10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-K

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE

ACT OF 1934

For the Fiscal Year Ended December 31, 2003

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to              Commission File Number: 1-7665

Lydall, Inc.

(Exact name of registrant as specified in its charter)

Delaware	06-0865505
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)
One Colonial Road, Manchester, Connecticut	06040
(Address of principal executive offices)	(Zip code)

Registrant’s telephone number, including area code: (860) 646-1233

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Name of each exchange on which registered
Common Stock, $.10 par value	New York Stock Exchange
Preferred Stock Purchase Rights	New York Stock Exchange

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).    Yes x  No ¨

On February 26, 2004, the aggregate market value of the Registrant’s voting stock held by nonaffiliates was $155,819,911. For purposes of this calculation the Registrant has assumed that its directors and executive officers are affiliates.

On February 26, 2004, there were 16,226,443 shares of Common Stock outstanding, exclusive of treasury shares.

DOCUMENTS INCORPORATED BY REFERENCE

Part III incorporates information by reference from the definitive Proxy Statement distributed in connection with the Registrant’s Annual Meeting of Stockholders to be held on April 22, 2004.

The exhibit index is located on pages 24-25.

INDEX TO ANNUAL REPORT ON FORM 10-K

Year Ended December 31, 2003

		Page Number
PART I
Item 1.	Business	1
Item 2.	Properties	4
Item 3.	Legal Proceedings	4
Item 4.	Submission of Matters to a Vote of Security Holders	4
	Executive Officers of the Registrant	5
PART II
Item 5.	Market for Registrant’s Common Equity and Related Stockholder Matters	6
Item 6.	Selected Financial Data	7
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	8
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	20
Item 8.	Financial Statements and Supplementary Data	21
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	21
Item 9A.	Controls and Procedures	21
PART III
Item 10.	Directors and Executive Officers of the Registrant	22
Item 11.	Executive Compensation	22
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	22
Item 13.	Certain Relationships and Related Transactions	22
Item 14.	Principal Accountant Fees and Services	22
PART IV
Item 15.	Exhibits, Financial Statement Schedules and Reports on Form 8-K	23
	Signatures	26

The information called for by Items 10, 11, 12, 13 and 14, to the extent not included in this document, is incorporated herein by reference to such information included under the captions “Corporate Governance,” “Equity Compensation Plan Information,” “Board of Directors,” “Stockholder Communications with Directors,” “Director Compensation,” “Compensation and Stock Option Committee Report on Executive Compensation,” “Performance Graph,” “Plan Descriptions,” “Stock Option Tables,” “Summary Compensation Table,” “Securities Ownership of Directors, Certain Officers and 5 Percent Beneficial Owners,” “Compensation Committee Interlocks and Insider Participation,” “Transactions with Management” and “Principal Fees and Services” in the Company’s definitive Proxy Statement filed with the Securities and Exchange Commission and distributed in connection with Lydall Inc.’s 2004 Annual Meeting of Stockholders.

PART I

Lydall, Inc. and its subsidiaries are hereafter collectively referred to as “Lydall,” the “Company” or the “Registrant.”

Item 1. BUSINESS

Lydall designs and manufactures specialty engineered automotive thermal and acoustical barriers, passive and active industrial thermal and insulating solutions, air and liquid filtration media, medical filtration media and devices and biopharmaceutical processing components for demanding thermal/acoustical and filtration/separation applications.

The Company has defined the Thermal/Acoustical Segment and Filtration/Separation Segment as its core businesses and has developed a long-term strategy to concentrate primarily on these businesses. Lydall has announced certain organizational changes, including the elimination of its previous Group structure and the establishment of two Councils operating across all businesses to focus sales and marketing resources and to advance manufacturing efficiency and profitability. These changes were made to streamline the organization, leverage synergies and manage the Company as a more unified enterprise.

The Company serves a number of market niches. Lydall’s products are primarily sold directly to customers through an internal sales force and distributed via common carrier or the Company’s distribution operation. The majority of the Company’s products are sold to original equipment manufacturers and tier-one suppliers. The Company competes through high-quality, specialty engineered innovative products and exceptional customer service. Lydall has a number of domestic and foreign competitors for its products, most of whom are either privately owned or divisions of larger companies, making it difficult to determine the Company’s share of the markets served.

Sales to the automotive market represented 48 percent of Lydall’s net sales in 2003 and 47 percent in both 2002 and 2001. Lydall’s thermal and acoustical products are used on a variety of automotive platforms and in various other applications. Sales to Ford Motor Company and DaimlerChrysler AG were $45.1 million and $29.1 million, or 17 percent and 11 percent of Lydall’s net sales in 2003, respectively. No other single customer accounted for more than 10 percent of the Company’s net sales in 2003.

Foreign and export sales were 37 percent of the Company’s net sales in 2003, 34 percent in 2002 and 30 percent in 2001. Export sales are concentrated primarily to Europe, Asia, Mexico and Canada and were $33.0 million, $32.2 million and $25.6 million in 2003, 2002 and 2001, respectively. Foreign sales were $67.6 million, $53.0 million and $40.7 million for the years ended December 31, 2003, 2002 and 2001, respectively. Foreign operations generated operating income of $5.4 million, $4.6 million and $3.3 million for the years ended December 31, 2003, 2002 and 2001, respectively. Total foreign assets were $73.6 million at December 31, 2003 compared with $44.3 million at December 31, 2002 and $32.3 million at December 31, 2001.

The Company’s Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Reports on Form 8-K are made available free of charge through the Investor Relations section of the Company’s Internet website at www.lydall.com after such material is electronically filed with, or furnished to, the Securities and Exchange Commission (the Commission) and are also available on the Commission’s website at www.sec.gov.

The Company’s Code of Ethics and Business Conduct for all employees and its Code of Ethics for the Chief Executive Officer, Senior Financial Officers and All Accounting and Financial Personnel are available through the Corporate Governance section of the Company’s website. Additionally, a copy of the Company’s Code of Ethics for the Chief Executive Officer, Senior Financial Officers and All Accounting and Financial Personnel is being filed with the Commission as Exhibit 14.1 to this report and can be obtained free of charge on the Company’s website or by contacting the Office of the General Counsel, P.O. Box 151, One Colonial Road, Manchester, CT 06045-0151.

SEGMENTS

Lydall has organized its business into two primary reportable segments – Thermal/Acoustical and Filtration/Separation. All other businesses are aggregated in Other Products and Services. Segments are defined by the grouping of similar products and services.

Thermal/Acoustical

Lydall’s thermal and acoustical barriers, temperature-control units and insulating products protect, control and insulate within temperature environments ranging from -459°F (-237°C) to +3000°F (+1649°C).

1

Lydall’s automotive thermal and acoustical barriers, including ZeroClearance^®, AMS^®, dBLyte^®, dBCore^® and Lytherm^® products, are comprised of organic and inorganic fiber composites, fiber and metal combinations and all metal components that are used in cars, trucks, sport utility vehicles and vans. The Company holds patents on several of these products, which can be employed on both the interior and exterior of vehicle passenger cabins and within the engine compartment and around such components as exhaust systems, fuel systems, heat and air-conditioning ducts, power trains, batteries and electronic components.

The Company’s passive thermal business features products such as Lytherm^® and Manniglas^® that are employed as linings for ovens, kilns and furnaces, in glass and metal manufacturing, and in consumer appliances, as well as heating, ventilating and air-conditioning systems. At the very coldest temperatures (approaching absolute-zero), Cryotherm^® cryogenic materials, composed of inorganic fibers, are used for super-insulating applications. These applications include tanker trucks that transport liquid gases, stationary and portable cryogenic storage vessels and fuel systems for vehicles powered by liquid natural gas.

Lydall’s active thermal business designs and manufactures high precision, specialty engineered temperature-control equipment for demanding semiconductor, pharmaceutical, life sciences and industrial applications.

Thermal/Acoustical Segment net sales, before elimination of intersegment sales, represented 62.1 percent of the Company’s net sales in 2003, 59.3 percent in 2002 and 56.2 percent in 2001. Additionally, total net sales generated by international operations of the Thermal/Acoustical Segment accounted for 27.5 percent, 23.5 percent and 20.2 percent of segment net sales in 2003, 2002 and 2001, respectively.

Filtration/Separation

The Filtration/Separation Segment includes air and liquid filtration products for industrial and consumer applications, as well as vital fluids management systems for medical and biopharmaceutical applications.

Lydair^® high-efficiency air filtration media range in filtering efficiencies from 45 percent ASHRAE through all HEPA grades to the highest ULPA grade and filter particles as small as 0.1 micron. Uses for these products include industrial and commercial heating, ventilating and air-conditioning systems, clean space applications and consumer products.

Lydall also produces liquid filtration media, sold under the Actipure^® and Lypore^® trademarks, used for industrial and residential water purification and in high-efficiency hydraulic oil and lubrication filters for off-road vehicles, trucks and heavy equipment.

The Company’s Vital Fluids business designs and manufactures specialty blood transfusion and cell therapy products and Bio-Pak^® sterilized disposable bioprocessing containers, which provide for containment of media such as cell tissue cultures, saline solutions and diagnostic fluids for bioprocessing applications. In addition, its medical filter materials are employed in traditional blood filtration devices such as cardiotomy reservoirs and autotransfusion filters.

Net sales from the Filtration/Separation Segment, before elimination of intersegment sales, represented 27.6 percent of the Company’s net sales in 2003 compared with 28.7 percent in 2002 and 29.8 percent in 2001. In addition, total net sales generated by the international operation of the Filtration/Separation Segment accounted for 28.5 percent, 24.2 percent and 23.0 percent of segment net sales in 2003, 2002 and 2001, respectively.

Other Products and Services

The largest component of Other Products and Services is Lydall’s transport, distribution and warehousing businesses. These businesses specialize in time-sensitive shipments and warehouse management services and possess an in-depth understanding of the special nature and requirements of the paper and printing industries. Other Products and Services also include assorted specialty products.

Other Products and Services net sales, before elimination of intersegment sales, were 11.0 percent of the Company’s net sales in 2003 compared with 12.7 percent in 2002 and 14.9 percent in 2001. There were no significant sales generated outside of the United States for the Other Products and Services Segment.

Discontinued Operations

In February 2001, the Company discontinued the Paperboard Segment, which consisted primarily of the Southern Products and Lydall & Foulds operations. The results of the Paperboard Segment have been excluded from continuing operations for all years presented. See Note 8 in “Notes to Consolidated Financial Statements.”

2

In the fourth quarter of 2002, the Company recorded an after-tax charge of approximately $.2 million, or $.01 per diluted share, for additional costs incurred during the phase-out period of the Paperboard Segment.

In the third quarter of 2003, the Company recorded an after-tax charge of approximately $.8 million, or $.05 per diluted share, for additional shut down costs and the write off of the remaining assets of the Paperboard Segment.

GENERAL BUSINESS INFORMATION

Lydall holds a number of patents, trademarks and licenses. While no single patent, trademark or license is critical to the success of Lydall, together these intangible assets are of considerable value to the Company.

The Company’s business is generally not seasonal; however, results of operations are impacted by shutdowns at the Company’s European operations and at automotive customers that typically occur in the third quarter of each year. Lydall maintains levels of inventory and grants credit terms that are normal within the industries it serves. The Company uses a wide range of raw materials in the manufacturing of its products. The majority of raw materials used are available from a variety of suppliers that could be substituted as necessary.

The Company invested $7.3 million in 2003, $6.5 million in 2002 and $6.9 million in 2001, or approximately 3 percent of net sales for each year, to develop new products and to improve existing products. Most of the Company’s investment in research and development is application specific; very little is pure research. There were no significant customer-sponsored research and development activities during the past three years.

