant’s period of service as a director of the Company or its subsidiaries.


	Benefits will commence on the later of:

		(i)	the January 1 next following the date on which the Participant Terminates; or

		(ii)	for terminated Participants, the January 1 next following the date on which (a) the Participant attains age sixty-five (65) or (b) (if earlier) the Participant dies;

	except that:

		(iii)	benefits to a Participant who Terminates upon a determination of disability under Section 2 (b) (2) shall become payable commencing the January 1 next following the date on which the Participant Terminates, notwithstanding that the Participant has not attained age sixty-five (65) at that time; and

		(iv)	benefits to be paid after a Participant’s death shall be settled, if the Participant had so elected in writing, by payment to the Participant’s designated beneficiary within sixty (60) days after death of a lump sum amount equal to the then present value of unpaid Benefit Payments determined by use of the immediate annuity rate being applied at the date of the Participant’s death by the Pension Benefit Guaranty Corporation. If not so elected, any remaining installments will be paid to the Participant’s designated beneficiary.

			Notwithstanding anything to the contrary, the Board in its sole and absolute discretion may at any time and for any reason elect to accelerate all or any portion of the Benefit Payments payable to (or with respect to) all or less than all of the Participants.

4.	ADMINISTRATION

	(a)	Taxes

		The Company shall withhold federal, state or local taxes from Benefit Payments to the extent required by law.

	(b)	Non-Funded

		The Company’s obligations under the Plan shall be an unfunded and unsecured promise to pay. Any assets which the Company may acquire to help meet its financial liabilities are and remain general assets of the Company subject to the claims of its creditors. The company does not give, nor does any Participant receive, any beneficial ownership interest in any asset of the Company.

	(c)	Continuation of Directorship

		The Plan shall not be deemed to give any Participant the right to continue as a director of the Company.

	(d)	Payments After Death


	Upon a Participant’s death, any Benefit Payments (including a lump-sum settlement elected under Section 3(b) (iv) payable with respect to that Participant, whether or not such payment had commenced, shall be paid to the beneficiary or beneficiaries who had been designated in writing to the Company by said Participant, or if such designation had been made, to said Participant’s estate.

(e)	Payments Due Incompetents or Minors

	If the Board determines that any person to whom a payment is due hereunder is unable to care for his or her affairs because of physical or mental disability, or that such person is a minor, the Company shall have the authority to cause payments becoming due to such person to be made for the benefit of such person to any individual or entity deemed appropriate by the Company without responsibility of the Company to see to the application of such payments and in complete discharge of the obligations of the Company under the Plan.

(f)	Assignability

	Except insofar as this provision may be contrary to applicable law, no sale, transfer, alienation, assignment, pledge, collateralization, or attachment of any benefits under the Plan shall be valid or recognized by the Company.

(g)	Amendment and Termination

	The Board necessarily reserves the right to amend the Plan from time to time, or to terminate the Plan at any time, except that, notwithstanding such amendment or termination, each Participant shall receive Benefit Payments at least equivalent to

	(i)	Benefit Payments the first of which become payable to or with respect to the Participant under the Plan prior to the date of amendment or termination (whether or not such first payment had been made); or

	(ii)	Benefit Payments none of which had become payable prior to the date of amendment or termination but to which the Participant had become entitled prior to such date because the Participant had Terminated; or

	(iii)	Benefit Payments to which the Participant later would have become entitled when the Participant Terminates, and which would have become payable to the Participant, if (a) the Plan had provided that the Participant receives credit under Section 3(b) hereof only for years of service as a director of the Company or its subsidiaries completed up to the date of amendment or termination, and (b) the Plan had not been terminated or amended (otherwise than to incorporate the assumption in (a) of this clause (iii)).

(h)	Governing Law


		The Plan shall be governed by the laws of the State of Minnesota to the extent not superseded by federal law.

	(i)	Company

		The term “Company” as used in the Plan shall include any successor to the Company by reason of merger, consolidation, the purchase of all or substantially all of the Company’s assets, or otherwise.

rfv2383

DONALDSON COMPANY, INC.
INDEPENDENT DIRECTOR RETIREMENT AND DEATH BENEFIT PLAN
BENEFICIARY DESIGNATIONS



	Date

TO: CHAIRMAN OF THE BOARD

I hereby designate the following as my beneficiary or beneficiaries as provided for in the Donaldson company, Inc., Independent Director Retirement and Death Benefit Plan to receive my account under said Plan in the event of my death. I revoke all beneficiary designations previously executed by me under the Plan.


1.

	Full Name	Relation	Social Security Number

2.

	Full Name	Relation	Social Security Number

3.

	Full Name	Relation	Social Security Number

4.

	Full Name	Relation	Social Security Number

I direct that the beneficiaries named above who are living at my death receive my account in the following manner:


	____		The entire account to person No. 1, if living. If person No. 1 is not living, then to person No. 2, etc.

	____		To person No. 1, if living. If person No. 1 is not living, then to persons No. ____ and ____ then living, in equal amounts.

	____		To persons No. ____ and ____ then living, in equal amounts.

I elect that payment be made to my designated beneficiary or beneficiaries as follows:


	____		Within sixty (60) days after death of a lump sum amount equal to the then present value of unpaid Benefit Payments determined by use of the immediate annuity rate being applied at the date of my death by the Pension Benefit Guaranty Corporation.

	____		In annual installments.




		Signature


Witness

rfv2383

Exhibit 10.E

DONALDSON COMPANY, INC.
1991 MASTER STOCK COMPENSATION PLAN

I. GENERAL

Section 1.01 Purpose of the Plan.

The purpose of the 1991 Master Stock Compensation Plan is to enhance the long-term profitability of Donaldson and shareholder value by offering stock based incentives in addition to current compensation to those individuals who are key to the growth and success of Donaldson.

Section 1.02 Definitions.

For all purposes of the Plan, the following terms shall have the meanings assigned to them, unless the context otherwise requires:

(a) “Award” means any award described in Parts II and III.

(b) “Award Agreement” means an agreement entered into between Donaldson and a Participant setting forth the terms and conditions applicable to the Award granted to the Participant.

(c) “Change in Control”. 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 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 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 (the date upon which an event described in clause (i), (ii), (iii) or (iv) of this paragraph (c) occurs shall be referred to herein as an “Acceleration Date”).

(d) “Committee” means the subcommittee (or subcommittees as may be necessary) of the Human Resources Committee of the Board of Directors (the “Board”) appointed to administer the Plan and constituted so as to satisfy the legal requirements, including any such requirements for disinterested administration, imposed by Rule 16b-3 of the Exchange Act (“Rule 16b-3”).

(e) “Common Stock” means the Common Stock of Donaldson, par value $5.00 per share, including treasury Shares and authorized but unissued Shares or any security of Donaldson issued in substitution, exchange or in lieu thereof.

(f) “Donaldson” means Donaldson Company, Inc. and its Subsidiaries.

(g) “Limitation Amount” means with respect to any Plan Year, one and one half (1½) percent of the Outstanding Shares.

(h) “Market Value” of Common Stock as of any date means the closing sales price on such date on the New York Stock Exchange, or if there was no sale on that date, then, unless otherwise specifically set forth hereinafter, on the preceding date on which a sale occurred.

(i) “Outstanding Shares” means, with respect to any Plan Year, the outstanding Shares of Common Stock, outstanding Common Stock equivalents (as determined by Donaldson in the calculation of earnings per share on a fully diluted basis) and Treasury Shares as reported in the Annual Report on Form 10-K of Donaldson for the most recent fiscal year that ends during the Plan Year.

(j) “Participant” means an individual who has been granted an Award pursuant to the Plan.

(k) “Plan” means this 1991 Master Stock Compensation Plan.

(l) “Plan Year” means the calendar year.

(m) “Shares” means shares of Common Stock.

(n) “Subsidiary” means any corporation or other entity of which a majority of the voting power is owned, directly or indirectly, by Donaldson, or which is otherwise controlled by Donaldson.

Section 1.03 Shares Subject to the Plan.

(a) Subject to adjustments authorized by Section 1.05 and the provisions of the remaining subsections of this Section 1.03, the number of Shares with respect to which Awards may be issued under the Plan in any Plan Year shall not exceed the Limitation Amount; provided that any Shares with respect to which Awards may be issued, but are not issued, under the Plan in any Plan Year shall be carried forward and shall be available to be covered by Awards issued in any subsequent Plan Year in which Awards may be issued under the Plan.

(b) In the event any options granted under the Plan shall terminate or expire for any reason without having been exercised in full, the Shares not purchased under such options shall again be available under the Plan.

(c) In the event Shares that are the subject of Awards under the Plan are subsequently forfeited to Donaldson pursuant to the applicable restrictions or Award Agreement, such Shares shall again be available under the Plan.

(d) If a Participant exercises a stock appreciation right, any Shares covered by the stock appreciation right in excess of the number of Shares issued (or, in the case of a settlement in cash or any other form of property, in excess of the number of Shares equal in value to the amount of such settlement, based on the Market Value of such Shares on the date of such exercise) shall again be available under the Plan.

(e) If pursuant to the terms of the Plan a Participant uses Shares to (i) pay a purchase or exercise price, including an option exercise price, or (ii) satisfy tax withholding or payment requirements, such Shares shall become available for grant under the Plan; provided, however, that such Shares shall not become available for grant under the Plan unless the Committee determines that this provision would be in compliance with the applicable requirements of Rule 16b-3 and other applicable law.

(f) The Shares that again become available under the Plan pursuant to Subsections (b), (c), and (d) above, and the Shares that become available under the Plan pursuant to Subsection (e) above, shall be in addition to the number of Shares authorized by Subsection (a) above.

(g) Subject to the foregoing provisions of this Section 1.03, the grant of an Award, the payment or settlement of which may be made in Shares, shall be deemed to be a grant of Shares equal to the greater of the number of Shares that may be issued under the Award or the number of Shares on the basis of which the Award is calculated. The grant of an Award that is convertible into, or exercisable for, Shares shall be deemed to be a grant of Shares equal to the number of Shares into which the Award is convertible or exercisable on the date of grant. Where the value of an Award is variable on the date it is granted, the value of the Award

shall be deemed to be equal to the maximum limitation on the number of Shares that may be granted or purchased under the Award. Where two or more Awards are granted with respect to the same Shares, such Shares shall be taken into account only once for purposes of this Section 1.03.

(h) Shares authorized or issued under any other plan or which are not specifically issued pursuant to this Plan, shall not reduce the number of Shares with respect to which Awards may be issued under this Plan.

Section 1.04 Administration of the Plan.

The Plan shall be administered by the Committee which shall in its sole discretion determine:

(a) the individuals to participate in the Plan;

(b) the number of Shares to be covered by Awards granted under the Plan and the price to be paid, if any, for such Shares;

(d) the provisions governing the disposition of an Award in the event of retirement, disability, death or other termination of a Participant’s employment or relationship to Donaldson; and

(e) the interpretation, construction and implementation of the Plan.

All determinations of the Committee shall be by a majority of its members. Decisions and determinations by the Committee shall be final.

Section 1.05 Adjustments Upon Changes in Capitalization.

(a) In the event that the Committee shall determine that any dividend or other distribution (whether in the form of cash, Shares, other securities, or other property), extraordinary cash dividend, recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, combination, repurchase, or exchange of Shares or other securities, exercisability of stock purchase rights received under the rights plan, issuance of warrants or other rights to purchase Shares or other securities, or other similar corporate transaction or event affects the Shares with respect to which Awards have been or may be issued under the Plan, such that an adjustment is determined by the Committee to be appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan, then the Committee, in such manner as the Committee may deem equitable, may adjust any or all of (i) the number and type of Shares that thereafter may be made the subject of Awards, (ii) the number and type of Shares (or other securities or property) subject to outstanding Awards, and (iii) the grant, purchase, or exercise price with respect to any Award, or, if deemed appropriate, make provision for a cash payment to the holder of an outstanding Award; provided, in each case, that with respect to incentive stock options, no such adjustment shall be authorized to the extent that such adjustment would cause such options to violate Section 422 of the Internal Revenue Code of 1988 as amended (the “Code”) or any successor provision; and provided further, that the number of Shares subject to any Award denominated in Shares shall always be a whole number.

(b) In the event of a corporate merger, consolidation, acquisition of property or stock, reorganization or liquidation, the Committee shall be authorized to cause the Corporation to issue or to assume stock options or stock appreciation rights, whether or not in a transaction to which Section 424(a) of the Code applies, by means of substitution of new options or rights for previously issued options or rights or an assumption or previously issued options or rights, but only if and to the extent that such substitution or assumption is consistent with the other provisions of the Plan, with the applicable requirements of Rule 16b-3, and with any other applicable law.

Section 1.06 Effective Date.

The effective date of the Plan shall be the date upon which the Plan shall be approved by the shareholders of Donaldson. Unless the Plan is terminated earlier in accordance with Section 1.07 hereof, the Plan shall remain in full force and effect until the close of business on December 31, 2001, at which time the right to grant Awards under the Plan shall terminate automatically unless the Shareholders of Donaldson approve an extension or renewal. Any Awards granted under the Plan before such termination date shall continue to be governed, thereafter, by the terms of the Plan and of the Awards.

Section 1.07 Amendment or Termination of Plan.

The Board may at any time terminate the Plan or from time to time amend or revise the terms of the Plan or any part thereof without further action of the shareholders; provided, however, that the Board may not amend the Plan in any manner or by any procedure that would result in noncompliance with Rule 16b-3 or any applicable law.

Notwithstanding any of the above, on or after the occurrence of a Change in Control, no direct or indirect alteration, amendment, suspension, termination or discontinuance of the Plan, no establishment or modification of rules, regulations or procedures under the Plan, no interpretation of the Plan or determination under the Plan, and no exercise of authority or discretion vested in the Committee under any provision of the Plan (collectively or individually, a “Change”) shall be made if such Change ⁽¹⁾ is not required by applicable law, necessary to meet the requirements of Rule 16b-3, or required to preserve the qualification of incentive stock options under the Code, and ⁽²⁾ would have the effect of:

(i) eliminating, reducing or otherwise adversely affecting a Participant’s, former Participant’s or beneficiary’s right with respect to any Award (including without limitation any Award previously deferred and unpaid (including any appreciation, dividend equivalents, interest, or other earnings thereon) in accordance with a deferral election made prior to such Change and in accordance with any investment or payment option permitted (irrespective of any requirement for approval) pursuant to rules, regulations or procedures in effect on the date immediately preceding the date on which the Change in Control occurs),

(ii) altering the meaning or operation of the definition of “Change in Control” in Section 1.02 hereof (and of the definition of all the defined terms that appear in the definition of “Change in Control”), the provisions of this Section 1.07 or Section 1.13 or any rule, regulation, procedure, provision or determination made or adopted prior to the Change in Control pursuant to this Section 1.07 or any provision in any rule, regulation, procedure, provision or determination made or adopted pursuant to the Plan that becomes effective upon the occurrence of a Change in Control (collectively, the “Change in Control Provisions”), or

(iii) undermining or frustrating the intent of the Change in Control Provisions to secure for Participants, former Participants and beneficiaries the maximum rights and benefits that can be provided under the Plan.

Upon and after the occurrence of a Change in Control, all rights of all Participants, former Participants and beneficiaries under the Plan (including without limitation any rules, regulations or procedures promulgated under the Plan) shall be contractual rights enforceable against Donaldson and any successor to all or substantially all of the Donaldson’s business or assets.

Section 1.08 Withholding of Tax.

Each participant, as a condition precedent to the issuance of Shares hereunder, shall make arrangements with Donaldson for payment or withholding of the amount of any tax required by any government authority to be withheld and paid by Donaldson to such government authority for the account of the participant.

Section 1.09 Employment.

Nothing in the Plan and no grant of an Award shall be deemed to grant any right of continued employment to a participating employee or to limit or waive any rights of Donaldson to terminate such employment at any time, with or without cause.

Section 1.10 Rights as Shareholders.

A participating employee shall have no rights whatsoever as a shareholder of Donaldson with respect to any Shares covered by an Award until the date of issuance of a stock certificate pursuant to the terms of such Award.

Section 1.11 Unfunded Plan.

The Plan shall be unfunded. Donaldson shall not be required to segregate any assets that may at any time be represented by Awards made pursuant to the Plan. Neither Donaldson nor the Board shall be deemed to be a trustee of any amounts to be paid under the Plan. Any liability of Donaldson to any Participant, former Participant or beneficiary with respect to an Award shall be based solely upon contractual obligations created by the Plan and the Award Agreement. No such obligation shall be deemed to be secured by any pledge of or any encumbrance on any property of Donaldson.

Section 1.12 No Fractional Shares.

No fractional Shares shall be issued pursuant to the Plan or any Award. The Committee shall determine whether cash, other securities, or other property shall be paid or transferred in lieu of fractional Shares, or whether fractional Shares or any rights thereto shall be canceled, terminated or otherwise eliminated.

Section 1.13 Change in Control. In the event of a Change in Control of Donaldson:

(a) any outstanding options and stock appreciation rights granted under the Plan 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;

(b) performance objectives applicable to Awards granted under the Plan shall be deemed to have been met at 100% of target then prorated on the basis of the portion of the performance period that has expired; and

(c) the restrictions applicable to any restricted Shares awarded under the Plan shall lapse and such Shares shall become fully vested.

II. EMPLOYEE AWARDS

Section 2.01

The following types of Awards may be granted under this Part II, singly or in combination or in tandem with other Awards (or with awards under other plans of Donaldson) as the Committee may determine. All such Awards shall be in a form determined by the Committee provided that no Award may be inconsistent with the terms of the Plan and must be set forth in an Award Agreement.

Section 2.02 Grant of Stock Options.

Any employee (including officers and employee directors) regularly employed by Donaldson shall be eligible to receive options hereunder. No option may be granted to any employee who owns more than 5% of the Common Stock.

Options shall be evidenced by written Award Agreements. The Award Agreements, in such form as the Committee shall from time to time approve, shall contain the terms and conditions of such option including the following:

(a) Time of Exercise. An employee may exercise an option at such time or times as determined by the Committee at the time of the grant; provided, however, that all rights to exercise an incentive stock option shall expire not more than ten years after the date such option is granted.

(b) Exercise Price. The exercise price per share of Common Stock deliverable upon the exercise of an option shall be determined by the Committee at the time of grant and clearly set forth in the Award Agreement; but shall not be less than the Market Value of the Shares on the date the option is granted.

(c) Exercise of Options. To exercise an option in whole or in part, the Participant employee shall give written notice to Donaldson’s Treasurer at the principal offices of Donaldson of the exercise of the option, stating the number of Shares with respect to which the Participant is so exercising and accompanying such notice with full payment of the exercise price for such number of Shares. Payment of the exercise price may be made in cash or, with the consent of the Committee, in whole or in part through the delivery or attestation to the ownership of Common Stock valued at the Market Value on the day preceding the date of exercise provided that in the case of attestation, the Shares transferred upon exercise of the option shall be net of the number of Shares attested to. Subject to rules established by the Committee, the amount of any tax required to be paid or withheld pursuant to Section 1.08 may be satisfied by Donaldson withholding Shares issued on exercise having a Market Value on the day preceding the date of exercise equal to such taxes; provided, that the number of Shares so withheld shall be rounded up to avoid the necessity of issuing fractional Shares.

(d) The Committee may grant “reload” options pursuant to which, subject to the terms and conditions established by the Committee and any applicable requirements of Rule 16b-3 or any other applicable law, the Participant would be granted a new option when the payment of the exercise price of a previously granted

option is made by the delivery or attestation to ownership of Common Stock owned by the Participant, as described in Section 2.02(c) hereof, which new option (i) would be an option to purchase the number of Shares provided as consideration upon the exercise of the previously granted option and (ii) would have a per share exercise price equal to the Market Value as of the date of grant of the new option.

Section 2.03 Stock Appreciation Rights.

The Committee may grant stock appreciation rights under the Plan. A Stock Appreciation Right (SAR) is a right, denominated in Shares, to receive, upon surrender of the right (or of both the right and a related option in the case of a tandem right) in whole or in part, but without payment, an amount (payable in Shares, in cash, or a combination thereof as the Committee shall determine) that does not exceed the excess of the Market Value on the exercise date of the number of Shares for which the SAR is exercised over the exercise price of such right, which exercise price shall not be less than the Market Value for such Shares on the date the right was granted (or, in the case of an option with tandem SAR not less than the option price that the optionee otherwise would have been required to pay for such Shares); provided that, in the case of any SAR granted retroactively in tandem with or in substitution for another Award (or any outstanding award granted under any other plan of Donaldson), the exercise price shall not be less than the Market Value for the number of Shares for which the SAR is exercised on the date of grant of the other Award (or award). The exercise of SARs for cash by a Participant who is an officer or a director for purposes of Sections 16(a) and 16(b) of the Exchange Act or any successor thereto, shall be subject to the requirements of Rule 16b-3. Upon exercise of a tandem SAR as to some or all of the Shares covered by the grant, the related stock option shall be canceled automatically to the extent of the number of Shares covered by such exercise. If a related stock option is exercised as to some or all of the Shares covered by the grant, the tandem SAR, if any, shall be canceled automatically to the extent of the number of Shares covered by the stock option exercise.

Section 2.04 Incentive Stock Options.

At the discretion of the Committee, options granted under Section 2.02 above may be designated incentive stock options in compliance with Section 422 of the Code or any successor section, as it may be amended from time to time, and the regulations thereunder.

Incentive stock options shall be evidenced by written Award Agreements and may be granted only with respect to Shares of Common Stock. The aggregate number of Shares for which incentive stock options may be granted under the Plan shall not exceed 1,000,000 Shares of Common Stock, subject in any Plan Year to the limitations imposed and adjustments required by Section 1.03 hereof and subject to the adjustment provisions set forth in Section 1.05 hereof. Incentive stock options may not be granted under the Plan after November 15, 2001.

Section 2.05 Restricted Stock.

The Committee may grant to any employee restricted stock, for no cash consideration, if permitted by applicable law, or for such other consideration as may be determined by the Committee and specified in the Award Agreement which sets forth the Award. The terms and conditions of Awards of restricted stock shall be determined by the Committee. Unless otherwise specified in the Award Agreement, holders of restricted stock shall have the right to vote such Shares and receive cash and stock dividends on such shares.

Any restricted stock issued hereunder may be evidenced in such manner as the Committee in its sole discretion shall deem appropriate, including, without limitation, bookentry registration or issuance of a stock certificate or certificates, and may be held in escrow by such party as the Committee in its sole discretion shall designate. In the event any stock certificate is issued in respect of restricted stock granted hereunder and not held in escrow, such certificate shall bear an appropriate legend with respect to the restrictions applicable to such Award.

Section 2.06 Other Stock-Based Awards.

