Polypore International, Inc.

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended September 29, 2007


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: 1-32266

POLYPORE INTERNATIONAL, INC.

(Exact Name of Registrant as Specified in Its Charter)


Delaware		43-2049334

(State or Other Jurisdiction of		(IRS Employer
Incorporation or Organization)		Identification No.)

11430 North Community House Road, Suite 350
Charlotte, North Carolina		28277

(Address of Principal Executive Offices)		(Zip Code)

(704) 587-8409

(Registrant’s Telephone Number, Including Area Code)

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

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

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

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

There were 40,306,928 shares of the registrant’s common stock outstanding as of October 30, 2007.

Forward-looking Statements

This Quarterly Report on Form 10-Q includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical facts included in this Quarterly Report on Form 10-Q that address activities, events or developments that we expect, believe or anticipate will or may occur in the future are forward-looking statements, including, in particular, the statements about Polypore International’s plans, objectives, strategies and prospects regarding, among other things, the financial condition, results of operations and business of Polypore International and its subsidiaries. We have identified some of these forward-looking statements with words like “believe,” “may,” “will,” “should,” “expect,” “intend,” “plan,” “predict,” “anticipate,” “estimate” or “continue” and other words and terms of similar meaning. These forward-looking statements may be contained under the captions “Management’s Discussion and Analysis of Financial Condition and Results of Operations” or “Controls and Procedures” or the Company’s consolidated financial statements or the notes thereto.

These forward-looking statements are based on current expectations about future events affecting us and are subject to uncertainties and factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control. Many factors mentioned in our discussion in this Quarterly Report on Form 10-Q, including the risks outlined under the caption entitled “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 30, 2006 and in any subsequent Quarterly Reports on Form 10-Q, will be important in determining future results. Although we believe that the expectations reflected in our forward-looking statements are reasonable, we do not know whether our expectations will prove correct. They can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties, including with respect to Polypore International, the following, among other things:

	•		the highly competitive nature of the markets in which we sell our products;

	•		the failure to continue to develop innovative products;

	•		the loss of our customers;

	•		the vertical integration by our customers of the production of our products into their own manufacturing process;

	•		increases in prices for raw materials or the loss of key supplier contracts;

	•		our substantial indebtedness;

	•		interest rate risk related to our variable rate indebtedness;

	•		our inability to generate cash;

	•		restrictions related to the senior secured credit facilities;

	•		employee slowdowns, strikes or similar actions;

	•		product liability claims exposure;

	•		risks in connection with our operations outside the United States;

	•		the incurrence of substantial costs to comply with, or as a result of violations of, or liabilities under, environmental laws;

	•		the failure to protect our intellectual property;

	•		the failure to replace lost senior management;

	•		the incurrence of additional debt, contingent liabilities and expenses in connection with future acquisitions;

	•		the adverse impact on our financial condition from past restructuring activities;

	•		the failure to effectively integrate newly acquired operations;

	•		the absence of expected returns from the amount of intangible assets we have recorded; and

	•		natural disasters, epidemics, terrorist acts and other events beyond our control.

Because our actual results, performance or achievements could differ materially from those expressed in, or implied by, the forward-looking statements, we cannot give any assurance that any of the events anticipated by the forward-looking statements will occur or, if any of them do, what impact they will have on Polypore International’s results of operations and financial condition. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. We do not undertake any obligation to update these forward-looking statement to reflect new information, future events or otherwise, except as may be required under federal securities laws.

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Polypore International, Inc.
Condensed Consolidated Balance Sheets


	September 29, 2007			December 30, 2006*
(in thousands)	(unaudited)

Assets
Current assets:
Cash and cash equivalents	$	60,701		$	54,712
Accounts receivable, net		109,018			102,110
Inventories		62,892			67,741
Refundable income taxes		2,009			—
Prepaid and other		12,402			13,386

Total current assets		247,022			237,949
Property, plant and equipment, net		384,053			363,526
Goodwill		568,879			567,587
Intangibles and loan acquisition costs, net		191,834			204,645
Environmental indemnification receivable		16,171			15,236
Other		1,161			917

Total assets	$	1,409,120		$	1,389,860


Liabilities and shareholders’ equity
Current liabilities:
Accounts payable	$	26,722		$	25,494
Accrued liabilities		63,611			55,883
Income taxes payable		—			3,689
Current portion of debt		4,533			3,938
Current portion of capital lease obligation		1,420			1,377

Total current liabilities		96,286			90,381
Debt, less current portion		805,954			1,038,837
Capital lease obligation, less current portion		3,684			4,754
Pension and postretirement benefits		68,599			61,219
Postemployment benefits		3,988			4,451
Environmental reserve, less current portion		24,387			22,935
Deferred income taxes		71,789			94,347
Other		16,060			3,274
Commitments and contingencies

Shareholders’ equity:
Common stock, $.01 par value – 200,000,000 shares authorized, 40,306,928 and 25,347,470 shares issued and outstanding at September 29, 2007 and December 30, 2006, respectively		403			253
Paid-in capital		390,038			125,234
Retained deficit		(65,551	)		(51,776	)
Accumulated other comprehensive loss		(6,517	)		(4,049	)

		318,373			69,662

Total liabilities and shareholders’ equity	$	1,409,120		$	1,389,860


*		Derived from audited consolidated financial statements

See notes to condensed consolidated financial statements

Polypore International, Inc.
Condensed Consolidated Statements of Operations (Unaudited)


	Three Months Ended						Nine Months Ended
	September 29,			September 30,			September 29,			September 30,
(in thousands, except share data)	2007			2006			2007			2006

Net sales	$	130,419		$	116,384		$	391,936		$	354,771
Cost of goods sold		84,404			78,296			249,739			231,737

Gross profit		46,015			38,088			142,197			123,034
Selling, general and administrative expenses		23,165			19,973			70,020			64,489
Business restructuring		223			36,333			358			37,658
Change in accounting principle related to postemployment benefits		—			—			—			(2,593	)

Operating income (loss)		22,627			(18,218	)		71,819			23,480
Other (income) expense:
Interest expense, net		16,713			22,880			64,185			68,642
Costs related to purchase of 10.50% senior discount notes		30,038			—			30,038			—
Write-off of loan acquisition costs associated with refinancing of senior secured credit facilities		7,173			—			7,173			—
Foreign currency and other		390			284			764			2,265

		54,314			23,164			102,160			70,907

Loss before income taxes		(31,687	)		(41,382	)		(30,341	)		(47,427	)
Income taxes		(17,107	)		(17,264	)		(16,820	)		(20,375	)

Loss before the cumulative effect of a change in accounting principle		(14,580	)		(24,118	)		(13,521	)		(27,052	)
Cumulative effect of a change in accounting principle related to stock compensation, net of income taxes of $139		—			—			—			231

Net loss	$	(14,580	)	$	(24,118	)	$	(13,521	)	$	(26,821	)


Net loss per share – basic and diluted:
Loss before cumulative effect of a change in accounting principle	$	(0.36	)	$	(0.95	)	$	(0.44	)	$	(1.07	)
Cumulative effect of a change in accounting principle related to stock compensation, net of income taxes		—			—			—			0.01

Net loss	$	(0.36	)	$	(0.95	)	$	(0.44	)	$	(1.06	)


Weighted average shares outstanding — basic and diluted		40,306,928			25,347,470			30,483,644			25,301,683

See notes to condensed consolidated financial statements

Polypore International, Inc.
Condensed Consolidated Statements of Cash Flows (unaudited)


	Nine Months Ended
(in thousands)	September 29, 2007			September 30, 2006

Operating activities:
Net loss	$	(13,521	)	$	(26,821	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation expense		23,119			30,689
Amortization expense		13,408			13,259
Amortization of loan acquisition costs		2,154			2,246
Amortization of debt discount		13,297			17,990
Stock compensation		460			230
Loss on disposal of property, plant and equipment		1,153			842
Foreign currency (gain) loss		(25	)		538
Deferred income taxes		(25,881	)		(29,122	)
Business restructuring		358			37,658
Costs related to purchase of 10.50% senior discount notes		30,038			—
Write-off of loan acquisition costs associated with refinancing of senior secured credit facilities		7,173			—
Change in accounting principle related to postemployment benefits		—			(2,593	)
Cumulative effect of change in accounting principle related to stock compensation		—			(370	)
Changes in operating assets and liabilities:
Accounts receivable		(2,403	)		(5,913	)
Inventories		8,262			(3,259	)
Prepaid and other current assets		1,153			(562	)
Accounts payable and accrued liabilities		5,206			10,025
Income taxes payable		(778	)		1,420
Other, net		(1,007	)		4,147

Net cash provided by operating activities		62,166			50,404
Investing activities:
Purchases of property, plant and equipment		(16,282	)		(15,862	)
Acquisition of business		(5,475	)		—
Proceeds from sale of property, plant and equipment		—			61

Net cash used in investing activities		(21,757	)		(15,801	)
Financing activities:
Proceeds from the senior secured credit facility		370,000			—
Principal payments on debt		(371,201	)		(1,116	)
Purchase of the 10.50% senior discount notes		(293,648	)		—
Proceeds from initial public offering, net of underwriting fees and other offering related costs		264,814			—
Loan acquisition costs		(8,672	)		(15	)
Repurchase of common stock		(320	)		—
Issuance of common stock		—			399

Net cash used in financing activities		(39,027	)		(732	)
Effect of exchange rate changes on cash and cash equivalents		4,607			1,864

Net increase in cash and cash equivalents		5,989			35,735
Cash and cash equivalents at beginning of period		54,712			28,060

Cash and cash equivalents at end of the period	$	60,701		$	63,795

See notes to condensed consolidated financial statements

Polypore International, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)

1. Description of Business and Basis of Presentation

Description of Business

Polypore International, Inc. (the “Company”) is a leading global high technology filtration company that develops, manufactures and markets specialized microporous membranes used in separation and filtration processes. The Company has a global presence in the major geographic markets of North America, South America, Western Europe and Asia.

On July 31, 2007, Polypore Inc. (“Polypore”) merged with and into the Company, and the Company assumed all of Polypore’s obligations, including the senior secured credit facility and the 8.75% senior subordinated notes.

On May 13, 2004, the Company acquired 100% of the outstanding common stock of PP Holding Corporation and its wholly owned subsidiary, PP Acquisition Corporation (“PP Acquisition”) for $320,385,000 in cash. On May 13, 2004, PP Acquisition purchased the outstanding capital stock of Polypore. The aggregate purchase price, including acquisition related costs, was approximately $1,150,073,000 in cash. In connection with the acquisition, PP Acquisition obtained a new credit facility, issued 8.75% senior subordinated notes and received equity contributions from its shareholders. PP Acquisition used the net proceeds from the new credit facility, the issuance of senior subordinated debt and equity contributions to repay all outstanding indebtedness under Polypore’s existing credit facility and pay transaction related fees and expenses. At the time of closing the acquisition, PP Acquisition merged with and into Polypore, with Polypore as the surviving corporation. These events are hereinafter referred to as the “Transactions”.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of the Company are prepared in accordance with U.S. generally accepted accounting principles for interim financial information. Accordingly, the unaudited condensed consolidated financial statements and notes do not contain certain information included in the Company’s annual financial statements. In the opinion of management, all normal and recurring adjustments that are necessary for a fair presentation have been made. Operating results for the period ended September 29, 2007 are not necessarily indicative of the results that may be expected for the fiscal year ending December 29, 2007. The unaudited condensed consolidated financial statements should be read in conjunction with the annual audited financial statements for the fiscal year ended December 30, 2006.