Lydall’s backlog was $37.4 million at December 31, 2003, $26.8 million at December 31, 2002 and $21.1 million at December 31, 2001. Backlog at January 31, 2004 was $38.9 million. The increase in backlog at December 31, 2003 compared with December 31, 2002 was primarily the result of increased backlog for the German automotive business related to delayed production at a customer, as well as the strengthening of the Euro in 2003 compared with 2002. The increase in backlog at December 31, 2002 compared with December 31, 2001 was primarily the result of increased orders from automotive customers, additional Ossipee operation backlog in 2002 and the strengthening of the Euro in 2002 versus 2001. There are minimal seasonal aspects to Lydall’s backlog as of the end of the Company’s fiscal years.

No material portion of Lydall’s business is subject to renegotiation of profits or termination of contracts or subcontracts at the election of any governmental body.

Lydall believes that its plants and equipment are in substantial compliance with applicable federal, state and local provisions that have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment. Additional measures to maintain compliance with presently enacted laws and regulations are not expected to have a substantially adverse effect on the capital expenditures, earnings or competitive position of the Company.

As of December 31, 2003, Lydall employed approximately 1,250 people. Four unions with contracts expiring on March 31, 2005 represent approximately 60 of the Company’s employees in the United States. All employees at the Company’s facilities in France are covered under a National Collective Bargaining Agreement. Certain salaried and all hourly employees at the operation in Germany are also covered under a National Collective Bargaining Agreement. Lydall considers its employee relationships to be satisfactory and did not have any actual or threatened work stoppages due to union-related activities in 2003.

There are no significant anticipated operating risks related to foreign investment law, expropriation, inflation effects or availability of material, labor or energy. The Company’s foreign and domestic operations limit foreign currency exchange transaction risk by completing transactions in functional currencies whenever practical or through the use of foreign currency forward exchange contracts when deemed appropriate.

CAUTIONARY NOTE CONCERNING FACTORS THAT MAY AFFECT FUTURE RESULTS

This report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. In general, any statements contained in this report that are not statements of historical fact may be deemed to be forward-

3

looking statements within the meaning of Section 21E. Without limiting the generality of the foregoing, the words “believes,” “anticipates,” “plans,” “projects,” “expects,” “estimates,” and other similar expressions are intended to identify forward-looking statements. Investors should be aware that such forward-looking statements are intended to provide management’s current expectations for the future operating and financial performance of the Company based on assumptions believed to be valid at the time. Thus, such expectations are inherently subject to a number of risks and uncertainties that could cause the actual results of the Company to differ materially from those reflected in forward-looking statements. In addition to general economic conditions and market trends, some of the important factors that could cause actual results to differ materially from those anticipated include: a major downturn of the United States or European automotive markets, raw-material pricing and supply and new-product introductions (see Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Cautionary Note Concerning Factors That May Affect Future Results” for a more detailed discussion of these factors).

Item 2. PROPERTIES

The principal properties of the Company as of December 31, 2003 are situated at the following locations and have the following characteristics:

			Approximate Area
	Location	Primary Business Segment/General Description	Land (Acres)	Buildings (Sq. Feet)
1.	Hamptonville, North Carolina	Thermal/Acoustical – Product Manufacturing	35.0	122,000
2.	Columbus, Ohio	Thermal/Acoustical – Product Manufacturing	9.0	80,000
3.	St. Johnsbury, Vermont	Thermal/Acoustical – Product Manufacturing	17.0	86,000
4.	Meinerzhagen, Germany	Thermal/Acoustical – Product Manufacturing	6.0	117,000
5.	Ossipee, New Hampshire	Thermal/Acoustical – Product Manufacturing	15.0	68,000
6.	Green Island, New York	Thermal/Acoustical – Product Manufacturing	5.4	275,000
7.	Rochester, New Hampshire	Filtration/Separation – Specialty Media Manufacturing	18.0	158,000
8.	Saint-Rivalain, France	Filtration/Separation – Specialty Media Manufacturing	14.3	156,000
9.	Winston-Salem, North Carolina	Filtration/Separation – Biomedical Products Manufacturing	2.6	71,000
10.	Newport News, Virginia	Other Products and Services – Warehouse and Office Facility	7.2	220,000
11.	Glen Allen, Virginia	Other Products and Services – Transport and Office Facility	1.0	6,000
12.	Monson, Massachusetts	Other Products and Services – Transport and Warehouse Facility	3.0	95,000
13.	Manchester, Connecticut	Corporate Office	4.5	20,000

Properties numbered 2, 3, 9, 10, 11 and 12 are leased; all others are owned. For information regarding lease obligations, see Note 16 in “Notes to Consolidated Financial Statements.” Lydall considers its properties to be in good operating condition and are suitable and adequate for its present needs. All properties are being appropriately utilized consistent with experience and demand for the Company’s products. As of December 31, 2003, the Company’s new manufacturing facility in Saint Nazaire, France was in the process of being constructed. This operation is expected to come on-line during the second quarter of 2004 to supplement the Thermal/Acoustical automotive business in Europe and will be a leased facility. In addition to the properties listed above, the Company had several additional leases for sales offices and warehouses in the United States, Europe, Japan, Singapore and Taiwan.

Item 3. LEGAL PROCEEDINGS

No significant legal proceedings were instituted or settled in the fourth quarter of 2003. See Note 16 in “Notes to Consolidated Financial Statements” for additional information on legal proceedings.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted to a vote of security holders during the fourth quarter of 2003.

4

EXECUTIVE OFFICERS OF THE REGISTRANT

The executive officers of Lydall, Inc., together with the offices presently held by them, their business experience since January 1, 1999, and their age as of February 26, 2004, the record date of the Company’s 2004 Annual Meeting, are as follows:

Name	Age	Title	Other Business Experience Since 1999
David Freeman	59	President and Chief Executive Officer and Director	Professor of International Business at Central Connecticut State University, Chairman and Chief Executive Officer of Loctite Corporation
Christopher R. Skomorowski	50	Executive Vice President and Chief Operating Officer and Director	President and Chief Executive Officer of Lydall
Bill W. Franks, Jr.	45	President, Lydall Transport
Thomas P. Smith	46	Vice President – Controller and Interim Chief Financial Officer	Assistant Controller of Carrier Corporation
Mary A. Tremblay	43	Vice President, General Counsel and Secretary	General Counsel and Secretary of Lydall
Mona G. Estey	49	Vice President – Human Resources	Director of Human Resources of Lydall
Lisa Krallis-Nixon	43	Vice President, General Manager, Charter Medical
James M. Posa	53	Vice President, General Manager, Lydall Filtration/Separation
Bertrand Ploquin	39	Managing Director – Lydall Gerhardi and President, Lydall Thermique/Acoustique	Operations Manager – Lüdenscheid Operations, Transition Manager – Lydall Gerhardi
John F. Tattersall	45	Vice President, General Manager, Lydall Industrial Thermal Solutions	Vice President, Marketing/Sales – Green Island Operations

5

PART II

Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

PRICE RANGE OF COMMON STOCK AND DIVIDEND HISTORY

The Company’s Common Stock is traded on the New York Stock Exchange (NYSE) under the symbol LDL. Shares totaling 6,413,600 and 5,346,200 were traded on the NYSE during 2003 and 2002, respectively. The table below shows the range of reported sale prices on the NYSE Composite Tape for the Company’s Common Stock for the periods indicated. As of February 26, 2004, the record date for the Company’s 2004 Annual Meeting, 1,586 stockholders of record held 16,226,443 shares of Lydall’s Common Stock, $.10 par value. As of the record date, there were no shares outstanding of the Company’s Preferred Stock, $1.00 par value.

	High		Low		Close
2003
First Quarter	$	12.46	$	8.50	$	8.80
Second Quarter		10.74		8.20		10.70
Third Quarter		12.72		10.31		12.01
Fourth Quarter		13.88		10.19		10.19
2002
First Quarter	$	14.96	$	9.72	$	14.18
Second Quarter		16.10		13.50		15.25
Third Quarter		14.54		9.60		11.80
Fourth Quarter		12.55		9.86		11.35

The Company’s domestic revolving credit facility contains restrictions that limit the amount of dividends (whether in cash, securities or other property, unless payable solely in additional shares of the Company’s capital stock) that can be paid to external shareholders of its capital stock each fiscal year. Currently, the Company does not pay a cash dividend on its Common Stock and does not anticipate doing so in the foreseeable future. Cash will be reinvested in operations.

6

Item 6. SELECTED FINANCIAL DATA

FIVE-YEAR SUMMARY

In thousands except per share amounts and ratio data	2003			2002			2001			2000			1999
Financial results from continuing operations
Net sales	$	271,385		$	253,522		$	223,559		$	261,118		$	274,984
Income (loss) from continuing operations		8,372			11,732			7,069			(3,616	)		11,089
Common stock per share data
Diluted income (loss) from continuing operations		$.52			$.72			$.44			($.23	)		$.70
Diluted net income (loss)		.47			.71			.43			(.15	)		.68
Financial position
Total assets	$	225,838		$	209,427		$	187,517		$	194,964		$	220,236
Working capital		54,722			43,460			36,307			54,550			64,630
Long-term debt, net of current maturities		21,026			16,228			18,210			24,927			38,334
Total stockholders’ equity		143,348			130,068			118,583			111,753			115,236
Property, plant and equipment
Net property, plant and equipment	$	91,028		$	85,801		$	77,789		$	74,420		$	80,556
Capital expenditures		15,852			14,171			11,948			19,767			16,773
Depreciation		13,132			11,183			9,874			9,925			11,946
Performance and other ratios
Gross margin		23.6	%		25.7	%		28.0	%		26.3	%		24.9	%
Operating margin		5.0	%		7.1	%		5.1	%		7.3	%		6.5	%
Current ratio		2.4	:1		2.1	:1		2.0	:1		2.3	:1		2.3	:1
Total debt to total capitalization		15.3	%		16.6	%		18.9	%		22.3	%		28.2	%

The results of operations of the discontinued Paperboard and Wovens Segments have been excluded from the Selected Financial Data table for all applicable periods. The Paperboard and Wovens Segments’ balance sheet items have been excluded from calculations of the “Performance and other ratios” section for all periods presented, except for the current ratio. See additional discussion under Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

7

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CAUTIONARY NOTE CONCERNING FACTORS THAT MAY AFFECT FUTURE RESULTS

This report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. In general, any statements contained in this report that are not statements of historical fact may be deemed to be forward-looking statements within the meaning of Section 21E. Without limiting the generality of the foregoing, the words “believes,” “anticipates,” “plans,” “projects,” “expects,” “estimates,” and other similar expressions are intended to identify forward-looking statements. Investors should be aware that such forward-looking statements are intended to provide management’s current expectations for the future operating and financial performance of the Company based on assumptions believed to be valid at the time. Thus, such expectations are inherently subject to a number of risks and uncertainties that could cause the actual results of the Company to differ materially from those reflected in forward-looking statements. In addition to general economic conditions and market trends, some of the important factors that could cause actual results to differ materially from those anticipated include, but are not limited to, the following:

A Major Downturn of the United States or European Automotive Markets – Although Lydall’s automotive sales are not solely contingent on the strength of the automotive market, a significant downturn of the United States or European automotive industries or a major decline in production of specific vehicles on which Lydall has significant content could have a substantial impact on Lydall’s results. The Company can also be affected when automotive manufacturers discontinue production of specific models that contain Lydall’s products. Conversely, Lydall benefits from the introduction of new models that contain the Company’s products. Approximately 48 percent of Lydall’s total net sales in 2003 were to the automotive market. Lydall’s automotive products are thermal and acoustical barriers employed both inside and under the body of vehicles. Most of Lydall’s products are supplied to meet unique, niche applications. Lydall may have a number of components on a particular automotive platform and applications can range across all types of vehicles from sport-utility models to trucks, vans and cars. Thus, there is not necessarily a direct correlation between the number of Lydall products sold and the number of vehicles being built by automotive manufacturers.