The Committee may grant Awards (other than the Awards described above) under the Plan that consist of or are denominated in or payable in, valued in whole or in part by reference to, or otherwise based on or related to, Shares, provided that such grants must comply with Rule 16b-3 and other applicable law. The Committee may subject such Awards to such restrictions on transfer and/or such other restrictions on incidents of ownership as the Committee may determine, provided that such restrictions must be consistent

with the terms of the Plan. The Committee may grant Awards under this Section 2.06 that require no payment of consideration by the Participant (other than services previously rendered or, as may be permitted by applicable law, services to be rendered), either on the date of grant or the date any restriction(s) thereon are removed. In addition, the Committee may grant Awards under this Section 2.06 that provide to the Participant the right to purchase Shares, provided that the purchase price or exercise price, if any, shall in no event be less than the Market Value for such Shares on the date of grant; provided that, in the case of any Award granted retroactively in tandem with or in substitution for another Award (or any outstanding award granted under any other plan of Donaldson) the purchase price or exercise price, if any, shall not be less than the Market Value on the date of grant of the other Award (or award).

Section 2.07 Dollar-Denominated Awards.

The Committee may grant cash Awards under the Plan that are denominated in, valued by reference to, or otherwise based on or related to, a designated dollar amount or amounts (including dollar amounts that are determined pursuant to a formula), as determined by the Committee, and that are determined in accordance with the achievement of long-term performance criteria applicable to Donaldson, a Subsidiary, division, operating unit or individual Participant, as determined by the Committee. Awards granted pursuant to this Section 2.07 shall be payable only in cash.

Section 2.08 Dividend Equivalents

The Committee may grant dividend equivalents in respect of Awards. In respect of any such Award that is outstanding on a dividend record date for the Shares covered by the Award, the Participant may be credited with an amount equal to the amount of cash or stock dividends that would have been paid on the Shares covered by the Award if the covered Shares had been issued and outstanding on the dividend record date. Subject to the terms of the Plan and any applicable Award Agreements, the Committee shall establish such rules and procedures governing the crediting of dividend equivalents, including the timing and payment contingencies that apply to the dividend equivalents, as the Committee deems necessary or appropriate and which rules and procedures shall comply with Rule 16b-3 and other applicable law. Dividend equivalents shall be paid only in cash.

Section 2.09 Non-Transferability of Awards.

Awards (other than Restricted Shares, the restrictions upon which have lapsed) are not transferable by an employee other than by will or the laws of descent and distribution. During the employee’s lifetime, stock options and stock appreciation rights may be exercised only by such employee. Notwithstanding the above, transferability of stock option grants is permitted with the approval of the Committee.

III. NONEMPLOYEE DIRECTOR AWARDS

Section 3.01 Eligible Participants.

Each member of the Board from time to time who is not a full time employee of Donaldson shall be an eligible participant (“Part III Participant”) for an Award under this Part III.

Section 3.02 Deferred Shares in Lieu of Retainer or Meeting Fees.

(a) Automatic Receipt of Restricted Shares. Thirty percent (30%) of the annual retainer payable to a Part III Participant for service on the Board shall be payable solely by crediting to such Part III Participant’s deferred stock account (a “Deferred Stock Account”) a number of Shares having a Fair Market Value equal to 30% of such annual retainer. Such Part III Participant shall receive the Shares held in his or her Deferred Share Account in accordance with the terms of Section 3.09 below. The Shares shall be issued to a Part III Participant in accordance with the election made by such Part III Participant prior to the commencement of the service year for which services will be rendered to the Board; provided that , if no such election is made, all such Deferred Shares shall be deferred until such Part III Participant’s retirement from service on the Board.

(b) Election To Receive Additional Restricted Shares. Each Part III Participant shall have the right to elect to receive up to 100% of his or her annual retainer for services on the Board which would otherwise be payable in cash (other than fees which have been deferred under the Company’s Compensation Plan for

Nonemployee Directors), in the form of Shares. Any part of the annual retainer elected to be so deferred shall be payable in Shares held in his or her Deferred Share Account in accordance with the terms of Section 3.09 below. The number of Shares to be credited to a Part III Participant’s Deferred Stock Account hereunder shall be determined in accordance with Section 3.02(d) of this Plan. Such election must be made prior to the service year for which the annual retainer is to be so deferred. Elections under this Subsection 3.02(b) shall remain in effect from year to year until changed by the Part III Participant. No change shall be effective until the next service year.

(c) Election to Receive Deferred Shares in Lieu of Meeting Fees. Each Part III Participant may also elect to be credited with Shares in lieu of all or any portion of the meeting fees otherwise payable to such Part III Participant. The number of Shares to be credited to a Part III Participant’s Deferred Stock Account hereunder shall be determined in accordance with Section 3.02(d) of this Plan. Such election must be made prior to the service year for which the annual retainer is to be so deferred. Elections under this Subsection 3.02(c) shall remain in effect from year to year until changed by the Part III Participant. No change shall be effective until the next service year.

(d) Credits to Deferred Stock Account for Elective Deferrals. On December 1 and on June 1 of each service year (each a “Credit Date”), a Part III Participant shall receive a credit to his or her Deferred Stock Account. The amount of the credit on December 1 shall be the number of Shares (rounded to the nearest one-hundredth of a share) determined by dividing (i) an amount equal to the portion of the annual retainer fees for the upcoming service year specified for deferral pursuant to Section 3.04 and the meeting fees payable to such Part III Participant on such Credit Date for meetings attended since the preceding Credit Date and specified for deferral pursuant to Section 3.04, by (ii) the Fair Market Value of one Share on such Credit Date. The amount of the credit on June 1 shall be the number of Shares (rounded to the nearest one-hundredth of a share) determined by dividing (i) an amount equal to the meeting fees payable to such Part III Participant on such Credit Date for meetings attended since the preceding Credit Date and specified for deferral pursuant to Section 3.04, by (ii) the Fair Market Value of one Share on such Credit Date.

Section 3.03 Issuance of Stock in Lieu of Cash.

The Company shall not issue fractional shares; however, fractional shares will be credited to the Deferred Stock Accounts (rounded to the nearest one-hundredth share). Whenever, under the terms of this Plan, a fractional share would be required to be issued, an amount in lieu thereof shall be paid in cash for such fractional share based upon the same Fair Market Value as was utilized to determine the number of Shares to be issued on the relevant issue date.

Section 3.04 Manner of Making Deferral Election.

A Part III Participant may elect to defer payment of a portion of the annual retainer or meeting fees pursuant to Sections 3.02(b) or (c) of this Plan by filing, no later than November 15 of each year (or by such other date as the Administrator shall determine), an irrevocable election with the Administrator on a form provided for that purpose (“Deferral Election”). The Deferral Election shall be effective with respect to the annual retainer and meeting fees payable on or after December 1 of the following service year unless the Part III Participant shall revoke or change the election in accordance with the procedure set forth in Section 3.07. The Deferral Election form shall specify an amount to be deferred expressed as a dollar amount or as a percentage of the Part III Participant’s annual retainer and/or meeting fees payment.

Section 3.05 Dividend Credit.

Each time a dividend is paid on the Common Stock, a Part III Participant shall receive a credit to his or her Deferred Stock Account equal to that number of shares of Common Stock (rounded to the nearest one-hundredth of a share) having a Fair Market Value on the dividend payment date equal to the amount of the dividend payable on the number of Shares credited to the Part III Participant’s Deferred Stock Account on the dividend record date.

Section 3.06 Fair Market Value.

For purposes of converting dollar amounts into shares of Common Stock, the Fair Market Value of each share of Common Stock shall be equal to the closing price of one share of the Company’s Common Stock on

the New York Stock Exchange-Composite Transactions on the last business day as of which Deferred Shares are credited to the Part III Participant’s Deferred Stock Account or the date of issuance of Shares, as the case may be.

Section 3.07 Change in Election.

Each Part III Participant may irrevocably elect in writing to change an earlier Deferral Election, either to change the percentage of his or her annual retainer or meeting fees to be credited in Shares to such Part III Participant’s Deferred Share Account or to receive the entire amount in cash (an “Amended Election”). Such Amended Election shall not become effective until the December 1 following the date of receipt of such Amended Election by the Company.

Section 3.09 Deferral Payment.

(a) Deferral Payment Election. At the time of making the Deferral Election, each Part III Participant shall also complete a deferral payment election specifying one of the payment options described in Sections 3.09(b) and (c), and the year in which amounts credited to the Part III Participant’s Deferred Stock Account shall be paid in a lump sum pursuant to Section 3.09(b), or in which installment payments shall commence pursuant to Section 3.09(c). The deferral payment election shall be irrevocable as to all amounts credited to the Part III Participant’s Deferred Stock Account. The Part III Participant may change the deferral payment election by means of a subsequent deferral payment election in writing that will take effect for deferrals credited after the date the Company receives such subsequent deferral payment election.

(b) Payment of Deferred Stock Accounts in a Lump Sum. Unless a Part III Participant elects to receive payment of his or her Deferred Stock Account in installments as described in Section 3.09(c), credits to a Part III Participant’s Deferred Stock Account shall be payable in full on December 1 of the year following the Part III Participant’s termination of service on the Board (or the first business day thereafter) or such other date as elected by the Part III Participant pursuant to Section 3.09(a). All payments shall be made in shares of Common Stock plus cash in lieu of any fractional share. Notwithstanding the foregoing, in the event of a Change in Control, credits to a Part III Participant’s Deferred Stock Account as of the business day immediately prior to the effective date of the transaction constituting the Change in Control shall be paid in full to the Part III Participant or the Part III Participant’s beneficiary or estate, as the case may be, in whole shares of Common Stock (together with cash in lieu of a fractional share) on such date.

(c) Payment of Deferred Stock Accounts in Installments. A Part III Participant may elect to have his or her Deferred Stock Account paid in annual installments following termination of service as a director or at such other time as elected by the Part III Participant pursuant to Section 3.09(a). All payments shall be made in shares of Common Stock plus cash in lieu of any fractional share. All installment payments shall be made annually on December 1 of each year (or the first business day thereafter). The amount of each installment payment shall be computed as the number of Shares credited to the Part III Participant’s Deferred Stock Account on the relevant installment payment date, multiplied by a fraction, the numerator of which is one and the denominator of which is the total number of installments elected (not to exceed ten) minus the number of installments previously paid. Amounts paid prior to the final installment payment shall be rounded to the nearest whole number of Shares; the final installment payment shall be for the whole number of Shares then credited to the Part III Participant’s Deferred Stock Account, together with cash in lieu of any fractional shares. Notwithstanding the foregoing, in the event of a Change of Control, credits to a Part III Participant’s Deferred Stock Account as of the business day immediately prior to the effective date of the transaction constituting the Change of Control shall be paid in full to the Part III Participant or the Part III Participant’s beneficiary or estate, as the case may be, in whole Shares (together with cash in lieu of a fractional share) on such date.

Section 3.10 Limitation on Rights of Part III Participants.

(a) Service as a Director. Nothing in this Plan will interfere with or limit in any way the right of the Company’s Board or its stockholders to remove a Part III Participant from the Board. Neither this Plan nor any action taken pursuant to it will constitute or be evidence of any agreement or understanding, express or implied, that the Company’s Board or its stockholders have retained or will retain a Part III Participant as a director for any period of time or at any particular rate of compensation.

(b) Nonexclusivity of the Plan. Nothing contained in this Plan is intended to effect, modify or rescind any of the Company’s existing compensation plans or programs or to create any limitations on the Board’s power or authority to modify or adopt compensation arrangements as the Board may from time to time deem necessary or desirable.

(c) Participants Are General Creditors of the Company. The Part III Participants and beneficiaries thereof shall be general, unsecured creditors of the Company with respect to any payments to be made pursuant to this Plan and shall not have any preferred interest by way of trust, escrow, lien or otherwise in any specific assets of the Company. If the Company shall, in fact, elect to set aside monies or other assets to meet its obligations hereunder (there being no obligation to do so), whether in a grantor’s trust or otherwise, the same shall, nevertheless, be regarded as a part of the general assets of the Company subject to the claims of its general creditors, and neither any Part III Participant nor any beneficiary thereof shall have a legal, beneficial or security interest therein.

Section 3.11 Special One-Time Award of Deferred Shares.

The following Award is being paid in conjunction with the termination, effective as of May 21, 1998, of the Company’s Independent Director Retirement and Death Benefit Plan (the “Director Retirement Plan”) with respect to all directors who are members of the Board of Directors on May 21, 1998:

Each Part III Participant who is a director on May 21,1998, shall be awarded a one-time grant, effective on such date, of Shares to his or her Deferred Stock Account in an amount equal to 115% of the benefits accrued for such Part III Participant in the Director Retirement Plan as of such date divided by the Fair Market Value of one Share as of such date. All of such Shares credited to a Part III Participant’s Deferred Stock Account shall be paid out in three, equal, annual installments, commencing on December 1 of the first service year in which such Part III Participant is no longer serving as a director.

Section 3.12 Restricted Stock Awards.

If such grant does not affect the “disinterested administrator” status of the Committee under Rule 16b-3, the Committee may grant to any Part III Participant Shares of restricted stock, for no cash consideration, if permitted by applicable law, or for such other consideration as may be determined by the Committee and specified in the Award.

Exhibit 10.F

1991 MASTER STOCK COMPENSATION
SECTION 2.05 - RESTRICTED STOCK AWARD

AWARD AGREEMENT made this day of by and between Donaldson Company, Inc. (“Donaldson”) and ________________, an employee of Donaldson (“Employee”).

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

1. Donaldson hereby grants to Employee ____________ shares of Common Stock for no cash consideration subject to the following restrictions (“Restricted Stock”):

a. This Award is granted pursuant to the 1991 Master Stock Compensation Plan of Donaldson (the “Master Plan”) and is subject to all of the terms and conditions of such plan. Employee acknowledges receipt of a copy of the Master Plan.

b. Date of grant shall be (“Grant Date”).

c. Restricted Stock may not be sold, assigned, hypothecated or transferred (including without limitation, transfer by gift or donation) until the fifth anniversary of the Grant Date (“Restriction Period”).

d. Shares subject to the Restricted Stock Award shall be forfeited to Donaldson if, within the Restriction Period employment of Employee by Donaldson terminates for any reason (including without limitation termination by Donaldson, with or without cause) other than for reasons of death, normal retirement, long-term disability.

e. Upon termination of Employee’s employment within the Restriction Period by reason of death, normal retirement or long-term disability the restrictions hereinabove imposed shall lapse for that number of shares obtained by multiplying the Award by a fraction formed from

dividing the full number of months of Employee’s employment since the Grant Date by sixty. The remainder of the shares shall be forfeited to Donaldson.

f. Notwithstanding anything herein to the contrary such restrictions shall lapse and all of the shares shall become fully vested in the event of a Change in Control as provided in the Master Plan.

2. Employee shall have the right to vote the shares of Restricted Stock and receive cash and stock dividends on such shares.

3. The certificate(s) evidencing shares of Restricted Stock shall be held in custody by Donaldson (attention of the Secretary) until the restrictions have lapsed.

4. Donaldson and Employee recognize that this Agreement in no way restricts the right of Donaldson to terminate Employee’s employment at any time.

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


DONALDSON COMPANY, INC.	EMPLOYEE
________________________________	________________________________

Its_________________________________

P2035

Exhibit 10.G

AGREEMENT TO DEFER COMPENSATION

I, ___________________ am making the following elections for the deferral of my _______________ compensation for fiscal year______________. The designation of beneficiary made below shall continue until revoked or amended pursuant to a written notice sent to the Human Resources Administrator.


	o	State % or Amount: ___________________ (5% increments)


Elect to receive deferred compensation on:

o	Specified Date	_________________________

o	Age	_________________________

o	Specified Occurrence	_________________________


	Elect to receive deferred compensation in the following form:

	o	Lump Sum

	o	Equal Quarterly Installments for ________ number of years

	o	Equal Quarterly Installments for _________ dollars

	o	Other Manner _____________________________________________

	Beneficiary Designation:

	o	Payable to my estate in a lump sum

	o	Payable in installments to ____________________________ as beneficiary

	o	Payable in lump sum to ________________________________ as beneficiary

It is understood that the Company shall include interest on such deferred income in the same manner, at the same rate and at the same time applied in the Fixed Income Option of the Company’s Employee’s Retirement Savings Plan. I understand that the deferral account shall not be held by the Company in a trust, escrow or similar fiduciary capacity and that I or my representative have no right with respect to such account except as a general unsecured creditor of the Company.


DATE:	________________________________	_________________________________________________

Accepted: DONALDSON COMPANY, INC.


BY	_____________________________

ITS	_____________________________

Exhibit 10.H

DONALDSON COMPANY, INC.
1998 NONEMPLOYEE DIRECTOR STOCK OPTION PLAN

1. Purpose of the Plan . This plan shall be known as the “Donaldson Company, Inc. 1998 Nonemployee Director Stock Option Plan” and is hereinafter referred to as the “Plan.” The purpose of the Plan is to promote the interests of the Company by enhancing its ability to attract and retain the services of experienced and knowledgeable outside directors and by providing additional incentive for such directors to increase their interest in the Company’s long-term success and progress.

2. Definitions . As used herein, the following definitions shall apply:

(a) “ Board ” shall mean the Board of Directors of the Company.

(b) A “ Change in Control ” of the Company shall have occurred if (i) any “person,” as such term is used in Sections 13(d) and 14(d) of 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 Plan), individuals who at the beginning of such period constitute the Board of Donaldson, 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 defined above) 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.

(d) “ Common Stock ” shall mean the Common Stock, $5 par value, of the Company.

(e) “ Company ” or “ Donaldson ” shall mean Donaldson Company, Inc. and its Subsidiaries.

(f) “ Director ” shall mean a member of the Board.

(g) “ Employee ” shall mean any person, including officers and directors, employed by the Company or any Subsidiary of the Company. The payment of a Director’s fee by the Company shall not be sufficient in and of itself to constitute “employment” by the Company.

(h) “ Exchange Act ” shall mean the Securities Exchange Act of 1934, as amended.

(i) “ Market Value ” of a share of Common Stock shall mean the closing sale price of the Common Stock on such date on the New York Stock Exchange (or on the principal exchange on which it is then listed if other than the New York Stock Exchange), as reported in The Wall Street Journal , or if there was no sale on that date, then on the nearest preceding date on which a sale occurred.

(j) “ Option ” shall mean a stock option granted pursuant to the Plan.

(k) “ Optionee ” shall mean an Outside Director who receives an Option.

(1) “ Outside Director ” shall mean a Director who is not an Employee.

(m) “ Subsidiary ” shall mean any corporation or other entity of which a majority of the voting power is owned, directly or indirectly, by Donaldson, or which is otherwise controlled by Donaldson.

3. Administration of Plan . The Plan shall be administered by a committee (the “Committee”) of three or more persons appointed by the Board of Directors of the Company and constituted so as to satisfy the legal requirements, including any such requirements for nonemployee directors, imposed by Rule 16b-3 of the Exchange Act. All determinations of the Committee shall be made by a majority of its members. Grants of Options under the Plan and the amount and nature of the awards to be granted shall be automatic as described in Section 7, and no person shall have any discretion to select which Outside Directors shall be granted Options or to determine the number of shares of Common Stock to be covered by Options granted to Outside Directors. However, all questions of interpretation of the Plan or of any Options issued under it shall be determined by the Committee, and such determination shall be final and binding upon all persons having an interest in the Plan.

4. Eligibility . Each Outside Director of the Company who shall be a member of the Board on December 1 of each year shall be eligible to participate in the Plan.

5. Stock Subject to the Plan . Subject to adjustment as provided in Section 11 hereof, the maximum aggregate number of shares of Common Stock with respect to which Options

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may be exercised under the Plan shall be [200,000]. All shares of Common Stock issued under this Plan shall either be shares held in the treasury of the Company or previously issued shares purchased by the Company on the open market. If an Option should expire or become unexercisable for any reason without having been exercised in full, the unpurchased shares which were subject thereto shall, unless the Plan shall have been terminated, become available for future grant under the Plan. Shares of Common Stock issued upon the exercise of an Option shall be fully paid and nonassessable. No fractional shares of Common Stock shall be issued upon exercise of an Option under the Plan.

6. Nonqualified Stock Options . None of the Options granted hereunder shall qualify as “incentive stock options” within the meaning of Section 422 of the Code.

7. Grants of Options under the Plan . Each Option granted under this Plan shall be evidenced by a written agreement in such form as the Committee shall from time to time approve, which agreement shall comply with and be subject to the following terms and conditions:


	(a) Annual Option Grants. An Option to purchase 3,600 shares of Common Stock shall be granted automatically on the first business day of December (the “Grant Date”) of each year to each eligible Director in office on such Grant Date. All grants of Options hereunder shall be automatic and nondiscretionary.

	(b) Option Exercise Price. The exercise price per share of Common Stock deliverable upon the exercise of an Option shall be the Market Value of the Common Stock on the Grant Date.

	(c) Period of Options. Each Option shall terminate upon the expiration of 10 years from the date on which it was granted.

	(d) Exercise of Options.

		(i) Options granted under the Plan shall vest and may be exercised by the Optionee with respect to 1,200 shares on the first day of December of each of the first three calendar years following the Grant Date; provided , however , that an unvested portion of an Option shall only vest so long as (1) the Outside Director remains a Director on the date such portion vests, (2) the Outside Director retires or resigns from service as a Director in accordance with Bylaw 4 of the Bylaws of the Company or (3) the Outside Director’s service is terminated for any other reason and a majority of the members of the Board other than the terminating Director consent to continued vesting of such portion of the Option in accordance with the original vesting schedule therefor; provided , further , that if the Optionee shall die prior to the time the Option is fully vested, such Option shall continue to vest for a period of two years after the Optionee’s death but shall, in all events, terminate upon the expiration of the original term of such Option.

		(ii) An Optionee electing to exercise an Option shall give written notice to the Company of such election, stating the number of shares subject to such exercise. The full purchase price of such shares shall be tendered with such

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		notice of exercise. Payment of the Option price may be made in cash (including check, bank draft or money order) or, with the consent of the Committee, in whole or in part through the delivery or attestation to ownership of Common Stock already owned by the Optionee for at least six months and having a Market Value on the day preceding the date of exercise equal to the Option price, subject to the approval of the Committee and to such rules as the Committee may adopt.

		(iii) An Option may not be exercised for a fraction of a share.

	(e) Reload Options. Each Optionee shall be granted a new option (a “Reload Option”) when the payment of the exercise price of any Option is made by the delivery of Common Stock owned by the Optionee, which Reload Option: (i) shall be for the number of shares of Common Stock provided as consideration upon the exercise of the previously granted Option, (ii) shall have an expiration date that is the same as the expiration date of the Option to which it relates, (iii) shall have a per share exercise price equal to the Market Value of the Common Stock on the date of grant of the Reload Option and (iv) shall be exercisable in full as of the date of grant of the Reload Option; provided , however, that Reload Options shall only be granted to an Optionee during such Optionee’s term as an Outside Director of the Company. A Reload Option shall be granted only once with respect to any shares acquired upon exercise of the original Option to which the Reload Option relates.

	(f) Options Non-Transferable. No Option granted under the Plan shall be transferable by the Optionee otherwise than by will or by the laws of descent and distribution as provided in Section 7(h) hereof. During the lifetime of the Optionee, the Options shall be exercisable only by such Optionee. No Option or interest therein may be transferred, assigned, pledged or hypothecated by the Optionee during such Optionee’s lifetime, whether by operation of law or otherwise, or be made subject to execution, attachment or similar process.