2. Recent Accounting Pronouncements

On January 1, 2006, the Company adopted EITF Issue No. 05-5, Accounting for Early Retirement or Postemployment Programs with Specific Features (Such As Terms Specified in Altersteilzeit Early Retirement Arrangements) (“EITF 05-5”). Under EITF 05-5, the salary components of Type I and Type II ATZ arrangements (excluding the bonus and additional contributions into the German government pension scheme) should be recognized over the period from the point at which the ATZ period begins until the end of the active service period. The bonus feature and the additional contributions into the German government pension scheme (collectively, the additional compensation) under a Type II ATZ arrangement should be accounted for as a postemployment benefit under FASB Statement No. 112, Employers’ Accounting for Postretirement Benefits. An entity should recognize the additional compensation over the period from the point at which the employee signs the ATZ contract until the end of the active service period. In connection with an acquisition in 2002, the Company implemented a restructuring plan that included Type II ATZ arrangements. The Company accrued in the opening balance sheet the estimated amounts to be paid to employees during the passive phase, plus the bonus feature of the plan. Salary paid to employees during their active phase was expensed as incurred. As a result of adopting this consensus, which was treated as a change in accounting estimate effected by a change in accounting principle, the Company reduced the accrual for postemployment benefits and recognized $2,593,000 in operating income in the three months ended April 1, 2006. The reduction in the postemployment benefits accrual decreased the net loss for the nine months ended September 30, 2006 by $1,634,000, or $0.05 per share.

On January 1, 2006, the Company adopted FASB Statement No. 123 (R), Share-Based Payment (“FAS 123(R)”) using the modified prospective transition method. FAS 123(R) generally requires, among other things, that all employee share-based compensation be measured using a fair value method and that the resulting compensation cost be recognized in the financial statements. Prior to adopting FAS 123(R), the Company accounted for employee share-based compensation using the fair value method under FASB Statement No. 123, Accounting for Stock Based Compensation (“FAS 123”). FAS 123(R) requires forfeitures to be estimated at the time of grant and the estimate to be revised, if necessary, in subsequent periods if actual forfeitures differ materially from those estimates. Prior to adopting FAS 123(R), the Company accounted for forfeitures as they occurred as allowed under FAS 123. The change in accounting for forfeitures under FAS 123(R) resulted in a $231,000 charge, net of applicable income taxes of $139,000, which was recorded in the three months ended April 1, 2006 as a cumulative effect of a change in accounting principle.

Polypore International, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)

In September 2006, the FASB issued Statement No. 157, Fair Value Measurement (“FAS 157”). FAS 157 establishes a framework for measuring fair value under generally accepted accounting principles and expands disclosure about fair value measurements. FAS 157 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact that adoption of FAS 157 will have on its consolidated financial statements.

In September 2006, the FASB issued Statement No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106, and 132(R) (“FAS 158”). FAS 158 requires an employer to recognize the funded status of a defined benefit postretirement plan as an asset or liability in its balance sheet and to recognize changes in that funded status through comprehensive income in the year in which the changes occur. This requirement will be effective for fiscal years ending after June 15, 2007. FAS 158 also requires an employer to measure defined benefit plan assets and obligations as of the date of its fiscal year-end, with limited exceptions. This requirement is effective for fiscal years ending after December 15, 2008. The Company is currently evaluating the impact that adoption of FAS 158 will have on its consolidated financial statements.

On December 31, 2006, the Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement 109 (“FIN 48”), which clarifies the accounting for uncertain tax positions. FIN 48 allows the tax effects from an uncertain tax position to be recognized in the Company’s financial statements if the position is more likely than not to be sustained upon audit, based on the technical merits of the position. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. Upon adoption of FIN 48, the Company recognized the cumulative effect of adopting FIN 48 by increasing the existing reserves for uncertain tax positions by $854,000, recording a deferred tax asset of $643,000, decreasing goodwill by $43,000 and decreasing retained earnings by $254,000 for the cumulative effect of adopting FIN 48. Additionally, the reserve for uncertain tax positions, which had been included in income taxes payable at December 30, 2006, was reclassified as a separate component and is now included in other liabilities.

In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“FAS 159”). FAS 159 permits entities to choose to measure eligible items at fair value at specified election dates and report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. FAS 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact that adoption of FAS 159 will have on its consolidated financial statements.

3. Initial Public Offering and Related Transactions

On June 25, 2007, the Company’s Board of Directors approved a 147.422-for-one stock split of the Company’s common stock. The Company’s shareholders approved amended and restated articles of incorporation which increased the Company’s authorized shares to 200,000,000 shares of common stock and 15,000,000 shares of preferred stock. The accompanying consolidated financial statements give retroactive effect as if the stock split of the Company’s common stock occurred for all periods presented.

On June 27, 2007, the Company priced its initial public offering of common stock and signed an underwriting agreement, pursuant to which the underwriters agreed to purchase 15,000,000 shares of its common stock on a firm commitment basis at a price of $19.00 per share. Public trading of the Company’s common stock commenced on June 28, 2007. Cash proceeds from the offering were $267,900,000, net of underwriting fees of $17,100,000. In July 2007, the Company used the net proceeds from the offering and cash on hand to purchase and retire the outstanding 10.50% senior discount notes and pay other offering costs of $3,086,000.

4. Inventories

Inventories are carried at the lower of cost or market using the first-in, first-out (“FIFO”) method of accounting and consist of:


(in thousands)	September 29, 2007		December 30, 2006

Raw materials	$	22,596	$	21,714
Work-in-process		10,682		10,679
Finished goods		29,614		35,348

Total	$	62,892	$	67,741

Polypore International, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)

5. Debt

Debt, in order of priority, consists of:


(in thousands)	September 29, 2007		December 30, 2006

Senior secured credit facility:
Revolving credit facility	$	—	$	—
Term loan facilities		372,548		369,163
8.75% senior subordinated notes		437,805		422,550
10.50% senior discount notes, net of unamortized original issue discount of $49,153 at December 30, 2006		—		250,847
Other		134		215

		810,487		1,042,775
Less current maturities		4,533		3,938

Long-term debt	$	805,954	$	1,038,837

On July 3, 2007, the Company refinanced Polypore’s senior secured credit facility with a new senior secured credit facility. The new credit facility provides for a $322,894,000 term loan facility and a €35,000,000 term loan facility ($47,106,000 at July 3, 2007) and a $90,000,000 revolving credit facility. No amounts were outstanding under the revolving credit facility at September 29, 2007. The term loans mature in July 2014 and the revolving credit facility matures in July 2013. Interest rates under the senior secured credit facilities are, at the Company’s option, equal to either an alternate base rate plus a 1.25% margin or the Eurocurrency base rate plus a 2.25% margin. The senior secured credit facility is subject to limitations on capital spending and, when loans are outstanding under the revolving credit facility, a maximum leverage ratio. In connection with the refinancing, the Company incurred loan acquisition costs of approximately $8,672,000, which were capitalized and will be amortized over the life of the new credit facility. During the three months ended September 29, 2007, the Company wrote-off loan acquisition costs of $7,173,000 associated with the previous senior secured credit facility.

In July 2007, the Company used the proceeds from the initial public offering and cash on hand to purchase and retire the 10.50% senior discount notes. The purchase of the notes was accomplished by a tender offer and subsequent redemption of the notes not tendered. The total purchase price for the notes was $293,648,000, consisting of principal of $264,144,000 and tender and redemption premiums of $29,504,000. As a result of the purchase of the notes, the Company incurred a $30,038,000 charge to income, which is comprised of redemption and tender premiums of $29,504,000 and the write-off of unamortized loan acquisition costs of $534,000.

6. Employee Benefit Plans

The Company and its subsidiaries sponsor multiple defined benefit pension plans and an other postretirement benefit plan. The following table provides the components of net periodic benefit cost:


	Pension Plans
	Three Months Ended						Nine Months Ended
(in thousands)	September 29, 2007			September 30, 2006			September 29, 2007			September 30, 2006

Service cost	$	815		$	807		$	2,416		$	2,285
Interest cost		842			854			2,496			2,422
Expected return on plan assets		(245	)		(211	)		(725	)		(603	)
Recognized net actuarial loss		94			9			278			26

Net periodic benefit cost	$	1,506		$	1,459		$	4,465		$	4,130


	Other Postretirement Benefits
	Three Months Ended				Nine Months Ended
(in thousands)	September 29, 2007		September 30, 2006		September 29, 2007		September 30, 2006

Service cost	$	8	$	7	$	25	$	23
Interest cost		28		29		83		86
Recognized net actuarial loss		—		2		—		6

Net periodic benefit cost	$	36	$	38	$	108	$	115

Polypore International, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)

7. Environmental Matters

The Company accrues for environmental obligations when such expenditures are probable and reasonably estimable. The amount of liability recorded is based on currently available information, including the progress of remedial investigations, current status of discussions with regulatory authorities regarding the method and extent of remediation, presently enacted laws and existing technology. Accruals for estimated losses from environmental obligations are adjusted as further information develops or circumstances change. Costs of future expenditures for environmental obligations are not discounted to their present value. Recoveries of environmental costs from other parties are recognized as assets when their receipt is deemed probable. Environmental reserves were $28,808,000 and $27,995,000 as of September 29, 2007 and December 30, 2006, respectively.

In connection with the Transactions, the Company identified potential environmental contamination at its manufacturing facility in Potenza, Italy. Based on environmental studies and the initial remediation plan presented to local authorities, the Company recorded a liability of $3,261,000 in connection with the application of purchase accounting for the Transactions. During the three months ended December 30, 2006, the Company further refined the remediation plan based on management’s analysis of facts and circumstances and consultations with local authorities, resulting in an increase in the estimated environmental liability of $1,078,000 that was recorded through a charge to earnings. The Company anticipates that expenditures will be made over the next seven to ten years.

In 2006, as part of an internal self-audit of its Corydon, Indiana and Owensboro, Kentucky facilities, the Company identified instances of potential non-compliance with its environmental operating permits at these facilities. The Company self-reported these issues to the proper state and federal agencies and is taking steps to resolve these issues. On November 2, 2007, the Company received a Notice of Violation from the Indiana Department of Environmental Management related to the issues that the Company had previously self reported at its facility in Corydon, Indiana. Although the agencies have the authority and discretion to issue substantial fines that could be material, based upon management’s analysis of facts and circumstances and consideration of recent cases addressed by the agencies involved, the Company does not believe that the maximum penalty will be assessed and that penalties, if any, resulting from this matter will not have a material adverse effect on the business, financial condition or results of operations of the Company.

In connection with the acquisition of Membrana in 2002, the Company recorded a reserve for environmental obligations. The reserve provides for costs to remediate known environmental issues and operational upgrades which are required in order for the Company to remain in compliance with local regulations. The Company anticipates that expenditures will continue to be made over the next seven to ten years. The initial estimate and subsequent finalization of the reserve was included in the allocation of purchase price at the date of the acquisition.

The Company has indemnification agreements for certain environmental matters from Acordis A.G. (“Acordis”) and Akzo Nobel (“Akzo”), the prior owners of Membrana. Akzo originally provided broad environmental protections to Acordis with the right to assign such indemnities to Acordis’s successors. Akzo’s indemnifications relate to conditions existing prior to December 1999, which is the date that Membrana was sold to Acordis. The Akzo agreement provides indemnification of claims through December 2007, with the indemnification percentage decreasing each year during the coverage period. Through December 2003, Akzo pays 75% of any approved claim. After that, Akzo pays 65% of claims reported through December 2006 and 50% of claims reported through December 2007. In addition to the Akzo indemnification, Acordis provides separate indemnification of claims incurred from December 1999 through February 2002, the acquisition date. At September 29, 2007 and December 30, 2006, amounts receivable under the indemnification agreement were $19,315,000 and $18,669,000, respectively. The current portion of the indemnification receivable is included in other current assets.

Polypore International, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)

8. Business Restructuring

2006 Restructuring Plan

In response to a significant decline in demand for cellulosic hemodialysis membranes driven by a shift in industry demand toward synthetic membranes, the Company’s separations media segment exited the production of cellulosic membranes and realigned its cost structure at its Wuppertal, Germany facility. On August 24, 2006, the Company announced a layoff of approximately 150 employees. Production of cellulosic hemodialysis membranes ceased on December 27, 2006 and the majority of the employees were laid off effective January 1, 2007. The total cost of the plan is expected to be approximately $17,040,000, consisting of $11,403,000 for the employee layoffs and $5,637,000 for other costs related to the shutdown of portions of the Wuppertal facility that will no longer be used. The other costs included in the restructuring plan are related to local regulations surrounding complete or partial shutdowns of a facility. The Company expects to complete these activities by the end of the second quarter of 2008. The timing, scope and costs of these restructuring measures are subject to change as the Company proceeds with its restructuring plans and further evaluates its business needs and costs. The restructuring charge also included a non-cash impairment charge of $17,492,000 for buildings and equipment used in the production of cellulosic hemodialysis membranes. No goodwill or intangible assets were assigned to the cellulosics business in the allocation of purchase price for the Transactions.