Raw Material Pricing and Supply – Raw material pricing and supply issues affect all of Lydall’s businesses and can influence results in the short term. The Thermal/Acoustical Segment uses aluminum to manufacture most automotive heat shields. Volatility in aluminum prices could impact the Thermal/Acoustical Segment’s profitability where the Company is selling its products under long-term agreements with fixed sales prices.

New Product Introductions – Improved performance and growth is partially linked to new product introductions planned for the future. The timing and degree of success of new product programs could impact Lydall’s anticipated results.

Lydall does not undertake to update any forward-looking statement made in this report or that may from time to time be made by or on behalf of the Company.

OVERVIEW

During 2003, the Company experienced sales growth of 7.0 percent and selling, product development and administrative expenses remained constant as a percentage of sales. However, profitability from higher sales was significantly offset by manufacturing inefficiencies at several locations. In addition, increased overhead costs related to capital investment depreciation and leasing expense for new machinery negatively impacted profitability as production and sales volumes associated with such costs were lower than planned levels in the second half of the year. As part of the process to address these issues, the Company took the following actions:

In the second quarter of 2003 the Company consolidated its Vital Fluids operation from two locations to one.

In December 2003, Lydall announced major changes to the Company’s organizational structure. The Company streamlined the organization and eliminated the Group structure in order to move closer to its customers and markets and to leverage

8

manufacturing knowledge throughout the Company. As part of this change, the Company formed Marketing and Sales and Manufacturing Councils comprised of key marketing and operating managers. These Councils will focus on current issues, as well as the long-term strategic plans of the Company.

In January 2004, the Company announced that it will consolidate its Columbus, Ohio operation into other Lydall automotive facilities and close the Columbus plant.

The Company believes that these changes will help it towards its goal of improving gross margins, and correspondingly increasing profitability, by reducing costs, leveraging overall capacity of existing facilities more effectively, allocating resources more efficiently and allowing it to better serve its customers and markets.

CONSOLIDATED RESULTS OF OPERATIONS

Net Sales

For the year ended December 31, 2003, Lydall recorded net sales of $271.4 million compared with $253.5 million for the year ended December 31, 2002, an increase of $17.9 million, or 7.0 percent. Foreign currency translation, which was primarily related to the strengthening of the Euro during 2003, increased net sales by approximately 4.4 percent. After adjusting for foreign currency translation, net sales growth was attributable to increased sales in the Thermal/Acoustical Segment, primarily related to the automotive business during the first three quarters of 2003 and continued improvement in sales of active thermal products from the Ossipee operation. Additionally, sales of building material and appliance thermal products, liquid filtration products, Vital Fluids’ blood transfusion and cell therapy products and products for bioprocessing applications, as well as improved revenues from the warehouse distribution operations of the transport business contributed to the overall sales improvement. These increases were partially offset by lower sales of air filtration products, Vital Fluids’ sales of traditional blood filtration materials, sales of specialty products and a reduction in revenues from the trucking operations of the transport business.

In 2002, the Company generated $253.5 million in net sales compared with $223.6 million for the year ended December 31, 2001, an increase of $29.9 million or 13.4 percent. The improvement in net sales was attributable to increased sales volumes across all core businesses. These increases were driven by new platform and product awards in the automotive business and new business gains in filtration and bioprocessing coupled with the incremental sales added by the Ossipee operation, acquired in October 2001, and the favorable impact of foreign currency translation of approximately 1.3 percent.

Gross Margin

Lydall recorded total gross margin for the year ended December 31, 2003 of $64.1 million compared with $65.2 million for the year ended December 31, 2002, a decrease of $1.1 million, or 1.7 percent. Gross margin as a percent of net sales was 23.6 percent compared with 25.7 percent for the year ended December 31, 2002. Although net sales for the Company increased during 2003 from 2002, several factors unfavorably impacted total gross margin and gross margin as a percent of sales. These factors included costs related to the consolidation of the Vital Fluids operations; lower year-over-year operating performance at the Columbus operation; higher fixed overhead costs; operational inefficiencies at several facilities; and changes in sales mix at certain operations.

The Company recorded gross margin for the year ended December 31, 2002 of 25.7 percent of net sales compared with 28.0 percent for the year ended December 31, 2001. Although the Company realized an increase in net sales in 2002 from 2001, several items negatively impacted gross margin. These items included a significant operating loss at the Columbus operation in the fourth quarter of 2002, increased tooling sales, which typically have low or no gross margin, sales mix changes in other thermal products and start-up costs associated with the Newport News Distribution Center. In addition, order deferrals for air filtration and bioprocessing products in the fourth quarter led to under-absorption of factory overhead. These negative events combined to more than offset the significant improvement in the operating performance of the Vital Fluids and industrial thermal businesses and gross margin improvement from increased sales volumes of automotive products.

9

Selling, Product Development and Administrative Expenses

Selling, product development and administrative expenses were $50.5 million, or 18.6 percent of net sales for 2003, compared with $46.8 million, or 18.5 percent for 2002. Selling, product development and administrative costs were negatively impacted by several factors during 2003 that caused the increase in overall costs; however, these costs remained in-line as a percentage of net sales. The significant items that negatively impacted selling, product development and administrative charges during 2003 as compared with 2002 were: charges for the consolidation of the e-commerce function, increased salaries, increased pension and other employee benefit costs, severance associated with the elimination of the Group organizational structure, fees for retained searches, outside professional fees related to the investigation at the Columbus operation, increased investment in research and development activities and consulting fees related to Sarbanes-Oxley compliance. These cost increases and one-time charges were partially offset by lower Economic Value Added (EVA) bonus expense during 2003 as compared with 2002.

Selling, product development and administrative expenses were $46.8 million for 2002 compared with $47.7 million for 2001. The 2001 amount includes $1.3 million of goodwill amortization, which in accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” was no longer amortized. Adjusting the 2001 amount for the goodwill amortization, selling, product development and administrative expenses increased $.4 million, or less than 1 percent in 2002 from 2001. Increases from the addition of the Ossipee operation and additional accruals for incentive compensation under the EVA program were substantially offset by controlled spending, targeted headcount reductions and minimized usage of external consulting.

Restructuring Activities

As part of a strategic evaluation initiated in the fourth quarter of 2003, the Company decided to implement a plan to respond to the automotive market demands for increasingly faster, technologically advanced, cost-effective solutions. As a result of this decision, the Company determined that it would consolidate the operations of the Columbus, Ohio plant into existing Lydall facilities. This consolidation within the automotive manufacturing operations supports long-term growth strategies for this business and positions the Company to more efficiently respond to current and projected market demands. In line with announced corporate organizational structure changes, the consolidation of the automotive business is expected to improve flexibility, lower costs and utilize overall capacity of existing facilities more effectively. The Company plans to initiate the process of transferring equipment and product lines by the end of the first quarter of 2004 and expects to complete these restructuring activities by the end of 2004. As a result of this plan, the Company recorded a pre-tax charge to cost of sales of approximately $.3 million for the acceleration of depreciation on certain assets during December 2003. Additionally, during December 2003 the Company recorded an after-tax charge of approximately $.5 million related to the write-off of deferred tax assets that are not expected to be realized as a result of the restructuring. The expected remaining pre-tax charges of approximately $4.6 million are comprised of severance and related costs of approximately $1.1 million, accelerated depreciation of approximately $2.1 million and facility exit and move costs of approximately $1.4 million. Approximately 90 percent of all restructuring costs are expected to be recorded in cost of sales and 10 percent are expected to be recorded in selling, product development and administrative expenses. Approximately 85 percent of restructuring costs are expected to be recorded in the Thermal/Acoustical Segment and 15 percent are expected to be recorded as Corporate Office expenses, which for segment reporting purposes are included under Reconciling Items. The remaining pre-tax charges described above are expected to be recorded or accrued throughout 2004, in accordance with the provisions of Statement of Financial Accounting Standards No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.”

During the fourth quarter of 2002, the Company recorded a final pre-tax non-cash charge of $.3 million, or $.01 per diluted share related to the closed fiberboard operation. This charge represented the write-off of the remaining assets that could not be sold.

During 2001, the Company recorded a pre-tax charge of $3.4 million, or $.13 per diluted share for closing costs, severance benefits and impairment of assets held for sale related to the closing of the fiberboard operation. On April 2, 2001, the Company sold certain assets of this business for approximately $1.9 million and announced that the operation would be closed.

Interest Expense

For the year ended December 31, 2003, Lydall recorded interest expense of $1.0 million. Interest expense for 2003 was $.1 million greater than interest expense for 2002, primarily due to higher average debt levels during the year.

10

For the year ended December 31, 2002, the Company recorded interest expense of $.9 million. Interest expense for 2002 was $.1 million less than interest expense for 2001, primarily due to lower debt levels and interest rates.

Other Income and Expense

For the year ended December 31, 2003, Lydall recorded other income of $.1 million, consisting primarily of investment income and net foreign currency transaction gains.

For the year ended December 31, 2002, Lydall recorded other income of $.2 million, consisting primarily of net foreign currency transaction gains and investment income.

For the year ended December 31, 2001, Lydall recorded other expense of $.4 million, consisting of net foreign currency transaction losses, partially offset by investment income.

Income Taxes

The effective income tax rate on income from continuing operations for the year ended December 31, 2003 was 34.4 percent compared with an effective rate of 32.6 percent in 2002. The effective tax rate for 2003 was impacted favorably by benefits derived from the recognition of deferred tax assets in a foreign jurisdiction as well as tax-exempt export income. The 2003 effective tax rate was negatively impacted by a valuation allowance established against deferred tax assets for state income tax credits and net operating losses primarily related to the closure of the Columbus, Ohio facility. The effective tax rate for 2002 was impacted favorably by benefits derived from tax-exempt export income, state income tax credits realized during the year, as well as the favorable resolution of a tax audit. The effective rate on income from continuing operations for the year ending December 31, 2001 was 29.9 percent. This rate reflected a benefit associated with the settlement of a tax audit during the year.

For 2004, the Company expects its effective tax rate to be approximately 36 percent.

In 2003, the World Trade Organization (WTO) ruled that the Extraterritorial Income program (ETI) as provided for in United States Internal Revenue Code represents a prohibited export subsidy under the WTO Agreement on Subsidies and Countervailing Measures. As a result, the President of the United States has indicated that tax law will be changed to comply with the WTO ruling. During 2003, the ETI benefit decreased the Company’s effective tax rate by approximately 2.2 percentage points. At this time the Company is unable to determine the impact that the potential changes to United States tax law will have on future financial results; however, it is possible that such changes will adversely affect the Company’s results of operations and cash flows in future periods.

SEGMENT RESULTS

Thermal/Acoustical

Net sales for the Thermal/Acoustical Segment for 2003 were $168.4 million compared with $150.4 million for 2002, an increase of $18.0 million, or 12.0 percent. The impact of foreign currency translation increased segment net sales by approximately 5.0 percent for 2003. After adjusting for the impact of foreign currency, sales growth was attributable to increased sales in the automotive business and continued improvement in sales of active thermal products.

Sales to the automotive industry accounted for approximately 80 percent of total segment net sales in 2003 and increased approximately 3.7 percent on a constant currency basis from 2002. The increased sales performance in the automotive business substantially occurred during the first three quarters of 2003 as part sales were up sharply from 2002 levels related to sales of thermal/acoustical exhaust wrap and acoustical tunnel insulator products, as well as part sales to Volkswagen, Nissan and BMW. In the fourth quarter of 2003, a decline in part and tooling sales partially offset the gains recorded through the first three quarters of the year. Reductions in content on the new model of Lydall’s previously largest platform and the end of model year production on certain other platforms were the primary drivers of the sales fall off at the end of 2003. A number of approvals have been received for several future vehicle platforms, both domestically and in Europe, which are expected to come on-line throughout 2004 and beyond.