	(g) Termination of Status as a Director. If an Outside Director ceases to serve as a Director, he or she may, exercise an Option to the extent that he or she was entitled to exercise it at the date of such termination, subject to the provisions set forth in Section 7(d)(i) for continued vesting. To the extent that the Director was not entitled to exercise an Option at the date of such termination, or if such Director does not exercise such Option (which the Director was entitled to exercise) within the time specified herein, the Option shall terminate.

	(h) Effect of Death. If the Optionee shall die prior to the time the Option is fully exercised, such Option may be exercised at any time within two years after his or her death by the personal representatives or administrators of the Optionee 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 the Optionee was entitled to purchase under the Option on the date of death, subject to the provisions set forth in Section 7(d)(i) for continued vesting and subject to the condition that no Option shall be exercisable after the expiration of the term of the Option.

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8. Term of Plan . The Plan shall become effective immediately upon its adoption by the Board and shall continue in effect for a term of ten (10) years unless sooner terminated under Section 11 of the Plan. No Option may be granted after such termination, but termination of the Plan shall not, without the consent of the Optionee, alter or impair any rights or obligations under any Option theretofore granted. Options granted prior to the termination of the Plan shall remain in effect until their exercise or expiration in accordance with their terms.

9. Limitation of Rights .

(a) No Right to Continue as Director. Neither the Plan, nor the granting of an Option nor any other action taken pursuant to the Plan, shall constitute, or be evidence of, any agreement or understanding, express or implied, that the Company will retain a Director for any period of time, or at any particular rate of compensation, nor shall it interfere in any way with any rights which the Director or the Company may have to terminate the Director’s membership on the Board.

(b) No Shareholder Rights for Options. An Optionee shall have no rights as a shareholder with respect to the shares covered by Options until the date of the issuance to such Optionee of a stock certificate therefor, and no adjustment will be made for cash dividends or other rights for which the record date is prior to the date such certificate is issued.

10. Adjustments Upon Changes in Capitalization or Change in Control .

(a) In the event that the number of outstanding shares of Common Stock of the Company is changed by a stock dividend, stock split, reverse stock split, combination, reclassification or similar change in the capital structure of the Company, appropriate adjustments in the Plan and outstanding Options shall be made. In the event of any such changes, adjustments shall include, where appropriate, changes in the aggregate number of shares subject to the Plan, the number of shares subject to outstanding Options and the Option exercise prices thereof in order to prevent dilution or enlargement of Option rights. Such adjustment shall be made by the Committee, whose determination in that respect shall be final, binding and conclusive.

(b) In the event of a Change in Control of the Company, any or all outstanding Options shall, notwithstanding any contrary terms of the written agreement governing such Option, accelerate and become fully vested and exercisable and shall remain exercisable thereafter until they are either exercised or expire by their terms.

11. Amendment and Termination of the Plan . The Board may at any time amend, alter, suspend, or discontinue the Plan, but no amendment, alteration, suspension, or discontinuance shall be made which would impair the rights of any Optionee under any grant theretofore made, without his or her consent. Any such amendment or termination of the Plan shall not affect Options already granted, and such Options shall remain in full force and effect as if this Plan had not been amended or terminated, unless mutually agreed otherwise by the Optionee and the Board.

12. Conditions Upon Issuance of Shares . Shares of Common Stock shall not be issued pursuant to the exercise of an Option unless the exercise of such Option and the issuance

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and delivery of such shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act, the rules and regulations promulgated thereunder, state securities laws, and the requirements of any stock exchange upon which the shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. Inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company’s counsel to be necessary to the lawful issuance and sale of any shares of Common Stock hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such shares as to which such requisite authority shall not have been obtained.

13. Governing Law . The Plan and all determinations made and actions taken pursuant hereto shall be governed by the law of the State of Delaware and construed accordingly.

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EXHIBIT 10.I

CONFORMED COPY

DONALDSON COMPANY, INC.

$150,000,000
Senior Notes Issuable In Series

$23,000,000

6.20% Senior Notes, Series 1998-A, Tranche 1, due July 15, 2005

$27,000,000 6.31% Senior Notes, Series 1998-A, Tranche 2, due July 15, 2008

NOTE PURCHASE AGREEMENT

Dated as of July 15, 1998

Series 1998-A, Tranche 1 PPN: 257651 A* 0 Series 1998-A, Tranche 2 PPN: 257651 A @ 8

TABLE OF CONTENTS

Section Page


1. AUTHORIZATION OF NOTES				1

		1.1.	Amount; Establishment of Series	1
		1.2.	The Series 1998-A Notes	2

	2.	SALE AND PURCHASE OF SERIES 1998-A NOTES		2

	3.	CLOSING		3

	4.	CONDITIONS TO CLOSING		3
		4.1.	Representations and Warranties	3
		4.2.	Performance; No Default	3
		4.3.	Compliance Certificates	3
		4.4.	Opinions of Counsel	4
		4.5.	Purchase Permitted By Applicable Law, etc	4
		4.6.	Sale of Other Notes	4
		4.7.	Payment of Special Counsel Fees	4
		4.8.	Private Placement Number	4
		4.9.	Changes in Corporate Structure	5
		4.10.	Proceedings and Documents	5

	5.	REPRESENTATIONS AND WARRANTIES OF THE COMPANY		5
		5.1.	Organization; Power and Authority	5
		5.2.	Authorization, etc	5
		5.3.	Disclosure	6
		5.4.	Organization and Ownership of Shares of Subsidiaries; Affiliates	6
		5.5.	Financial Statements	7
		5.6.	Compliance with Laws, Other Instruments, etc	7
		5.7.	Governmental Authorizations, etc	7
		5.8.	Litigation; Observance of Agreements, Statutes and Orders	8
		5.9.	Taxes	8
		5.10.	Title to Property; Leases	8
		5.11.	Licenses, Permits, etc	9
		5.12.	Compliance with ERISA	9
		5.13.	Private Offering by the Company	10
		5.14.	Use of Proceeds; Margin Regulations	10
		5.15.	Existing Indebtedness; Future Liens	11
		5.16.	Foreign Assets Control Regulations, etc	11
		5.17.	Status under Certain Statutes	11


	5.18.	Environmental Matters	11

6.	REPRESENTATIONS OF THE PURCHASERS		12
	6.1.	Purchase for Investment	12
	6.2.	Source of Funds	12

7.	INFORMATION AS TO COMPANY		14
	7.1.	Financial and Business Information	14
	7.2.	Officer’s Certificate	17
	7.3.	Inspection	17

8.	PREPAYMENT OF THE NOTES		18
	8.1.	Required Prepayments	18
	8.2.	Optional Prepayments with Make-Whole Amount	18
	8.3.	Allocation of Partial Prepayments	18
	8.4.	Maturity; Surrender, etc	18
	8.5.	Purchase of Notes	19
	8.6.	Make-Whole Amount	19

9.	AFFIRMATIVE COVENANTS		20
	9.1.	Compliance with Law	20
	9.2.	Insurance	21
	9.3.	Maintenance of Properties	21
	9.4.	Payment of Taxes and Claims	21
	9.5.	Corporate Existence, etc	21

10.	NEGATIVE COVENANTS		22
	10.1.	Consolidated Indebtedness; Indebtedness of Restricted Subsidiaries	22
	10.2.	Liens	22
	10.3.	Sale of Assets	24
	10.4.	Mergers, Consolidations, etc	24
	10.5.	Disposition of Stock of Restricted Subsidiaries	25
	10.6.	Designation of Unrestricted Subsidiaries	25
	10.7.	Nature of Business	26
	10.8.	Transactions with Affiliates	26

11.	EVENTS OF DEFAULT		26

12.	REMEDIES ON DEFAULT, ETC		28
	12.1.	Acceleration	28
	12.2.	Other Remedies	29
	12.3.	Rescission	29
	12.4.	No Waivers or Election of Remedies, Expenses, etc	30

13.	REGISTRATION; EXCHANGE; SUBSTITUTION OF NOTES		30
	13.1.	Registration of Notes	30


	13.2.	Transfer and Exchange of Notes	30
	13.3.	Replacement of Notes	31

14.	PAYMENTS ON NOTES		31
	14.1.	Place of Payment	31
	14.2.	Home Office Payment	31

15.	EXPENSES, ETC		32
	15.1.	Transaction Expenses	32
	15.2.	Survival	32

16.	SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ENTIRE AGREEMENT		32

17.	AMENDMENT AND WAIVER		33
	17.1.	Requirements	33
	17.2.	Solicitation of Holders of Notes	33
	17.3.	Binding Effect, etc	33
	17.4.	Notes held by Company, etc	34

18.	NOTICES		34

19.	REPRODUCTION OF DOCUMENTS		34

20.	CONFIDENTIAL INFORMATION		35

21.	SUBSTITUTION OF PURCHASER		36

22.	MISCELLANEOUS		36
	22.1.	Successors and Assigns	36
	22.2.	Payments Due on Non-Business Days	36
	22.3.	Severability	36
	22.4.	Construction	37
	22.5.	Counterparts	37
	22.6.	Governing Law	37


SCHEDULE A	—	Information Relating to Purchasers

SCHEDULE B	—	Defined Terms

SCHEDULE B-1	—	Existing Investments

SCHEDULE 5.4	—	Subsidiaries of the Company and Ownership of Subsidiary Stock

SCHEDULE 5.5	—	Financial Statements

iii


SCHEDULE 5.15	—	Existing Indebtedness

SCHEDULE 10.2	—	Existing Liens

EXHIBIT 1.1-A	—	Form of Senior Note

EXHIBIT 1.1-B	—	Form of Supplement

EXHIBIT 1.2(a)	—	Form of Series 1998-A, Tranche 1, Senior Note

EXHIBIT 1.2(b)	—	Form of Series 1998 -A, Tranche 2, Senior Note

EXHIBIT 4.4(a)	—	Form of Opinion of Counsel for the Company

EXHIBIT 4.4(b) — Form of Opinion of Special Counsel for the Purchasers

DONALDSON COMPANY, INC.
1400 West 94th Street
Minneapolis, Minnesota 55440
(612) 887-3131
Fax: (612) 887 3005

$150,000,000
Senior Notes Issuable In Series

$23,000,000

6.20% Senior Notes, Series 1998-A, Tranche 1, due July 15, 2005

$27,000,000 6.31% Senior Notes, Series 1998-A, Tranche 2, due July 15, 2008

Dated as of July 15, 1998

TO EACH OF THE PURCHASERS LISTED IN
THE ATTACHED SCHEDULE A:

Ladies and Gentlemen:

DONALDSON COMPANY, INC., a Delaware corporation (the “COMPANY”), agrees with you as follows:

1. AUTHORIZATION OF NOTES.

1.1. AMOUNT; ESTABLISHMENT OF SERIES.

The Company is contemplating the issue and sale of up to $150,000,000 aggregate principal amount of its Senior Notes issuable in series (the “NOTES”, such term to include any such Notes issued in substitution therefor pursuant to Section 13 of this Agreement). The Notes shall be substantially in the form set out in Exhibit 1.1-A, with such changes therefrom, if any, as may be approved by the purchasers of such Notes, or series thereof, and the Company. Certain capitalized terms used in this Agreement are defined in Schedule B; references to a “Schedule” or an “Exhibit” are, unless otherwise specified, to a Schedule or an Exhibit attached to this Agreement. The Notes may be issued in one or more series. Each series of Notes, other than the initial series, shall be issued pursuant to a supplement to this Agreement

(a “SUPPLEMENT”) in substantially the form of Exhibit 1.1-B, and shall be subject to the following terms and conditions:

(a) the designation of each series of Notes shall distinguish the Notes of one series from the Notes of all other series and the designation of each tranche within a series shall distinguish the Notes of one tranche from the Notes of all other tranches;

(b) the Notes of each series shall rank PARI PASSU with the Notes of all other series and the Company’s other outstanding unsecured Indebtedness that has not been expressly subordinated to any other Indebtedness of the Company;

(c) each series of Notes shall be dated the date of issue, bear interest at such rate or rates, mature on such date or dates, be subject to such mandatory prepayments on the dates and with the Make-Whole Amounts, if any, as are provided in the Supplement under which such Notes are issued, and shall have such additional or different conditions precedent to closing and such additional or different representations and warranties or other terms and provisions as shall be specified in such Supplement;

(d) except to the extent provided in foregoing clauses (a) through (c), all of the provisions of this Agreement shall apply to the Notes of each series.

The Purchasers of the Series 1998-A Notes need not purchase subsequent series of Notes.

1.2. THE SERIES 1998-A NOTES.

The Company has authorized, as the initial series of Notes hereunder, the issue and sale of $50,000,000 aggregate principal amount of Notes to be designated as its “SERIES 1998-A NOTES” (such term to include any such Notes issued in substitution therefor pursuant to Section 13 of this Agreement). The Series 1998-A Notes will consist of $23,000,000 aggregate principal amount of 6.20% Senior Notes, Series 1998-A, Tranche 1, due July 15, 2005 (the “SERIES 1998-A, TRANCHE 1, NOTES”), and $27,000,000 aggregate principal amount of 6.31% Senior Notes, Series 1998-A, Tranche 2, due July 15, 2008 (the “SERIES 1998-A, TRANCHE 2, NOTES”). The Series 1998-A Notes shall be substantially in the forms set out in Exhibits 1.2(a) and (b), respectively, with such changes therefrom, if any, as may be approved by you and the Company.

2. SALE AND PURCHASE OF SERIES 1998-A NOTES.

Subject to the terms and conditions of this Agreement, the Company will issue and sell to you and each of the other purchasers named in Schedule A (the “OTHER PURCHASERS”), and you and the Other Purchasers will purchase from the Company, at the Closing provided for in Section 3, Series 1998-A Notes in the principal amount specified opposite your names in Schedule A at the purchase price of 100% of the principal amount thereof. Your obligation hereunder and the obligations of the Other Purchasers are several and not joint obligations and you shall have no liability to any Person for the performance or non-performance by any Other Purchaser hereunder.

3. CLOSING.

The sale and purchase of the Series 1998-A Notes to be purchased by you and the Other Purchasers shall occur at the offices of Gardner, Carton & Douglas, Quaker Tower, Suite 3400, 321 North Clark Street, Chicago, Illinois 60610 at 9:00 a.m., Chicago time, at a closing (the “CLOSING”) on July 15, 1998 or on such other Business Day thereafter on or prior to July 30, 1998 as may be agreed upon by the Company and you and the Other Purchasers. At the Closing the Company will deliver to you the Series 1998-A Notes to be purchased by you in the form of a single Series 1998-A Note (or such greater number of Series 1998-A Notes in denominations of at least $500,000 as you may request) dated the date of the Closing and registered in your name (or in the name of your nominee), against delivery by you to the Company or its order of immediately available funds in the amount of the purchase price therefor by wire transfer of immediately available funds for the account of the Company to account number 1502-5005-4130 at US Bank - Minneapolis, US Bank Place, 601 Second Avenue South, Minneapolis, MN 55402, ABA No. 0910-0002-2. If at the Closing the Company shall fail to tender such Series 1998-A Notes to you as provided above in this Section 3, or any of the conditions specified in Section 4 shall not have been fulfilled to your satisfaction, you shall, at your election, be relieved of all further obligations under this Agreement, without thereby waiving any rights you may have by reason of such failure or such nonfulfillment.

4. CONDITIONS TO CLOSING.

Your obligation to purchase and pay for the Series 1998-A Notes to be sold to you at the Closing is subject to the fulfillment to your satisfaction, prior to or at the Closing, of the following conditions:

4.1. REPRESENTATIONS AND WARRANTIES.

The representations and warranties of the Company in this Agreement shall be correct when made and at the time of the Closing.

4.2. PERFORMANCE; NO DEFAULT.

The Company shall have performed and complied with all agreements and conditions contained in this Agreement required to be performed or complied with by it prior to or at the Closing and after giving effect to the issue and sale of the Series 1998-A Notes (and the application of the proceeds thereof as contemplated by Section 5.14) no Default or Event of Default shall have occurred and be continuing. Neither the Company nor any Subsidiary shall have entered into any transaction since the date of the Memorandum that would have been prohibited by Sections 10.1 through 10.8 had such Sections applied since such date.

4.3. COMPLIANCE CERTIFICATES.

(a) Officer’s Certificate. The Company shall have delivered to you an Officer’s Certificate, dated the date of the Closing, certifying that the conditions specified in Sections 4.1, 4.2 and 4.9 have been fulfilled.

(b) Secretary’s Certificate. The Company shall have delivered to you a certificate certifying as to the resolutions attached thereto and other corporate proceedings relating to the authorization, execution and delivery of the Series 1998-A Notes and the Agreement.

4.4. OPINIONS OF COUNSEL.

You shall have received opinions in form and substance satisfactory to you, dated the date of the Closing (a) from Dorsey & Whitney LLP, Counsel for the Company, covering the matters set forth in Exhibit 4.4(a) and covering such other matters incident to the transactions contemplated hereby as you or your counsel may reasonably request (and the Company instructs its counsel to deliver such opinion to you) and (b) from Gardner, Carton & Douglas, your special counsel in connection with such transactions, substantially in the form set forth in Exhibit 4.4(b) and covering such other matters incident to such transactions as you may reasonably request.

4.5. PURCHASE PERMITTED BY APPLICABLE LAW, ETC.

On the date of the Closing your purchase of Series 1998-A Notes shall (i) be permitted by the laws and regulations of each jurisdiction to which you are subject, without recourse to provisions (such as Section 1405(a)(8) of the New York Insurance Law) permitting limited investments by insurance companies without restriction as to the character of the particular investment, (ii) not violate any applicable law or regulation (including, without limitation, Regulation T, U or X of the Board of Governors of the Federal Reserve System) and (iii) not subject you to any tax, penalty or liability under or pursuant to any applicable law or regulation, which law or regulation was not in effect on the date hereof. If requested by you, you shall have received an Officer’s Certificate certifying as to such matters of fact as you may reasonably specify to enable you to determine whether such purchase is so permitted.

4.6. SALE OF OTHER NOTES.

Contemporaneously with the Closing the Company shall sell to the Other Purchasers and the Other Purchasers shall purchase the Series 1998-A Notes to be purchased by them at the Closing as specified in Schedule A.

4.7. PAYMENT OF SPECIAL COUNSEL FEES.

Without limiting the provisions of Section 15.1, the Company shall have paid on or before the Closing the fees, charges and disbursements of your special counsel referred to in Section 4.4, to the extent reflected in a statement of such counsel rendered to the Company at least one Business Day prior to the Closing.

4.8. PRIVATE PLACEMENT NUMBER.

Private Placement numbers issued by Standard & Poor’s CUSIP Service Bureau (in cooperation with the Securities Valuation Office of the National Association of Insurance Commissioners) shall have been obtained for the Series 1998-A Notes.

4.9. CHANGES IN CORPORATE STRUCTURE.

The Company shall not have changed its jurisdiction of incorporation or been a party to any merger or consolidation and shall not have succeeded to all or any substantial part of the liabilities of any other entity, at any time following the date of the most recent financial statements referred to in Schedule 5.5.

4.10. PROCEEDINGS AND DOCUMENTS.

All corporate and other proceedings in connection with the transactions contemplated by this Agreement and all documents and instruments incident to such transactions shall be satisfactory to you and your special counsel, and you and your special counsel shall have received all such counterpart originals or certified or other copies of such documents as you or they may reasonably request.

5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.

The Company represents and warrants to you that:

5.1. ORGANIZATION; POWER AND AUTHORITY.

The Company is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation, and is duly qualified as a foreign corporation and is in good standing in each jurisdiction in which such qualification is required by law, other than those jurisdictions as to which the failure to be so qualified or in good standing could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. The Company has the corporate power and authority to own or hold under lease the properties it owns or holds under lease, to transact the business it transacts and proposes to transact, to execute and deliver this Agreement and the Series 1998-A Notes and to perform the provisions hereof and thereof.

5.2. AUTHORIZATION, ETC.

This Agreement and the Series 1998-A Notes have been duly authorized by all necessary corporate action on the part of the Company, and this Agreement constitutes, and upon execution and delivery thereof each Series 1998-A Note will constitute, a legal, valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except as such enforceability may be limited by (i) applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors’ rights generally and (ii) general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law).

5.3. DISCLOSURE.

The Company, through its agent, BancAmerica Robertson Stephens, has delivered to you and each Other Purchaser a copy of a Private Placement Memorandum, dated June 1998 (the “MEMORANDUM”), relating to the transactions contemplated hereby. The Memorandum fairly describes, in all material respects, the general nature of the business and principal properties of the Company and its Subsidiaries. Except for projections, as to which no representation or warranty is made, this Agreement, the Memorandum, the documents, certificates or other writings delivered to you by or on behalf of the Company in connection with the transactions contemplated hereby and the financial statements listed in Schedule 5.5, taken as a whole, do not contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading in light of the circumstances under which they were made. The projections provided to you are based upon good faith estimates and assumptions believed by the Company to be reasonable. Except as disclosed in the Memorandum or in one of the documents, certificates or other writings identified therein, or in the financial statements listed in Schedule 5.5, since July 31, 1997, there has been no change in the financial condition, operations, business or properties of the Company or any Restricted Subsidiary except changes that individually or in the aggregate could not reasonably be expected to have a Material Adverse Effect. There is no fact known to the Company that could reasonably be expected to have a Material Adverse Effect that has not been set forth herein or in the Memorandum or in the other documents, certificates and other writings delivered to you by or on behalf of the Company specifically for use in connection with the transactions contemplated hereby.

5.4. ORGANIZATION AND OWNERSHIP OF SHARES OF SUBSIDIARIES; AFFILIATES.

(a) Schedule 5.4 contains (except as noted therein) complete and correct lists (i) of the Company’s Subsidiaries, showing, as to each Subsidiary, the correct name thereof, the jurisdiction of its organization, and the percentage of shares of each class of its capital stock or similar equity interests outstanding owned by the Company and each other Subsidiary, (ii) to the Company’s knowledge, of the Company’s Affiliates, other than Subsidiaries, and (iii) of the Company’s directors and senior officers. Each Subsidiary listed in Schedule 5.4 is a Restricted Subsidiary.

(b) All of the outstanding shares of capital stock or similar equity interests of each Subsidiary shown in Schedule 5.4 as being owned by the Company and its Subsidiaries have been validly issued, are fully paid and nonassessable and are owned by the Company or another Subsidiary free and clear of any Lien (except as otherwise disclosed in Schedule 5.4).

(c) Each Subsidiary identified in Schedule 5.4 is a corporation or other legal entity duly organized, validly existing and in good standing under the laws of its jurisdiction of organization, and is duly qualified as a foreign corporation or other legal entity and is in good standing in each jurisdiction in which such qualification is required by law, other than those jurisdictions as to which the failure to be so qualified or in good

standing could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. Each such Subsidiary has the corporate or other power and authority to own or hold under lease the properties it purports to own or hold under lease and to transact the business it transacts and proposes to transact.