2005 Restructuring Plan

In order to better accommodate customer growth and related demand for both lead-acid and lithium battery separators in the greater Asian market, the Company’s energy storage segment transferred certain assets from Europe and the United States to its facilities in Thailand and China. The capacity realignment plan included the closure of the Company’s facility in Feistritz, Austria, the downsizing of its Norderstedt, Germany facility and the relocation of certain assets from these two plants to the Company’s facilities in Prachinburi, Thailand. During the three months ended September 30, 2006, the Company completed installation and started production with the assets relocated to Thailand. Additionally, finishing equipment from the Company’s facility in Charlotte, North Carolina was relocated to its facility in Shanghai, China. The total cost of the realignment plan is expected to be approximately $9,115,000, substantially all of which has been recognized through September 29, 2007. In addition to the benefit of realigning capacity with market growth, the Company expects to realize the full impact of cost savings in 2007.

2004 Restructuring Plan

In an effort to manage costs and in response to the decision of a customer to outsource its dialyzer production, the Company implemented a number of cost reduction measures in 2004 relating to the separations media segment, including employee layoffs, the relocation of certain research and development operations conducted in a leased facility in Europe to facilities where the related manufacturing operations are conducted and other cost reductions. All activities and charges relating to the 2004 Restructuring Plan were completed as of December 30, 2006.

Restructuring activity during the nine months ended September 29, 2007 consisted of:


	Balance at							Foreign		Balance at
	December 30,		Restructuring		Cash			Currency		September 29,
(in thousands)	2006		Charges		Payments			Translation		2007

2006 Restructuring Plan:
Severance and benefit costs	$	11,559	$	—	$	(7,201	)	$	461	$	4,819
Other		5,684		—		(4,476	)		174		1,382

		17,243		—		(11,677	)		635		6,201

2005 Restructuring Plan:
Severance and benefit costs		876		148		(586	)		43		481
Other		—		210		(210	)		—		—

		876		358		(796	)		43		481

2004 Restructuring Plan:
Severance and benefit costs		1,152		—		(730	)		43		465

Total	$	19,271	$	358	$	(13,203	)	$	721	$	7,147

Polypore International, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)

9. Stock Option Plans

On June 15, 2006, the Company adopted the Polypore International, Inc. 2006 Stock Option Plan (“2006 Plan”). On June 28, 2007, the Company adopted the 2007 Stock Incentive Plan (“2007 Plan”). The 2007 Plan allows for the grant of stock options, restricted stock and other instruments for up to a total of 1,751,963 shares of common stock. Stock options granted under the 2007 Plan will have 10-year terms and will be issued with an exercise price not less than the fair market value of the Company’s stock on the grant date. During the three months ended September 29, 2007, the Company granted 50,000 stock options and 548 shares of restricted stock under the 2007 Plan.

The Company recognized stock compensation expense of $164,000 and $460,000 during the three and nine month periods ended September 29, 2007, respectively. The Company recognized stock compensation expense of $157,000 and $230,000 during the three and nine month periods ended September 30, 2006, respectively. Stock compensation expense is recognized as a component of “Selling, general and administrative expenses” in the accompanying consolidated statements of operations.

10. Income Taxes

The income tax provision for the interim periods presented is computed at the effective income tax rate expected to be applicable in each respective full year using the estimated taxable income by country and the statutory rates on a country-by-country basis. Income tax expense recorded in the financial statements differs from the Federal statutory income tax rate due to a variety of factors, including state income taxes, the mix of income between U.S. and foreign jurisdictions taxed at varying rates, certain export sales which are excluded from taxable income and various changes in estimates of permanent differences and valuation allowances.

During the three months ended September 29, 2007, the Company increased the income tax benefit by $18,130,000 for significant events related to financing activities and German tax reform.

In July 2007, the Company purchased its outstanding 10.50% senior discount notes and refinanced its senior secured credit facilities. The cost of these transactions was $37,211,000, consisting of redemption and tender premiums and the write-off of unamortized loan acquisition costs, and resulted in an income tax benefit of $11,990,000 for the three months ended September 29, 2007.

On August 17, 2007, the German government enacted the 2008 Tax Reform Act legislation. This comprehensive German tax reform legislation reduces corporate tax rates for 2008 and beyond and also fundamentally changes the calculation of taxable income in Germany. While the corporate income tax and trade tax regime within Germany have remained, the Act reduces the maximum corporate income tax rate from 25% to 15% and the maximum trade tax rate from approximately 18% to 15.2%. Additional provisions of the legislation include the disallowance of deductions of the trade tax and certain interest expense from taxable income. As a result of the Act, the Company’s German deferred tax liabilities existing as of January 1, 2008 will reverse in future years at a lower effective tax rate. The Company recognized the effect of the new tax legislation during the three months ended September 29, 2007, resulting in an increase in the income tax benefit of $6,140,000.

As of September 29, 2007 and December 31, 2006, the Company had unrecognized tax benefits of $11,281,000 and $8,703,000, respectively. The increase in unrecognized tax benefits from December 31, 2006 related to additions for tax positions taken in prior periods. The unrecognized tax benefits include uncertain tax positions of $1,478,000 that may affect the Company’s annual effective income tax rate upon resolution.

The Company recognizes accrued interest and penalties related to unrecognized tax positions as a component of income tax expense in its financial statements. As of September 29, 2007 and December 31, 2006, the Company had accrued $458,000 and $375,000, respectively, for the potential payment of penalties and interest.

The Company files numerous tax returns in approximately 10 different tax jurisdictions, including North America, Europe and Asia. Generally, the Company is not subject to income tax adjustments in the U.S. for tax years before 2002 and in foreign jurisdictions for tax years prior to 2000. The Company is currently undergoing income tax audits in two tax jurisdictions. The U.S. tax authority is currently examining the Company’s Federal income tax returns for tax years 2003 and 2004. The German tax authority has informed the Company that they will audit the 2001, 2002 and 2003 tax years of one of the Company’s German subsidiaries. Because audit outcomes and the timing of audit settlements are subject to significant uncertainty, the Company cannot make a reasonable estimate of the impact on earnings in the next twelve months from these audits.

Polypore International, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)

11. Comprehensive Loss

Comprehensive loss is as follows:


	Three Months Ended						Nine Months Ended
(in thousands)	September 29, 2007			September 30, 2006			September 29, 2007			September 30, 2006

Net loss	$	(14,580	)	$	(24,118	)	$	(13,521	)	$	(26,821	)
Other comprehensive income (loss), primarily foreign currency translation		(7,027	)		1,045			(2,468	)		4,258

Comprehensive loss	$	(21,607	)	$	(23,073	)	$	(15,989	)	$	(22,563	)

12. Related Party Transactions

The Company’s German subsidiary has equity investments in two companies that provide patent, trademark and research services for the Company and other companies that have invested in them. The Company’s investments represent 25% ownership in each of the firms and are accounted for by the equity method of accounting. The Company’s equity investment account balance was $268,000 and $177,000 at September 29, 2007 and December 30, 2006, respectively. Charges from the affiliates for work performed were $425,000 and $954,000 for the three and nine months ended September 29, 2007, respectively. Charges from the affiliates for work performed were $195,000 and $655,000 for the three and nine months ended September 30, 2006, respectively. Amounts due to the affiliates were approximately $106,000 and $59,000 at September 29, 2007 and December 30, 2006, respectively.

13. Acquisition

Effective January 1, 2007, the Company purchased from Nippon Sheet Glass Company, Limited (“NSG”) a 60% share in Daramic NSG Tianjin PE Separator Co., LTD (“DNPET”) for $5,475,000, including acquisition related costs. DNPET is a lead-acid battery separator manufacturing facility located in Tianjin, China. The acquisition supports the Company’s strategy of expanding capacity in the high growth Asia-Pacific region. Beginning January 1, 2007, DNPET’s assets, liabilities, results of operations and cash flows are consolidated with those of the Company and NSG’s interest in DNPET is included in the Company’s consolidated balance sheet as minority interest. The Company is entitled to all of the earnings and cash flow from DNPET for the first two years and after that, earnings and cash flows are allocated based on ownership percentages. The acquisition was accounted for as a purchase in conformity with FASB Statement No. 141, Business Combinations and FASB Statement No. 142, Goodwill and Other Intangible Assets. On January 1, 2009 and January 1, 2012, the Company can exercise a call option and NSG can exercise a put option for the Company to purchase NSG’s 40% ownership interest for $3,600,000. After 2012, the exercise price of the call and put options will be equal to the fair market value of the shares, as determined by an independent appraiser. No amounts were assigned to the call or put option in the allocation of purchase price for the acquisition. The excess of the purchase price over the fair value of the net assets purchased was approximately $1,240,000 and was allocated to goodwill. DNPET is included in the Company’s energy storage segment.

Polypore International, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)

14. Segment Information

The Company’s operations are principally managed on a products basis and are comprised of three operating segments that have been aggregated into two reportable segments: energy storage and separations media. The energy storage segment produces and markets membranes that provide the critical function of separating the cathode and anode in a variety of battery markets, including lithium, industrial and transportation applications. The separations media segment produces and markets membranes used as the high technology filtration element in various healthcare and industrial applications.

The Company evaluates the performance of segments and allocates resources to segments based on operating income before interest, income taxes, depreciation and amortization.

Financial information relating to the reportable operating segments is presented below:


	Three Months Ended						Nine Months Ended
	September 29,			September 30,			September 29,			September 30,
(in thousands)	2007			2006			2007			2006

Net sales to external customers (by major product group):
Lead-acid battery separators	$	70,114		$	63,591		$	214,831		$	194,000
Lithium battery separators		24,265			19,518			65,918			60,071

Energy storage		94,379			83,109			280,749			254,071
Healthcare		22,820			22,351			72,178			68,178
Filtration and specialty		13,220			10,924			39,009			32,522

Separations media		36,040			33,275			111,187			100,700

Total net sales to external customers	$	130,419		$	116,384		$	391,936		$	354,771

Operating income:
Energy storage	$	19,992		$	17,746		$	59,756		$	53,225
Separations media		3,123			453			12,736			5,482
Corporate		(265	)		(84	)		(315	)		(162	)

Segment operating income		22,850			18,115			72,177			58,545
Business restructuring		223			36,333			358			37,658
Change in accounting principle related to postemployment benefits		—			—			—			(2,593	)

Total operating income (loss)		22,627			(18,218	)		71,819			23,480
Reconciling items:
Interest expense, net		16,713			22,880			64,185			68,642
Costs related to purchase of 10.50% senior discount notes		30,038			—			30,038			—
Write-off of loan acquisition costs associated with refinancing of senior secured credit facilities		7,173			—			7,173			—
Foreign currency and other		390			284			764			2,265

Loss before income taxes	$	(31,687	)	$	(41,382	)	$	(30,341	)	$	(47,427	)

Depreciation and amortization:
Energy storage	$	8,024		$	7,785		$	24,387		$	23,511
Separations media		4,017			7,021			12,140			20,437

Total depreciation and amortization	$	12,041		$	14,806		$	36,527		$	43,948

Polypore International, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)

15. Financial Statements of Guarantors

On July 31, 2007, Polypore merged with and into the Company, and the Company assumed all of Polypore’s obligations under the 8.75% senior subordinated notes. The senior subordinated notes are unconditionally guaranteed, jointly and severally, on a senior basis by certain of the Company’s wholly owned subsidiaries (“Guarantors”). Management has determined that separate complete financial statements of the Guarantors would not be material to users of the financial statements.

The following sets forth condensed consolidating financial statements of the Guarantors and non-Guarantor subsidiaries.