11

Industrial thermal products accounted for approximately 20 percent of total segment net sales in 2003. Sales of industrial thermal products, which include both passive and active systems, showed strong growth in the Affinity^® product line and in passive insulating products used in building and appliance applications during 2003.

Net sales for the Thermal/Acoustical Segment for 2002 were $150.4 million compared with $125.7 million for 2001, an increase of $24.7 million, or 19.6 percent. The increase in segment net sales was primarily driven by increased automotive product and tooling sales for new platforms and the full year impact of the Ossipee operation, which was acquired in the fourth quarter of 2001. The impact of foreign currency translation increased segment net sales by approximately 1.6 percent for 2002.

Sales to the automotive industry accounted for approximately 80 percent of total segment net sales in 2002. Strong performance by the Company’s operation in Germany as new platforms for the BMW Mini, the BMW 7 Series and new business with Nissan contributed to the increase in segment net sales for 2002.

Industrial thermal products accounted for approximately 20 percent of total segment net sales in 2002 and included the sales of the Ossipee operation acquired in 2001. Sales of these products are particularly sensitive to economic conditions, and as a result, posted only modest revenue gains in 2002 resulting from new business in building materials and market share gains in the appliance market.

For 2003, segment operating income was $19.5 million compared with $20.4 million in 2002, a decrease of $.9 million, or 4.4 percent. Segment operating margin for 2003 was 11.6 percent of segment net sales compared with 13.6 percent in 2002. The impact of foreign currency translation increased segment operating income by approximately 3.1 percent for 2003. The declines in segment operating income and margin primarily related to the significant downshift in the automotive business during the latter half of 2003, where lower sales volume, operational inefficiencies and increased overhead costs severely impacted operating results. Lower year-over-year operating performance at the Columbus operation also contributed to the decline. Additionally, an initial charge for the acceleration of depreciation of certain assets of the Columbus operation during the fourth quarter, related to its closure in 2004, also impacted operating results. These declines were partially offset by improved income and margins in the industrial thermal businesses as improved sales of building and appliance application products and active thermal products sold to the semiconductor market showed distinct improvements during 2003.

For 2002, segment operating income was $20.4 million compared with $18.4 million in 2001, an increase of $2.0 million, or 11.0 percent. The increase, excluding goodwill amortization of $1.0 million in 2001 no longer amortized under FAS 142, was $1.0 million. Segment operating margin for 2002 was 13.6 percent of segment net sales compared with 14.7 percent in 2001. The increase in segment operating income for 2002 was the result of increased automotive sales, operational improvements at the Green Island operation and the addition of the Ossipee operation. Additionally, the impact of foreign currency translation increased segment operating income by approximately 1.3 percent for 2002. Segment operating margin was negatively impacted by sales mix changes in other thermal products, higher tooling sales that carry low or no margin and the significant operating loss at the Columbus operation in the fourth quarter of 2002.

Filtration/Separation

For 2003, Filtration/Separation Segment net sales increased $2.1 million, or 2.9 percent to $74.9 million from $72.8 million in 2002. The impact of foreign currency translation increased segment net sales by approximately 4.9 percent for 2003. After adjusting for the impact of foreign currency, the decrease in segment net sales from 2002 levels was related to lower sales of air filtration media in the United States and declining sales of traditional blood filtration materials sold to medical device manufacturers. These declines were partially offset by higher liquid filtration product sales and growth in sales of blood transfusion and cell therapy products and products for bioprocessing applications.

Sales of air filtration media in the United States were substantially lower during 2003. Specifically, sales of Lydair^® were down year-over-year due to an overall softness in the commercial heating, ventilating and air-conditioning (HVAC) market and sales of membrane composite products used in consumer vacuum products were lower. Sales of liquid filtration products increased as water filtration and fluid-power products, sold under the Actipure^® and Lypore^® trademarks, enjoyed sustained growth and acceptance in consumer and industrial applications.

12

Sales of Vital Fluids’ products decreased approximately 2.6 percent for 2003 compared with 2002. This decrease was related to the declining sales of traditional blood filtration materials sold to original equipment manufacturers as these markets are continuing an expected decline. The decrease was partially offset by increases in blood transfusion and cell therapy products related to launches of new products during 2003 and growth in sales of the Company’s Bio-Pak^® sterilized disposable bioprocessing containers.

For 2002, Filtration/Separation Segment net sales increased $6.2 million, or 9.2 percent to $72.8 million from $66.6 million in 2001. This increase was primarily driven by increased sales of air filtration products in Europe, liquid filtration products in the United States, as well as increases in bioprocessing and blood management products. The impact of foreign currency translation increased segment net sales by approximately 1.3 percent for 2002.

Sales of filtration products increased approximately 9.9 percent in 2002 from 2001 levels. The increase was driven by new business gains of the Company’s microglass air filtration products in Europe, strong year-over-year growth of carbon filter media for liquid filtration and the introduction of membrane composite media. This increase for 2002 was achieved in spite of soft commercial and industrial and semiconductor markets.

Sales of Vital Fluids’ products increased approximately 7.1 percent for 2002 compared with 2001. Increased market share and market growth of flexible containers for bioprocessing applications and a 20 percent increase in blood transfusion and cell therapy products contributed to the increase. In addition, Charter Medical received regulatory approval for certain of its blood management products in 2002 allowing for distribution in Europe and Canada. These increases were partially offset by lower demand for traditional blood filtration materials during the year.

Segment operating income declined $1.9 million, or 18.1 percent to $8.7 million for 2003 compared with $10.6 million for 2002. Segment operating margin as a percent of segment net sales also decreased to 11.6 percent in 2003 from 14.6 percent in 2002. The impact of foreign currency translation increased segment operating income by approximately 3.7 percent for 2003. The declines in segment operating income and margin related to lower margin performance of the domestic air filtration business and traditional blood filtration products primarily due to lower sales volumes, as well as non-recurring charges for severance associated with the elimination of the Group organizational structure and costs related to the consolidation of the Vital Fluids’ operations in the second quarter of 2003.

Segment operating income improved $3.3 million, or 46.0 percent to $10.6 million for 2002 compared with $7.3 million for 2001. Segment operating margin as a percent of segment net sales also improved to 14.6 percent in 2002 from 10.9 percent in 2001. The improvement in segment operating income for the year resulted from increases in sales volume in the filtration and Vital Fluids businesses, material and labor cost reduction efforts, controlled selling, product development and administrative expenses and approximately $.3 million due to the absence of goodwill amortization. Foreign currency translation did not have a significant impact on segment operating income.

Other Products and Services

Other Products and Services Segment net sales were $29.8 million for 2003, a decrease of $2.4 million, or 7.3 percent from $32.2 million in 2002. Segment net sales declined primarily as a result of decreased sales of specialty products and a reduction in revenues from the trucking operations of the transport business due to the general softness in the overall economy. These sales declines were partially offset by increased revenues from the warehouse distribution operations of the transport business as the Newport News Distribution Center continued to perform at improved operating levels from its start-up performance in 2002.

Segment net sales were $32.2 million for 2002, a decrease of $1.1 million, or 3.3 percent from $33.3 million in 2001. Segment net sales declined primarily due to the divestment of the fiberboard operation in the first half of 2001. After removing the related sales impact of the fiberboard operation from 2001, segment net sales increased by approximately $.1 million. This increase primarily related to additional revenues provided by the Newport News Distribution Center, which were partially offset by a decline in sales of the Company’s economically sensitive specialty products in 2002 from 2001.

13

Segment operating income decreased $.2 million, or 7.0 percent to $2.0 million in 2003 from $2.2 million in 2002. Segment operating margin was 6.8 percent of segment net sales for both 2003 and 2002. The decrease in segment operating income primarily related to the significant reduction in specialty products and the weakness in the trucking operations transport business. An overall reduction in gross margin for these businesses was partially mitigated by controlled administrative costs.

Segment operating income increased $2.6 million from a loss of approximately $.4 million in 2001 to income of $2.2 million in 2002, including charges of $.3 million and $3.4 million recorded in 2002 and 2001, respectively, related to the closure of the fiberboard operation. Excluding these impairment charges, segment operating income decreased $.5 million in 2002 compared with 2001 primarily due to start-up costs associated with the Newport News Distribution Center.

Discontinued Operations

In February 2001, the Company discontinued the Paperboard Segment, which consisted primarily of the Southern Products and Lydall & Foulds operations. The results of the Paperboard Segment have been excluded from continuing operations for all years presented. See Note 8 in “Notes to Consolidated Financial Statements.”

In the fourth quarter of 2002, the Company recorded an after-tax charge of $.2 million, or $.01 per diluted share for additional costs incurred during the phase-out period of the Paperboard Segment.

In the third quarter of 2003, the Company recorded an after-tax charge of approximately $.8 million, or $.05 per diluted share for additional shut down costs and the write off of the remaining assets of the Paperboard Segment.

LIQUIDITY AND CAPITAL RESOURCES

The Company ended 2003 with $3.0 million in cash and cash equivalents compared with $2.6 million as of December 31, 2002. Additionally, the Company held $2.5 million in restricted cash as of December 31, 2003. This balance was held as part of the capital lease transaction for the St. Nazaire facility. It is expected to be released in the first quarter of 2004.

Operating Cash Flows

Net cash provided by operating activities in 2003 was $21.0 million compared with $18.4 million in 2002. For 2003, lower net income was offset by increased depreciation, a non-cash expense, and improved cash flows from changes in working capital and other long-term liabilities. The Company contributed $5.8 million and $5.9 million to its defined benefit pension plans during 2003 and 2002, respectively.

Investing Cash Flows

Net cash used for investing activities was $18.2 million in 2003 compared with $14.1 million in 2002. For 2003, capital expenditures totaled $15.9 million compared with $14.2 million in 2002. The Company held $2.5 million in a restricted cash balance at the end of 2003, which was shown as a cash outflow for investing activities. This balance was related to the leasing arrangement for the new operating facility in St. Nazaire, France. The restriction is expected to be lifted during the first quarter of 2004. In 2003, no acquisition activities occurred, compared with $1.1 million in 2002, when certain contingent events associated with the acquisition of the Ossipee operation in 2001 were met.

Financing Cash Flows

In 2003, net cash used for financing activities was $1.6 million compared with $2.8 million in 2002. Cash repayments exceeded borrowings in 2003 by $2.9 million as cash generated from operating activities was utilized to reduce debt levels. Proceeds from common stock issuances were approximately $1.3 million in 2003 and $1.1 million in 2002. The Company did not repurchase any of its Common Stock in 2003 or 2002. On August 21, 2003 the Company’s Board of Directors approved a resolution to repurchase its Common Stock to offset shares granted pursuant to the 2003 Lydall Stock Incentive Compensation Plan, within the confines of the Company’s credit agreements. As of December 31, 2003, approximately 408,000 shares are eligible for repurchase under the program.

14

Financing Arrangements

The Company amended and restated its $50 million domestic revolving credit facility with a group of five banking institutions on August 29, 2003. The credit agreement continues to have the same maturity date of September 30, 2005 and, other than specific modifications made to certain covenants, was renewed under similar terms and conditions as previously in place under the prior arrangement. The modifications to the restrictive and financial covenants provide the Company with increased flexibility to reacquire its stock under the Stock Repurchase Program and to fund the capital requirements of the new European automotive operation. The restrictive and financial covenants of the credit agreement that were amended are listed in the table below:

Covenant Number	Covenant Description	Previous Requirement	Amended Requirement
6.06	Restricted Payments	Not to exceed $5,000,000 in any fiscal year	Not to exceed $8,000,000 in any fiscal year
6.12	Fixed Charge Coverage Ratio	•  2.25 to 1.00 – For quarters ending on or before December 31, 2003 •  2.50 to 1.00 – For quarters ending after December 31, 2003	1.50 to 1.00
6.15	Consolidated Capital Expenditures	Less than $20,000,000 for the trailing four fiscal quarters	Less than $30,000,000 for the trailing four fiscal quarters

As of December 31, 2003, the Company was in compliance with all financial covenants contained in the credit agreement and there was $6.0 million outstanding under the facility.