(d) No Subsidiary is a party to, or otherwise subject to any legal restriction or any agreement (other than this Agreement, the agreements listed on Schedule 5.4 and limitations imposed by corporate law statutes) restricting the ability of such Subsidiary to pay dividends out of profits or make any other similar distributions of profits to the Company or any of its Subsidiaries that owns outstanding shares of capital stock or similar equity interests of such Subsidiary.

5.5. FINANCIAL STATEMENTS.

The Company has delivered to you and each Other Purchaser copies of the financial statements of the Company and its Subsidiaries listed on Schedule 5.5. All of said financial statements (including in each case the related schedules and notes) fairly present in all material respects the consolidated financial condition of the Company and its Subsidiaries as of the respective dates specified in such Schedule and the consolidated results of their operations and cash flows for the respective periods so specified and have been prepared in accordance with GAAP consistently applied throughout the periods involved except as set forth in the notes thereto (subject, in the case of any interim financial statements, to normal year-end adjustments).

5.6. COMPLIANCE WITH LAWS, OTHER INSTRUMENTS, ETC.

The execution, delivery and performance by the Company of this Agreement and the Series 1998-A Notes will not (i) contravene, result in any breach of, or constitute a default under, or result in the creation of any Lien in respect of any property of the Company or any Subsidiary under, any Material agreement, or corporate charter or By-Laws, to which the Company or any Subsidiary is bound or by which the Company or any Subsidiary or any of their respective properties may be bound or affected, (ii) conflict with or result in a breach of any of the terms, conditions or provisions of any order, judgment, decree, or ruling of any court, arbitrator or Governmental Authority applicable to the Company or any Subsidiary or (iii) violate any provision of any statute or other rule or regulation of any Governmental Authority applicable to the Company or any Subsidiary.

5.7. GOVERNMENTAL AUTHORIZATIONS, ETC.

No consent, approval or authorization of, or registration, filing or declaration with, any Governmental Authority is required in connection with the execution, delivery or performance by the Company of this Agreement or the Series 1998-A Notes.

5.8. LITIGATION; OBSERVANCE OF AGREEMENTS, STATUTES AND ORDERS.

(a) Except as disclosed in Schedule 5.8, there are no actions, suits or proceedings pending or, to the knowledge of the Company, threatened against or

affecting the Company or any Subsidiary or any property of the Company or any Subsidiary in any court or before any arbitrator of any kind or before or by any Governmental Authority that, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect.

(b) Neither the Company nor any Subsidiary is in default under any term of any agreement or instrument to which it is a party or by which it is bound, or any order, judgment, decree or ruling of any court, arbitrator or Governmental Authority or is in violation of any applicable law, ordinance, rule or regulation (including without limitation Environmental Laws) of any Governmental Authority, which default or violation, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect.

5.9. TAXES.

The Company and its Subsidiaries have filed all tax returns that are required to have been filed in any jurisdiction, and have paid all taxes shown to be due and payable on such returns and all other taxes and assessments levied upon them or their properties, assets, income or franchises, to the extent such taxes and assessments have become due and payable and before they have become delinquent, except for any taxes and assessments (i) the amount of which is not individually or in the aggregate Material or (ii) the amount, applicability or validity of which is currently being contested in good faith by appropriate proceedings and with respect to which the Company or a Subsidiary, as the case may be, has established adequate reserves in accordance with GAAP. The Company knows of no basis for any other tax or assessment that could reasonably be expected to have a Material Adverse Effect. The charges, accruals and reserves on the books of the Company and its Subsidiaries in respect of Federal, state or other taxes for all fiscal periods are adequate under GAAP. The Federal income tax liabilities of the Company and its Subsidiaries have been determined by the Internal Revenue Service and paid for all fiscal years up to and including the fiscal year ended December 31, 1990.

5.10. TITLE TO PROPERTY; LEASES.

The Company and its Subsidiaries have good and sufficient title to the properties that they own or purport to own and that individually or in the aggregate are Material, including all such properties reflected in the most recent audited balance sheet referred to in Section 5.5 or purported to have been acquired by the Company or any Subsidiary after said date (except as sold or otherwise disposed of in the ordinary course of business), in each case free and clear of Liens prohibited by this Agreement. All leases that individually or in the aggregate are Material are valid and subsisting and are in full force and effect in all material respects.

5.11. LICENSES, PERMITS, ETC.

Except as disclosed in Schedule 5.11,

(a) the Company and its Subsidiaries own or possess all licenses, permits, franchises, authorizations, patents, copyrights, service marks, trademarks and trade names, or rights thereto, that individually or in the aggregate are Material, without known Material conflict with the rights of others;

(b) to the best knowledge of the Company, no product of the Company infringes in any Material respect any license, permit, franchise, authorization, patent, copyright, service mark, trademark, trade name or other right owned by any other Person; and

(c) to the best knowledge of the Company, there is no Material violation by any Person of any right of the Company or any of its Subsidiaries with respect to any patent, copyright, service mark, trademark, trade name or other right owned or used by the Company or any of its Subsidiaries.

5.12. COMPLIANCE WITH ERISA.

(a) The Company and each ERISA Affiliate have operated and administered each Plan in compliance with all applicable laws except for such instances of noncompliance as have not resulted in and could not reasonably be expected to result in a Material Adverse Effect. Neither the Company nor any ERISA Affiliate has incurred any liability pursuant to Title I or IV of ERISA or the penalty or excise tax provisions of the Code relating to employee benefit plans (as defined in Section 3 of ERISA), and no event, transaction or condition has occurred or exists that could reasonably be expected to result in the incurrence of any such liability by the Company or any ERISA Affiliate, or in the imposition of any Lien on any of the rights, properties or assets of the Company or any ERISA Affiliate, in either case pursuant to Title I or IV of ERISA or to such penalty or excise tax provisions or to Section 401(a)(29) or 412 of the Code, other than such liabilities or Liens as would not be individually or in the aggregate Material.

(b) The present value of the aggregate benefit liabilities under each of the Plans that are subject to Title IV of ERISA (other than Multiemployer Plans), determined as of the end of such Plan’s most recently ended plan year on the basis of the actuarial assumptions specified for funding purposes in such Plan’s most recent actuarial valuation report, did not exceed the aggregate current value of the assets of such Plan allocable to such benefit liabilities by more than 5% of Adjusted Consolidated Net Worth. The term “BENEFIT LIABILITIES” has the meaning specified in section 4001 of ERISA and the terms “CURRENT VALUE” and “PRESENT VALUE” have the meaning specified in section 3 of ERISA.

(c) The Company and its ERISA Affiliates have not incurred withdrawal liabilities (and are not subject to contingent withdrawal liabilities) under section 4201 or 4204 of ERISA in respect of Multiemployer Plans that individually or in the aggregate are Material.

(d) The expected postretirement benefit obligation (determined as of the last day of the Company’s most recently ended fiscal year in accordance with Financial Accounting Standards Board Statement No. 106, without regard to liabilities attributable to continuation coverage mandated by section 4980B of the Code) of the Company and its Subsidiaries is not Material or has been disclosed in the most recent audited consolidated financial statements of the Company and its Subsidiaries.

(e) The execution and delivery of this Agreement and the issuance and sale of the Notes hereunder will not involve any transaction that is subject to the prohibitions of section 406 of ERISA or in connection with which a tax could be imposed pursuant to section 4975(c)(1)(A)-(D) of the Code. The representation by the Company in the first sentence of this
Section 5.12(e) is made in reliance upon and subject to the accuracy of your representation in Section 6.2 as to the sources of the funds used to pay the purchase price of the Notes to be purchased by you.

5.13. PRIVATE OFFERING BY THE COMPANY.

Neither the Company nor anyone acting on its behalf has offered the Series 1998-A Notes or any similar securities for sale to, or solicited any offer to buy any of the same from, or otherwise approached or negotiated in respect thereof with, any person other than you, the Other Purchasers and not more than 42 other Institutional Investors, each of which has been offered the Series 1998-A Notes at a private sale for investment. Neither the Company nor anyone acting on its behalf has taken, or will take, any action that would subject the issuance or sale of the Series 1998-A Notes to the registration requirements of Section 5 of the Securities Act.

5.14. USE OF PROCEEDS; MARGIN REGULATIONS.

The Company will apply the proceeds of the sale of the Series 1998-A Notes to the repayment of Indebtedness to banks. No part of the proceeds from the sale of the Series 1998-A Notes hereunder will be used, directly or indirectly, for the purpose of buying or carrying any margin stock within the meaning of Regulation U of the Board of Governors of the Federal Reserve System (12 CFR 221), or for the purpose of buying or carrying or trading in any securities under such circumstances as to involve the Company in a violation of Regulation X of said Board (12 CFR 224) or to involve any broker or dealer in a violation of Regulation T of said Board (12 CFR 220). Margin stock does not constitute more than 5% of the value of the consolidated assets of the Company and its Subsidiaries and the Company does not have any present intention that margin stock will constitute 25% or more of the value of such assets. As used in this Section, the terms “MARGIN STOCK” and “PURPOSE OF BUYING OR CARRYING” shall have the meanings assigned to them in said Regulation U.

5.15. EXISTING INDEBTEDNESS; FUTURE LIENS.

(a) Except as described therein, Schedule 5.15 sets forth a complete and correct list of all outstanding Indebtedness of the Company and its Subsidiaries as of

April 30, 1998, since which date there has been no Material change in the amounts, interest rates, sinking funds, installment payments or maturities of the Indebtedness of the Company or its Subsidiaries. Neither the Company nor any Subsidiary is in default and no waiver of default is currently in effect, in the payment of any principal or interest on any Indebtedness of the Company or such Subsidiary that is outstanding in an aggregate principal amount in excess of $5,000,000 and no event or condition exists with respect to any Indebtedness of the Company or any Subsidiary that is outstanding in an aggregate principal amount in excess of $5,000,000 and that would permit (or that with notice or the lapse of time, or both, would permit) one or more Persons to cause such Indebtedness to become due and payable before its stated maturity or before its regularly scheduled dates of payment.

(b) Except as disclosed in Schedule 5.15, neither the Company nor any Subsidiary has agreed or consented to cause or permit in the future (upon the happening of a contingency or otherwise) any of its property, whether now owned or hereafter acquired, to be subject to a Lien not permitted by Section 10.2.

5.16. FOREIGN ASSETS CONTROL REGULATIONS, ETC.

Neither the sale of the Series 1998-A Notes by the Company hereunder nor its use of the proceeds thereof will violate the Trading with the Enemy Act, as amended, or any of the foreign assets control regulations of the United States Treasury Department (31 CFR, Subtitle B, Chapter V, as amended) or any enabling legislation or executive order relating thereto.

5.17. STATUS UNDER CERTAIN STATUTES.

Neither the Company nor any Subsidiary is subject to regulation under the Investment Company Act of 1940, as amended, the Public Utility Holding Company Act of 1935, as amended, the Interstate Commerce Act, as amended by the ICC Termination Act, as amended, or the Federal Power Act, as amended.

5.18. ENVIRONMENTAL MATTERS.

Neither the Company nor any Subsidiary has knowledge of any claim or has received any notice of any claim, and no proceeding has been instituted asserting any claim against the Company or any of its Subsidiaries or any of their respective real properties now owned, leased or operated by any of them or other assets nor, to the knowledge of the Company or any Subsidiary, has any such proceeding been instituted against any of their respective real properties formerly owned, for damage to the environment or violation of any Environmental Laws, except, in each case, such as could not reasonably be expected to result in a Material Adverse Effect. Except as otherwise disclosed to you in writing,

(a) neither the Company nor any Subsidiary has knowledge of any facts that would give rise to any claim for violation of Environmental Laws or damage to the environment emanating from, occurring on or in any way related to real properties now or

formerly owned, leased or operated by any of them or to other assets or their use, except, in each case, such as could not reasonably be expected to result in a Material Adverse Effect;

(b) neither the Company nor any of its Subsidiaries has stored any Hazardous Materials on real properties now or formerly owned, leased or operated by any of them and has not disposed of any Hazardous Materials in a manner contrary to any Environmental Laws in each case in any manner that could reasonably be expected to result in a Material Adverse Effect; and

(c) all buildings on all real properties now owned, leased or operated by the Company or any of its Subsidiaries are in compliance with applicable Environmental Laws, except where failure to comply could not reasonably be expected to result in a Material Adverse Effect.

6. REPRESENTATIONS OF THE PURCHASERS.

6.1. PURCHASE FOR INVESTMENT.

You represent that you are purchasing the Series 1998-A Notes for your own account or for one or more separate accounts maintained by you or for the account of one or more pension or trust funds and not with a view to the distribution thereof, provided that the disposition of your or their property shall at all times be within your or their control. You understand that the Series 1998-A Notes have not been registered under the Securities Act and may be resold only if registered pursuant to the provisions of the Securities Act or if an exemption from registration is available, and that the Company is not required to register the Series 1998-A Notes.

6.2. SOURCE OF FUNDS.

You represent that at least one of the following statements is an accurate representation as to each source of funds (a “SOURCE”) to be used by you to pay the purchase price of the Series 1998-A Notes to be purchased by you hereunder:

(a) if you are an insurance company, the Source does not include assets allocated to any separate account maintained by you in which any employee benefit plan (or its related trust) has any interest, other than a separate account that is maintained solely in connection with your fixed contractual obligations under which the amounts payable, or credited, to such plan and to any participant or beneficiary of such plan (including any annuitant) are not affected in any manner by the investment performance of the separate account; or

(b) the Source is either (i) an insurance company pooled separate account, within the meaning of Prohibited Transaction Exemption (“PTE”) 90-1 (issued January 29, 1990), or (ii) a bank collective investment fund, within the meaning of the PTE 91-38

(issued July 12, 1991) and, except as you have disclosed to the Company in writing pursuant to this paragraph (b), no employee benefit plan or group of plans maintained by the same employer or employee organization beneficially owns more than 10% of all assets allocated to such pooled separate account or collective investment fund; or

(c) the Source constitutes assets of an “investment fund” (within the meaning of Part V of the QPAM Exemption) managed by a “qualified professional asset manager” or “QPAM” (within the meaning of Part V of the QPAM Exemption), no employee benefit plan’s assets that are included in such investment fund, when combined with the assets of all other employee benefit plans established or maintained by the same employer or by an affiliate (within the meaning of Section V(c)(1) of the QPAM Exemption) of such employer or by the same employee organization and managed by such QPAM, exceed 20% of the total client assets managed by such QPAM, the conditions of Part I(c) and (g) of the QPAM Exemption are satisfied, neither the QPAM nor a person controlling or controlled by the QPAM (applying the definition of “control” in Section V(e) of the QPAM Exemption) owns a 5% or more interest in the Company and (i) the identity of such QPAM and (ii) the names of all employee benefit plans whose assets are included in such investment fund have been disclosed to the Company in writing pursuant to this paragraph (c); or

(d) the Source is a governmental plan; or

(e) the Source is one or more employee benefit plans, or a separate account or trust fund comprised of one or more employee benefit plans, each of which has been identified to the Company in writing pursuant to this paragraph (e); or

(f) the Source does not include assets of any employee benefit plan, other than a plan exempt from the coverage of ERISA; or

(g) the Source is an “insurance company general account” as such term is defined in the Department of Labor Prohibited Transaction Class Exemption 95-60 (issued July 12, 1995) (“PTE 95-60”) and there is no “employee benefit plan” with respect to which the aggregate amount of such general account’s reserves and liabilities for the contracts held by or on behalf of such employee benefit plan and all other employee benefit plans maintained by the same employer (and affiliates thereof as defined in Section V(a)(1) of PTE 95-60) or by the same employee organization (in each case determined in accordance with the provisions of PTE 95-60) exceeds 10% of the total reserves and liabilities of such general account (as determined under PTE 95-60) (exclusive of separate account liabilities) plus surplus as set forth in the National Association of Insurance Commissioners Annual Statement filed with the state of domicile of such Purchaser.

As used in this Section 6.2, the terms “EMPLOYEE BENEFIT PLAN”, “GOVERNMENTAL PLAN”, “PARTY IN INTEREST” and “SEPARATE ACCOUNT” shall have the respective meanings assigned to such terms in Section 3 of ERISA.

7. INFORMATION AS TO COMPANY.

7.1. FINANCIAL AND BUSINESS INFORMATION

The Company shall deliver to each holder of Notes that is an Institutional Investor:

(a) Quarterly Statements — within 60 days after the end of each quarterly fiscal period in each fiscal year of the Company (other than the last quarterly fiscal period of each such fiscal year), duplicate copies of,

(i) a consolidated balance sheet of the Company and its Subsidiaries as at the end of such quarter, and

(ii) consolidated statements of income, changes in stockholders’ equity and cash flows of the Company and its Subsidiaries, for such quarter and (in the case of the second and third quarters) for the portion of the fiscal year ending with such quarter,

setting forth in each case in comparative form the figures for the corresponding periods in the previous fiscal year, all in reasonable detail, prepared in accordance with GAAP applicable to quarterly financial statements generally, and certified by a Senior Financial Officer as fairly presenting, in all material respects, the financial condition of the companies being reported on and their results of operations and cash flows, subject to changes resulting from year-end adjustments, provided that delivery within the time period specified above of copies of the Company’s Quarterly Report on Form 10-Q prepared in compliance with the requirements therefor and filed with the Securities and Exchange Commission shall be deemed to satisfy the requirements of this Section 7.1(a);

(b) Annual Statements — within 120 days after the end of each fiscal year of the Company, duplicate copies of,

(i) a consolidated balance sheet of the Company and its Subsidiaries, as at the end of such year, and

(ii) consolidated statements of income, changes in stockholders’ equity and cash flows of the Company and its Subsidiaries, for such year,

setting forth in each case in comparative form the figures for the previous fiscal year, all in reasonable detail, prepared in accordance with GAAP, and accompanied by an opinion thereon of independent certified public accountants of recognized national standing, which opinion shall state that such financial statements present fairly, in all material respects, the financial condition of the companies being reported upon and their results of operations and cash flows and have been prepared in conformity with GAAP, and that the examination of such accountants in connection with such financial statements has been made in accordance with generally accepted auditing standards, and that such audit

provides a reasonable basis for such opinion in the circumstances, provided that the delivery within the time period specified above of the Company’s Annual Report on Form 10-K for such fiscal year (together with the Company’s annual report to shareholders, if any, prepared pursuant to Rule 14a-3 under the Exchange Act) prepared in accordance with the requirements therefor and filed with the Securities and Exchange Commission shall be deemed to satisfy the requirements of this Section 7.1(b);

(c) Unrestricted Subsidiaries — if, at the time of delivery of any financial statements pursuant to Section 7.1(a) or (b), Unrestricted Subsidiaries account for more than 10% of (i) the consolidated total assets of the Company and its Subsidiaries reflected in the balance sheet included in such financial statements or (ii) the consolidated revenues of the Company and its Subsidiaries reflected in the consolidated statement of income included in such financial statements, an unaudited balance sheet for all Unrestricted Subsidiaries taken as whole as at the end of the fiscal period included in such financial statements and the related unaudited statements of income, stockholders’ equity and cash flows for such Unrestricted Subsidiaries for such period, together with consolidating statements reflecting all eliminations or adjustments necessary to reconcile such group financial statements to the consolidated financial statements of the Company and its Subsidiaries;

(d) SEC and Other Reports — promptly upon their becoming available, one copy of (i) each financial statement, report, notice or proxy statement sent by the Company or any Subsidiary to public securities holders generally, and (ii) each regular or periodic report, each registration statement (without exhibits except as expressly requested by such holder), and each prospectus and all amendments thereto filed by the Company or any Subsidiary with the Securities and Exchange Commission and of all press releases and other statements made available generally by the Company or any Restricted Subsidiary to the public concerning developments that are Material;

(e) Notice of Default or Event of Default — promptly, and in any event within five days after a Responsible Officer obtains actual knowledge of the existence of any actual or claimed Default or Event of Default or that any Person has given any notice or taken any action with respect to a claimed default of the type referred to in Section 11(f), a written notice specifying the nature and period of existence thereof and what action the Company is taking or proposes to take with respect thereto;

(f) ERISA Matters — promptly, and in any event within five days after a Responsible Officer becoming aware of any of the following, a written notice setting forth the nature thereof and the action, if any, that the Company or an ERISA Affiliate proposes to take with respect thereto:

(i) with respect to any Plan, any reportable event, as defined in section 4043(b) of ERISA and the regulations thereunder, for which notice thereof has not been waived pursuant to such regulations as in effect on the date hereof; or

(ii) the taking by the PBGC of steps to institute, or the threatening by the PBGC of the institution of, proceedings under section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan, or the receipt by the Company or any ERISA Affiliate of a notice from a Multiemployer Plan that such action has been taken by the PBGC with respect to such Multiemployer Plan; or

(iii) any event, transaction or condition that could result in the incurrence of any liability by the Company or any ERISA Affiliate pursuant to Title I or IV of ERISA or the penalty or excise tax provisions of the Code relating to employee benefit plans, or in the imposition of any Lien on any of the rights, properties or assets of the Company or any ERISA Affiliate pursuant to Title I or IV of ERISA or such penalty or excise tax provisions, if such liability or Lien, taken together with any other such liabilities or Liens then existing, could reasonably be expected to have a Material Adverse Effect;

(g) Notices from Governmental Authority — promptly, and in any event within 30 days of receipt thereof, copies of any notice to the Company or any Subsidiary from any Federal or state Governmental Authority relating to any order, ruling, statute or other law or regulation that could reasonably be expected to have a Material Adverse Effect;

(h) Requested Information — with reasonable promptness, such other data and information relating to the business, operations, affairs, financial condition, assets or properties of the Company or any of its Subsidiaries or relating to the ability of the Company to perform its obligations hereunder and under the Notes as from time to time may be reasonably requested by any such holder of Notes that is an Institutional Investor; and

(i) Supplements to Agreement — in the event an additional series of Notes is, or is proposed to be, issued under this Agreement, promptly, and in any event within 10 Business Days after execution and delivery thereof, a true copy of the Supplement pursuant to which such Notes are to be, or were, issued.

7.2. OFFICER’S CERTIFICATE.

Each set of financial statements delivered to a holder of Notes pursuant to Section 7.1(a) or (b) shall be accompanied by a certificate of a Senior Financial Officer setting forth:

(a) Covenant Compliance — the information (including detailed calculations) required in order to establish whether the Company was in compliance with the requirements of Section 10.1 during the quarterly or annual period covered by the statements then being furnished; and

(b) Event of Default — a statement that such officer has reviewed the relevant terms hereof and has made, or caused to be made, under his or her supervision, a review of the transactions and conditions of the Company and its Restricted Subsidiaries from the beginning of the quarterly or annual period covered by the statements then being furnished to the date of the certificate and that such review has not disclosed the existence during such period of any condition or event that constitutes a Default or an Event of Default or, if any such condition or event existed or exists (including any such event or condition resulting from the failure of the Company or any Restricted Subsidiary to comply with any Environmental Law), specifying the nature and period of existence thereof and what action the Company shall have taken or proposes to take with respect thereto.