Condensed Consolidating Balance Sheet

As of September 29, 2007


	Combined		Combined
	Guarantor		Non-Guarantor						Reclassifications
(in thousands)	Subsidiaries		Subsidiaries			The Company			and Eliminations			Consolidated

Assets
Cash and cash equivalents	$	—	$	37,886		$	22,815		$	—		$	60,701
Accounts receivable, net		38,334		70,684			—			—			109,018
Inventories		17,743		45,149			—			—			62,892
Refundable income taxes		580		(2,064	)		3,493			—			2,009
Other		2,393		9,946			(478	)		541			12,402

Total current assets		59,050		161,601			25,830			541			247,022
Due from affiliates		228,985		300,461			285,745			(815,191	)		—
Investment in subsidiaries		236,310		274,314			242,846			(753,470	)		—
Property, plant and equipment, net		106,741		277,312			—			—			384,053
Goodwill		—		1,335			567,544			—			568,879
Intangibles and loan acquisition costs, net		47		—			191,787			—			191,834
Other		763		16,569			—			—			17,332

Total assets	$	631,896	$	1,031,592		$	1,313,752		$	(1,568,120	)	$	1,409,120


Liabilities and shareholders’ equity
Accounts payable and accrued liabilities	$	33,685	$	41,181		$	15,467		$	—		$	90,333
Current portion of debt		—		497			4,036			—			4,533
Current portion of capital lease obligation		1,420		—			—			—			1,420

Total current liabilities		35,105		41,678			19,503			—			96,286
Due to affiliates		313,100		282,791			219,300			(815,191	)		—
Debt, less current portion		—		49,292			756,662			—			805,954
Capital lease obligation, less current portion		3,684		—			—			—			3,684
Pension and postretirement benefits		2,442		66,157			—			—			68,599
Postemployment benefits		—		3,988			—			—			3,988
Environmental reserve, less current portion		—		24,387			—			—			24,387
Deferred income taxes and other		70,724		16,670			(86	)		541			87,849
Shareholder’s equity		206,841		546,629			318,373			(753,470	)		318,373

Total liabilities and shareholders’ equity	$	631,896	$	1,031,592		$	1,313,752		$	(1,568,120	)	$	1,409,120

Polypore International, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)

15. Financial Statements of Guarantors (continued)

Condensed Consolidating Balance Sheet
As of December 30, 2006


	Combined		Combined
	Guarantor		Non-Guarantor						Reclassifications and
(in thousands)	Subsidiaries		Subsidiaries			The Company			Eliminations			Consolidated

Assets
Cash and cash equivalents	$	—	$	30,807		$	23,905		$	—		$	54,712
Accounts receivable, net		37,287		64,823			—			—			102,110
Inventories		16,211		51,530			—			—			67,741
Other		3,435		10,062			(111	)		—			13,386

Total current assets		56,933		157,222			23,794			—			237,949
Due from affiliates		199,196		256,327			284,658			(740,181	)		—
Investment in subsidiaries		252,129		304,592			220,743			(777,464	)		—
Property, plant and equipment, net		107,050		256,476			—			—			363,526
Goodwill		—		—			567,587			—			567,587
Intangibles and loan acquisition costs, net		57		—			204,588			—			204,645
Other		645		15,437			71			—			16,153

Total assets	$	616,010	$	990,054		$	1,301,441		$	(1,517,645	)	$	1,389,860


Liabilities and shareholders’ equity
Accounts payable and accrued liabilities	$	13,769	$	53,741		$	13,867		$	—		$	81,377
Income taxes payable		13,447		(9,758	)		—			—			3,689
Current portion of debt		—		152			3,786			—			3,938
Current portion of capital lease obligation		1,377		—			—			—			1,377

Total current liabilities		28,593		44,135			17,653			—			90,381
Due to affiliates		290,183		258,683			191,315			(740,181	)		—
Debt, less current portion		—		63			1,038,774			—			1,038,837
Capital lease obligations, less current portion		4,754		—			—			—			4,754
Pension and postretirement benefits		2,302		58,917			—			—			61,219
Post employment benefits		—		4,451			—			—			4,451
Environmental reserve, less current portion		—		22,935			—			—			22,935
Deferred income taxes and other		63,593		49,991			(15,963	)		—			97,621
Shareholder’s equity		226,585		550,879			69,662			(777,464	)		69,662

Total liabilities and shareholders’ equity	$	616,010	$	990,054		$	1,301,441		$	(1,517,645	)	$	1,389,860

Polypore International, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)

15. Financial Statements of Guarantors (continued)

Condensed Consolidating Statement of Operations

For the three months ended September 29, 2007


	Combined			Combined
	Guarantor			Non-Guarantor						Reclassifications and
(in thousands)	Subsidiaries			Subsidiaries			The Company			Eliminations			Consolidated

Net sales	$	47,252		$	83,167		$	—		$	—		$	130,419
Cost of goods sold		21,051			63,353			—			—			84,404

Gross profit		26,201			19,814			—			—			46,015
Selling, general and administrative expenses		14,643			8,258			264			—			23,165
Business restructuring		—			223			—			—			223

Operating income (loss)		11,558			11,333			(264	)		—			22,627
Costs related to purchase of 10.50% senior discount notes		—			—			30,038			—			30,038
Write-off of loan acquisition costs associated with refinancing of senior secured credit facilities		—			—			7,173			—			7,173
Interest expense and other		(1,831	)		3,012			15,922			—			17,103
Equity in earnings of subsidiaries		—			—			(16,440	)		16,440			—

Income (loss) before income taxes		13,389			8,321			(36,957	)		(16,440	)		(31,687	)
Income taxes		6,935			(1,665	)		(22,377	)		—			(17,107	)

Net income (loss)	$	6,454		$	9,986		$	(14,580	)	$	(16,440	)	$	(14,580	)

Condensed Consolidating Statement of Operations

For the three months ended September 30, 2006


				Combined
	Combined			Non-
	Guarantor			Guarantor						Reclassifications
(in thousands)	Subsidiaries			Subsidiaries			The Company			and Eliminations			Consolidated

Net sales	$	44,001		$	72,383		$	—		$	—		$	116,384
Cost of goods sold		19,584			58,712			—			—			78,296

Gross profit		24,417			13,671			—			—			38,088
Selling, general and administrative expenses		12,678			7,035			260			—			19,973
Business restructuring		—			36,333			—			—			36,333

Operating income (loss)		11,739			(29,697	)		(260	)		—			(18,218	)
Interest expense and other		(1,233	)		1,735			22,662			—			23,164
Equity in earnings of subsidiaries		—			—			12,663			(12,663	)		—

Income (loss) before income taxes		12,972			(31,432	)		(35,585	)		12,663			(41,382	)
Income taxes		7,499			(13,296	)		(11,467	)		—			(17,264	)

Net income (loss)	$	5,473		$	(18,136	)	$	(24,118	)	$	12,663		$	(24,118	)

Polypore International, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)

15. Financial Statements of Guarantors (continued)

Condensed Consolidating Statement of Operations

For the nine months ended September 29, 2007


				Combined
	Combined			Non-
	Guarantor			Guarantor					Reclassifications
(in thousands)	Subsidiaries			Subsidiaries		The Company			and Eliminations			Consolidated

Net sales	$	142,115		$	249,821	$	—		$	—		$	391,936
Cost of goods sold		62,762			186,977		—			—			249,739

Gross profit		79,353			62,844		—			—			142,197
Selling, general and administrative expenses		43,995			25,431		594			—			70,020
Business restructuring		—			358		—			—			358

Operating income (loss)		35,358			37,055		(594	)		—			71,819
Costs related to purchase of 10.50% senior discount notes		—			—		30,038			—			30,038
Write-off of loan acquisition costs associated with refinancing of senior secured credit facilities		—			—		7,173			—			7,173
Interest expense and other		(5,353	)		7,007		63,295			—			64,949
Equity in earnings of subsidiaries		—			—		(44,422	)		44,422			—

Income (loss) before income taxes		40,711			30,048		(56,678	)		(44,422	)		(30,341	)
Income taxes		22,346			3,991		(43,157	)		—			(16,820	)

Net income (loss)	$	18,365		$	26,057	$	(13,521	)	$	(44,422	)	$	(13,521	)

Condensed Consolidating Statement of Operations

For the nine months ended September 30, 2006


				Combined
	Combined			Non-
	Guarantor			Guarantor						Reclassifications
(in thousands)	Subsidiaries			Subsidiaries			The Company			and Eliminations			Consolidated

Net sales	$	136,110		$	218,661		$	—		$	—		$	354,771
Cost of goods sold		61,524			170,213			—			—			231,737

Gross profit		74,586			48,448			—			—			123,034
Selling, general and administrative expenses		39,355			24,796			338			—			64,489
Business restructuring		—			37,658			—			—			37,658
Change in accounting principle related to postemployment benefits		—			(2,593	)		—			—			(2,593	)

Operating income (loss)		35,231			(11,413	)		(338	)		—			23,480
Interest expense and other		(2,267	)		3,674			69,500			—			70,907
Equity in earnings of subsidiaries		—			—			(12,048	)		12,048			—

Income (loss) before income taxes		37,498			(15,087	)		(57,790	)		(12,048	)		(47,427	)
Income taxes		20,741			(10,378	)		(30,738	)		—			(20,375	)

Net income (loss) before the cumulative effect of a change in accounting principle	$	16,757		$	(4,709	)	$	(27,052	)	$	(12,048	)	$	(27,052	)

Polypore International, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)

15. Financial Statements of Guarantors (continued)

Condensed Consolidating Statement of Cash Flows

For the nine months ended September 29, 2007


	Combined			Combined
	Guarantor			Non-Guarantor						Reclassifications
(in thousands)	Subsidiaries			Subsidiaries			The Company			and Eliminations			Consolidated

Net cash provided by operating activities	$	27,857		$	46,110		$	32,621		$	(44,422	)	$	62,166
Investing activities:
Purchases of property, plant and equipment		(7,069	)		(9,213	)		—			—			(16,282	)
Purchase of 60% share in manufacturing facility		—			(5,475	)		—			—			(5,475	)

Net cash used in investing activities		(7,069	)		(14,688	)		—			—			(21,757	)
Financing activities:
Proceeds from the new senior secured credit facility		—			42,551			327,449			—			370,000
Principal payments on debt		(1,027	)		(1,991	)		(368,183	)		—			(371,201	)
Purchase of the 10.50% senior discount notes		—			—			(293,648	)		—			(293,648	)
Proceeds from initial public offering, net of underwriting fees and other offering related costs		—			—			264,814			—			264,814
Loan acquisition costs		—			—			(8,672	)		—			(8,672	)
Repurchase of common stock		—			—			(320	)		—			(320	)
Intercompany transactions, net		(19,796	)		(69,475	)		44,849			44,422			—

Net cash used in financing activities		(20,823	)		(28,915	)		(33,711	)		44,422			(39,027	)
Effect of exchange rate changes on cash and cash equivalents		35			4,572			—			—			4,607

Net increase in cash and cash equivalents		—			7,079			(1,090	)		—			5,989
Cash and cash equivalents at beginning of period		—			30,807			23,905			—			54,712

Cash and cash equivalents at end of period	$	—		$	37,886		$	22,815		$	—		$	60,701

Condensed Consolidating Statement of Cash Flows

For the nine months ended September 30, 2006


	Combined			Combined
	Guarantor			Non-Guarantor						Reclassifications
(in thousands)	Subsidiaries			Subsidiaries			The Company			and Eliminations			Consolidated

Net cash provided by (used in) operating activities	$	33,145		$	40,847		$	(11,745	)	$	(11,843	)	$	50,404
Investing activities:
Purchases of property, plant and equipment		(8,053	)		(7,809	)		—			—			(15,862	)
Proceeds from sale of property, plant and equipment		5			56			—			—			61

Net cash used in investing activities		(8,048	)		(7,753	)		—			—			(15,801	)
Financing activities:
Principal payments on debt		(963	)		(153	)		—			—			(1,116	)
Loan acquisition costs		—			—			(15	)		—			(15	)
Issuance of common stock		—			—			399			—			399
Intercompany transactions, net		(24,283	)		(16,697	)		29,137			11,843			—

Net cash provided by (used in) financing activities		(25,246	)		(16,850	)		29,521			11,843			(732	)
Effect of exchange rate changes on cash and cash equivalents		(48	)		1,917			(5	)		—			1,864

Net increase (decrease) in cash and cash equivalents		(197	)		18,161			17,771			—			35,735
Cash and cash equivalents at beginning of period		20			18,173			9,867			—			28,060

Cash and cash equivalents at end of period	$	(177	)	$	36,334		$	27,638		$	—		$	63,795

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

The following discussion of our financial condition and results of operations should be read together with our unaudited consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q and our audited consolidated financial statements and the related notes included in our Annual Report on Form 10-K for the fiscal year ended December 30, 2006.