The Company has two Euro-denominated term loans, with a total outstanding balance of $14.2 million. These two loans bear interest equal to Euro LIBOR plus a percentage based on the Company’s calculated leverage ratio.

In addition, during 2003 the Company’s German operating subsidiary financed certain real estate assets purchased in 2002 with two term loans in a total amount of $2.4 million (€2.0 million) obtained from a local banking institution.

Certain foreign subsidiaries of the Company have available lines of credit totaling $9.5 million, of which $3.2 million was outstanding as of December 31, 2003.

As of December 31, 2003, the Company had unused borrowing capacity of approximately $48.0 million. Management believes that current financing arrangements provide sufficient capacity to meet working capital requirements and fund future capital expenditures, as required.

Off-Balance Sheet Financing Arrangements

In conjunction with the plan to construct a new facility in St. Nazaire, France to manufacture engineered thermal/acoustical solutions for automotive applications, a wholly owned subsidiary of the Company entered into a financing agreement on December 18, 2003 that will provide a long-term capital lease upon the facility’s completion in early 2004. The agreement, completed with the leasing subsidiaries of two French banks, calls for the Company to lease the facility for 12 years, and provides an option to purchase the facility at the end of the lease for a nominal amount. The cost to construct the facility is being funded by the leasing subsidiaries of the banks. The estimated present value of the capital lease obligation of the Company was $6.3 million (€5.0 million) as of December 31, 2003, and lease payments are expected to begin in the second quarter of 2004. In connection with this financing, the Company is required to pay interest, EONIA (Euro Overnight Index Average) plus one percentage point, on the amounts disbursed by the banks toward the construction of the facility in advance of the capital lease becoming effective. Additionally, the Company was required to hold cash in the amount of $2.5 million related to this agreement as of December 31, 2003. It is expected that such restricted cash will be released to the Company in the first quarter of 2004 upon the formalization of certain assurances by Lydall, Inc.

15

Future Cash Requirements

Cash requirements for 2004 are expected to include the funding of ongoing operations, capital expenditures, share repurchases, contributions to the Company’s defined benefit pension plans and debt service. Capital spending for 2004 is expected to be approximately $24.0 million, including approximately $6.4 million for the Thermal/Acoustical Segment’s European expansion. The Company expects to finance its 2004 cash requirements from cash provided by operating activities and through borrowings under its existing credit agreements.

At the end of 2003, total indebtedness was $26.0 million, or 15.3 percent of the Company’s total capital structure. The Company continually explores its core markets for suitable acquisitions. Strategic acquisitions, if completed, would be financed under the credit facility described under “Financing Arrangements” above or other forms of financing, as required.

Contractual Obligations

The following table summarizes the Company’s significant obligations as of December 31, 2003, and the effect such obligations are expected to have on the Company’s liquidity and cash flows in future periods. This table excludes amounts already recorded on the Consolidated Balance Sheet as current liabilities as of December 31, 2003:

	Payments Due by Period
In thousands	2004		2005		2006		2007		2008		After 5 years		Total
Contractual obligations:
Operating leases	$	3,967	$	3,436	$	2,622	$	1,991	$	1,465	$	2,540	$	16,021
Capital leases		518		690		690		690		690		5,008		8,286
Long-term debt		4,951		9,958		3,969		5,878		219		1,002		25,977
Purchase obligations		18,753		4,349		—		—		—		—		23,102
Total contractual obligations	$	28,189	$	18,433	$	7,281	$	8,559	$	2,374	$	8,550	$	73,386

Purchase obligations in the table above are primarily related to capital purchase obligations at St. Nazaire ($5.8 million in 2004) and contracts to purchase aluminum at various automotive operations ($4.5 million in 2004). Additionally, purchase obligations include estimated microfiber purchases under variable purchase commitments that require a certain percentage of materials utilized in production to be purchased from a specific supplier ($8.5 million and $4.3 million in 2004 and 2005, respectively). Purchase orders or contracts for normal purchases of raw materials and other goods and services are not included in the table above. The Company is not able to determine the aggregate amount of such purchase orders that represent contractual obligations, as purchase orders may represent authorizations to purchase rather than binding agreements. For purposes of this table, contractual obligations for purchase of goods or services are defined as agreements that are enforceable and legally binding on the Company and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transactions. The Company does not have significant agreements for the purchase of raw materials or other goods specifying minimum quantities or set prices that exceed expected requirements.

In addition to the above contractual obligations, the Company utilizes letters of credit in the ordinary course of business and to satisfy self-insurance security deposit requirements. Outstanding letters of credit were $2.1 million and $2.4 million as of December 31, 2003 and 2002, respectively. The Company does not expect any material losses to result from these instruments, as performance is not expected to be required. See Notes 3 and 16 in “Notes to Consolidated Financial Statements” for additional information regarding contractual obligations.

Stock Repurchase Program

In August 2003, the Company’s Board of Directors approved the initiation of a Stock Repurchase Program. The purpose of the repurchase program is to mitigate the potentially dilutive effects of stock options and shares of restricted and unrestricted stock granted by the Company. Shares may be repurchased up to the quantity of shares underlying options, and other equity-based awards granted after January 1, 2003, under shareholder approved plans. The Company intends to take advantage of the safe

16

harbor protections afforded by Rule 10b-18 promulgated under the Exchange Act, and to engage in repurchase activity in accordance with the provisions of the Exchange Act. As of December 31, 2003, no repurchases had been made under the Stock Repurchase Program. As of March 1, 2004, the Company had repurchased approximately 59,000 shares of common stock for approximately $.6 million and approximately 349,000 shares remained eligible for repurchase under the authorized program as of that date.

CRITICAL ACCOUNTING ESTIMATES

The preparation of the Company’s consolidated financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Note 1 in “Notes to Consolidated Financial Statements” describes the significant accounting policies used in the preparation of the consolidated financial statements. The Company’s management is required to make judgments and estimates about the effect of matters that are inherently uncertain. Actual results could differ from management’s estimates. The most significant areas involving management judgments and estimates are described below.

Intangible Assets and Goodwill

The Company accounts for its business acquisitions under the purchase method whereby the assets and liabilities of acquired businesses are recorded at their estimated fair values at the dates of acquisition. Goodwill represents the costs in excess of fair values assigned to the underlying net assets of acquired businesses. The Company had goodwill recorded, net of accumulated amortization, of $30.9 million at December 31, 2003 and 2002.

Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” (FAS 142) requires that goodwill and other intangible assets determined to have indefinite lives not be amortized, but rather are subject to annual impairment tests in accordance with the specific guidance and criteria described in the standard. The identification and measurement of goodwill impairment involves the estimation of the fair value of reporting units (as defined in FAS 142), including related goodwill. The estimates of fair value of reporting units are based on the best information available as of the date of the assessment, which incorporate management assumptions about expected future cash flows as well as other factors.

Future cash flows can be affected by numerous factors including changes in economic, industry or market conditions, changes in the underlying business or products of the reporting unit, changes in competition and changes in technology. Any changes in key assumptions about the business and its prospects, changes in any of the factors discussed above or other factors could affect the fair value of one or more of the reporting units resulting in an impairment charge. Such a charge could have a material adverse effect on the Company’s reported financial condition and results of operations. Although no goodwill impairment has been recorded to date, there can be no assurance that a future impairment of goodwill will not occur. See Note 6 in “Notes to Consolidated Financial Statements.”

Pensions

The Company accounts for its defined benefit pension plans in accordance with Statement of Financial Accounting Standards No. 87, “Employers’ Accounting for Pensions,” (FAS 87) which requires that pension cost and the related obligations recognized in financial statements be determined on an actuarial basis. The determination of such amounts is made in consultation with the Company’s outside actuaries based on information and assumptions provided by the Company. A substantial portion of the Company’s pension amounts relate to its defined benefit plans in the United States.

A significant element in determining the Company’s pension cost is the expected return on plan assets. Based on a review of market trends, actual returns on plan assets and other factors, the Company lowered the expected long-term rate of return on plan assets from 9.25 percent used in determining 2002 pension cost to 8.75 percent for determining 2003 pension cost and will continue to utilize this expected rate of return for determining 2004 pension cost. The expected long-term rate of return on assets is applied to the value of plan assets at the beginning of the year and this produces the expected return on plan assets that is included

17

in the determination of pension cost for that year. The difference between this expected return and the actual return on plan assets is deferred, within certain parameters, as discussed below. The Company continually evaluates its expected long-term rate of return and will adjust such rate as deemed appropriate.

At the end of each year, the Company determines the discount rate to be used to calculate the present value of plan liabilities, as well as the following year’s pension cost. The discount rate is an estimate of the current interest rate at which the pension liabilities could be effectively settled at the end of the year. In estimating this rate, the Company looks to rates of return on high-quality, corporate debt instruments. At December 31, 2003, the Company determined this rate to be 6.25 percent; a decrease of 50 basis points from the rate used at December 31, 2002 and 100 basis points from that used at December 31, 2001. Increases or decreases in the discount rate result in decreases and increases, respectively, in the projected benefit obligation. The net effect on pension liabilities from changes in the discount rate is deferred within certain parameters, as discussed below.

FAS 87 requires that gains or losses (as defined in FAS 87) be deferred unless the unrecognized net gain or loss at the end of a year exceeds a “corridor” (as defined in FAS 87). If the deferred gain or loss exceeds the corridor at the end of the year, then the amount in excess of the corridor is amortized over a period equal to the average remaining service period of active employees expected to receive benefits. As of December 31, 2003, the net deferred loss exceeded the corridor. Consequently pension cost for 2004 is expected to include amortization of a portion of the deferred loss in excess of the corridor. The amount of amortization in future years will be dependent on changes in the components of the deferred loss amount, particularly actual return on plan assets in relation to the estimated return on plan assets, as well as future increases or decreases in the discount rate.

For the years ended December 31, 2003, 2002 and 2001, the Company recognized pension cost of $2.4 million, $1.5 million and $1.1 million, respectively. As discussed above, the Company lowered the discount rate to 6.25 percent for purposes of determining 2004 pension cost. This is expected to negatively impact 2004 pension cost; however, the effect of higher than expected plan asset returns and significant contributions during 2003 is expected to offset this impact. Pension cost for 2004 is expected to be approximately $2.2 million. See Note 12 in “Notes to Consolidated Financial Statements.”

Income Taxes

The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes,” (FAS 109) which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between book and tax bases of recorded assets and liabilities. FAS 109 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some or all of a deferred tax asset will not be realized.

Deferred tax assets, net of valuation allowance, related to future tax benefits arising from deductible temporary differences and tax carryforwards were $21.6 million and $12.7 million at December 31, 2003 and 2002, respectively. Management believes that the Company’s earnings during the periods when the temporary differences become deductible will be sufficient to realize the related net future income tax benefits. For those jurisdictions where the projected operating results indicate that the ability to realize the future benefits is uncertain or not likely, a valuation allowance has been provided.

In assessing the need for a valuation allowance, the Company estimates future taxable income, considering the feasibility of ongoing tax planning strategies and the realizability of tax loss carryforwards. Valuation allowances related to deferred tax assets can be impacted by changes in tax law, changes in statutory tax rates and future levels of taxable income. In the event the Company were to determine that it would not be able to realize all or a portion of its deferred tax assets in the future, the Company would reduce such amounts through a charge to income in the period that such determination was made. Conversely, if the Company was to determine that it would be able to realize its deferred tax assets in the future in excess of the net carrying amounts, the Company would decrease the recorded valuation allowance and record an increase to income in the period that such determination was made. See Note 15 in “Notes to Consolidated Financial Statements.”