7.3. INSPECTION.

The Company will permit the representatives of each holder of Notes that is an Institutional Investor:

(a) No Default — if no Default or Event of Default then exists, at the expense of such holder and upon reasonable prior notice to the Company, to visit the principal executive office of the Company, to discuss the affairs, finances and accounts of the Company and its Restricted Subsidiaries with the Company’s officers, and (with the consent of the Company, which consent will not be unreasonably withheld) its independent public accountants, and (with the consent of the Company, which consent will not be unreasonably withheld) to visit the other offices and properties of the Company and each Restricted Subsidiary, all at such reasonable times and as often as may be reasonably requested in writing; and

(b) Default — if a Default or Event of Default then exists, at the expense of the Company and upon reasonable prior notice to the Company, to visit the principal executive office of the Company, to discuss the affairs, finances and accounts of the Company and its Restricted Subsidiaries with the Company’s officers, and (with the consent of the Company, which consent will not be unreasonably withheld) its independent public accountants, and (with the consent of the Company, which consent will not be unreasonably withheld) to visit the other offices and properties of the Company and each Restricted Subsidiary, all at such reasonable times and as often as may be reasonably requested in writing.

8. PREPAYMENT OF THE NOTES.

8.1. REQUIRED PREPAYMENTS.

No regularly scheduled prepayments are due on the Series 1998-A Notes prior to their stated maturity.

8.2. OPTIONAL PREPAYMENTS WITH MAKE-WHOLE AMOUNT.

The Company may, at its option, upon notice as provided below, prepay at any time all, or from time to time any part of, the Notes of any series, including the Series 1998-A Notes, in an amount not less than $2,000,000 in the aggregate in the case of a partial prepayment, at 100% of the principal amount so prepaid, plus the Make-Whole Amount determined for the prepayment date with respect to such principal amount. The Company will give each holder of Notes of the series to be prepaid written notice of each optional prepayment under this Section 8.2 not less than 30 days and not more than 60 days prior to the date fixed for such prepayment. Each such notice shall specify such date, the aggregate principal amount of the Notes to be prepaid on such date, the principal amount of each Note held by such holder to be prepaid (determined in accordance with Section 8.3), and the interest to be paid on the prepayment date with respect to such principal amount being prepaid, and shall be accompanied by a certificate of a Senior Financial Officer as to the estimated Make-Whole Amount due in connection with such prepayment (calculated as if the date of such notice were the date of the prepayment), setting forth the details of such computation. Two Business Days prior to such prepayment, the Company shall deliver to each holder of Notes a certificate of a Senior Financial Officer specifying the calculation of such Make-Whole Amount as of the specified prepayment date.

8.3. ALLOCATION OF PARTIAL PREPAYMENTS.

In the case of each partial prepayment of the Notes of a series, the principal amount of the Notes of such series to be prepaid shall be allocated among all of the Notes of every tranche of such series at the time outstanding in proportion, as nearly as practicable, to the respective unpaid principal amounts thereof not theretofore called for prepayment. Each such partial prepayment pursuant to Section 8.2 shall, in respect of the Notes of a series, be applied first to the payment due on such Notes at final maturity and thereafter to any required prepayments on such Notes, in inverse order of maturity.

8.4. MATURITY; SURRENDER, ETC.

In the case of each prepayment of Notes pursuant to this Section 8, the principal amount of each Note to be prepaid shall mature and become due and payable on the date fixed for such prepayment, together with interest on such principal amount accrued to such date and the applicable Make-Whole Amount, if any. From and after such date, unless the Company shall fail to pay such principal amount when so due and payable, together with the interest and Make-Whole Amount, if any, as aforesaid, interest on such principal amount shall cease to accrue. Any Note paid or prepaid in full shall be surrendered to the Company and canceled and shall not be reissued, and no Note shall be issued in lieu of any prepaid principal amount of any Note.

8.5. PURCHASE OF NOTES.

The Company will not, and will not permit any Affiliate to, purchase, redeem, prepay or otherwise acquire, directly or indirectly, any of the outstanding Notes except upon the payment or prepayment of the Notes in accordance with the terms of this Agreement and the

Notes. The Company will promptly cancel all Notes acquired by it or any Affiliate pursuant to any payment, prepayment or purchase of Notes pursuant to any provision of this Agreement and no Notes may be issued in substitution or exchange for any such Notes.

8.6. MAKE-WHOLE AMOUNT.

The term “MAKE-WHOLE AMOUNT” means, with respect to any Note, an amount equal to the excess, if any, of the Discounted Value of the Remaining Scheduled Payments with respect to the Called Principal of such Note over the amount of such Called Principal, provided that the Make-Whole Amount may in no event be less than zero. For the purposes of determining the Make-Whole Amount, the following terms have the following meanings:

“CALLED PRINCIPAL” means, with respect to any Note, the principal of such Note that is to be prepaid pursuant to Section 8.2 or has become or is declared to be immediately due and payable pursuant to Section 12.1, as the context requires.

“DISCOUNTED VALUE” means, with respect to the Called Principal of any Note, the amount obtained by discounting all Remaining Scheduled Payments with respect to such Called Principal from their respective scheduled due dates to the Settlement Date with respect to such Called Principal, in accordance with accepted financial practice and at a discount factor (applied on the same periodic basis as that on which interest on the Notes is payable) equal to the Reinvestment Yield with respect to such Called Principal.

“REINVESTMENT YIELD” means, with respect to the Called Principal of any Note, .50% over the yield to maturity implied by (i) the yields reported, as of 10:00 A.M. (New York City time) on the second Business Day preceding the Settlement Date with respect to such Called Principal, on the display designated as the “PX Screen” on the Bloomberg Financial Market Service (or such other display as may replace the PX Screen on Bloomberg Financial Market Service) for actively traded U.S. Treasury securities having a maturity equal to the Remaining Average Life of such Called Principal as of such Settlement Date, or (ii) if such yields are not reported as of such time or the yields reported as of such time are not ascertainable, the Treasury Constant Maturity Series Yields reported, for the latest day for which such yields have been so reported as of the second Business Day preceding the Settlement Date with respect to such Called Principal, in Federal Reserve Statistical Release H.15 (519) (or any comparable successor publication) for actively traded U.S. Treasury securities having a constant maturity equal to the Remaining Average Life of such Called Principal as of such Settlement Date. Such implied yield will be determined, if necessary, by (a) converting U.S. Treasury bill quotations to bond-equivalent yields in accordance with accepted financial practice and (b) interpolating linearly between (1) the actively traded U.S. Treasury security with the MATURITY closest to and greater than the Remaining Average Life and (2) the actively traded U.S. Treasury security with the MATURITY closest to and less than the Remaining Average Life.

“REMAINING AVERAGE LIFE” means, with respect to any Called Principal, the number of years (calculated to the nearest one-twelfth year) obtained by dividing (i) such Called Principal into (ii) the sum of the products obtained by multiplying (a) the principal component of each Remaining Scheduled Payment with respect to such Called Principal by (b) the number of years (calculated to the nearest one-twelfth year) that will elapse between the Settlement Date with respect to such Called Principal and the scheduled due date of such Remaining Scheduled Payment.

“REMAINING SCHEDULED PAYMENTS” means, with respect to the Called Principal of any Note, all payments of such Called Principal and interest thereon that would be due after the Settlement Date with respect to such Called Principal if no payment of such Called Principal were made prior to its scheduled due date, provided that if such Settlement Date is not a date on which interest payments are due to be made under the terms of the Notes, then the amount of the next succeeding scheduled interest payment will be reduced by the amount of interest accrued to such Settlement Date and required to be paid on such Settlement Date pursuant to Section 8.2 or 12.1.

“SETTLEMENT DATE” means, with respect to the Called Principal of any Note, the date on which such Called Principal is to be prepaid pursuant to Section 8.2 or has become or is declared to be immediately due and payable pursuant to Section 12.1, as the context requires.

9. AFFIRMATIVE COVENANTS.

The Company covenants that so long as any of the Notes are outstanding:

9.1. COMPLIANCE WITH LAW.

The Company will, and will cause each Subsidiary to, comply with all laws, ordinances or governmental rules or regulations to which each of them is subject, including, without limitation, Environmental Laws, and will obtain and maintain in effect all licenses, certificates, permits, franchises and other governmental authorizations necessary to the ownership of their respective properties or to the conduct of their respective businesses, in each case to the extent necessary to ensure that non-compliance with such laws, ordinances or governmental rules or regulations or failures to obtain or maintain in effect such licenses, certificates, permits, franchises and other governmental authorizations could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.

9.2. INSURANCE.

The Company will, and will cause each Restricted Subsidiary to, maintain, with financially sound and reputable insurers, insurance with respect to their respective properties and businesses against such casualties and contingencies, of such types, on such terms and in such amounts (including deductibles, co-insurance and self-insurance, if adequate reserves are

maintained with respect thereto) as is customary in the case of entities of established reputations engaged in the same or a similar business and similarly situated.

9.3. MAINTENANCE OF PROPERTIES.

The Company will and will cause each Restricted Subsidiary to maintain and keep, or cause to be maintained and kept, their respective properties in good repair, working order and condition (other than ordinary wear and tear), so that the business carried on in connection therewith may be properly conducted at all times, provided that this Section shall not prevent the Company or any Restricted Subsidiary from discontinuing the operation and the maintenance of any of its properties if such discontinuance is desirable in the conduct of its business and the Company has concluded that such discontinuance could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.

9.4. PAYMENT OF TAXES AND CLAIMS.

The Company will, and will cause each Subsidiary to, file all tax returns required to be filed in any jurisdiction and to pay and discharge all taxes shown to be due and payable on such returns and all other taxes, assessments, governmental charges, or levies imposed on them or any of their properties, assets, income or franchises, to the extent such taxes and assessments have become due and payable and before they have become delinquent and all claims for which sums have become due and payable that have or might become a Lien on properties or assets of the Company or any Subsidiary, provided that neither the Company nor any Subsidiary need pay any such tax or assessment or claim if (i) the amount, applicability or validity thereof is contested by the Company or such Subsidiary in good faith and in appropriate proceedings, and the Company or a Subsidiary has established adequate reserves therefor in accordance with GAAP on the books of the Company or such Subsidiary or (ii) the nonpayment of all such taxes, assessments and claims in the aggregate could not reasonably be expected to have a Material Adverse Effect.

9.5. CORPORATE EXISTENCE, ETC.

Subject to Section 10.4, the Company will at all times preserve and keep in full force and effect its corporate existence. Subject to Sections 10.3 and 10.4, the Company will at all times preserve and keep in full force and effect the corporate existence of each Restricted Subsidiary (unless merged into the Company or another Restricted Subsidiary) and all rights and franchises of the Company and its Restricted Subsidiaries unless, in the good faith judgment of the Company, the termination of or failure to preserve and keep in full force and effect such corporate existence, right or franchise could not, individually or in the aggregate, have a Material Adverse Effect.

10. NEGATIVE COVENANTS.

The Company covenants that so long as any of the Notes are outstanding:

10.1. CONSOLIDATED INDEBTEDNESS; INDEBTEDNESS OF RESTRICTED SUBSIDIARIES.

The Company will not permit:

(a) Consolidated Indebtedness to exceed 65% of Consolidated Total Capitalization at any time; and

(b) Any Restricted Subsidiary to incur any Indebtedness if, after giving effect thereto and to the application of the proceeds therefrom, Priority Debt outstanding would exceed 20% of Consolidated Total Capitalization.

10.2. LIENS.

The Company will not, and will not permit any Restricted Subsidiary to, permit to exist, create, assume or incur, directly or indirectly, any Lien on its properties or assets, whether now owned or hereafter acquired (unless, concurrently with the incurrence, assumption or creation of such Lien, the Company makes, or causes to be made, effective provision whereby the Notes are equally and ratably secured by a Lien on the same property or assets), except:

(a) Liens existing on property or assets of the Company or any Restricted Subsidiary as of the date of this Agreement that are described in Schedule 10.2;

(b) Liens for taxes, assessments or governmental charges not then due and delinquent or the nonpayment of which is permitted by Section 9.4;

(c) encumbrances in the nature of leases, subleases, zoning restrictions, easements, rights of way and similar charges and encumbrances of record on the use of real property and defects in title arising or incurred in the ordinary course of business, which, individually and in the aggregate, do not materially impair the use or value of the property or assets subject thereto;

(d) Liens incidental to the conduct of business or the ownership of properties and assets (including landlords’, carriers’, warehousemen’s, mechanics’, materialmen’s and other similar liens) and Liens to secure the performance of bids, tenders, leases or trade contracts, or to secure statutory obligations (including obligations under workers compensation, unemployment insurance and other social security legislation), surety or appeal bonds or other Liens of like general nature incurred in the ordinary course of business and not in connection with the borrowing of money;

(e) any attachment or judgment Lien, unless the judgment it secures has not, within 60 days after the entry thereof, been discharged or execution thereof stayed pending appeal, or has not been discharged within 60 days after the expiration of any such stay;

(f) Liens securing Indebtedness of a Restricted Subsidiary to the Company or to another Restricted Subsidiary;

(g) Liens (i) existing on property at the time of its acquisition by the Company or a Restricted Subsidiary and not created in contemplation thereof, whether or not the Indebtedness secured by such Lien is assumed by the Company or a Restricted Subsidiary; or (ii) on property created contemporaneously with its acquisition or within 180 days of the acquisition or completion of construction or improvement thereof to secure or provide for all or a portion of the purchase price or cost of construction or improvement of such property after the date of Closing; or (iii) existing on property of a Person at the time such Person is merged or consolidated with, or becomes a Restricted Subsidiary of, or substantially all of its assets are acquired by, the Company or a Restricted Subsidiary and not created in contemplation thereof; provided that in the case of clauses (i), (ii) and (iii) such Liens do not extend to additional property of the Company or any Restricted Subsidiary (other than property that is an improvement to or is acquired for specific use in connection with the subject property) and, in the case of clause (ii) only, that the aggregate principal amount of Indebtedness secured by each such Lien does not exceed the lesser of the fair market value (determined in good faith by the board of directors of the Company or by one or more officers of the Company to whom authority to enter into the transaction has been delegated by the board of directors) or cost of acquisition or construction of the property subject thereto;

(h) Liens coincident to asset securitization transactions;

(i) Liens resulting from extensions, renewals or replacements of Liens permitted by paragraphs (a), (f), (g) and (h), provided that (i) there is no increase in the principal amount or decrease in maturity of the Indebtedness secured thereby at the time of such extension, renewal or replacement, (ii) any new Lien attaches only to the same property theretofore subject to such earlier Lien and (iii) immediately after such extension, renewal or replacement no Default or Event of Default would exist; and

(j) Additional Liens securing Indebtedness not otherwise permitted by paragraphs (a) through (i) above, provided that, at the time of creation, assumption or incurrence thereof and immediately after giving effect thereto and to the application of the proceeds therefrom, Priority Debt outstanding does not exceed 20% of Consolidated Total Capitalization.

10.3. SALE OF ASSETS.

Except as permitted by Section 10.4, the Company will not, and will not permit any Restricted Subsidiary to, sell, lease, transfer or otherwise dispose of, including by way of merger (collectively a “DISPOSITION”), any assets, including capital stock of Restricted Subsidiaries, in one or a series of transactions, to any Person, other than (a) Dispositions in the ordinary course of business, (b) Dispositions by the Company to a Restricted Subsidiary or by a Restricted Subsidiary to the Company or another Restricted Subsidiary or (c) other Dispositions not otherwise permitted by this Section 10.3, including the sale of receivables pursuant to asset

securitization transactions, provided that the aggregate net book value of all assets so disposed of in any fiscal year pursuant to this Section 10.3(c) does not exceed 10% of Consolidated Total Assets as of the end of the immediately preceding fiscal year. Notwithstanding the foregoing, the Company may, or may permit any Restricted Subsidiary to, make a Disposition and the assets subject to such Disposition shall not be subject to or included in the foregoing limitation and computation contained in Section 10.3(c) of the preceding sentence to the extent that (i) such assets were acquired or constructed not more than 180 days prior to Closing and are leased back by the Company or any Restricted Subsidiary, as lessee, within 180 days of the acquisition or construction thereof, or (ii) the net proceeds from such Disposition are within one year of such Disposition (A) reinvested in productive assets by the Company or a Restricted Subsidiary or (B) applied to the payment or prepayment of any outstanding Indebtedness of the Company or any Restricted Subsidiary that is not subordinated to the Notes. Any prepayment of Notes pursuant to this Section 10.3 shall be in accordance with Sections 8.2 and 8.3, without regard to the minimum prepayment requirements of Section 8.2.

10.4. MERGERS, CONSOLIDATIONS, ETC.

The Company will not, and will not permit any Restricted Subsidiary to, consolidate with or merge with any other Person or convey, transfer, sell or lease all or substantially all of its assets in a single transaction or series of transactions to any Person except that:

(a) the Company may consolidate or merge with any other Person or convey, transfer, sell or lease all or substantially all of its assets in a single transaction or series of transactions to any Person, provided that:

(i) the successor formed by such consolidation or the survivor of such merger or the Person that acquires by conveyance, transfer, sale or lease all or substantially all of the assets of the Company as an entirety, as the case may be, shall be a solvent corporation organized and existing under the laws of the United States or any State thereof (including the District of Columbia), and, if the Company is not such corporation, such corporation (x) shall have executed and delivered to each holder of any Notes its assumption of the due and punctual performance and observance of each covenant and condition of this Agreement and the Notes and (y) shall have caused to be delivered to each holder of any Notes an opinion of independent counsel reasonably satisfactory to the Required Holders, to the effect that all agreements or instruments effecting such assumption are enforceable in accordance with their terms and comply with the terms hereof;

(ii) the successor formed by such consolidation or the survivor of such merger or the Person that acquires by conveyance, transfer, sale or lease all or substantially all of the assets of the Company as an entirety, as the case may be, could incur immediately thereafter $1.00 of additional Priority Debt;

(iii) immediately before and after giving effect to such transaction, no Default or Event of Default shall exist; and

(b) Any Restricted Subsidiary may (x) merge into the Company (provided that the Company is the surviving corporation) or another Restricted Subsidiary or (y) sell, transfer or lease all or any part of its assets to the Company or another Restricted Subsidiary, or (z) merge or consolidate with, or sell, transfer or lease all or substantially all of its assets to, any Person in a transaction that is permitted by Section 10.3 or, as a result of which, such Person becomes an Restricted Subsidiary; provided in each instance set forth in clauses (x) through (z) that, immediately before and after giving effect thereto, there shall exist no Default or Event of Default.

10.5. DISPOSITION OF STOCK OF RESTRICTED SUBSIDIARIES.

The Company (i) will not permit any Restricted Subsidiary to issue its capital stock, or any warrants, rights or options to purchase, or securities convertible into or exchangeable for, such capital stock, to any Person other than the Company or another Restricted Subsidiary (other than directors’ qualifying shares, shares satisfying local ownership requirements or shares for any similar statutory purposes), and (ii) will not, and will not permit any Restricted Subsidiary to, sell, transfer or otherwise dispose of any shares of capital stock of a Restricted Subsidiary (other than directors’ qualifying shares, shares satisfying local ownership requirements or shares for any similar statutory purposes) if such sale would be prohibited by Section 10.3. If a Restricted Subsidiary at any time ceases to be such as a result of a sale or issuance of its capital stock, any Liens on property of the Company or any other Restricted Subsidiary securing Indebtedness owed to such Restricted Subsidiary, which is not contemporaneously repaid, together with such Indebtedness, shall be deemed to have been incurred by the Company or such other Restricted Subsidiary, as the case may be, at the time such Restricted Subsidiary ceases to be a Restricted Subsidiary.

10.6. DESIGNATION OF UNRESTRICTED SUBSIDIARIES.

The Company may designate any Restricted Subsidiary as an Unrestricted Subsidiary and any Unrestricted Subsidiary as a Restricted Subsidiary; provided that, (a) if such Subsidiary initially is a Restricted Subsidiary, then such Restricted Subsidiary may be subsequently designated as an Unrestricted Subsidiary and such Unrestricted Subsidiary may be subsequently designated as a Restricted Subsidiary, but no further changes in designation may be made, (b) if such Subsidiary initially is an Unrestricted Subsidiary, then such Unrestricted Subsidiary may be subsequently designated as a Restricted Subsidiary and such Restricted Subsidiary may be subsequently designated as an Unrestricted Subsidiary, but no further changes in designation may be made, (c) immediately before and after designation of a Restricted Subsidiary as an Unrestricted Subsidiary there exists no Default or Event of Default and (d) after designation of a Restricted Subsidiary as an Unrestricted Subsidiary, the Company could incur an additional $1.00 of Priority Debt.

10.7. NATURE OF BUSINESS.

The Company will not, and will not permit any Restricted Subsidiary to, engage in any business if, as a result, the general nature of the business in which the Company and its Restricted Subsidiaries, taken as a whole, would then be engaged would be substantially changed from the general nature of the business in which the Company and its Restricted Subsidiaries, taken as a whole, are engaged on the date of this Agreement as described in the Memorandum.

10.8. TRANSACTIONS WITH AFFILIATES.

The Company will not and will not permit any Restricted Subsidiary to enter into directly or indirectly any Material transaction or Material group of related transactions (including without limitation the purchase, lease, sale or exchange of properties of any kind or the rendering of any service) with any Affiliate (other than the Company or another Restricted Subsidiary), except upon fair and reasonable terms no less favorable to the Company or such Restricted Subsidiary than would be obtainable in a comparable arm’s-length transaction with a Person not an Affiliate.