Overview

We are a leading global high technology filtration company that develops, manufactures and markets specialized microporous membranes used in separation and filtration processes. We operate in two business segments: (i) the energy storage segment and (ii) the separations media segment. We manufacture our products at facilities in North America, Europe and Asia.

In the energy storage segment, our membrane separators are a critical performance component in lithium batteries, which are used in consumer electronic applications, and lead-acid batteries, which are used in transportation and industrial applications. The energy storage segment has benefited from the overall increase in demand by consumers for mobile power which we believe will continue.

Lithium batteries are the power source in a wide variety of electronics applications ranging from laptop computers and mobile phones to power tools. In addition, many new applications, such as consumer power tools and electric bikes and developing applications such as hybrid electric vehicles incorporate large-format batteries that require much greater membrane separator volume per battery. As a result, we believe that membrane separator growth will exceed battery unit sales growth. In June 2007, our Board of Directors approved a lithium battery separator capacity expansion at our Charlotte, North Carolina facility to be completed in 2008.

In the motor vehicle battery market, the high proportion of aftermarket sales and the steady growth of the worldwide fleet of motor vehicles provide us with a growing, recurring revenue base in lead-acid battery membrane separators. We believe we will also benefit from the worldwide conversion of alternative separator materials to the higher-performance polyethylene-based membrane separators such as those we produce. Growth is strongest in the Asia-Pacific region as a result of increasing per capita penetration of automobiles, growth in the industrial and manufacturing sectors, and a high rate of conversion to polyethylene-based membrane separators. We have positioned ourselves to benefit from this growth by expanding capacity at our Prachinburi, Thailand facility, acquiring a 60% stake in a production facility in Tianjin, China, and establishing an Asian Technical Center in Thailand. In August 2007, our Board of Directors approved an additional capacity expansion at our Prachinburi, Thailand facility to be completed by the end of 2008.

The initial expansion of the Thailand facility occurred as part of larger restructuring activities. In 2005, we closed our Austrian lead-acid battery separator facility, downsized our German facility and transferred certain assets from these facilities to our facility in Thailand.

In the separations media segment, our filtration membranes and modules are used in healthcare and high-performance filtration and specialty applications. Healthcare applications include hemodialysis, blood oxygenation, and plasmapheresis. Growth in demand for hemodialysis membranes is driven by the increasing worldwide population of end-stage renal disease patients. We estimate that conversion to single-use dialyzers and increasing treatment frequency will result in additional dialyzer market growth.

We produce a wide range of membranes and membrane-based elements for micro- and ultrafiltration and gasification/degasification of liquids. Micro- and ultrafiltration membrane element market growth is being driven by several factors, including end-market growth in applications such as water treatment and pharmaceutical processing, displacement of conventional filtration media by membrane filtration due to membranes’ superior cost and performance attributes and increasing purity requirements in industrial and other applications.

In separations media, we engaged in certain restructuring activities in each of 2004 and 2006 in response to changing customer, industry and market demands. Our 2004 restructuring plan was enacted to manage costs and to respond to the decision of a customer to outsource its dialyzer production. We implemented a number of cost reduction measures in 2004 relating to the separations media segment, including employee layoffs and the relocation and consolidation of certain research and development operations. All activities and charges relating to this plan were completed as of December 30, 2006. In 2005 and 2006, we experienced a significant decline in demand for cellulosic hemodialysis membranes, primarily driven by a shift in industry demand toward higher performing synthetic membranes. In response, in 2006 we ceased production of cellulosic hemodialysis membranes and realigned the cost structure of our separations media segment at our Wuppertal, Germany facility.

On May 13, 2004, Polypore International, Inc., through a wholly owned subsidiary, purchased the outstanding capital stock of Polypore Inc. (“Polypore”). The aggregate purchase price, including acquisition related costs, was approximately $1.15 billion in cash. In connection with the acquisition, Polypore obtained a new credit facility, issued 8.75% senior subordinated notes and received equity contributions from its shareholders. These net proceeds were used to pay the net purchase price to the existing shareholders, repay all outstanding indebtedness under Polypore’s existing credit facility and pay transaction related fees and expenses. These events are hereinafter referred to as the “Transactions”.

Initial Public Offering and Related Transactions

On June 25, 2007, our Board of Directors approved a 147.422-for-one stock split of our common stock.

On June 27, 2007, we priced our initial public offering of common stock and signed an underwriting agreement, pursuant to which the underwriters agreed to purchase 15.0 million shares of our common stock on a firm commitment basis at a price of $19.00 per share. Public trading of our common stock commenced on June 28, 2007. The cash proceeds from this offering were approximately $267.9 million, net of underwriting fees of $17.1 million.

In July 2007, we used the proceeds from the initial public offering and cash on hand to purchase and retire our outstanding 10.50% senior discount notes and pay other offering related costs of $3.1 million. The purchase of the notes was accomplished by a tender offer and subsequent redemption of the notes not tendered. The total purchase price of the notes was $293.6 million, consisting of principal of $264.1 million and tender and redemption premiums of $29.5 million. As a result of the purchase of the notes, we incurred a $30.0 million charge to income, which is comprised of redemption and tender premiums of $29.5 million and the write-off of unamortized loan acquisition costs of $0.5 million.

On July 3, 2007, we refinanced Polypore, Inc.’s senior secured credit facility with a new senior secured credit facility. The new credit facility provides for a $322.9 million term loan facility and a €35.0 million term loan facility ($47.1 million at July 3, 2007) and a $90.0 million revolving credit facility. No amounts were outstanding under the revolving credit facility at September 29, 2007. The term loans mature in July 2014 and the revolving credit facility matures in July 2013. In connection with the refinancing, we incurred loan acquisition costs of approximately $8.7 million, which were capitalized and will be amortized over the life of the new credit facility. During the three months ended September 29, 2007, we wrote-off loan acquisition costs of $7.2 million associated with the previous senior secured credit facility.

On July 31, 2007, Polypore Inc. merged with and into Polypore International, and Polypore International assumed all of Polypore’s obligations including the senior secured credit facility and the 8.75% senior subordinated notes.

Critical accounting policies

Critical accounting policies are those accounting policies that can have a significant impact on the presentation of our financial condition and results of operations, and that require the use of complex and subjective estimates based on past experience and management’s judgment. Because of uncertainty inherent in such estimates, actual results may differ from these estimates. Below are those policies that we believe are critical to the understanding of our operating results and financial condition.

Allowance for doubtful accounts

Accounts receivable are primarily composed of amounts owed to us through our operating activities and are presented net of an allowance for doubtful accounts. We establish an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information. We charge accounts receivables off against our allowance for doubtful accounts when we deem them to be uncollectible on a specific identification basis. The determination of the amount of the allowance for doubtful accounts is subject to judgment and estimated by management. If circumstances or economic conditions deteriorate, we may need to increase the allowance for doubtful accounts.

Impairment of intangibles and goodwill

Identified intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. In accordance with FASB Statement No. 142, Goodwill and Other Intangible Assets, goodwill and indefinite-lived intangible assets are not amortized, but are subject to an annual impairment test based primarily on a discounted cash flow analysis. A discounted cash flow analysis requires various judgmental assumptions including assumptions about future cash flows and discount rates. The assumptions about future cash flows are based on our financial and strategic plans and industry conditions. The discount rate assumptions used in the fair value estimates are based on an assessment of the risk inherent in the future cash flows of the respective reporting units. The determination of whether or not goodwill has become impaired involves judgment in the assumptions underlying the approach used to determine the value of our reporting segments. Changes in our strategy or market conditions could impact these judgments and require adjustments to recorded amounts of intangible assets. At December 30, 2006, a 1% decrease in the estimated free cash flow assumptions would have resulted in a reduction in fair values of approximately $10.0 million for our energy storage segment and $4.0 million for our separations media segment. At December 30, 2006, a 1% increase in the discount rate would have resulted

in a reduction in fair values of $104.3 million for our energy storage segment and $45.2 million for our separations media segment. None of these changes would have resulted in an impairment charge to goodwill or intangible assets.

Pension and other postretirement benefits

Certain assumptions are used in the calculation of the actuarial valuation of our defined benefit pension plans and other postretirement benefits. Two critical assumptions, discount rate and expected return on assets, are important elements of plan expense and/or liability measurement and differences between actual results and these two actuarial assumptions can materially affect our projected benefit obligation or the valuation of our plan assets. Other assumptions involve demographic factors such as retirement, expected increases in compensation, mortality and turnover. The discount rate enables us to state expected future cash flows at a present value on the measurement date. The discount rate assumptions are based on the market rate for high quality fixed income investments, and are thus subject to change each year. At December 30, 2006, a 1% decrease in the discount rate would increase our projected benefit obligations and the unfunded status of our pension plans by approximately $15.2 million. The expected rates of return on our pension plans’ assets are based on the asset allocation of each plan and the long-term projected return of those assets. At December 30, 2006, if the expected long-term rate of return on pension plan assets were reduced by 1%, the unfunded status of our pension plans would increase by approximately $0.2 million.

Environmental matters

In connection with the Transactions, we identified and accrued for potential environmental contamination at our manufacturing facility in Potenza, Italy. In connection with the acquisition of Membrana GmbH (“Membrana”) in 2002, we recorded a reserve for environmental obligations for costs to remediate known environmental issues and operational upgrades as a matter of good manufacturing practices or in order to remain in compliance with local regulations.

We accrue for environmental obligations when such expenditures are probable and reasonably estimable. The amount of liability recorded is based on currently available information, including the progress of remedial investigations, current status of discussions with regulatory authorities regarding the method and extent of remediation, presently enacted laws and existing technology. Accruals for estimated losses from environmental obligations are adjusted as further information develops or circumstances change. If actual results are less favorable than those projected by management, we may be required to recognize additional expense and liabilities.

We have indemnification agreements for certain environmental matters from Acordis A.G. (“Acordis”) and Akzo Nobel (“Akzo”), the prior owners of Membrana. Recoveries of environmental costs from other parties are recognized as assets when their receipt is deemed probable. We have recorded a receivable with regard to the Akzo indemnification agreement. If indemnification claims cannot be enforced against Acordis and Akzo, we may be required to reduce the amount of indemnification receivables recorded.

Results of Operations

The following table sets forth, for the periods indicated, certain operating data:


							Percentage of Net Sales
	Three Months Ended						Three Months Ended
	September 29,			September 30,			September 29,			September 30,
($’s in millions)	2007			2006			2007			2006


Net sales	$	130.4		$	116.4			100.0	%		100.0	%


Gross profit		46.0			38.1			35.3	%		32.7	%
Selling, general and administrative expenses		23.2			20.0			17.8	%		17.2	%
Business restructuring		0.2			36.3			0.2	%		31.2	%

Operating income (loss)		22.6			(18.2	)		17.3	%		(15.7	)%
Interest expense, net		16.7			22.9			12.8	%		19.7	%
Costs related to purchase of 10.50% senior discount notes		30.0			—			23.0	%		—
Write-off of loan acquisition costs associated with refinancing of senior secured credit facilities		7.2			—			5.5	%		—
Foreign currency and other		0.4			0.3			0.3	%		0.2	%

		54.3			23.2			41.6	%		19.9	%

Loss before income taxes		(31.7	)		(41.4	)		(24.3	)%		(35.6	)%
Income taxes		(17.1	)		(17.3	)		(13.1	)%		(14.9	)%

Net loss	$	(14.6	)	$	(24.1	)		(11.2	)%		(20.7	)%


							Percentage of Net Sales
	Nine Months Ended						Nine Months Ended
	September 29,			September 30,			September 29,			September 30,
($’s in millions)	2007			2006			2007			2006

Net sales	$	391.9		$	354.8			100.0	%		100.0	%


Gross profit		142.2			123.0			36.3	%		34.7	%
Selling, general and administrative expenses		70.0			64.5			17.9	%		18.2	%
Business restructuring		0.4			37.6			0.1	%		10.6	%
Change in accounting principle related to postemployment benefits		—			(2.6	)		—			(0.7	)%

Operating income		71.8			23.5			18.3	%		6.6	%
Interest expense, net		64.2			68.6			16.4	%		19.3	%
Costs related to purchase of 10.50% senior discount notes		30.0			—			7.7	%		—
Write-off of loan acquisition costs associated with refinancing of senior secured credit facilities		7.2			—			1.8	%		—
Foreign currency and other		0.7			2.3			0.1	%		0.6	%