Unremitted earnings of foreign subsidiaries have been included in the consolidated financial statements without giving effect to the United States taxes that may be payable on the distribution to the United States because it is not anticipated such earnings will be remitted to the United States. If remitted, the additional United States tax liability would not be material.

18

The Company’s effective tax rates in future periods could be adversely affected by earnings being lower or higher than anticipated in countries where tax rates differ from the United States federal rate, the relative impact of permanent tax adjustments on higher or lower earnings from domestic operations, changes in net deferred tax asset valuation allowances, and/or by changes in tax law or interpretations thereof.

In 2003, the World Trade Organization (WTO) ruled that the Extraterritorial Income program (ETI) as provided for in the United States Internal Revenue Code represents a prohibited export subsidy under the WTO Agreement on Subsidies and Countervailing Measures. As a result, the President of the United States has indicated that tax law will be changed to comply with the WTO ruling. During 2003, the ETI benefit decreased the Company’s effective tax rate by approximately 2.2 percentage points. At this time the Company is unable to determine the impact that the potential changes to United States tax law will have on future financial results; however, it is possible that such changes will adversely affect the Company’s results of operations and cash flows in future periods.

RECENTLY ISSUED ACCOUNTING STANDARDS

In December 2003, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits (revised 2003)” (FAS 132, as revised). FAS 132, as revised, requires additional disclosures about pension plans and other postretirement benefit plans compared with those required in the original FASB Statement 132. These disclosures require that additional information be provided related to assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. FAS 132, as revised, also requires that information be provided regarding the types of plan assets, investment strategy and measurement date(s). Most of the required disclosures under FAS 132, as revised, that are pertinent to the Company were effective for annual periods ending after December 15, 2003 and interim periods beginning after December 15, 2003. The adoption of this standard did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

In April 2003, the FASB issued Statement of Financial Accounting Standards No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” (FAS 149). FAS 149 amends Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities,” for certain decisions made by the FASB as part of the Derivatives Implementation Group process. FAS 149 was effective for applicable contracts entered into or modified after June 30, 2003 and should be applied prospectively, except for certain provisions specifically referenced within the pronouncement. The adoption of this standard did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

In December 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities (revised December 2003), an interpretation of ARB No. 51.” This interpretation requires variable interest entities to be consolidated by the primary beneficiary if the equity investment at risk is not sufficient to permit an entity to finance its activities without support from other parties or the equity investors lack certain specified characteristics of a controlling financial interest. The Company does not have any accounting or disclosure requirements under the provisions of this interpretation.

OTHER KEY FINANCIAL ITEMS

Cash and cash equivalents – Cash and cash equivalents increased to $3.0 million as of December 31, 2003 compared with $2.6 million as of December 31, 2002.

Restricted cash – The Company held $2.5 million in a restricted cash balance at the end of 2003. This balance was required related to the leasing arrangement for the new operating facility in St. Nazaire, France. The restriction is expected to be lifted during the first quarter of 2004.

Receivables – Receivables, net of the allowance for doubtful receivables, were $40.8 million at the end of 2003 compared with $39.9 million at the end of 2002. The increase was primarily related to the impact of foreign currency exchange rates on translating accounts receivable balances held at operations in Europe to U.S. dollar balances.

Inventories – Inventories were $37.3 million as of December 31, 2003 compared with $32.0 million as of December 31, 2002. The increase was primarily related to additional tooling work in process inventory, which is related to future automotive business.

19

Working capital and current ratio – Working capital increased to $54.7 million at December 31, 2003 compared with $43.5 million at December 31, 2002. The ratio of current assets to current liabilities in 2003 increased to 2.4:1 from 2.1:1 in 2002. The increase in working capital was primarily related to the reduction in the current portion of long-term debt caused by debt refinancing during 2003, the increase in tooling work in process inventory and the effects of foreign exchange on working capital items.

Capital expenditures – Capital expenditures were $15.9 million in 2003, $14.2 million in 2002 and $11.9 million in 2001. Capital spending for 2004 is expected to be approximately $24.0 million.

Total debt to total capitalization – Total debt to total capitalization decreased to 15.3 percent in 2003 compared with 16.6 percent in 2002.

Stockholders’ equity – Stockholders’ equity increased to $143.3 million at December 31, 2003 from $130.1 million at December 31, 2002. On a per share basis, Stockholders’ equity increased to $8.81 at December 31, 2003 from $8.09 at December 31, 2002.

Dividend policy – The Company’s domestic revolving credit facility contains restrictions that limit the amount of dividends (whether in cash, securities or other property, unless payable solely in additional shares of the Company’s capital stock) that can be paid to external shareholders of its capital stock each fiscal year. Currently, the Company does not pay a cash dividend on its Common Stock and does not anticipate doing so in the foreseeable future.

Item  7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Lydall’s significant market risk exposures related to changes in foreign currency exchange rates and interest rates.

FOREIGN CURRENCY RISK

Lydall has sales and manufacturing activities in foreign countries. As a result, financial results could be affected by factors such as changes in foreign currency exchange rates or economic conditions in the foreign markets where the Company distributes its products. The Company’s primary currency exposure is to the Euro and, to a lesser degree, the Japanese Yen.

Lydall’s foreign and domestic operations limit foreign currency exchange transaction risk by completing transactions in local functional currencies whenever practicable. In addition, Lydall periodically enters into foreign currency forward exchange contracts to mitigate exposure to foreign currency volatility. Lydall utilizes bank loans and other debt instruments throughout its operations. To mitigate foreign currency risk, such debt is denominated primarily in the functional currency of the operation maintaining the debt.

INTEREST RATE RISK

The Company’s interest rate exposure is most sensitive to fluctuations in interest rates in the United States and Europe, which impact interest paid on its debt. At December 31, 2003, the Company had $14.5 million outstanding on various lines of credit with variable interest rates. The weighted average interest rate paid on this debt was 4.2 percent in 2003 and 3.5 percent in 2002. A 10 percent change in the weighted average interest rate on the Company’s variable rate debt would be immaterial to the Company’s consolidated financial position, results of operations or cash flows.

As of December 31, 2003, the Company had $2.9 million outstanding on a five-year term loan with a variable interest rate. In July 1999, Lydall entered into an interest rate swap agreement to convert the variable base rate component of the interest rate on the term loan to a fixed rate of 3.45 percent, thereby taking advantage of favorable long-term borrowing rates in Europe. The swap has scheduled maturity dates that are identical to the payment schedule of the borrowings.

20

In January 2003, Lydall entered into an interest rate swap to convert the variable base rate on certain borrowings with an initial principal amount of $6.0 million under its domestic credit facility to a fixed rate; taking advantage of the favorable interest rate environment in the United States. The swap, with a final maturity on September 15, 2005, requires Lydall to pay a fixed base rate of 2.2 percent on the outstanding borrowings and has scheduled maturity dates that are identical to the payment schedule of the borrowings.

The weighted average interest rate on long-term debt, including the effect of the interest rate swaps described above, was 3.9 percent for the year ended December 31, 2003 compared with 3.7 percent for 2002.

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The response to this Item is contained under Item 15 “Exhibits, Financial Statement Schedules and Reports on Form 8-K.”

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

Item 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company’s management, including the Company’s President and Chief Executive Officer and Vice President – Controller and Interim Chief Financial Officer, conducted an evaluation as of December 31, 2003 of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e)). Based on that evaluation, the President and Chief Executive Officer and Vice President – Controller and Interim Chief Financial Officer concluded that the disclosure controls and procedures were effective in ensuring that all material information required to be disclosed in the reports the Company files and submits under the Securities and Exchange Act of 1934 has been made known to them on a timely basis and that it has been properly recorded, processed, summarized and reported, as required.

Changes in Internal Controls

There have been no significant changes in the Company’s internal controls over financial reporting during the Company’s fiscal year ended December 31, 2003 that materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

21

PART III

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information required by this Item is incorporated by reference from the sections entitled “Board of Directors,” “Corporate Governance,” “Stockholder Communications with Directors” and “Director Compensation” of the definitive Proxy Statement of Lydall filed with the Commission in connection with its Annual Meeting of Stockholders to be held on April 22, 2004. Information regarding the Executive Officers of the Company is contained on page 5 of this report.

Item 11. EXECUTIVE COMPENSATION

Information required by this Item is incorporated by reference from the sections entitled “Compensation and Stock Option Committee Report on Executive Compensation,” “Performance Graph,” “Summary Compensation Table,” “Plan Descriptions” and “Stock Option Tables” of the definitive Proxy Statement of Lydall filed with the Commission in connection with its Annual Meeting of Stockholders to be held on April 22, 2004.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Information required by this Item is incorporated by reference from the sections entitled “Equity Compensation Plan Information” and “Securities Ownership of Directors, Certain Officers and 5 Percent Beneficial Owners” of the definitive Proxy Statement of Lydall filed with the Commission in connection with its Annual Meeting of Stockholders to be held on April 22, 2004.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information required by this Item is incorporated by reference from the sections entitled “Transactions with Management” and “Compensation Committee Interlocks and Insider Participation” of the definitive Proxy Statement of Lydall filed with the Commission in connection with its Annual Meeting of Stockholders to be held on April 22, 2004.

Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information required by this Item is incorporated by reference from the section entitled “Ratification of Appointment of Auditors,” subsection “Principal Fees and Services” of the definitive Proxy Statement of Lydall filed with the Commission in connection with its Annual Meeting of Stockholders to be held on April 22, 2004.

22

PART IV

Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

	Page
Statement of Management Responsibility	F-1
a) 1, Financial Statements:
Report of Independent Auditors	F-2
Consolidated Statements of Operations for the years ended December 31, 2003, 2002 and 2001	F-3
Consolidated Balance Sheets at December 31, 2003 and 2002	F-4
Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001	F-5
Consolidated Statements of Changes in Stockholders’ Equity for each of the three years in the period ended December 31, 2003	F-6
Notes to Consolidated Financial Statements	F-7
a) 2, Financial Statement Schedule:
Schedule II – Valuation and Qualifying Accounts for the years ended December 31, 2003, 2002 and 2001	S-1

Other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions, are inapplicable or are presented in “Notes to Consolidated Financial Statements” and therefore have been omitted.