11. EVENTS OF DEFAULT.

An “EVENT OF DEFAULT” shall exist if any of the following conditions or events shall occur and be continuing:

(a) the Company defaults in the payment of any principal or Make-Whole Amount, if any, on any Note when the same becomes due and payable, whether at maturity or at a date fixed for prepayment or by declaration or otherwise; or

(b) the Company defaults in the payment of any interest on any Note for more than five Business Days after the same becomes due and payable; or

(c) the Company defaults in the performance of or compliance with any term contained in Section 7.1(e) or Sections 10.1 through 10.8; or

(d) the Company defaults in the performance of or compliance with any term contained herein (other than those referred to in paragraphs (a), (b) and (c) of this Section 11) and such default is not remedied within 30 days after the earlier of (i) a Responsible Officer obtaining actual knowledge of such default and (ii) the Company receiving written notice of such default from any holder of a Note; or

(e) any representation or warranty made in writing by or on behalf of the Company or by any officer of the Company in this Agreement or in any writing furnished in connection with the transactions contemplated hereby proves to have been false or incorrect in any material respect on the date as of which made; or

(f) (i) the Company or any Restricted Subsidiary is in default (as principal or as guarantor or other surety) in the payment of any principal of or premium or make-whole amount or interest on any Indebtedness that is outstanding in an aggregate principal amount in excess of 5% of Adjusted Consolidated Net Worth (as of the end of the most recently completed fiscal period of the Company) beyond any period of grace provided with respect thereto, or (ii) the Company or any Restricted Subsidiary is in default in the performance of or compliance with any term of any evidence of any Indebtedness that is outstanding in an aggregate principal amount in excess of 5% of Adjusted Consolidated Net Worth (as of the end of the most recently completed fiscal period of the Company) or of any mortgage, indenture or other agreement relating thereto or any other condition exists, and as a consequence of such default or condition such Indebtedness has become, or has been declared, due and payable before its stated maturity or before its regularly scheduled dates of payment, or (iii) as a consequence of the occurrence or continuation of any event or condition (other than the giving of notice of optional redemption, the passage of time or the right of the holder of Indebtedness to convert such Indebtedness into equity interests), the Company or any Restricted Subsidiary has become obligated to purchase or repay Indebtedness before its regular maturity or before its regularly scheduled dates of payment in an aggregate outstanding principal amount in excess of 5% of Adjusted Consolidated Net Worth (as of the end of the most recently completed fiscal period of the Company); or

(g) the Company or any Significant Subsidiary (i) is generally not paying, or admits in writing its inability to pay, its debts as they become due, (ii) files, or consents by answer or otherwise to the filing against it of, a petition for relief or reorganization or arrangement or any other petition in bankruptcy, for liquidation or to take advantage of any bankruptcy, insolvency, reorganization, moratorium or other similar law of any jurisdiction, (iii) makes an assignment for the benefit of its creditors, (iv) consents to the appointment of a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its property, (v) is adjudicated as insolvent or to be liquidated, or (vi) takes corporate action for the purpose of authorizing any of the foregoing; or

(h) a court or governmental authority of competent jurisdiction enters an order appointing, without consent by the Company or any Significant Subsidiary, a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its property, or constituting an order for relief or approving a petition for relief or reorganization or any other petition in bankruptcy or for liquidation or to take advantage of any bankruptcy or insolvency law of any jurisdiction, or ordering the dissolution, winding-up or liquidation of the Company or any Significant Subsidiary, or any such petition shall be filed against the Company or any Significant Subsidiary and such petition shall not be dismissed within 60 days; or

(i) a final judgment or judgments for the payment of money aggregating in excess of 5% of Adjusted Consolidated Net Worth (as of the end of the most recently completed fiscal period of the Company) are rendered against one or more of the

Company and its Significant Subsidiaries, which judgments are not, within 60 days after entry thereof, bonded, discharged or stayed pending appeal, or are not discharged within 60 days after the expiration of such stay; or

(j) if (i) any Plan shall fail to satisfy the minimum funding standards of ERISA or the Code for any plan year or part thereof or a waiver of such standards or extension of any amortization period is sought or granted under section 412 of the Code, (ii) a notice of intent to terminate any Plan shall have been or is reasonably expected to be filed with the PBGC or the PBGC shall have instituted proceedings under ERISA section 4042 to terminate or appoint a trustee to administer any Plan or the PBGC shall have notified the Company or any ERISA Affiliate that a Plan may become a subject of any such proceedings, (iii) the aggregate “amount of unfunded benefit liabilities” (within the meaning of section 4001(a)(18) of ERISA) under all Plans, determined in accordance with Title IV of ERISA, shall exceed 5% of Adjusted Consolidated Net Worth (as of the end of the most recently completed fiscal period of the Company), (iv) the Company or any ERISA Affiliate shall have incurred or is reasonably expected to incur any liability pursuant to Title I or IV of ERISA or the penalty or excise tax provisions of the Code relating to employee benefit plans, (v) the Company or any ERISA Affiliate withdraws from any Multiemployer Plan, or (vi) the Company or any Subsidiary establishes or amends any employee welfare benefit plan that provides post-employment welfare benefits in a manner that would increase the liability of the Company or any Subsidiary thereunder; and any such event or events described in clauses (i) through (vi) above, either individually or together with any other such event or events, could reasonably be expected to have a Material Adverse Effect.

As used in Section 11(j), the terms “EMPLOYEE BENEFIT PLAN” and “EMPLOYEE WELFARE BENEFIT PLAN” shall have the respective meanings assigned to such terms in Section 3 of ERISA.

12. REMEDIES ON DEFAULT, ETC.

12.1. ACCELERATION.

(a) If an Event of Default with respect to the Company described in paragraph (g) or (h) of Section 11 (other than an Event of Default described in clause (i) of paragraph (g) or described in clause (vi) of paragraph (g) by virtue of the fact that such clause encompasses clause (i) of paragraph (g)) has occurred, all the Notes then outstanding shall automatically become immediately due and payable.

(b) If any other Event of Default has occurred and is continuing, any holder or holders of more than 50% in principal amount of the Notes at the time outstanding may at any time at its or their option, by notice or notices to the Company, declare all the Notes then outstanding to be immediately due and payable.

(c) If any Event of Default described in paragraph (a) or (b) of Section 11 has occurred and is continuing, any holder or holders of Notes at the time outstanding affected by such Event of Default may at any time, at its or their option, by notice or

notices to the Company, declare all the Notes held by it or them to be immediately due and payable.

Upon any Notes becoming due and payable under this Section 12.1, whether automatically or by declaration, such Notes will forthwith mature and the entire unpaid principal amount of such Notes, plus (x) all accrued and unpaid interest thereon and (y) the Make-Whole Amount determined in respect of such principal amount (to the full extent permitted by applicable law), shall all be immediately due and payable, in each and every case without presentment, demand, protest or further notice, all of which are hereby waived. The Company acknowledges, and the parties hereto agree, that each holder of a Note has the right to maintain its investment in the Notes free from repayment by the Company (except as herein specifically provided for) and that the provision for payment of a Make-Whole Amount by the Company in the event that the Notes are prepaid or are accelerated as a result of an Event of Default, is intended to provide compensation for the deprivation of such right under such circumstances.

12.2. OTHER REMEDIES.

If any Default or Event of Default has occurred and is continuing, and irrespective of whether any Notes have become or have been declared immediately due and payable under Section 12.1, the holder of any Note at the time outstanding may proceed to protect and enforce the rights of such holder by an action at law, suit in equity or other appropriate proceeding, whether for the specific performance of any agreement contained herein or in any Note, or for an injunction against a violation of any of the terms hereof or thereof, or in aid of the exercise of any power granted hereby or thereby or by law or otherwise.

12.3. RESCISSION.

At any time after any Notes have been declared due and payable pursuant to clause (b) or (c) of Section 12.1, the holders of more than 50% in principal amount of the Notes then outstanding, by written notice to the Company, may rescind and annul any such declaration and its consequences if (a) the Company has paid all overdue interest on the Notes, all principal of and Make-Whole Amount, if any, on any Notes that are due and payable and are unpaid other than by reason of such declaration, and all interest on such overdue principal and Make-Whole Amount, if any, and (to the extent permitted by applicable law) any overdue interest in respect of the Notes, at the Default Rate, (b) all Events of Default and Defaults, other than non-payment of amounts that have become due solely by reason of such declaration, have been cured or have been waived pursuant to Section 17, and (c) no judgment or decree has been entered for the payment of any monies due pursuant hereto or to the Notes. No rescission and annulment under this Section 12.3 will extend to or affect any subsequent Event of Default or Default or impair any right consequent thereon.

12.4. NO WAIVERS OR ELECTION OF REMEDIES, EXPENSES, ETC.

No course of dealing and no delay on the part of any holder of any Note in exercising any right, power or remedy shall operate as a waiver thereof or otherwise prejudice

such holder’s rights, powers or remedies. No right, power or remedy conferred by this Agreement or by any Note upon any holder thereof shall be exclusive of any other right, power or remedy referred to herein or therein or now or hereafter available at law, in equity, by statute or otherwise. Without limiting the obligations of the Company under Section 15, the Company will pay to the holder of each Note on demand such further amount as shall be sufficient to cover all costs and expenses of such holder incurred in any enforcement or collection under this Section 12, including, without limitation, reasonable attorneys’ fees, expenses and disbursements.

13. REGISTRATION; EXCHANGE; SUBSTITUTION OF NOTES.

13.1. REGISTRATION OF NOTES.

The Company shall keep at its principal executive office a register for the registration and registration of transfers of Notes. The name and address of each holder of one or more Notes, each transfer thereof and the name and address of each transferee of one or more Notes shall be registered in such register. Prior to due presentment for registration of transfer, the Person in whose name any Note shall be registered shall be deemed and treated as the owner and holder thereof for all purposes hereof, and the Company shall not be affected by any notice or knowledge to the contrary. The Company shall give to any holder of a Note that is an Institutional Investor, promptly upon request therefor, a complete and correct copy of the names and addresses of all registered holders of Notes.

13.2. TRANSFER AND EXCHANGE OF NOTES.

Upon surrender of any Note at the principal executive office of the Company for registration of transfer or exchange (and in the case of a surrender for registration of transfer, duly endorsed or accompanied by a written instrument of transfer duly executed by the registered holder of such Note or his attorney duly authorized in writing and accompanied by the address for notices of each transferee of such Note or part thereof), the Company shall execute and deliver, at the Company’s expense (except as provided below), one or more new Notes (as requested by the holder thereof) of the same series in exchange therefor, in an aggregate principal amount equal to the unpaid principal amount of the surrendered Note. Each such new Note shall be payable to such Person as such holder may request and shall be substantially in the form of Note established for such series. Each such new Note shall be dated and bear interest from the date to which interest shall have been paid on the surrendered Note or dated the date of the surrendered Note if no interest shall have been paid thereon. The Company may require payment of a sum sufficient to cover any stamp tax or governmental charge imposed in respect of any such transfer of Notes. Notes shall not be transferred in denominations of less than $500,000, provided that if necessary to enable the registration of transfer by a holder of its entire holding of Notes, one Note may be in a denomination of less than $500,000. Any transferee, by its acceptance of a Note registered in its name (or the name of its nominee), shall be deemed to have made the representations set forth in Sections 6.1(to the extent such representation is required for such transfer) and 6.2.

13.3. REPLACEMENT OF NOTES.

Upon receipt by the Company of evidence reasonably satisfactory to it of the ownership of and the loss, theft, destruction or mutilation of any Note (which evidence shall be, in the case of an Institutional Investor, notice from such Institutional Investor of such ownership and such loss, theft, destruction or mutilation), and

(a) in the case of loss, theft or destruction, of indemnity reasonably satisfactory to it (provided that if the holder of such Note is, or is a nominee for, an original Purchaser or another Institutional Investor holder of a Note with a minimum net worth of at least $250,000,000, such Person’s own unsecured agreement of indemnity shall be deemed to be satisfactory), or

(b) in the case of mutilation, upon surrender and cancellation thereof,

the Company at its own expense shall execute and deliver, in lieu thereof, a new Note of the same series, dated and bearing interest from the date to which interest shall have been paid on such lost, stolen, destroyed or mutilated Note or dated the date of such lost, stolen, destroyed or mutilated Note if no interest shall have been paid thereon.

14. PAYMENTS ON NOTES.

14.1. PLACE OF PAYMENT.

Subject to Section 14.2, payments of principal, Make-Whole Amount, if any, and interest becoming due and payable on the Notes shall be made in Chicago, Illinois at the principal office of Bank of America National Trust & Savings Association in such jurisdiction. The Company may at any time, by notice to each holder of a Note, change the place of payment of the Notes so long as such place of payment shall be either the principal office of the Company in such jurisdiction or the principal office of a bank or trust company in such jurisdiction.

14.2. HOME OFFICE PAYMENT.

So long as you or your nominee shall be the holder of any Note, and notwithstanding anything contained in Section 14.1 or in such Note to the contrary, the Company will pay all sums becoming due on such Note for principal, Make-Whole Amount, if any, and interest by the method and at the address specified for such purpose below your name in Schedule A, or by such other method or at such other address as you shall have from time to time specified to the Company in writing for such purpose, without the presentation or surrender of such Note or the making of any notation thereon, except that upon written request of the Company made concurrently with or reasonably promptly after payment or prepayment in full of any Note, you shall surrender such Note for cancellation, reasonably promptly after any such request, to the Company at its principal executive office or at the place of payment most recently designated by the Company pursuant to Section 14.1. Prior to any sale or other disposition of any Note held by you or your nominee you will, at your election, either endorse thereon the amount of principal paid thereon and the last date to which interest has been paid thereon or

surrender such Note to the Company in exchange for a new Note or Notes pursuant to Section 13.2. The Company will afford the benefits of this Section 14.2 to any Institutional Investor that is the direct or indirect transferee of any Note purchased by you under this Agreement and that has made the same agreement relating to such Note as you have made in this Section 14.2.

15. EXPENSES, ETC.

15.1. TRANSACTION EXPENSES.

Whether or not the transactions contemplated hereby are consummated, the Company will pay all costs and expenses (including reasonable attorneys’ fees of one special counsel for you and the Other Purchasers collectively and, if reasonably required, local or other counsel) incurred by you and each Other Purchaser or holder of a Note in connection with such transactions and in connection with any amendments, waivers or consents under or in respect of this Agreement or the Notes (whether or not such amendment, waiver or consent becomes effective), including, without limitation: (a) the reasonable costs and expenses incurred in enforcing or defending (or determining whether or how to enforce or defend) any rights under this Agreement or the Notes or in responding to any subpoena or other legal process or informal investigative demand issued in connection with this Agreement or the Notes, or by reason of being a holder of any Note, and (b) the costs and expenses, including financial advisors’ fees, incurred in connection with the insolvency or bankruptcy of the Company or any Subsidiary or in connection with any work-out or restructuring of the transactions contemplated hereby and by the Notes. The Company will pay, and will save you and each other holder of a Note harmless from, all claims in respect of any fees, costs or expenses if any, of brokers and finders (other than those retained by you).

15.2. SURVIVAL.

The obligations of the Company under this Section 15 will survive the payment or transfer of any Note, the enforcement, amendment or waiver of any provision of this Agreement or the Notes, and the termination of this Agreement.

16. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ENTIRE AGREEMENT.

All representations and warranties contained herein shall survive the execution and delivery of this Agreement and the Notes, the purchase or transfer by you of any Note or portion thereof or interest therein and the payment of any Note, and may be relied upon by any subsequent holder of a Note, regardless of any investigation made at any time by or on behalf of you or any other holder of a Note. All statements contained in any certificate or other instrument delivered by or on behalf of the Company pursuant to this Agreement shall be deemed representations and warranties of the Company under this Agreement. Subject to the preceding sentence, this Agreement and the Notes embody the entire agreement and understanding between you and the Company and supersede all prior agreements and understandings relating to the subject matter hereof.

17. AMENDMENT AND WAIVER.

17.1. REQUIREMENTS.

This Agreement and the Notes may be amended, and the observance of any term hereof or of the Notes may be waived (either retroactively or prospectively), with (and only with) the written consent of the Company and the Required Holders, except that (a) no amendment or waiver of any of the provisions of Section 1, 2, 3, 4, 5, 6 or 21 hereof, or any defined term (as it is used therein), will be effective as to you unless consented to by you in writing, and (b) no such amendment or waiver may, without the written consent of the holder of each Note at the time outstanding affected thereby, (i) subject to the provisions of Section 12 relating to acceleration or rescission, change the amount or time of any prepayment or payment of principal of, or reduce the rate or change the time of payment or method of computation of interest or of the Make-Whole Amount on, the Notes, (ii) change the percentage of the principal amount of the Notes the holders of which are required to consent to any such amendment or waiver, or (iii) amend any of Sections 8, 11(a), 11(b), 12, 17 or 20.

17.2. SOLICITATION OF HOLDERS OF NOTES.

(a) Solicitation. The Company will provide each holder of the Notes (irrespective of the amount of Notes then owned by it) with sufficient information, sufficiently far in advance of the date a decision is required, to enable such holder to make an informed and considered decision with respect to any proposed amendment, waiver or consent in respect of any of the provisions hereof or of the Notes. The Company will deliver executed or true and correct copies of each amendment, waiver or consent effected pursuant to the provisions of this Section 17 to each holder of outstanding Notes promptly following the date on which it is executed and delivered by, or receives the consent or approval of, the requisite holders of Notes.

(b) Payment. The Company will not directly or indirectly pay or cause to be paid any remuneration, whether by way of supplemental or additional interest, fee or otherwise, or grant any security, to any holder of Notes as consideration for or as an inducement to the entering into by any holder of Notes or any waiver or amendment of any of the terms and provisions hereof unless such remuneration is concurrently paid, or security is concurrently granted, on the same terms, ratably to each holder of Notes then outstanding even if such holder did not consent to such waiver or amendment.

17.3. BINDING EFFECT, ETC.

Any amendment or waiver consented to as provided in this Section 17 applies equally to all holders of Notes and is binding upon them and upon each future holder of any Note and upon the Company without regard to whether such Note has been marked to indicate such amendment or waiver. No such amendment or waiver will extend to or affect any obligation, covenant, agreement, Default or Event of Default not expressly amended or waived or impair any right consequent thereon. No course of dealing between the Company and the holder of any Note nor any delay in exercising any rights hereunder or under any Note shall operate as a waiver

of any rights of any holder of such Note. As used herein, the term “THIS AGREEMENT” or “THE AGREEMENT” and references thereto shall mean this Agreement as it may from time to time be amended or supplemented.

17.4. NOTES HELD BY COMPANY, ETC.

Solely for the purpose of determining whether the holders of the requisite percentage of the aggregate principal amount of Notes then outstanding approved or consented to any amendment, waiver or consent to be given under this Agreement or the Notes, or have directed the taking of any action provided herein or in the Notes to be taken upon the direction of the holders of a specified percentage of the aggregate principal amount of Notes then outstanding, Notes directly or indirectly owned by the Company or any of its Affiliates shall be deemed not to be outstanding.

18. NOTICES.

All notices and communications provided for hereunder shall be in writing and sent (a) by telecopy if the sender on the same day sends a confirming copy of such notice by a recognized overnight delivery service (charges prepaid), or (b) by registered or certified mail with return receipt requested (postage prepaid), or (c) by a recognized overnight delivery service (with charges prepaid). Any such notice must be sent:

(i) if to you or your nominee, to you or it at the address specified for such communications in Schedule A, or at such other address as you or it shall have specified to the Company in writing,

(ii) if to any other holder of any Note, to such holder at such address as such other holder shall have specified to the Company in writing, or

(iii) if to the Company, to the Company at its address set forth at the beginning hereof to the attention of the Chief Financial Officer, or at such other address as the Company shall have specified to the holder of each Note in writing.

Notices under this Section 18 will be deemed given only when actually received.

19. REPRODUCTION OF DOCUMENTS.

This Agreement and all documents relating thereto, including, without limitation, (a) consents, waivers and modifications that may hereafter be executed, (b) documents received by you at the Closing (except the Notes themselves), and (c) financial statements, certificates and other information previously or hereafter furnished to you, may be reproduced by you by any photographic, photostatic, microfilm, microcard, miniature photographic or other similar process and you may destroy any original document so reproduced. The Company agrees and stipulates that, to the extent permitted by applicable law, any such reproduction shall be admissible in evidence as the original itself in any judicial or administrative proceeding (whether or not the original is in existence and whether or not such reproduction was made by you in the regular

course of business) and any enlargement, facsimile or further reproduction of such reproduction shall likewise be admissible in evidence. This Section 19 shall not prohibit the Company or any other holder of Notes from contesting any such reproduction to the same extent that it could contest the original, or from introducing evidence to demonstrate the inaccuracy of any such reproduction.

20. CONFIDENTIAL INFORMATION.

For the purposes of this Section 20, “CONFIDENTIAL INFORMATION” means information delivered to you by or on behalf of the Company or any Subsidiary in connection with the transactions contemplated by or otherwise pursuant to this Agreement that is proprietary in nature and that was clearly marked or labeled or otherwise adequately identified in writing when received by you as being confidential or nonpublic information of the Company or such Subsidiary, provided that such term does not include information that (a) was publicly known or otherwise known to you prior to the time of such disclosure, (b) subsequently becomes publicly known through no act or omission by you or any person acting on your behalf, (c) otherwise becomes known to you other than through disclosure by the Company or any Subsidiary or a Person known to you to be under an obligation of confidentiality to the Company, or (d) constitutes financial statements delivered to you under Section 7.1 that are otherwise publicly available. You will maintain the confidentiality of such Confidential Information in accordance with procedures adopted by you in good faith to protect confidential information of third parties delivered to you, provided that you may deliver or disclose Confidential Information to (i) your directors, trustees, officers, employees, agents, attorneys and affiliates (to the extent such disclosure reasonably relates to the administration of the investment represented by your Notes), (ii) your financial advisors and other professional advisors who agree to hold confidential the Confidential Information substantially in accordance with the terms of this Section 20 (to the extent such disclosure reasonably relates to the administration of the investment represented by your Notes), (iii) any other holder of any Note, (iv) any Institutional Investor to which you sell or offer to sell such Note or any part thereof or any participation therein (if such Person has agreed in writing prior to its receipt of such Confidential Information to be bound by the provisions of this Section 20), (v) any Person from which you offer to purchase any security of the Company (if such Person has agreed in writing prior to its receipt of such Confidential Information to be bound by the provisions of this Section 20), (vi) any federal or state regulatory authority having supervisory jurisdiction over you, (vii) the National Association of Insurance Commissioners or any similar organization, or any nationally recognized rating agency that requires access to information about your investment portfolio or (viii) any other Person to which such delivery or disclosure may be necessary or appropriate (w) to effect compliance with any law, rule, regulation or order applicable to you, (x) in response to any subpoena or other legal process, (y) in connection with any litigation to which you are a party or (z) if an Event of Default has occurred and is continuing, to the extent you may reasonably determine such delivery and disclosure to be necessary or appropriate in the enforcement or for the protection of the rights and remedies under your Notes and this Agreement. Each holder of a Note, by its acceptance of a Note, will be deemed to have agreed to be bound by and to be entitled to the benefits of this Section 20 as though it were a party to this Agreement. On reasonable request by the Company in connection with the delivery to any holder of a Note of information required to be delivered to

such holder under this Agreement or requested by such holder (other than a holder that is a party to this Agreement or its nominee), such holder will enter into an agreement with the Company embodying the provisions of this Section 20.

21. SUBSTITUTION OF PURCHASER.

You shall have the right to substitute any one of your Affiliates as the purchaser of the Notes that you have agreed to purchase hereunder, by written notice to the Company, which notice shall be signed by both you and such Affiliate, shall contain such Affiliate’s agreement to be bound by this Agreement and shall contain a confirmation by such Affiliate of the accuracy with respect to it of the representations set forth in Section 6. Upon receipt of such notice, wherever the word “you” is used in this Agreement (other than in this Section 21), such word shall be deemed to refer to such Affiliate in lieu of you. In the event that such Affiliate is so substituted as a purchaser hereunder and such Affiliate thereafter transfers to you all of the Notes then held by such Affiliate, upon receipt by the Company of notice of such transfer, wherever the word “you” is used in this Agreement (other than in this Section 21), such word shall no longer be deemed to refer to such Affiliate, but shall refer to you, and you shall have all the rights of an original holder of the Notes under this Agreement.