		102.1			70.9			26.0	%		19.9	%

Loss before income taxes		(30.3	)		(47.4	)		(7.7	)%		(13.3	)%
Income taxes		(16.8	)		(20.4	)		(4.3	)%		(5.7	)%

Loss before the cumulative effect of a change in accounting principle		(13.5	)		(27.0	)		(3.4	)%		(7.6	)%
Cumulative effect of a change in accounting principle		—			0.2			—			0.1	%

Net loss	$	(13.5	)	$	(26.8	)		(3.4	)%		(7.5	)%

Comparison of the three months ended September 29, 2007 with the three months ended September 30, 2006

Net sales. Net sales for the three months ended September 29, 2007 were $130.4 million, an increase of $14.0 million, or 12.0%, from the three months ended September 30, 2006. Energy storage sales for the three months ended September 29, 2007 were $94.4 million, an increase of $11.3 million, or 13.6%. The increase in energy storage sales was primarily due to higher sales of lead-acid and lithium battery separators, higher average sales prices for lead-acid battery separators and the $2.1 million positive impact of dollar/euro exchange rate fluctuations. The 10.3% increase in lead-acid separator sales was due to a 3.5% volume increase, driven by the increasing size of the automotive market and the trend of conversion from alternative separator materials to superior performing polyethylene-based separators, particularly in Asia. Average sales prices increased due to global price increases implemented in the three months ended December 30, 2006 to offset higher raw material and energy costs. Lithium battery separator sales increased 24.3% over the same period in the prior year. Although lithium battery separator sales can fluctuate on a quarterly basis, we believe that longer term time horizons are more indicative. Furthermore, we believe that strong demand for consumer electronic products and expanding applications for lithium batteries will continue to drive growth.

Separations media sales for the three months ended September 29, 2007 were $36.0 million, an increase of $2.7 million, or 8.1% from the same period in the prior year. Included in this increase was a $2.0 million positive impact of dollar/euro exchange rate fluctuations. Healthcare product sales increased by 2.1% due to strong growth in sales of synthetic hemodialysis membranes combined with the positive impact of dollar/euro exchange rate fluctuations, offset by the expected decline of cellulosic hemodialysis membranes due to our exit of this product line. Filtration and specialty product sales increased by 21.0% driven by continued strong demand for high performance filtration applications and the positive impact of dollar/euro exchange rate fluctuations.

Gross Profit. Gross profit as a percent of net sales was 35.3% for the three months ended September 29, 2007, as compared to 32.7% in the same period of the prior year. Energy storage gross profit as a percent of net sales increased to 38.2% for the three months ended September 29, 2007, as compared to 37.8% for the same period in the prior year, due to lower production costs per unit as increased production volumes resulted in fixed costs being applied to higher production volumes. Separations media gross profit as a percent of net sales was 27.5% for the three months ended September 29, 2007, as compared to 20.1% for the same period in the prior year. The increase in separations media gross profit percentage is due primarily to a favorable change in mix of product sales due to the increase in sales of synthetic hemodialysis membranes and filtration and specialty products and a decline in sales of cellulosic membranes.

Selling, general and administrative expenses. Selling, general and administrative expenses as a percent of net sales was 17.8% for the three months ended September 29, 2007, as compared to 17.2% for the same period in the prior year. The increase in selling, general and administrative expenses as a percentage of net sales is due to increased costs aimed at driving growth, including selling and marketing costs and personnel costs.

Interest expense. Interest expense for the three months ended September 29, 2007 decreased by $6.2 million compared with the same period in the prior year. The decrease in interest expense was primarily driven by the purchase of our senior discount notes and lower interest rates under our refinanced senior credit facilities.

Income taxes. The income tax provision for the interim periods presented is computed at the effective income tax rate expected to be applicable in each respective full year using the estimated taxable income by country and the statutory rates on a country-by-country basis. The effective tax rate was 53.9% for the three months ended September 29, 2007, as compared to 41.7% for the same period in the prior year. Our effective tax rate fluctuates due to a variety of factors, including state income taxes, the mix of income between U.S. and foreign jurisdictions taxed at varying rates, certain export sales that are excluded from taxable income, various changes in estimates of permanent differences and valuation allowances and the relative size of our consolidated income or loss before income taxes.

The primary factor impacting our effective tax rate is the mix of earnings between the various tax jurisdictions in which we do business. Each tax jurisdiction has its own set of tax laws and tax rates. The income earned by our subsidiaries in each jurisdiction is taxed independently by these various jurisdictions. Currently, the applicable statutory income tax rates in the jurisdictions that we operate in range from 0% to 39%. Therefore, the amount of income tax expense in each jurisdiction as compared to our consolidated income (loss) before income taxes has a significant impact on our annual effective tax rate.

Our effective tax rate was also impacted by significant events related to financing activities and German tax reform that occurred during the three months ended September 29, 2007. These events resulted in an increase in our income tax benefit of $18.1 million.

In July 2007, we purchased the 10.50% senior discount notes and refinanced our senior secured credit facilities. The cost of these transactions was $37.2 million, consisting of redemption and tender premiums and the write-off of unamortized loan acquisition costs, and resulted in an income tax benefit of $12.0 million for the three months ended September 29, 2007.

The effect of each of these items on our effective tax rate is quantified in the table below:


	Three Months Ended
	September 29, 2007			September 30, 2006

U.S. Federal statutory rate		35.0	%		35.0	%
State income taxes		(3.7	)		2.7
Mix of income in taxing jurisdictions		(19.1	)		7.9
Export sales excluded from taxable income		—			2.0
Other permanent differences and valuation allowances		6.3			(5.9	)
Purchase of 10.50% senior discount notes and write-off of loan acquisition costs associated with refinancing of senior secured credit facility		16.0			—
Impact of German tax reform legislation		19.4			—

Total effective tax rate		53.9	%		41.7	%

Comparison of the nine months ended September 29, 2007 with the nine months ended September 30, 2006

Net sales. Net sales for the nine months ended September 29, 2007 were $391.9 million, an increase of $37.1 million, or 10.5%, from the nine months ended September 30, 2006. Energy storage sales for the nine months ended September 29, 2007 were $280.7 million, an increase of $26.6 million, or 10.5%. The increase in energy storage sales was primarily due to higher lead-acid and lithium battery separator sales volume, higher average sales prices for lead-acid battery separators and the $6.7 million positive impact of dollar/euro exchange rate fluctuations. Lead-acid separator volume growth of 4.4% was driven by the increasing size of the automotive market and the trend of conversion from alternative separator materials to superior performing polyethylene-based separators, particularly in Asia. Average sales prices increased due to global price increases implemented in the three months ended December 30, 2006 to offset higher raw material and energy costs. Lithium battery separator sales increased by 9.7% due to increased demand for consumer electronic products and expanding applications for lithium batteries.

Separations media sales for the nine months ended September 29, 2007 were $111.2 million, an increase of $10.5 million, or 10.4% from the same period in the prior year. Included in this increase was a $6.3 million positive impact of dollar/euro exchange rate fluctuations. Healthcare product sales increased by 5.9% due to strong growth in sales of synthetic hemodialysis membranes combined with the positive impact of dollar/euro exchange rate fluctuations, offset by the expected decline of cellulosic hemodialysis membranes due to our exit of this product line. Filtration and specialty product sales increased by 19.9% driven by continued strong demand for high performance filtration applications and the positive impact of dollar/euro exchange rate fluctuations.

Gross Profit. Gross profit as a percent of net sales was 36.3% for the nine months ended September 29, 2007, as compared to 34.7% in the same period of the prior year. Energy storage gross profit as a percent of net sales was 38.7% for the nine months ended September 29, 2007, as compared to 38.0% for the same period of the prior year, due to lower production costs per unit as increased production volumes resulted in fixed costs being applied to higher production volumes. Separations media gross profit as a percent of net sales increased to 30.1% for the nine months ended September 29, 2007 from 26.3% for the same period in the prior year. The increase in separations media gross profit percentage is due primarily to a favorable change in mix of product sales due to the increase in sales of synthetic hemodialysis membranes and filtration and specialty products and a decline in sales of cellulosic hemodialysis membranes.

Selling, general and administrative expenses. Selling, general and administrative expenses as a percent of net sales was 17.9% for the nine months ended September 29, 2007, as compared to 18.2% for the same period in the prior year. The increase in selling, general and administrative expenses is due to increased costs aimed at driving growth, including selling and marketing costs and personnel costs.

Interest expense. Interest expense for the nine months ended September 29, 2007 decreased by $4.4 million compared with the same period in the prior year. The decrease in interest expense was primarily driven by the purchase of our senior discount notes and lower interest rates under our refinanced senior credit facilities.

Income taxes. The income tax provision for the interim periods presented is computed at the effective rate expected to be applicable in each respective full year using the estimated taxable income by country and the statutory rates on a country-by-country basis. The effective tax rate was 55.4% for the nine months ended September 29, 2007, as compared to 43.0% for the same period in the prior year. Our effective tax rate fluctuates due to a variety of factors, including state income taxes, the mix of income between U.S. and foreign jurisdictions taxed at varying rates, certain export sales that are excluded from taxable income, various changes in estimates of permanent differences and valuation allowances and the relative size of our consolidated income or loss before income taxes.

The effect of each of these items on our effective tax rate is quantified in the table below:


	Nine Months Ended
	September 29, 2007			September 30, 2006

U.S. Federal statutory rate		35.0	%		35.0	%
State income taxes		(3.7	)		2.7
Mix of income in taxing jurisdictions		(19.1	)		7.9
Export sales excluded from taxable income		—			2.0
Other permanent differences and valuation allowances		6.9			(4.6	)
Purchase of 10.50% senior discount notes and write-off of loan acquisition costs associated with refinancing of senior secured credit facility		16.1			—
Impact of German tax reform legislation		20.2			—

Total effective tax rate		55.4	%		43.0	%

Business Restructuring

The pre-tax components of restructuring activity in the nine months ended September 29, 2007 were as follows:


	Balance at							Foreign		Balance at
	December 30,		Restructuring		Cash			Currency		September 29,
(in millions)	2006		Charges		Payments			Translation		2007

2006 Restructuring Plan:
Severance and benefit costs	$	11.5	$	—	$	(7.2	)	$	0.5	$	4.8
Other		5.7		—		(4.5	)		0.2		1.4

		17.2		—		(11.7	)		0.7		6.2
2005 Restructuring Plan:
Severance and benefit costs		0.9		0.2		(0.6	)		—		0.5
Other		—		0.2		(0.2	)		—		—

		0.9		0.4		(0.8	)		—		0.5
2004 Restructuring Plan:
Severance and benefit costs		1.2		—		(0.7	)		—		0.5

Total	$	19.3	$	0.4	$	(13.2	)	$	0.7	$	7.2

We expect to make payments against the restructuring reserve of approximately $2.2 million in the fourth quarter of 2007, with the remaining payments expected to be made in 2008 and 2009.

2006 Restructuring Plan. In response to a significant decline in demand for cellulosic hemodialysis membranes driven by a shift in industry demand toward synthetic membranes, our separations media segment exited the production of cellulosic membranes and realigned its cost structure at its Wuppertal, Germany facility. On August 24, 2006, we announced a layoff of approximately 150 employees. During the third quarter of 2006, we recorded a restructuring charge of $36.0 million related to the 2006 restructuring plan. Production of cellulosic hemodialysis membranes ceased on December 27, 2006 and the majority of the employees were laid off effective January 1, 2007. The total cost of the plan is expected to be approximately $37.5 million, consisting of $11.4 million for the employee layoffs, $5.6 million for other costs related to the shutdown of portions of the Wuppertal facility that will no longer be used and a non-cash impairment charge of $17.5 million for buildings and equipment used in the production of cellulosic hemodialysis membranes.. The other costs included in the restructuring plan are related to local regulations surrounding complete or partial shutdowns of a facility. We expect to complete these activities by the end of the second quarter of 2008. The timing, scope and costs of these restructuring measures are subject to change as we proceed with our restructuring plans and further evaluate our business needs and costs.