23

a) 3, Exhibits Included Herein or Incorporated by Reference:

3.1	Certificate of Incorporation of the Registrant, as amended through the date of filing of this report, consisting of: (i) Restated Certificate of Incorporation of the Registrant, dated as of May 12, 1993, filed herewith; (ii) Certificate of Amendment of Restated Certificate of Incorporation of the Registrant, dated as of August 14, 1995, filed herewith; and (iii) Certificate of Designation of Board of Directors Classifying and Designating a Series of Preferred Stock as Series A Junior Participating Preferred Stock and Fixing Distribution and Other Preferences and Rights of Such Series, dated as of May 20, 1999, filed herewith.
3.2	Bylaws of the Registrant, as amended and restated as of December 11, 2003, filed herewith.
4.1	Certain long-term debt instruments, each representing indebtedness in an amount equal to less than 10 percent of the Registrant’s total consolidated assets, have not been filed as Exhibits to this Annual Report on Form 10-K. The Registrant will file these instruments with the Commission upon request.
10.3*	Lydall, Inc. Board of Directors Deferred Compensation Plan effective January 1, 1991, filed as Exhibit 10.17 to the Registrant’s Annual Report on Form 10-K dated March 26, 1991 and incorporated herein by this reference.
10.4*	Lydall, Inc. Supplemental Executive Retirement Plan effective January 1, 1994, filed as Exhibit 10.20 to the Registrant’s Annual Report on Form 10-K dated March 27, 1996 and incorporated herein by this reference.
10.5*	Amended and restated, 1992 Stock Incentive Compensation Plan, dated May 14, 1992, amended through March 10, 1999, filed as Exhibit 10.9 to the Registrant’s Annual Report on Form 10-K dated March 21, 2001 and incorporated herein by this reference.
10.6*	Lydall 2003 Stock Incentive Compensation Plan, with an effective date of October 24, 2002, filed as Exhibit A to the Company’s definitive Proxy Statement on March 26, 2003 and incorporated herein by this reference.
10.7	Asset Purchase and Sale Agreement between Lydall Filtration/Separation, Inc. and Bennett Fleet (Chambly), Inc., dated April 2, 2001, filed as Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q dated May 11, 2001 and incorporated herein by this reference.
10.8	Credit Agreement dated as of July 14, 1999, amended and restated as of May 13, 2002, and amended and restated as of August 29, 2003, filed as Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q dated November 7, 2003 and incorporated herein by this reference.
10.9	Contract for a Consortium Credit in the Amount of €6,000,000, filed as Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q dated November 7, 2003 and incorporated herein by this reference.
10.10*	Employment Agreement with Mary A. Tremblay dated March 1, 2000, filed as Exhibit 10.10 to the Registrant’s Annual Report on Form 10-K dated March 30, 2000 and incorporated herein by this reference.
10.11*	Amendment dated August 1, 2000 to the Employment Agreement with Mary A. Tremblay dated March 1, 2000, filed as Exhibit 10.29 to the Registrant’s Annual Report on Form 10-K dated March 21, 2001 and incorporated herein by this reference.
10.12*	Agreement with Thomas P. Smith dated May 1, 2000, filed as Exhibit 10.17 to the Registrant’s Annual Report on Form 10-K dated March 21, 2001 and incorporated herein by this reference.
10.13*	Employment Agreement with Christopher R. Skomorowski dated July 1, 2003, filed as Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q dated November 7, 2003 and incorporated herein by this reference.
10.14*	Agreement Covering Nonqualified Stock Option Award to the Chairman of the Board, dated January 12, 2000, filed as Exhibit 10.29 to the Registrant’s Annual Report on Form 10-K dated March 26, 2003 and incorporated herein by this reference.
10.15*	Agreement Covering Nonqualified Stock Option Award to the Chairman of the Board, dated May 8, 2002, filed as Exhibit 10.30 to the Registrant’s Annual Report on Form 10-K dated March 26, 2003 and incorporated herein by this reference.

24

10.16*		Restricted Stock Agreement dated July 1, 2003 between Lydall, Inc. and David Freeman, filed as Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q dated November 7, 2003 and incorporated herein by this reference.
10.17*		Employment Agreement with Mona G. Estey dated March 1, 2000, filed as Exhibit 10.9 to the Registrant’s Annual Report on Form 10-K dated March 30, 2000 and incorporated herein by this reference.
10.18*		Amendment dated August 1, 2000 to the Employment Agreement with Mona G. Estey dated March 1, 2000, filed as Exhibit 10.28 to the Registrant’s Annual Report on Form 10-K dated March 21, 2001 and incorporated herein by this reference.
10.19*		Employment Agreement with Lisa Krallis-Nixon dated March 1, 2000, filed as Exhibit 10.18 to the Registrant’s Annual Report on Form 10-K dated March 30, 2000 and incorporated herein by this reference.
10.20*		Amendment dated August 1, 2000 to the Employment Agreement with Lisa Krallis-Nixon dated March 1, 2000, filed as Exhibit 10.36 to the Registrant’s Annual Report on Form 10-K dated March 21, 2001 and incorporated herein by this reference.
10.21*		Employment Agreement with Bill W. Franks, Jr. dated March 1, 2000, filed as Exhibit 10.20 to the Registrant’s Annual Report on Form 10-K dated March 30, 2000 and incorporated herein by this reference.
10.22*		Amendment dated August 1, 2000 to the Employment Agreement with Bill W. Franks, Jr. dated March 1, 2000, filed as Exhibit 10.35 to the Registrant’s Annual Report on Form 10-K dated March 21, 2001 and incorporated herein by this reference.
10.23*		Employment Agreement with Kevin G. Lynch dated March 1, 2000, filed as Exhibit 10.17 to the Registrant’s Annual Report on Form 10-K dated March 30, 2000 and incorporated herein by this reference.
10.24*		Amendment dated August 1, 2000 to the Employment Agreement with Kevin G. Lynch dated March 1, 2000, filed as Exhibit 10.33 to the Registrant’s Annual Report on Form 10-K dated March 21, 2001 and incorporated herein by this reference.
14.1		Code of Ethics for the Chief Executive Officer, Senior Financial Officers and All Accounting and Financial Personnel, filed herewith.
21.1		List of subsidiaries of the Registrant, filed herewith.
23.1		Consent of PricewaterhouseCoopers LLP, filed herewith.
24.1		Power of Attorney, dated February 26, 2004, authorizing David Freeman and/or Thomas P. Smith to sign this report on behalf of each member of the Board of Directors indicated therein, filed herewith.
31.1		Certification Pursuant to Rule 13a-14(a) and Rule 15d-14(a) under the Securities Exchange Act of 1934, filed herewith.
31.2		Certification Pursuant to Rule 13a-14(a) and Rule 15d-14(a) under the Securities Exchange Act of 1934, filed herewith.
32.1		Certifications Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.
*		Management contract or compensatory plan.
b	)	Reports on Form 8-K:
		On December 16, 2003, a Report on Form 8-K was filed pursuant to Item 5 “Other Events and Regulation FD Disclosure” to disclose the issuance of a press release announcing certain organizational changes and comments on expected fourth quarter and year ended December 31, 2003 financial results.
		On October 21, 2003, a Report on Form 8-K was filed pursuant to Item 12 “Results of Operations and Financial Condition” to disclose the issuance of a press release setting forth the Company’s financial results for the third quarter and nine months ended September 30, 2003. The report contained an Exhibit furnished under Item 7 “Financial Statements and Exhibits,” which was the Company’s press release dated October 21, 2003 (such press release is not incorporated by reference herein or deemed “filed” within the meaning of Section 18 of the Securities Exchange Act of 1934).

25

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Lydall, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	LYDALL, INC.
March 12, 2004	By:	/s/    THOMAS P. SMITH
		Thomas P. Smith Vice President – Controller and Interim Chief Financial Officer (On behalf of the Registrant and as Principal Accounting Officer and as Interim Principal Financial Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Lydall, Inc. in the capacities and on the dates indicated.

Signature	Title	Date
/s/    DAVID FREEMAN David Freeman	President, Chief Executive Officer and Director (Principal Executive Officer)	March 12, 2004
/s/    THOMAS P. SMITH Thomas P. Smith	Vice President – Controller and Interim Chief Financial Officer (Interim Principal Financial Officer)	March 12, 2004
/s/    THOMAS P. SMITH Thomas P. Smith Attorney-in-fact for:		March 12, 2004
David Freeman	President and Chief Executive Officer and Director
Christopher R. Skomorowski	Executive Vice President, Chief Operating Officer and Director
Kathleen Burdett	Director
Samuel P. Cooley	Director	(constituting in excess of a majority of the full Board of Directors)
W. Leslie Duffy	Director
Matthew T. Farrell	Director
Suzanne Hammett	Director
S. Carl Soderstrom, Jr.	Director
Elliott F. Whitely	Director
Roger M. Widmann	Chairman of the Board of Directors

26

STATEMENT OF MANAGEMENT RESPONSIBILITY

The consolidated financial statements of Lydall, Inc. and its subsidiaries are the responsibility of the Company’s management and have been prepared in accordance with accounting principles generally accepted in the United States of America.

Management is responsible for the integrity and objectivity of these statements, including the effect of certain estimates and judgments, and fulfills this responsibility primarily by establishing and maintaining an internal control structure that is designed to provide reasonable assurance that Company assets are safeguarded, transactions are executed in accordance with management’s authorization and that the Company’s financial records may be relied upon for the purpose of preparing financial statements and related disclosures. That system is continuously monitored and assessed by direct management review and by the Company’s internal audit function.

For 2003, Lydall’s Board of Directors appointed independent auditors who audited the Company’s financial statements. Their accompanying report is based on an audit conducted in accordance with auditing standards generally accepted in the United States of America, which includes the consideration of the Company’s internal controls to establish a basis for determining the nature, timing and extent of audit tests to be applied.

The Audit Review Committee of the Board of Directors, which consists of directors who are neither officers nor employees of the Company, is directly responsible for the oversight of the work performed by our independent auditors, oversight of the work performed by our internal auditors, as well as overseeing our internal control systems and financial reporting processes. The Audit Review Committee meets regularly with management, the independent auditors and the internal auditors to discuss financial reporting, internal accounting controls, and auditing matters. Both the independent auditors and internal auditors have direct and private access to the Audit Review Committee.

/s/    DAVID FREEMAN	/s/    THOMAS P. SMITH
David Freeman President and Chief Executive Officer	Thomas P. Smith Vice President – Controller and Interim Chief Financial Officer

F-1

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and

Stockholders of Lydall, Inc.:

In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) on page 23 present fairly, in all material respects, the financial position of Lydall, Inc. and its subsidiaries at December 31, 2003 and 2002, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) on page 23 present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 6 in “Notes to the Consolidated Financial Statements,” effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets.”

/s/    PRICEWATERHOUSECOOPERS LLP

PricewaterhouseCoopers LLP

Hartford, Connecticut

February 6, 2004

F-2

CONSOLIDATED STATEMENTS OF OPERATIONS

		For the years ended December 31,
In thousands except per share data		2003			2002			2001
Net sales	$	271,385		$	253,522		$	223,559
Cost of sales		207,242			188,286			160,938
Gross margin		64,143			65,236			62,621
Selling, product development and administrative expenses		50,533			46,846			47,738
Restructuring charges		—			303			3,389
Operating income		13,610			18,087			11,494
Interest expense		974			872			985
Other (income) expense, net		(123	)		(188	)		429
		851			684			1,414
Income from continuing operations before income taxes		12,759			17,403			10,080
Income tax expense		4,387			5,671			3,011
Income from continuing operations		8,372			11,732			7,069
Discontinued operations:
Loss from operations of discontinued segments, net of tax benefit of $181		—			—			(308	)
(Loss) Gain on disposal of discontinued segments, including provision for operating losses during the phase-out period, net of tax (benefit) expense of ($481), ($130) and $121, respectively		(819	)		(220	)		206
Loss from discontinued operations		(819	)		(220	)		(102	)
Net income	$	7,553		$	11,512		$	6,967
Basic earnings per common share:
Continuing operations		$.52			$.73			$.44
Discontinued operations		(.05	)		(.01	)		(.01	)
Net income		$.47			$.72			$.43
Weighted average common shares outstanding		16,105			16,003			15,899
Diluted earnings per common share:
Continuing operations		$.52			$.72			$.44
Discontinued operations		(.05	)		(.01	)		(.01	)
Net income		$.47			$.71			$.43
Weighted average common shares and equivalents outstanding		16,229			16,292			16,011

The accompanying notes are an integral part of these consolidated financial statements.