22. MISCELLANEOUS.

22.1. SUCCESSORS AND ASSIGNS.

All covenants and other agreements contained in this Agreement by or on behalf of any of the parties hereto bind and inure to the benefit of their respective successors and assigns (including, without limitation, any subsequent holder of a Note) whether so expressed or not.

22.2. PAYMENTS DUE ON NON-BUSINESS DAYS.

Anything in this Agreement or the Notes to the contrary notwithstanding, any payment of principal of or Make-whole Amount or interest on any Note that is due on a date other than a Business Day shall be made on the next succeeding Business Day without including the additional days elapsed in the computation of the interest payable on such next succeeding Business Day.

22.3. SEVERABILITY.

Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall (to the full extent permitted by law) not invalidate or render unenforceable such provision in any other jurisdiction.

22.4. CONSTRUCTION.

Each covenant contained herein shall be construed (absent express provision to the contrary) as being independent of each other covenant contained herein, so that compliance with any one covenant shall not (absent such an express contrary provision) be deemed to excuse compliance with any other covenant. Where any provision herein refers to action to be taken by any Person, or which such Person is prohibited from taking, such provision shall be applicable whether such action is taken directly or indirectly by such Person.

22.5. COUNTERPARTS.

This Agreement may be executed in any number of counterparts, each of which shall be an original but all of which together shall constitute one instrument. Each counterpart may consist of a number of copies hereof, each signed by less than all, but together signed by all, of the parties hereto.

22.6. GOVERNING LAW.

This Agreement shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the law of the State of Illinois excluding choice-of-law principles of the law of such State that would require the application of the laws of a jurisdiction other than such State.

* * * * *

If you are in agreement with the foregoing, please sign the form of agreement on the accompanying counterpart of this Agreement and return it to the Company, whereupon the foregoing shall become a binding agreement between you and the Company.

Very truly yours,

DONALDSON COMPANY, INC.

By:

Name:

Title:

The foregoing is agreed to as of the date thereof.

METROPOLITAN LIFE INSURANCE COMPANY

By:
Name:
Title:

PRINCIPAL LIFE INSURANCE COMPANY

By:
Name:
Title:

TMG LIFE INSURANCE COMPANY

By:
Name:
Title:

STATE FARM LIFE INSURANCE COMPANY

By:
Name:
Title:

AMERITAS LIFE INSURANCE CORP.

By: Ameritas Investment Advisors, Inc., as Agent

By:
Name: Patrick J. Henry
Title: Vice President - Fixed Income Securities

AMERITAS VARIABLE LIFE INSURANCE COMPANY

By: Ameritas Investment Advisors, Inc., as Agent

By:
Name: Patrick J. Henry
Title: Vice President - Fixed Income Securities

SCHEDULE A

INFORMATION RELATING TO PURCHASERS


	Name and Address of Purchaser			Principal Amount of Notes to be Purchased


	METROPOLITAN LIFE INSURANCE COMPANY			$22,000,000 Series 1998-A, Tranche 2

(1) All payments by wire transfer of immediately available funds to:

Metropolitan Life Insurance Company, Corporate Investments Account No. 002-2-410591
The Chase Manhattan Bank
Metropolitan Branch
33 East 23rd Street
New York, NY 10010
ABA # 021000021

providing sufficient information, including PPN, to identify the source and application of funds and requesting the bank to send a credit advice thereof to Metropolitan Life Insurance Company.

(2) All other communications:

Metropolitan Life Insurance Company Fixed Income Investments
334 Madison Avenue, P.O. Box 633
Convent Station, NJ 07961-0633
Attention: Private Placement Unit
Telecopier Number: (973) 254-3050

Tax ID #13-5581829

Schedule A


	Name and Address of Purchaser			Principal Amount of Notes to be Purchased


	PRINCIPAL LIFE INSURANCE COMPANY			$10,000,000 Series 1998-A, Tranche 1

	711 High Street Des Moines, IA 50392-0800 Attention: Investment Department - Secuirities Fax: (515) 248-2490 Tel: (515) 248-3495

	Address for all communications is as above, except notices of payment with respect to the notes, which shall be addressed to:

	Principal Life Insurance Company 711 High Street Des Moines, IA 50392-0960 Attention: Investment Accounting - Secuirities Fax: (515) 248-2643 Tel: (515) 247-0689

	All payments are to be by bank wire transfer of immediately available funds to:

	Norwest Bank Iowa, N.A. 7th & Walnut Streets Des Moines, IA 50309 ABA # 073000228 OBI PFGSE (S) B0061681 ( )

	For credit to Principal Life Insurance Company Account No. 032395

Schedule A

With the following accompanying information:

Name of Company: Donaldson Company, Inc. Description of Security: $23,000,000 Series 1998-A, Tranche 1, Senior Notes due July 15, 2005 Issuance Date: __________________________ Security Number: 257651 A* 0
Bond Number: 16-B-61681
due Date and Application (as among principal, premium and interest) of the payment being made.

Notes to be delivered to the Law Department of Purchaser

Taxpayer ID #42-0127290

Schedule A


	Name and Address of Purchaser			Principal Amount of Notes to be Purchased


	TMG LIFE INSURANCE COMPANY c/o The Mutual Group (U.S.), Inc. 401 North Executive Drive, Suite 300 Brookfield, WI 53008-0503 Attention: Connie Keller Phone: (414) 641-4022 Facsimile: (414) 641-4055			$5,000,000 Series 1998-A, Tranche 1

(1) All payments on account of the Notes shall be made by wire or interbank transfer of immediately available funds to:

Norwest Bank Minnesota, N.A.
ABA# 091000019
BNF A/C: 0840245
BNF: Trust Clearing Account
REF: ATTN: Income Collections
TRUST ACCOUNT: 12250600
Service Experts PPN: 257651 A* 0

(2) All notices in respect of payment shall be delivered to:

TMG Life Insurance Company
c/o The Mutual Group (U.S.), Inc.
Attention: Tamie Greenwood
401 North Executive Drive, Suite 300
Brookfield, WI 53008-0503
Phone: (414) 641-4027
Facsimile: (414) 641-4055

(3) All other communications shall be delivered to:

TMG Life Insurance Company
c/o The Mutual Group (U.S.), Inc.
401 North Executive Drive, Suite 300
Brookfield, WI 53008-0503
Phone: (414) 641-4027
Facsimile: (414) 641-4055

Name of Nominee in which Notes are to be issued: TMG Life Insurance Company

Taxpayer I.D. #: 45-0208990

Schedule A


	Name and Address of Purchaser			Principal Amount of Notes to be Purchased


	STATE FARM LIFE INSURANCE COMPANY			$5,000,000 Series 1998-A, Tranche 1

				$5,000,000 Series 1998-A, Tranche 2

	WIRE TRANSFER INSTRUCTIONS

	The Chase Manhattan Bank ABA No. 021000021 SSG Private Income Processing A/C #900-9-000200 For Credit To Account Number G 06893 Ref. PPN: 257651 A* 0 (Series 1998-A, Tranche 1)

PPN: 257651 A @ 8 (Series 1998-A, Tranche 2) Rate: 6.20% (Series 1998-A, Tranche 1) 6.31% (Series 1998-A, Tranche 2) Maturity Date: July 15, 2005 (Series 1998-A, Tranche 1) July 15, 2008 (Series 1998-B, Tranche 2)

SEND NOTICES TO:

State Farm Life Insurance Company
Investment Dept. E-10
One State Farm Plaza
Bloomington, IL 61710

SEND CONFIRMATIONS TO:

State Farm Life Insurance Company
Investment Accounting Dept. D-3
One State Farm Plaza
Bloomington, IL 61710

Schedule A

SEND THE ORIGINAL (VIA REGISTERED MAIL) TO:

Chase Manhattan Bank
Attn: Barbara Walsh

(North America Insurance)

3 Chase Metrotech Center - 6th Floor
Brooklyn, New York 11245

SEND AN ADDITIONAL COPY OF THE ORIGINAL SECURITY TO:

State Farm Life Insurance Company
One State Farm Plaza E-8
Bloomington, IL 61710
Attn: Investment Legal E-8
Larry Rottunda, Investment Counsel

Tax ID #37-0533090

Schedule A


	Name and Address of Purchaser			Principal Amount of Notes to be Purchased


	AMERITAS LIFE INSURANCE CORP.			$2,000,000 Series 1998-A, Tranche 1

(1) All payments by wire trans- fer of immediately available funds to:

U.S. Bank
ABA# 104-000-029
Ameritas Life Insurance Corp. Acct# 1-494-0070-0188
Re: Description of Note; Principal & Interest Breakdown

with sufficient information
to identify the source and
application of such funds.

(2) All notices of payments and written confirmations of such wire transfers:

Ameritas Life Insurance Corp. 5900 “O” Street
Lincoln, NE 68510-2234
Fax Number (402) 467-6970
Attn: James Mikus

(3) All other communications:

Ameritas Life Insurance Corp. 5900 “O” Street
Lincoln, NE 68510-2234
Attn: James Mikus

Tax ID Number: 47-0098400

Schedule A


	Name and Address of Purchaser			Principal Amount of Notes to be Purchased


	AMERITAS VARIABLE LIFE INSURANCE COMPANY			$1,000,000 Series 1998-A, Tranche 1
	5900 “O” Street Lincoln, NE 68510-2234

	(1) All payments by wire trans-
	fer of Federal or other immediately available funds to:

	Bankers Trust Company ABA# 021-001-033 Attn: Private Placement Processing

FCC: Ameritas Variable Life Insurance Company Acct: 097223
Re: Description of Note; Principal & Interest Breakdown with sufficient information

with sufficient information
to identify the source and
application of such funds.

(2) All notices of payments and written confirmations of such wire transfers:

Ameritas Variable Life Insurance Company c/o Ameritas Life Insurance Corp. 5900 “O” Street
Lincoln, NE 68510-2234
Fax Number (402) 467-6970
Attn: James Mikus

(3) All other communications:

Ameritas Variable Life Insurance Company

Ameritas Life Insurance Corp. 5900 “O” Street
Lincoln, NE 68510-2234
Attn: James Mikus

Tax ID Number: 47-0657746

Schedule A

SCHEDULE B

DEFINED TERMS

As used herein, the following terms have the respective meanings set forth below or set forth in the Section hereof following such term:

“ADJUSTED CONSOLIDATED NET WORTH” means, as of any date, consolidated stockholders’ equity of the Company and its Restricted Subsidiaries on such date, determined in accordance with GAAP, less the amount by which outstanding Restricted Investments on such date exceed 10% of the consolidated stockholders’ equity of the Company and its Restricted Subsidiaries, determined in accordance with GAAP.

“AFFILIATE” means, at any time, and with respect to any Person, (a) any other Person that at such time directly or indirectly through one or more intermediaries Controls, or is Controlled by, or is under common Control with, such first Person, and (b) any Person beneficially owning or holding, directly or indirectly, 10% or more of any class of voting or equity interests of the Company or any Subsidiary or any corporation of which the Company and its Subsidiaries beneficially own or hold, in the aggregate, directly or indirectly, 10% or more of any class of voting or equity interests. As used in this definition, “CONTROL” means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise. Unless the context otherwise clearly requires, any reference to an “Affiliate” is a reference to an Affiliate of the Company.

“BUSINESS DAY” means (a) for the purposes of Section 8.6 only, any day other than a Saturday, a Sunday or a day on which commercial banks in New York City are required or authorized to be closed, and (b) for the purposes of any other provision of this Agreement, any day other than a Saturday, a Sunday or a day on which commercial banks in Chicago, Illinois or New York City are required or authorized to be closed.

“CAPITAL LEASE” means, at any time, a lease with respect to which the lessee is required concurrently to recognize the acquisition of an asset and the incurrence of a liability in accordance with GAAP.

“CLOSING” is defined in Section 3.

“CODE” means the Internal Revenue Code of 1986, as amended from time to time, and the rules and regulations promulgated thereunder from time to time.

“COMPANY” means Donaldson Company, Inc., a Delaware corporation.

Schedule B

“CONFIDENTIAL INFORMATION” is defined in Section 20.

“CONSOLIDATED INDEBTEDNESS” means, as of any date, Indebtedness of the Company and its Restricted Subsidiaries as of such date determined on a consolidated basis in accordance with GAAP.

“CONSOLIDATED TOTAL ASSETS” means, as of any date, the assets and properties of the Company and its Restricted Subsidiaries as of such date determined on a consolidated basis in accordance with GAAP.

“CONSOLIDATED TOTAL CAPITALIZATION” means, as of any date, the sum of Consolidated Indebtedness and Adjusted Consolidated Net Worth as of such date.

“DEFAULT” means an event or condition the occurrence or existence of which would, with the lapse of time or the giving of notice or both, become an Event of Default.

“DEFAULT RATE” means that rate of interest that is the greater of (i) 2% per annum above the rate of interest stated in clause (a) of the first paragraph of the Notes or (ii) 2% over the rate of interest publicly announced by Bank of America National Trust & Savings Association in Chicago, Illinois as its “base” or “prime” rate.

“DOMESTIC RESTRICTED SUBSIDIARY” means any Restricted Subsidiary organized under the laws of the United States or any State thereof (including the District of Columbia), substantially all of whose assets and business are located or transacted in the United States.

“ENVIRONMENTAL LAWS” means any and all Federal, state, local, and foreign statutes, laws, regulations, ordinances, rules, judgments, orders, decrees, permits, concessions, grants, franchises, licenses, agreements or governmental restrictions relating to pollution and the protection of the environment or the release of any materials into the environment, including but not limited to those related to hazardous substances or wastes, air emissions and discharges to waste or public systems.

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended from time to time, and the rules and regulations promulgated thereunder from time to time in effect.

“ERISA AFFILIATE” means any trade or business (whether or not incorporated) that is treated as a single employer together with the Company under section 414 of the Code.

“EVENT OF DEFAULT” is defined in Section 11.

“EXCHANGE ACT” means the Securities Exchange Act of 1934, as amended.

Schedule B

“GAAP” means generally accepted accounting principles as in effect from time to time in the United States of America.

“GOVERNMENTAL AUTHORITY” means

(a) the government of

(i) the United States of America or any State or other political subdivision thereof, or

(ii) any jurisdiction in which the Company or any Subsidiary conducts all or any part of its business, or which otherwise has jurisdiction over any properties of the Company or any Subsidiary, or

(b) any entity exercising executive, legislative, judicial, regulatory or administrative functions of, or pertaining to, any such government.

“GUARANTY” means, with respect to any Person, any obligation (except the endorsement in the ordinary course of business of negotiable instruments for deposit or collection and representations and warranties made in connection with the securitization of assets) of such Person guaranteeing or in effect guaranteeing any indebtedness, dividend or other obligation of any other Person in any manner, whether directly or indirectly, including (without limitation) obligations incurred through an agreement, contingent or otherwise, by such Person:

(a) to purchase such indebtedness or obligation or any property constituting security therefor;

(b) to advance or supply funds (i) for the purchase or payment of such indebtedness or obligation, or (ii) to maintain any working capital or other balance sheet condition or any income statement condition of any other Person or otherwise to advance or make available funds for the purchase or payment of such indebtedness or obligation;

(c) to lease properties or to purchase properties or services primarily for the purpose of assuring the owner of such indebtedness or obligation of the ability of any other Person to make payment of the indebtedness or obligation; or

(d) otherwise to assure the owner of such indebtedness or obligation against loss in respect thereof.

In any computation of the indebtedness or other liabilities of the obligor under any Guaranty, the indebtedness or other obligations that are the subject of such Guaranty shall be assumed to be direct obligations of such obligor.

Schedule B

“HAZARDOUS MATERIAL” means any and all pollutants, toxic or hazardous wastes or any other substances that might pose a hazard to health or safety, the removal of which may be required or the generation, manufacture, refining, production, processing, treatment, storage, handling, transportation, transfer, use, disposal, release, discharge, spillage, seepage, or filtration of which is or shall be restricted, prohibited or penalized by any applicable Environmental Law (including, without limitation, asbestos, urea formaldehyde foam insulation and polychlorinated biphenyls).

“HOLDER” means, with respect to any Note, the Person in whose name such Note is registered in the register maintained by the Company pursuant to Section 13.1.

“INDEBTEDNESS” with respect to any Person means, at any time, without duplication,

(a) its liabilities for borrowed money;

(b) its liabilities for the deferred purchase price of property acquired by such Person (excluding accounts payable and other accrued liabilities arising in the ordinary course of business but including all liabilities created or arising under any conditional sale or other title retention agreement with respect to any such property);

(d) all liabilities for borrowed money secured by any Lien with respect to any property owned by such Person (whether or not it has assumed or otherwise become liable for such liabilities); and

(e) any Guaranty of such Person with respect to liabilities of a type described in any of clauses (a) through (d) hereof.

Indebtedness of any Person shall include all obligations of such Person of the character described in clauses (a) through (e) to the extent such Person remains legally liable in respect thereof notwithstanding that any such obligation is deemed to be extinguished under GAAP. Indebtedness of the Company or a Restricted Subsidiary shall not include Indebtedness of the Company to a Restricted Subsidiary or Indebtedness of a Restricted Subsidiary to the Company or to another Restricted Subsidiary.

“INSTITUTIONAL INVESTOR” means (a) any original purchaser of a Note and (b) any bank, trust company, savings and loan association or other financial institution, any pension plan, any investment company, any insurance company, or any other similar financial institution or entity, regardless of legal form.

Schedule B

“INVESTMENTS” means all investments made, in cash or by delivery of property, directly or indirectly, by any Person, in any other Person, whether by acquisition of shares of capital stock, indebtedness or other obligations or securities or by loan, advance, capital contribution or otherwise.

“LIEN” means, with respect to any Person, any mortgage, lien, pledge, charge, security interest or other encumbrance, or any interest or title of any vendor, lessor, lender or other secured party to or of such Person under any conditional sale or other title retention agreement or Capital Lease, upon or with respect to any property or asset of such Person (including in the case of stock, stockholder agreements, voting trust agreements and all similar arrangements).

“MAKE-WHOLE AMOUNT” is defined in Section 8.6.

“MATERIAL” means material in relation to the business, operations, affairs, financial condition, assets or properties of the Company and its Restricted Subsidiaries taken as a whole.

“MATERIAL ADVERSE EFFECT” means a material adverse effect on (a) the business, operations, affairs, financial condition, assets or properties of the Company and its Restricted Subsidiaries taken as a whole, or (b) the ability of the Company to perform its obligations under this Agreement and the Notes, or (c) the validity or enforceability of this Agreement or the Notes.

“MEMORANDUM” is defined in Section 5.3.

“MULTIEMPLOYER PLAN” means any Plan that is a “multiemployer plan” (as such term is defined in section 4001(a)(3) of ERISA).

“NOTES” is defined in Section 1.1.

“OFFICER’S CERTIFICATE” means a certificate of a Senior Financial Officer or of any other officer of the Company whose responsibilities extend to the subject matter of such certificate.

“OTHER PURCHASERS” is defined in Section 2.

“PBGC” means the Pension Benefit Guaranty Corporation referred to and defined in ERISA or any successor thereto.

“PERSON” means an individual, partnership, corporation, limited liability company, association, trust, unincorporated organization, or a government or agency or political subdivision thereof.

Schedule B

“PLAN” means an “employee benefit plan” (as defined in section 3(3) of ERISA) that is or, within the preceding five years, has been established or maintained, or to which contributions are or, within the preceding five years, have been made or required to be made, by the Company or any ERISA Affiliate or with respect to which the Company or any ERISA Affiliate may have any liability.

“PRIORITY DEBT” means, as of any date, the sum (without duplication) of (a) unsecured Indebtedness of Domestic Restricted Subsidiaries on such date (other than Indebtedness owed to the Company or another Restricted Subsidiary or Indebtedness of a Person outstanding at the time such Person is merged or consolidated with, or becomes, a Restricted Subsidiary) and (b) Indebtedness of the Company and its Domestic Restricted Subsidiaries secured by Liens permitted by Section 10.2(j) on such date.

“PROPERTY” or “PROPERTIES” means, unless otherwise specifically limited, real or personal property of any kind, tangible or intangible, choate or inchoate.

“PURCHASER” means each purchaser listed in Schedule A.

“QPAM EXEMPTION” means Prohibited Transaction Class Exemption 84-14 issued by the United States Department of Labor.

“REQUIRED HOLDERS” means, at any time, the holders of at least a majority in principal amount of the Notes at the time outstanding (exclusive of Notes then owned by the Company or any of its Affiliates).

“RESPONSIBLE OFFICER” means any Senior Financial Officer and any other officer of the Company with responsibility for the administration of the relevant portion of this agreement.

“RESTRICTED INVESTMENTS” means all Investments of the Company and its Restricted Subsidiaries, other than:

(a) property or assets to be used or consumed in the ordinary course of business;

(b) assets arising from the sale of goods or services in the ordinary course of business;

Schedule B

(d) Investments existing as of the date of this Agreement that are listed in the attached Schedule B-1;

(e) Investments in treasury stock;

(f) Investments in:

(i) obligations, maturing within one year from the date of acquisition, of or fully guaranteed by (A) the United States of America or an agency thereof or (B) Canada or a province thereof;

(ii) tax-exempt securities, having an effective maturity within one year from the date of acquisition, which are rated in one of the top two rating classifications by at least one nationally recognized rating agency;

(iii) certificates of deposit or banker’s acceptances maturing within one year from the date of acquisition issued by Bank of America National Trust & Savings Association or other commercial banks whose long-term unsecured debt obligations (or the long-term unsecured debt obligations of the bank holding company owning all of the capital stock of such bank) are rated in one of the top three rating classifications by at least one nationally recognized rating agency;

(iv) commercial paper maturing within 270 days from the date of issuance that, at the time of acquisition, is rated in one of the top two rating classifications by at least one nationally recognized rating agency;

(v) repurchase agreements, having a term of not more than 90 days and fully collateralized with obligations of the type described in clause (i), with a bank satisfying the requirements of clause (iii) or a broker-dealer registered as such under the Exchange Act whose long-term unsecured debt obligations are rated in one of the top three rating classifications by at least one nationally recognized rating agency; and

(vi) cash or cash equivalents and money market instrument programs that are properly classified as current assets in accordance with GAAP.

For purposes of this Agreement, an Investment shall be valued at the lesser of (i) cost and (ii) the value at which such Investment is shown on the books of the Company and its Restricted Subsidiaries in accordance with GAAP.

“RESTRICTED SUBSIDIARY” means any Subsidiary (a) of which at least a majority of the voting securities are owned by the Company and/or one or more Wholly-Owned Restricted

Schedule B

Subsidiaries and of which the Company has management control and (b) which the Company has not designated an Unrestricted Subsidiary.

“SECURITIES ACT” means the Securities Act of 1933, as amended from time to time.

“SENIOR FINANCIAL OFFICER” means the chief financial officer, principal accounting officer, treasurer or comptroller of the Company.

“SERIES 1998-A NOTES” is defined in Section 1.2.