2005 Restructuring Plan. In order to better accommodate customer growth and related demand for both lead-acid and lithium battery separators in the greater Asian market, our energy storage segment transferred certain assets from Europe and the United States to its facilities in Thailand and China. The capacity realignment plan included the closure of our facility in Feistritz, Austria, the downsizing of our Norderstedt, Germany facility and the relocation of certain assets from these two plants to our facilities in Prachinburi, Thailand. During the three months ended September 30, 2006, we completed installation and started production with the assets relocated to Thailand. Additionally, finishing equipment from our facility in Charlotte, North Carolina was relocated to our facility in Shanghai, China. The total cost of the realignment plan is expected to be approximately $9.1 million, which has been substantially recognized through September 29, 2007. In addition to the benefit of realigning capacity with market growth, we expect to realize the full impact of cost savings in 2007. The timing and scope of these restructuring measures are subject to change as we further evaluate our business needs and costs.

2004 Restructuring Plan. In an effort to manage costs and in response to the decision of a customer to outsource its dialyzer production, we implemented a number of cost reduction measures in 2004 relating to the separations media segment, including employee layoffs, the relocation of certain research and development operations conducted in a leased facility in Europe to facilities where the related manufacturing operations are conducted and other cost reductions. All activities and charges relating to the 2004 Restructuring Plan have been completed as of December 30, 2006.

Liquidity and Capital Resources

Cash and cash equivalents increased from $54.7 million at December 30, 2006 to $60.7 million at September 29, 2007, due primarily to cash flows from operations of $62.2 million and the $4.6 million effect of exchange rate changes on cash, partially offset by cash used in investing activities of $21.8 million and cash used in financing activities of $39.0 million.

Operating activities. Net cash provided by operations was $62.2 million in the nine months ended September 29, 2007, as compared to $50.4 million in the nine months ended September 30, 2006. Cash provided by operations for the nine months ended September 29, 2007 consisted of cash flows from operations before changes in working capital of $51.7 million, partially offset by an increase in working capital of $10.5 million, excluding the impact of foreign exchange rate fluctuations. Accounts receivable increased from December 30, 2006 to September 29, 2007 by approximately $2.4 million (excluding the $4.5 million increase due to movements in foreign exchange rates) and days sales outstanding remained comparable to prior periods. Inventories decreased approximately $8.3 million (excluding an $3.4 million increase due to movements in foreign exchange rates) due to the annual European shutdowns in the third quarter and the reduction of cellulosic hemodialysis membrane inventories as we make final shipments out of inventory to our customers. Accounts payable and accrued liabilities increased approximately $5.2 million (excluding the $3.8 million due to movements in foreign exchange rates), primarily due to accrued interest, partially offset by restructuring payments. Interest for the 8.75% Notes is paid semi-annually in the second and fourth quarters.

Cash provided by operations for the nine months ended September 30, 2006 consisted of cash flows from operations before changes in working capital of $26.6 million and an increase in working capital of $23.8 million. Accounts receivable increased from December 31, 2005 to September 30, 2006 by approximately $5.9 million (excluding the $3.9 million increase due to movements in foreign exchange rates) primarily due to the increase in sales during the quarter as compared to the same period in the prior year, while days sales outstanding decreased slightly compared to prior periods. Inventories increased approximately $3.3 million (excluding the $2.6 million increase due to movements in foreign exchange rates) primarily due to the build-up of cellulosic inventories as we produced during 2006 to meet customer sales commitments for 2006, 2007 and 2008. The increase was partially offset by a reduction in inventory days resulting from the annual European shutdowns in the three months ended September 30, 2006. Accounts payable and accrued liabilities increased approximately $28.0 million (excluding the $3.9 million increase due to movements in foreign exchange rates), primarily due to increases in accrued restructuring costs of $14.0 million, accrued interest and accrued personnel costs, including the performance-based incentive compensation plan accrual.

Investing activities. Capital expenditures were $16.3 million and $15.9 million in the nine months ended September 29, 2007 and September 30, 2006, respectively. In June 2007, our Board of Directors approved a capital project for approximately $18.0 million to increase the production capacity of lithium battery separators at our Charlotte, North Carolina facility. The expansion project began in the three months ended September 29, 2007 and should be completed in 2008. In August 2007, our Board of Directors approved a capital project for approximately $19.0 million to increase the production capacity of lead-acid battery separators at our Prachinburi, Thailand facility. The expansion project began in the three months ended September 29, 2007 and should be completed by the end of 2008. We estimate that total capital expenditures in fiscal year 2007 will be approximately $35.0 million.

During 2007, we purchased a 60% share in a lead-acid battery separator manufacturing facility in Tianjin, China for $5.5 million.

Financing activities. Cash used in financing activities was $39.0 million and $0.7 million in the nine months ended September 29, 2007 and September 30, 2006, respectively. Financing activities in the nine months ended September 29, 2007 primarily consisted of the initial public offering, net of underwriting fees and other offering related costs, with net proceeds of $264.8 million, the purchase of our 10.50% senior discount notes for $293.6 million, the refinancing of our senior secured credit facility and related loan acquisition costs. We believe that these changes in our capital structure will provide us with greater flexibility due to lower interest costs and less restrictive debt covenants associated with our new senior secured credit facility.

We intend to fund our ongoing operations through cash generated by operations and availability under the senior secured credit facilities.

As part of the Transactions, Polypore incurred substantial debt under the senior secured credit facilities and the issuance of the 8.75% senior subordinated notes. On July 3, 2007, we refinanced Polypore’s senior secured credit facility with a new senior secured credit facility that provides improved financial flexibility and lower interest rate spreads. The new credit facility provides for a $322.9 million term loan facility ($322.9 million outstanding at September 29, 2007) and a €35.0 million term loan facility ($49.7 million at September 29, 2007) and a $90.0 million revolving credit facility. No amounts were outstanding under the revolving credit facility at September 29, 2007. On July 31, 2007, Polypore merged with and into Polypore International, and Polypore International assumed all of Polypore’s obligations under the new senior secured credit facility. The term loans mature in July 2014 and the revolving credit facility matures in July 2013.

Interest rates under the senior secured credit facility are, at our option, equal to either an alternate base rate plus a 1.25% margin or the Eurocurrency base rate plus a 2.25% margin. At September 29, 2007, the interest rates on the U.S. dollar term loan and Eurodollar term loan were 7.38% and 6.66%, respectively. Our cash interest requirements for the next twelve months are estimated to be approximately $66.2 million.

When loans are outstanding under the revolving credit facility, the credit agreement requires us to meet a maximum senior leverage ratio based on a calculation of Adjusted EBITDA in which certain items are added back to EBITDA.

Adjusted EBITDA, as defined under the senior secured credit facility, at September 29, 2007 was as follows:


	Twelve Months Ended
(in millions)	September 29, 2007

Net loss	$	(16.3	)
Add:
Depreciation		34.9
Amortization		17.9
Interest expense, net		87.8
Income taxes		(19.5	)
Stock compensation expense		0.8
Foreign currency loss		2.0
Loss on disposal of property, plant and equipment		1.2
Business restructuring		0.1
Costs related to purchase of 10.50% senior discount notes		30.0
Write-off of loan acquisition costs associated with refinancing of senior secured credit facilities		7.2
Other non-cash or non-recurring charges		2.0

Adjusted EBITDA	$	148.1

The calculation of the senior leverage ratio as defined under the senior credit facility as of September 29, 2007 is as follows:


	Twelve Months
	Ended
	September 29,
(in millions)	2007

Indebtedness (1)	$	327.7
Adjusted EBITDA		148.1
Actual leverage ratio		2.21x

(1)

Calculated as the sum of outstanding borrowings under the term loan facility plus the capital lease obligation of $5.1 million, less the amount of cash on hand (not to exceed $50.0 million).

When loans are outstanding under the revolving credit facility, we are required to maintain a ratio of not more than the following ratios of indebtedness to Adjusted EBITDA at the end of any quarter ending during any of the following periods:


Period	Ratio

July 3, 2007 through and including June 28, 2008	3.25 to 1.00
Thereafter		3.00 to 1.00

Based on the calculation above, the full amount of the revolving credit facility was available for borrowing at September 29, 2007.

In addition, the senior secured credit agreement contains certain restrictive covenants which, among other things, limit capital spending, the incurrence of additional indebtedness, investments, dividends, transactions with affiliates, asset sales,

acquisitions, mergers and consolidations, prepayments of other indebtedness, liens and encumbrances, and other matters customarily restricted in such agreements. The facilities also contain certain customary events of default, subject to grace periods, as appropriate. We believe that annual capital expenditure limitations imposed by the senior credit facilities will not significantly inhibit us from meeting our ongoing capital expenditure needs.

Future principal debt payments are expected to be paid out of cash flows from operations, borrowings on our revolving credit facility and future refinancing of our debt.

In July 2007, we purchased and retired all of our 10.50% senior discount notes for $293.6 million, including tender and redemption premium payments of $29.5 million, which were expensed in the three months ended September 29, 2007. The purchases of the notes were funded with the proceeds from our initial public offering and cash on hand.

Polypore, Inc.’s 8.75% senior subordinated notes ($437.8 million outstanding at September 29, 2007) will mature in 2012 and are guaranteed by most of our existing and future domestic restricted subsidiaries, subject to certain exceptions. Except under certain circumstances, the 8.75% senior subordinated notes do not require principal payments prior to their maturity in 2012. Interest on the 8.75% senior subordinated notes is payable semi-annually in cash. The 8.75% senior subordinated notes contain customary covenants and events of default, including covenants that limit our ability to incur debt, pay dividends and make investments. On July 31, 2007, Polypore merged with and into Polypore International, and Polypore International assumed Polypore’s obligations under the 8.75% senior subordinated notes.

We believe we have sufficient liquidity to meet our cash requirements over both the short term (next twelve months) and long term (in relation to our debt service requirements). In evaluating the sufficiency of our liquidity for both the shorter and longer term, we considered the expected cash flow to be generated by our operations and the available borrowings under our new senior secured credit facilities compared to our anticipated cash requirements for debt service, working capital (including restructuring payments), cash taxes and capital expenditures as well as funding requirements for long-term liabilities. We anticipate that our operating cash flow, together with borrowings under the revolving credit facility, will be sufficient to meet our anticipated future operating expenses, capital expenditures and debt service obligations as they become due for at least the next 12 months. However, our ability to make scheduled payments of principal, to pay interest on or to refinance our indebtedness and to satisfy our other debt obligations will depend upon our future operating performance, which will be affected by general economic, financial, competitive, legislative, regulatory, business and other factors beyond our control. See “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2006 and in any subsequent Quarterly Reports on Form 10-Q.

From time to time, we may explore additional financing methods and other means to lower our cost of capital, which could include stock issuance or debt financing and the application of the proceeds therefrom to the repayment of bank debt or other indebtedness. In addition, in connection with any future acquisitions, we may require additional funding which may be provided in the form of additional debt or equity financing or a combination thereof. There can be no assurance that any additional financing will be available to us on acceptable terms.

Foreign Operations

We manufacture our products at 11 strategically located facilities in North America, Europe and Asia. Net sales from the foreign locations were approximately $249.8 million and $218.3 million for the nine months ended September 29, 2007 and September 30, 2006, respectively. Typically, we sell our products in the currency of the country where the manufacturing facility that produces the product is located. Sales to foreign customers are subject to numerous additional risks, including the impact of foreign government regulations, currency fluctuations, political uncertainties and differences in business practices. There can be no assurance that foreign governments will not adopt regulations or take other action that would have a direct or indirect adverse impact on our business or market opportunities within such governments’ countries. Furthermore, there can be no assurance that the political, cultural and economic climate outside the United States will be favorable to our operations and growth strategy.

Seasonality

Operations at our European production facilities are traditionally subjected to shutdowns during the month of August each year for employee vacations. As a result, net income during the third quarter of the fiscal years 2007 and 2006 were lower than net income in other quarters during the same fiscal year. In view of the seasonal fluctuations, we believe that comparisons to our operating results for the third quarter of any fiscal year with those of the other quarters during the same fiscal year may be of limited relevance in predicting our future financial performance.