“SIGNIFICANT SUBSIDIARY” means, as of the date of determination, any Restricted Subsidiary the assets or revenues of which account for more than 10% of the Consolidated Total Assets of the Company and its Restricted Subsidiaries at the end of the most recently ended fiscal period or more than 10% of the consolidated revenues of the Company and its Restricted Subsidiaries for the most recently completed four fiscal quarters.

“SOURCE” is defined in Section 6.2

“SUBSIDIARY” means, as to any Person, any corporation, association or other business entity in which such Person or one or more of its Subsidiaries or such Person and one or more of its Subsidiaries owns sufficient equity or voting interests to enable it or them (as a group) ordinarily, in the absence of contingencies, to elect a majority of the directors (or Persons performing similar functions) of such entity, and any partnership or joint venture if more than a 50% interest in the profits or capital thereof is owned by such Person or one or more of its Subsidiaries or such Person and one or more of its Subsidiaries (unless such partnership can and does ordinarily take major business actions without the prior approval of such Person or one or more of its Subsidiaries). Unless the context otherwise clearly requires, any reference to a “Subsidiary” is a reference to a Subsidiary of the Company.

“SUPPLEMENT” is defined in Section 1.1.

“THIS AGREEMENT” OR “THE AGREEMENT” is defined in Section 17.3.

“UNRESTRICTED SUBSIDIARY” means any Subsidiary of the Company that the Company has designated an Unrestricted Subsidiary by notice in writing given to the holders of the Notes.

“WHOLLY-OWNED SUBSIDIARY” means, at any time, any Subsidiary 100% of all of the equity interests (except directors’ qualifying shares) and voting interests of which are owned by any one or more of the Company and the Company’s other Wholly-Owned Subsidiaries at such time.

Schedule B

SCHEDULE B-1

EXISTING INVESTMENTS


	Loan to AFS Inc. in the amount of	$200,000

	Loan Guarantee to AFS Inc. in the amount of	$100,000

	Loan to Craig Phillips in the amount of	$750,000

	Loan to Douglas Smyth dba. Tubtec	$305,000

Schedule B-1

SCHEDULE 5.4

SUBSIDIARIES AND OWNERSHIP
OF SUBSIDIARY STOCK

Schedule 5.4

SCHEDULE 5.5

FINANCIAL STATEMENTS

Audited consolidated balance sheets of the Company and its Subsidiaries as of July 31, 1997, 1996, 1995, 1994, 1993 and 1992, and the related consolidated statements of earnings, changes in shareholders’ equity and cash flows for each of the years then ended.

Unaudited consolidated balance sheets of the Company and its Subsidiaries as of January 31, 1998 and 1997, the consolidated statements of earnings for the three months ended January 31, 1998 and 1997 and the six months ended January 31, 1997 and 1998, and the consolidated statements of cash flows for the six months ended January 31, 1998 and 1997.

Schedule 5.5

SCHEDULE 5.15

EXISTING INDEBTEDNESS
(Principal Amounts in Excess of $5,000,000)


	Donaldson Company Multi-Currency Revolver	$55,000,000

	Donaldson Coordination Center NV	$9,319,000

	Schedule 5.15

SCHEDULE 10.2

EXISTING LIENS

Capital Leases in an aggregate amount of $325,000

Donaldson Europe NV Mortgage $182,000

Schedule 10.2

EXHIBIT 1.1-A

[FORM OF NOTE]

DONALDSON COMPANY, INC.

[____]% SENIOR NOTE DUE [__________, ____]


	No. [_____]	[Date]
	$[_______]	PPN[______________]

	FOR VALUE RECEIVED, the undersigned, DONALDSON COMPANY, INC. (herein

called the “Company”), a corporation organized and existing under the laws of the State of Delaware, promises to pay to [__________], or registered assigns, the principal sum of $[_______] on [_____], [_____], with interest (computed on the basis of a 360-day year of twelve 30-day months) (a) on the unpaid balance thereof at the rate of [____]% per annum from the date hereof, payable semiannually, on [______] [____] and [______][____] in each year, commencing with the [______] [____] or [______] [____] next succeeding the date hereof, until the principal hereof shall have become due and payable, and (b) to the extent permitted by law on any overdue payment (including any overdue prepayment) of principal, any overdue payment of interest and any overdue payment of any Make-Whole Amount (as defined in the Note Purchase Agreement referred to below), payable semiannually as aforesaid (or, at the option of the registered holder hereof, on demand), at a rate per annum from time to time equal to the greater of (i) [_____]% or (ii) 2% over the rate of interest publicly announced by Bank of America National Trust & Savings Association from time to time in Chicago, Illinois as its “base” or “prime” rate.

Payments of principal of, interest on and any Make-Whole Amount with respect to this Note are to be made in lawful money of the United States of America at the principal office of Bank of America National Trust & Savings Association in Chicago, Illinois or at such other place as the Company shall have designated by written notice to the holder of this Note as provided in the Note Purchase Agreement referred to below.

This Note is one of a series of Senior Notes (herein called the “Notes”) issued pursuant to a Note Purchase Agreement dated as of July 15, 1998 [and a Supplement thereto dated as of [________], [________]](as from time to time further amended and supplemented, the “Note Purchase Agreement”), between the Company and the respective Purchasers named therein, and is entitled to the benefits thereof. Each holder of this Note will be deemed, by its acceptance hereof, (i) to have agreed to the confidentiality provisions set forth in Section 20 of the Note Purchase Agreement and (ii) to have made the representation set forth in Sections 6.1(to the extent such representation is required for such transfer) and 6.2 of the Note Purchase Agreement. The Notes have not been registered under the Securities Act of 1933, as amended.

Exhibit 1.1-A

This Note is a registered Note and, as provided in the Note Purchase Agreement, upon surrender of this Note for registration of transfer, duly endorsed, or accompanied by a written instrument of transfer duly executed, by the registered holder hereof or such holder’s attorney duly authorized in writing, a new Note for a like principal amount will be issued to, and registered in the name of, the transferee. Prior to due presentment for registration of transfer, the Company may treat the person in whose name this Note is registered as the owner hereof for the purpose of receiving payment and for all other purposes, and the Company will not be affected by any notice to the contrary.

[The Company will make required prepayments of principal on the dates and in the amounts specified in the Note Purchase Agreement.] This Note is [also] subject to optional prepayment, in whole or from time to time in part, at the times and on the terms specified in the Note Purchase Agreements but not otherwise.

If an Event of Default, as defined in the Note Purchase Agreement, occurs and is continuing, the principal of this Note may be declared or otherwise become due and payable in the manner, at the price (including any applicable Make-Whole Amount) and with the effect provided in the Note Purchase Agreement.

This Note shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the law of the State of Illinois excluding choice-of-law principles of the law of such State that would require the application of the laws of a jurisdiction other than such State.

DONALDSON COMPANY, INC.

By:

Title:

Exhibit 1.1-A

EXHIBIT 1.1-B

[FORM OF SUPPLEMENT]

SUPPLEMENT TO NOTE PURCHASE AGREEMENT

THIS SUPPLEMENT is entered into as of [ ], [ ] (this “Supplement”) between Donaldson Company, Inc., a Delaware corporation (the “COMPANY”), and the Purchasers listed in the attached Schedule A (the “PURCHASERS”).

R E C I T A L S

A. The Company has entered into a Note Purchase Agreement dated as of July 15, 1998 with the purchasers listed in Schedule A thereto [and one or more supplements or amendments thereto] (as heretofore amended and supplemented, the “NOTE PURCHASE AGREEMENT”); and

B. The Company desires to issue and sell, and the Purchasers desire to purchase, an additional series of Notes (as defined in the Note Purchase Agreement) pursuant to the Note Purchase Agreement and in accordance with the terms set forth below;

NOW, THEREFORE, the Company and the Purchasers agree as follows:

1. Authorization of the New Series of Notes. The Company has authorized the issue and sale of $[ ] aggregate principal amount of Notes to be designated as its [__]% Senior Notes, Series [ ], due [ ], [ ] (the “SERIES [ ] NOTES”, such term to include any such Notes issued in substitution therefor pursuant to Section 13 of the Note Purchase Agreement). The Series [ ] Notes shall be substantially in the form set out in Exhibit 1, with such changes therefrom, if any, as may be approved by you and the Company.

2. Sale and Purchase of Series [ ] Notes. Subject to the terms and conditions of this Supplement and the Note Purchase Agreement, the Company will issue and sell to each of the Purchasers, and the Purchasers will purchase from the Company, at the Closing provided for in Section 3, Series [ ] Notes in the principal amount specified opposite their respective names in Schedule A at the purchase price of 100% of the principal amount thereof. The obligations of the Purchasers hereunder are several and not joint obligations and no Purchaser shall have any liability to any Person for the performance or non-performance by any other Purchaser hereunder.

Exhibit 1.1-B

3. Closing. The sale and purchase of the Series [ ] Notes to be purchased by the Purchasers shall occur at the offices of Gardner, Carton & Douglas, Quaker Tower, Suite 3400, 321 North Clark Street, Chicago, Illinois 60610 at 9:00 a.m., Chicago time, at a closing (the “CLOSING”) on [ ], [ ] or on such other Business Day thereafter on or prior to [ ], [ ] as may be agreed upon by the Company and the Purchasers. At the Closing the Company will deliver to each Purchaser the Series [ ] Notes to be purchased by it in the form of a single Note (or such greater number of Series [ ] Notes in denominations of at least $500,000 as such Purchaser may request) dated the date of the Closing and registered in its name (or in the name of its nominee), against delivery by such Purchaser to the Company or its order of immediately available funds in the amount of the purchase price therefor by wire transfer of immediately available funds for the account of the Company to account number [__________] at [_________________] Bank, [Insert Bank address, ABA number for wire transfers, and any other relevant wire transfer information]. If at the Closing the Company shall fail to tender such Series [ ] Notes to a Purchaser as provided above in this Section 3, or any of the conditions specified in Section 4 of the Note Purchase Agreement, as modified or expanded by Section 4 hereof, shall not have been fulfilled to such Purchaser’s satisfaction, such Purchaser shall, at its election, be relieved of all further obligations under this Agreement, without thereby waiving any rights it may have by reason of such failure or such nonfulfillment.

4. Conditions to Closing. Each Purchasers obligation to purchase and pay for the Series [ ] Notes to be sold to it at the Closing is subject to the fulfillment to its satisfaction, prior to or at the Closing, of the conditions set forth in Section 4 of the Note Purchase Agreement, as hereafter modified, and to the following additional conditions:

[Set forth any modifications and additional conditions.]

5. Representations and Warranties of the Company. The Company represents and warrants to the Purchasers that each of the representations and warranties contained in Section 5 of the Note Purchase Agreement is true and correct as of the date hereof (i) except that all references to “Purchaser” and “you” therein shall be deemed to refer to the Purchasers hereunder, all references to “this Agreement” shall be deemed to refer to the Note Purchase Agreement as supplemented by this Supplement, all references to “Notes” therein shall be deemed to include the Series [ ] Notes, and (ii) except for changes to such representations and warranties or the Schedules referred to therein, which changes are set forth in the attached Schedule 5.

6. Representations of the Purchasers. Each Purchaser confirms to the Company that the representations set forth in Section 6 of the Note Purchase Agreement are true and correct as to such Purchaser.

Exhibit 1.1-B

7. Mandatory Prepayment of the Series [ ] Notes. [The Series [ ] Notes are not subject to mandatory prepayment by the Company.] [On [ ], [ ] and on each [ ] thereafter to and including [ ], [ ] the Company will prepay $[ ] principal amount (or such lesser principal amount as shall then be outstanding) of the Series [ ] Notes at par and without payment of the Make-Whole Amount or any premium.]

8. Applicability of Note Purchase Agreement. Except as otherwise expressly provided herein (and expressly permitted by the Note Purchase Agreement), all of the provisions of the Note Purchase Agreement are incorporated by reference herein and shall apply to the Series [ ] Notes as if expressly set forth in this Supplement.

IN WITNESS WHEREOF, the Company and the Purchasers have caused this Supplement to be executed and delivered as of the date set forth above.

DONALDSON COMPANY, INC.

By:

Title:

[ADD PURCHASER SIGNATURE BLOCKS]

Exhibit 1.1-B

Schedule A to Supplement

INFORMATION RELATING TO PURCHASERS


	Name and Address of Purchaser			Principal Amount of Series [ ] Notes to be Purchased


	[NAME OF PURCHASER]			$

	(1) All payments by wire transfer
	of immediately available funds to:

	with sufficient information to identify the source and application of such funds.

	(2) All notices of payments and
	written confirmations of such

wire transfers:

(3) All other communications:

Exhibit 1.1-B

Schedule 5 to Supplement

EXCEPTIONS TO REPRESENTATIONS
AND WARRANTIES

Exhibit 1.1-B

Exhibit 1 to Supplement

[FORM OF SERIES [ ] NOTE]

Exhibit 1.1-B

EXHIBIT 1.2(a)

[FORM OF SERIES 1998-A, TRANCHE 1, NOTE]

DONALDSON COMPANY, INC.


	6.20% Senior Note, Series 1998, Tranche 1 Due July 15, 2005

	No. [_____]	[Date]
	$[_______]	PPN[______________]

	FOR VALUE RECEIVED, the undersigned, DONALDSON COMPANY, INC. (herein

called the “Company”), a corporation organized and existing under the laws of the State of Delaware, promises to pay to [__________], or registered assigns, the principal sum of $[ ] on July 15, 2005, with interest (computed on the basis of a 360-day year of twelve 30-day months) (a) on the unpaid balance thereof at the rate of 6.20% per annum from the date hereof, payable semiannually, on July 15 and January 15 in each year, commencing with the July 15 or January 15 next succeeding the date hereof, until the principal hereof shall have become due and payable, and (b) to the extent permitted by law on any overdue payment (including any overdue prepayment) of principal, any overdue payment of interest and any overdue payment of any Make-Whole Amount (as defined in the Note Purchase Agreement referred to below), payable semiannually as aforesaid (or, at the option of the registered holder hereof, on demand), at a rate per annum from time to time equal to the greater of (i) 8.20% or (ii) 2% over the rate of interest publicly announced by Bank of America National Trust & Savings Association from time to time in Chicago, Illinois as its “base” or “prime” rate.

This Note is one of a series of Notes (herein called the “Notes”) issued pursuant to a Note Purchase Agreement, dated as of July 15, 1998 as from time to time amended and supplemented, the “Note Purchase Agreement”), between the Company and the respective Purchasers named therein, and is entitled to the benefits thereof. Each holder of this Note will be deemed, by its acceptance hereof, (i) to have agreed to the confidentiality provisions set forth in Section 20 of the Note Purchase Agreement and (ii) to have made the representations set forth in Sections 6.1 (to the extent such representation is required for such transfer) and 6.2 of the Note

Exhibit 1.2(a)

Purchase Agreement. The Notes have not been registered under the Securities Act of 1933, as amended.

This Note is subject to optional prepayment, in whole or from time to time in part, at the times and on the terms specified in the Note Purchase Agreement but not otherwise.

DONALDSON COMPANY, INC.

By:

Title:

Exhibit 1.2(a)

EXHIBIT 1.2(b)

[FORM OF SERIES 1998-A, TRANCHE 2, NOTE]

DONALDSON COMPANY, INC.


	6.31% Senior Note, Series 1998, Tranche 2 Due July 15, 2008

	No. [_____]	[Date]
	$[_______]	PPN[______________]

	FOR VALUE RECEIVED, the undersigned, DONALDSON COMPANY, INC. (herein

called the “Company”), a corporation organized and existing under the laws of the State of Delaware, promises to pay to [_________], or registered assigns, the principal sum of $[ ] on July 15, 2008, with interest (computed on the basis of a 360-day year of twelve 30-day months) (a) on the unpaid balance thereof at the rate of 6.31% per annum from the date hereof, payable semiannually, on July 15 and January 15 in each year, commencing with the July 15 or January 15 next succeeding the date hereof, until the principal hereof shall have become due and payable, and (b) to the extent permitted by law on any overdue payment (including any overdue prepayment) of principal, any overdue payment of interest and any overdue payment of any Make-Whole Amount (as defined in the Note Purchase Agreement referred to below), payable semiannually as aforesaid (or, at the option of the registered holder hereof, on demand), at a rate per annum from time to time equal to the greater of (i) 8.31% or (ii) 2% over the rate of interest publicly announced by Bank of America National Trust & Savings Association from time to time in Chicago, Illinois as its “base” or “prime” rate.

Exhibit 1.2(b)

Purchase Agreement. The Notes have not been registered under the Securities Act of 1933, as amended.

This Note is subject to optional prepayment, in whole or from time to time in part, at the times and on the terms specified in the Note Purchase Agreement but not otherwise.

DONALDSON COMPANY, INC.

By:

Title:

Exhibit 1.2(b)

EXHIBIT 4.4(a)

FORM OF OPINION OF COUNSEL
TO THE COMPANY

The opinion of Dorsey & Whitney LLP, counsel for the Company, shall be to the effect that:

1. The Company is a corporation duly incorporated, validly existing in good standing under the laws of Delaware, and has all requisite corporate power and authority to own and operate its properties, to carry on its business as now conducted and to enter into and perform the Note Purchase Agreement.

2. The Note Purchase Agreement and the Notes have been duly authorized by proper corporate action on the part of the Company, have been duly executed and delivered by an authorized officer of the Company, and constitute the legal, valid and binding agreements of the Company, enforceable in accordance with their terms, except to the extent that enforcement thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws of general application relating to or affecting the enforcement of the rights of creditors or by equitable principles, regardless of whether enforcement is sought in a proceeding in equity or at law.

3. The offering, sale and delivery of the Notes do not require the registration of the Notes under the Securities Act of 1933, as amended, or the qualification of an indenture under the Trust Indenture Act of 1939, as amended.

4. No authorization, approval or consent of, and no designation, filing, declaration, registration and/or qualification with, any United States federal or Minnesota state Governmental Authority is necessary or required in connection with the execution, delivery and performance by the Company of the Note Purchase Agreement or the offering, issuance and sale by the Company of the Notes.

5. The issuance and sale of the Notes by the Company, the performance of the terms and conditions of the Notes and the Note Purchase Agreement and the execution and delivery of the Note Purchase Agreement do not conflict with, or result in any breach or violation of any of the provisions of, or constitute a default under, or result in the creation or imposition of any Lien on, the property of the Company or any Subsidiary pursuant to the provisions of (i) the Certificate of Incorporation or By-laws of the Company, (ii) any loan agreement known to such counsel to which the Company or any Subsidiary is a party or by which any of them or their property is bound, pursuant to which Indebtedness in an amount in excess of $5,000,000 is

Exhibit 1.2(b)

outstanding, (iii) any other Material agreement or instrument known to such counsel to which the Company or any Subsidiary is a party or by which any of them or their property is bound, (iv) any United States federal or Minnesota state law (including usury laws) or regulation applicable to the Company, or (v) to the knowledge of such counsel, any order, writ, injunction or decree of any court or Governmental Authority applicable to the Company.

6. Except as disclosed in Schedule 5.8 to the Note Purchase Agreement, to the knowledge of such counsel, there are no actions, suits or proceedings pending or overtly threatened against, or affecting the Company or any Subsidiary, at law or in equity or before or by any Governmental Authority, which are likely to result, individually or in the aggregate, in a Material Adverse Effect.

7. Neither the Company nor any Subsidiary is (i) a “public utility company” or a “holding company,” or an “affiliate” or a “subsidiary company” of a “holding company,” or an “affiliate” of such a “subsidiary company,” as such terms are defined in the Public Utility Holding Company Act of 1935, as amended (the “1935 Act”), (ii) a “public utility” as defined in the Federal Power Act, as amended, or (iii) an “investment company” or an “affiliated person” thereof, as such terms are defined in the Investment Company Act of 1940, as amended (the “1940 Act”).

8. The issuance of the Notes and the intended use of the proceeds of the sale of the Notes do not violate or conflict with Regulation T, U or X of the Board of Governors of the Federal Reserve System.

The opinion of Dorsey & Whitney LLP shall cover such other matters relating to the sale of the Notes as the Purchasers may reasonably request. With respect to matters of fact on which such opinion is based, such counsel shall be entitled to rely on appropriate certificates of public officials and officers of the Company. For purposes of its opinion as to enforceability of the Note Purchase Agreement and the Notes contained in paragraph 2, such counsel may assume that the Note Purchase Agreement and the Notes are governed by the laws of the State of Minnesota.

Exhibit 1.2(b)

EXHIBIT 4.4(b)

FORM OF OPINION OF SPECIAL COUNSEL
TO THE PURCHASERS

The opinion of Gardner, Carton & Douglas, special counsel to the Purchasers, shall be to the effect that:

1. The Company is a corporation organized and validly existing in good standing under the laws of the State of Delaware, with all requisite corporate power and authority, in the case of the Company, to enter into the Agreement and to issue and sell the Notes.

2. The Agreement and the Notes have been duly authorized by proper corporate action on the part of the Company, have been duly executed and delivered by an authorized officer of the Company, and constitute the legal, valid and binding agreements of the Company, enforceable in accordance with their terms, except to the extent that enforcement thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws of general application relating to or affecting the enforcement of the rights of creditors or by equitable principles, regardless of whether enforcement is sought in a proceeding in equity or at law.

3. Based upon the representations set forth in the Agreement, the offering, sale and delivery of the Notes do not require the registration of the Notes under the Securities Act of 1933, as amended, nor the qualification of an indenture under the Trust Indenture Act of 1939, as amended.

4. The issuance and sale of the Notes and compliance with the terms and provisions of the Notes and the Agreement will not conflict with or result in any breach of any of the provisions of the Certificate of Incorporation or By-Laws of the Company.

5. No approval, consent or withholding of objection on the part of, or filing, registration or qualification with, any governmental body, Federal or state, is necessary in connection with the execution and delivery of the Note Purchase Agreement or the Notes.

The opinion of Gardner, Carton & Douglas also shall state that the opinion of Dorsey & Whitney, delivered to you pursuant to the Agreement, is satisfactory in form and scope to Gardner, Carton & Douglas, and, in its opinion, the Purchasers and it are justified in relying thereon and shall cover such other matters relating to the sale of the Notes as the Purchasers may reasonably request.

Exhibit 4.4(b)

Exhibit 31A

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

I, William M. Cook, certify that:

	1.	I have reviewed this quarterly report on Form 10-Q of Donaldson Company, Inc.;
	2.	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;
	3.	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;
	4.	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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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)	designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
		c)	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
		d)	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 4, 2008

	/s/ William M. Cook
	William M. Cook Chief Executive Officer

Exhibit 31B

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

I, Thomas R. VerHage, certify that:

	1.	I have reviewed this quarterly report on Form 10-Q of Donaldson Company, Inc.;
	2.	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;
	3.	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;
	4.	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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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)	designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
		c)	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
		d)	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

		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 4, 2008

	/s/ Thomas R. VerHage
	Thomas R. VerHage Chief Financial Officer

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, 2008 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, 2008 (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 4, 2008

	/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, 2008 (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 4, 2008

	/s/ Thomas R. VerHage
	Thomas R. VerHage Chief Financial Officer