Environmental matters

We accrue for environmental obligations when such expenditures are probable and reasonably estimable. The amount of liability recorded is based on currently available information, including the progress of remedial investigations, current status of discussions with regulatory authorities regarding the method and extent of remediation, presently enacted laws and existing technology. Accruals for estimated losses from environmental obligations are adjusted as further information develops or circumstances change. Costs of future expenditures for environmental obligations are not discounted to their present value. Recoveries of environmental costs from other parties are recognized as assets when their receipt is deemed probable. Environmental reserves were $28.8 million and $28.0 million as of September 29, 2007 and December 30, 2006, respectively.

In connection with the Transactions, we identified potential environmental contamination at our manufacturing facility in Potenza, Italy. Based on environmental studies and the initial remediation plan presented to local authorities, we recorded a liability of $3.3 million in connection with the application of purchase accounting for the Transactions. During the three months ended December 30, 2006, we further refined the remediation plan based on management’s analysis of facts and circumstances and consultations with local authorities, resulting in an increase in the estimated environmental liability of $1.1 million that was recorded through a charge to earnings. We anticipate that expenditures will be made over the next seven to ten years.

In 2006, as part of an internal self-audit of our Corydon, Indiana and Owensboro, Kentucky facilities, we identified instances of potential non-compliance with our environmental operating permits at these facilities. We self-reported these issues to the proper state and federal agencies and are taking steps to resolve these issues. On November 2, 2007, we received a Notice of Violation from the Indiana Department of Environmental Management related to the issues that we had previously self reported at our facility in Corydon, Indiana. Although the agencies have the authority and discretion to issue substantial fines that could be material, based upon management’s analysis of facts and circumstances and consideration of recent cases addressed by the agencies involved, we do not believe that the maximum penalty will be assessed and that penalties, if any, resulting from this matter will not have a material adverse effect on our business, financial condition or results of operations.

In connection with the acquisition of Membrana in 2002, we recorded a reserve for environmental obligations. The reserve provides for costs to remediate known environmental issues and operational upgrades which are required in order for us to remain in compliance with local regulations. We anticipate that expenditures will continue to be made over the next seven to ten years. The initial estimate and subsequent finalization of the reserve was included in the allocation of purchase price at the date of the acquisition.

We have indemnification agreements for certain environmental matters from Acordis A.G. (“Acordis”) and Akzo Nobel (“Akzo”), the prior owners of Membrana. Akzo originally provided broad environmental protections to Acordis with the right to assign such indemnities to Acordis’s successors. Akzo’s indemnifications relate to conditions existing prior to December 1999, which is the date that Membrana was sold to Acordis. The Akzo agreement provides indemnification of claims through December 2007, with the indemnification percentage decreasing each year during the coverage period. Through December 2003, Akzo pays 75% of any approved claim. After that, Akzo pays 65% of claims reported through December 2006 and 50% of claims reported through December 2007. In addition to the Akzo indemnification, Acordis provides separate indemnification of claims incurred from December 1999 through February 2002, the acquisition date. At September 29, 2007 and December 30, 2006, amounts receivable under the indemnification agreement were $19.3 million and $18.7 million, respectively. The current portion of the indemnification receivable is included in other current assets.

Off-Balance Sheet Arrangements

We are not a party to any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

New Accounting Standards

On January 1, 2006, we adopted EITF Issue No. 05-5, Accounting for Early Retirement or Postemployment Programs with Specific Features (Such As Terms Specified in Altersteilzeit Early Retirement Arrangements) (“EITF 05-5”). Under EITF 05-5, the salary components of Type I and Type II ATZ arrangements (excluding the bonus and additional contributions into the German government pension scheme) should be recognized over the period from the point at which the ATZ period begins until the end of the active service period. The bonus feature and the additional contributions into the German government pension scheme (collectively, the additional compensation) under a Type II ATZ arrangement should be accounted for as a postemployment benefit under FASB Statement No.112, Employers’ Accounting for Postretirement Benefits. An entity should recognize the additional compensation over the period from the point at which the employee signs the ATZ contract until the end of the active service period. In connection with an acquisition in 2002, we implemented a restructuring plan that included Type II ATZ arrangements. We accrued in the opening balance sheet the estimated amounts to be paid to employees during the passive phase, plus the bonus feature of the plan. Salary paid to employees during their active phase was expensed as incurred. As a result of adopting this consensus, which was treated as a change in accounting estimate effected by a change in

accounting principle, we reduced the accrual for postemployment benefits and recognized $2.6 million in operating income in the three months ended April 1, 2006. The reduction in the postemployment benefits accrual decreased the net loss in the nine months ended September 29, 2006 by $1.6 million, or $0.05 per share.

On January 1, 2006, we adopted FASB Statement No. 123 (R), Share-Based Payment (“FAS 123(R)”) using the modified prospective transition method. FAS 123(R) generally requires, among other things, that all employee share-based compensation be measured using a fair value method and that the resulting compensation cost be recognized in the financial statements. Prior to adopting FAS 123(R), we accounted for employee share-based compensation using the fair value method under FASB Statement No. 123, Accounting for Stock Based Compensation (“FAS 123”). FAS 123(R) requires forfeitures to be estimated at the time of grant and the estimate to be revised, if necessary, in subsequent periods if actual forfeitures differ materially from those estimates. Prior to adopting FAS 123(R), we accounted for forfeitures as they occurred as allowed under FAS 123. The change in accounting for forfeitures under FAS 123(R) resulted in a $0.2 million charge, net of applicable income taxes of $0.1 million, that was recorded in the three months ended April 1, 2006 as a cumulative effect of a change in accounting principle.

In September 2006, the FASB issued Statement No. 157, Fair Value Measurement (“FAS 157”). FAS 157 establishes a framework for measuring fair value under generally accepted accounting principles and expands disclosure about fair value measurements. FAS 157 is effective for fiscal years beginning after November 15, 2007. We are currently evaluating the impact the adoption of FAS 157 will have on our consolidated financial statements.

In September 2006, the FASB issued FASB Statement No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106, and 132(R) (“FAS 158”). FAS 158 requires an employer to recognize the funded status of a defined benefit postretirement plan as an asset or liability in its balance sheet and to recognize changes in that funded status through comprehensive income in the year in which the changes occur. This requirement will be effective for fiscal years ending after June 15, 2007. FAS 158 also requires an employer to measure defined benefit plan assets and obligations as of the date of its fiscal year-end, with limited exceptions. This requirement is effective for fiscal years ending after December 15, 2008. We are currently evaluating the impact the adoption of FAS 158 will have on our consolidated financial statements.

On December 31, 2006, we adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement 109 (“FIN 48”), which clarifies the accounting for uncertain tax positions. FIN 48 allows the tax effects from an uncertain tax position to be recognized in our financial statements if the position is more likely than not to be sustained upon audit, based on the technical merits of the position. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. Upon adoption of FIN 48, we recognized the cumulative effect of adopting FIN 48 by increasing the existing reserves for uncertain tax positions by $0.9 million, recording a deferred tax asset of $0.6 million and decreasing retained earnings by $0.3 million for the cumulative effect of adopting FIN 48. Additionally, the reserve for uncertain tax positions, which had been included in income taxes payable at December 30, 2006, was reclassified as a separate component and is now included in other liabilities.

In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“FAS 159”). FAS 159 permits entities to choose to measure eligible items at fair value at specified election dates and report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. FAS 159 is effective for fiscal years beginning after November 15, 2007. We are currently evaluating the impact the adoption of FAS 159 will have on our consolidated financial statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to various market risks, which are potential losses arising from adverse changes in market rates and prices, such as interest rates and foreign exchange fluctuations. We do not enter into derivatives or other financial instruments for trading or speculative purposes.

Interest rate risk

On September 29, 2007, we had fixed rate debt of approximately $437.8 million and variable rate debt of approximately $372.7 million. The pre-tax earnings and cash flow impact resulting from a 100 basis point increase in interest rates on our variable rate debt, holding other variables constant, would be approximately $3.7 million per year. We currently are not a party to any interest rate hedging arrangements.

Currency risk

Outside of the United States, we maintain assets and operations in Europe and Asia. The results of operations and financial position of our foreign operations are principally measured in their respective currency and translated into U.S. dollars. As a result, exposure to foreign currency gains and losses exists. The reported income of these subsidiaries will be higher or lower depending on a weakening or strengthening of the U.S. dollar against the respective foreign currency. Our subsidiaries and affiliates also purchase and sell products and services in various currencies. As a result, we may be exposed to cost increases relative to the local currencies in the markets in which we sell. Because a different percentage of our revenues are in a foreign currency other than our costs, a change in the relative value of the U.S. dollar could have a disproportionate impact on our revenues compared to our cost, which could impact our margins. A portion of our assets are based in our foreign locations and are translated into U.S. dollars at foreign currency exchange rates in effect as of the end of each period, with the effect of such translation reflected in other comprehensive income (loss). We have a euro-denominated term loan and senior subordinated notes that effectively hedge a portion of our net investment in foreign subsidiaries. Therefore, foreign currency gains and losses resulting from the translation of the euro-denominated debt are included in accumulated other comprehensive income (loss). Accordingly, our consolidated shareholders’ equity will fluctuate depending upon the weakening or strengthening of the U.S. dollar against the respective foreign currency, primarily the euro.

The dollar/euro exchange rates used in our financial statements for the periods ended as set forth below were as follows:


	September 29,		September 30,
	2007		2006

Period end rate		1.4187		1.2688
Period average rate for the three months ended		1.3728		1.2752
Period average rate for the nine months ended		1.3436		1.2447

Our strategy for management of currency risk relies primarily on conducting our operations in a country’s respective currency and may, from time to time, involve currency derivatives. As of September 29, 2007, we did not have any foreign currency derivatives outstanding.

Item 4. Controls and Procedures

An evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act) was performed under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective, as of September 29, 2007.

During the three months ended September 29, 2007, there has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

As part of a formal internal self-audit of our Corydon, Indiana facility and an informal self-audit of our Owensboro, Kentucky facility, we identified instances of deviations from our environmental operating permits at these facilities. We self-reported these issues to the proper state and local agencies in October to December 2006. On November 2, 2007, we received a Notice of Violation from the Indiana Department of Environmental Management related to the issues that we had previously self reported at our facility in Corydon, Indiana. Although the agencies have the authority and discretion to issue substantial fines that could be material, based upon management’s analysis of the facts and circumstances and consideration of recent cases addressed by the agencies involved, we do not believe that the maximum penalty will be assessed or that penalties, if any, resulting from these matters will have a material adverse effect on our business, financial condition or results of operations.

Item 6. Exhibits


Exhibit No.		Exhibit Description


3.1		Certificate of Amendment to the Certificate of Incorporation of Polypore International, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, filed on June 29, 2007)

4.1		Supplemental Indenture, dated as of July 3, 2007, between Polypore International, Inc. and The Bank of New York, as Trustee, supplementing the Indenture dated as of October 18, 2004, between Polypore International, Inc. and The Bank of New York, as Trustee, relating to Polypore International Inc.’s 10.50% Senior Discount Notes due 2012 (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K, filed on July 10, 2007)

10.1		Amended and Restated Credit Agreement, dated as of July 3, 2007, between PP Holding Corporation, Polypore, Inc., Daramic Holding S.A.S., JPMorgan Chase Bank, N.A., as Administrative Agent, and the other agents and lenders named therein (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed on July 10, 2007)

10.2		First Amendment and Reaffirmation Agreement, dated as of July 3, 2007, between PP Holding Corporation, Polypore, Inc. and all of Polypore, Inc.’s domestic restricted subsidiaries (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed on July 10, 2007)

10.3		Second Supplemental Indenture, dated as of July 31, 2007, between Polypore International, Inc., the Guarantors (as defined therein) and The Bank of New York (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed on August 3, 2007)

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

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

32.1		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


		Page
PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements		4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		32
Item 4.	Controls and Procedures		33

PART II	OTHER INFORMATION
Item 1.	Legal Proceedings		33
Item 6.	Exhibits		34

SIGNATURES
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2


Date: November 6, 2007	POLYPORE INTERNATIONAL, INC. (Registrant)
	By:	/s/ Robert B. Toth
		Robert B. Toth
		President and Chief Executive Officer (principal executive officer)



	By:	/s/ Lynn Amos
		Lynn Amos
		Chief Financial Officer (principal financial officer and principal accounting officer)

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

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

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

	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.

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