F-3

CONSOLIDATED BALANCE SHEETS

		December 31,
In thousands of dollars and shares		2003			2002
Assets
Current assets:
Cash and cash equivalents	$	3,008		$	2,596
Restricted cash		2,516			—
Accounts receivable (less allowance for doubtful receivables of $619 and $703)		40,804			39,882
Income taxes receivable		1,157			2,723
Inventories		37,333			32,011
Prepaid expenses and other current assets		4,669			3,083
Net investment in discontinued operations		—			1,044
Deferred tax assets		3,188			2,990
Total current assets		92,675			84,329
Property, plant and equipment, net		91,028			85,801
Goodwill, net		30,884			30,884
Other assets, net		11,251			8,413
Total assets	$	225,838		$	209,427
Liabilities and Stockholders’ Equity
Current liabilities:
Current portion of long-term debt	$	4,951		$	9,686
Accounts payable		20,692			19,635
Accrued taxes		364			768
Accrued payroll and other compensation		3,326			4,500
Other accrued liabilities		8,620			6,280
Total current liabilities		37,953			40,869
Long-term debt		21,026			16,228
Deferred tax liabilities		12,512			10,408
Pension and other long-term liabilities		10,999			11,854
Commitments and contingencies (Note 16)
Stockholders’ equity:
Preferred stock		—			—
Common stock (par value $.10 per share; authorized 30,000 shares; issued 22,374 and 22,176 shares)		2,237			2,218
Capital in excess of par value		44,687			42,519
Unearned compensation		(912	)		—
Retained earnings		163,696			156,143
Accumulated other comprehensive loss		(4,718	)		(9,170	)
		204,990			191,710
Treasury stock, 6,097 shares of common stock, at cost		(61,642	)		(61,642	)
Total stockholders’ equity		143,348			130,068
Total liabilities and stockholders’ equity	$	225,838		$	209,427

The accompanying notes are an integral part of these consolidated financial statements.

F-4

CONSOLIDATED STATEMENTS OF CASH FLOWS

		For the years ended December 31,
In thousands		2003			2002			2001
Cash flows from operating activities:
Net income	$	7,553		$	11,512		$	6,967
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		13,132			11,183			9,874
Amortization		261			346			1,545
Deferred income taxes		3,532			4,801			1,250
Loss (Gain) on disposal of segments		819			350			(849	)
Restructuring charges		—			303			1,745
Loss on disposition of property, plant and equipment, net		527			217			88
Stock-based compensation		—			—			145
Changes in operating assets and liabilities, excluding effects from acquisitions:
Accounts receivable		1,256			(3,194	)		7,229
Income taxes receivable		1,760			(2,112	)		1,679
Inventories		(2,664	)		(3,315	)		(3,622	)
Prepaid expenses and other assets		(4,275	)		(451	)		(189	)
Accounts payable		(16	)		611			(3,565	)
Accrued taxes		(597	)		(164	)		(316	)
Accrued payroll and other accrued liabilities		1,246			3,279			(6,684	)
Other long-term liabilities		4,254			958			802
Contributions to pension plans		(5,754	)		(5,875	)		—
Total adjustments		13,481			6,937			9,132
Net cash provided by operating activities		21,034			18,449			16,099
Cash flows from investing activities:
Capital expenditures		(15,852	)		(14,171	)		(11,948	)
Proceeds from sale of segments		127			122			14,322
Deposits of restricted cash		(2,516	)		—			—
Acquisitions, net		—			(1,058	)		(18,661	)
Proceeds from sale of operations		—			1,002			1,058
Net cash used for investing activities		(18,241	)		(14,105	)		(15,229	)
Cash flows from financing activities:
Debt proceeds		58,262			93,368			40,743
Debt repayments		(61,138	)		(97,273	)		(43,928	)
Common stock issued		1,275			1,091			1,116
Net cash used for financing activities		(1,601	)		(2,814	)		(2,069	)
Effect of exchange rate changes on cash		(780	)		111			(66	)
Increase (Decrease) in cash and cash equivalents		412			1,641			(1,265	)
Cash and cash equivalents at beginning of year		2,596			955			2,220
Cash and cash equivalents at end of year	$	3,008		$	2,596		$	955
Supplemental Schedule of Cash Flow Information
Cash paid during the year for:
Interest	$	1,188		$	911		$	888
Income taxes		1,063			3,030			1,184
Noncash transactions:
Additional minimum pension liability	$	248		$	6,259		$	1,772
Restricted stock issuances		1,171			—			—
Building purchase		—			1,680			—
Liabilities assumed with acquisitions		—			—			1,340
Net cash provided by operating activities includes changes in certain assets and liabilities, which have been reclassified as “Net investment in discontinued operations” in the Consolidated Balance Sheets.

The accompanying notes are an integral part of these consolidated financial statements.

F-5

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

In thousands	Common Stock		Capital in Excess of Par Value		Unearned Compen- sation			Retained Earnings		Accumulated Other Compre- hensive Loss			Treasury Stock			Total Stock- holders’ Equity
Balance at January 1, 2001	$	2,196	$	40,335	$	—		$	137,664	($	6,800	)	($	61,642	)	$	111,753
Net income									6,967								6,967
Other comprehensive income:
Foreign currency translation adjustments, net of income tax benefits of $83											(155	)					(155	)
Minimum pension liability adjustment, net of income tax benefits of $656											(1,116	)					(1,116	)
Change in fair value of derivative instrument, net of income tax benefits of $99											(183	)					(183	)
Cumulative effect change in accounting principle, net of income taxes of $108											201						201
Comprehensive income																	5,714
Stock issued under employee plans		10		961													971
Stock issued to Directors		2		143													145
Balance at December 31, 2001		2,208		41,439		—			144,631		(8,053	)		(61,642	)		118,583
Net income									11,512								11,512
Other comprehensive income:
Foreign currency translation adjustments, net of income taxes of $1,502											2,790						2,790
Minimum pension liability adjustment, net of income tax benefits of $2,401											(3,858	)					(3,858	)
Change in fair value of derivative instrument, net of income tax benefits of $26											(49	)					(49	)
Comprehensive income																	10,395
Stock issued under employee plans		10		1,080													1,090
Balance at December 31, 2002		2,218		42,519		—			156,143		(9,170	)		(61,642	)		130,068
Net income									7,553								7,553
Other comprehensive income:
Foreign currency translation adjustments, net of income taxes of $2,484											4,613						4,613
Minimum pension liability adjustment, net of income tax benefits of $94											(153	)					(153	)
Change in fair value of derivative instrument, net of income tax benefits of $4											(8	)					(8	)
Comprehensive income																	12,005
Stock issued under employee plans		16		1,798		(1,171	)										643
Amortization of unearned compensation						259											259
Stock issued to Directors		3		370													373
Balance at December 31, 2003	$	2,237	$	44,687	($	912	)	$	163,696	($	4,718	)	($	61,642	)	$	143,348

The accompanying notes are an integral part of these consolidated financial statements.

F-6

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Significant Accounting Policies

The preparation of the Company’s consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the financial statement dates and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

Principles of consolidation – The consolidated financial statements include the accounts of Lydall, Inc. and its subsidiaries. All significant intercompany accounts and transactions have been eliminated.

Cash and cash equivalents – Cash and cash equivalents include cash on hand and highly liquid investments with original maturities of three months or less at the date of purchase. The restricted cash balance at the end of 2003 was required related to the leasing arrangement for the new operating facility in St. Nazaire, France. The restriction is expected to be lifted during the first quarter of 2004.

Concentrations of credit risk – Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and trade accounts receivable. The Company places its cash and cash equivalents in high-quality financial institutions and instruments. Concentrations of credit risk with respect to trade accounts receivable are limited by the large number of customers comprising the Company’s customer base and their dispersion across many different industries and geographies. Foreign and export sales were 37 percent of the Company’s net sales in 2003, 34 percent in 2002 and 30 percent in 2001. Export sales are concentrated primarily in Europe, Asia, Mexico and Canada and were $33.0 million, $32.2 million and $25.6 million in 2003, 2002 and 2001, respectively. The Company performs ongoing credit evaluations of its customers’ financial condition and generally does not require collateral. Sales to the automotive market were approximately 48 percent in 2003, and 47 percent of the Company’s total net sales in both 2002 and 2001. Sales to Ford Motor Company represented approximately 17 percent of Lydall’s total net sales in 2003, 18 percent in 2002 and 15 percent in 2001. Sales to DaimlerChrysler AG were approximately 11 percent, 13 percent and 10 percent of Lydall’s total net sales in 2003, 2002 and 2001, respectively. No other customer accounted for more than 10 percent of total net sales in 2003, 2002 or 2001.

Inventories – Inventories are valued at the lower of cost or market. Approximately 18 percent in 2003 and 27 percent in 2002 of inventories were valued using the last-in, first-out (LIFO) cost method and the balance were valued using the first-in, first-out (FIFO) cost method. If inventories that were valued using the LIFO method had been valued using the FIFO method, overall inventories would have been approximately $.4 million and $.2 million higher as of December 31, 2003 and 2002, respectively.

Pre-production design and development costs – The Company has contractual agreements with certain customers to design and develop molds, dies and tools (tooling). The Company accounts for these pre-production design and development costs pursuant to Emerging Issues Task Force Issue No. 99-5, “Accounting for Pre-Production Costs Related to Long-Term Supply Arrangements” (EITF 99-5). These costs are capitalized and subsequently recognized, along with the related revenue, upon acceptance of the tooling by the customer. Periodically, the Company may incur costs in excess of the related tooling revenue. Such excess costs are deferred when the Company meets the requirements for deferral under EITF 99-5. The Company also may receive prepayments on tooling being constructed, which are recorded as deferred revenue until the appropriate revenue recognition criteria have been met. The following tooling related assets and liabilities were included in the Consolidated Balance Sheets as of December 31, 2003 and 2002:

		December 31,
In thousands		2003		2002
Inventories	$	11,253	$	5,112
Prepaid expenses and other current assets		1,051		545
Other assets, net		2,061		2,173
Total tooling related assets	$	14,365	$	7,830
Other accrued liabilities	$	3,712	$	1,116
Total tooling related liabilities	$	3,712	$	1,116

F-7

Amounts included in “Prepaid expenses and other current assets” include the short-term portion of receivables due under reimbursement arrangements and amounts included in “Other assets, net” represent the long-term portion of those receivables in addition to customer owned tooling that was not reimbursed. Amounts included in “Other accrued liabilities” represent deferred revenue under tooling arrangements, where customers have made prepayment(s) on tooling purchases.

Property, plant and equipment – Property, plant and equipment are depreciated over their estimated useful lives using the straight-line method for financial statement purposes. Leasehold improvements are depreciated on a straight-line basis over the term of the lease or the life of the asset, whichever is shorter. The cost and accumulated depreciation accounts applicable to assets sold or otherwise disposed of are removed from the asset and accumulated depreciation accounts and any net gain or loss is included in the Consolidated Statements of Operations.

Goodwill and other intangible assets – Goodwill represents costs in excess of fair values assigned to the underlying net assets of acquired companies. Goodwill was historically amortized on a straight-line basis over periods not exceeding 25 years. Effective July 1, 2001, the Company adopted certain provisions of Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” (FAS 142) which require that goodwill and certain other intangible assets with indefinite lives recorded as a result of business combinations completed after June 30, 2001 not be amortized. Effective January 1, 2002, additional provisions of FAS 142, which require that goodwill recorded from business combinations completed on or before June 30, 2001 and certain other intangible assets deemed to have indefinite lives no longer be amortized, were adopted by the Company. Goodwill and other intangible assets with indefinite lives are subject to annual impairment tests. All other intangible assets are amortized over their estimated useful lives, which range from 3 to 30 years. See Note 6 for additional information regarding goodwill and other intangible assets.

Valuation of long-lived assets – The Company evaluates the recoverability of long-lived assets, or asset groups, whenever events or changes in circumstances indicate that carrying amounts may not be recoverable. Should such evaluations indicate that the related future undiscounted cash flows are not sufficient to recover the carrying values of the assets, such carrying values would be reduced to fair value and this adjusted carrying value would become the assets’ new cost basis. Fair value is determined primarily using future anticipated cash flows that are directly associated with and that are expected to arise as a direct result of the use and eventual disposition of the asset, or asset group, discounted using an interest rate commensurate with the risk involved.

Revenue recognition – Lydall recognizes revenue when the earnings process is complete and the risks and rewards of ownership have transferred to the customer, which is generally upon shipment.

Research and development – Research and development costs are charged to expense as incurred and amounted to $7.3 million in 2003, $6.5 million in 2002 and $6.9 million in 2001. Research and development costs were primarily comprised of development personnel salaries, prototype material costs, testing and trials of new products.

Earnings per share – Basic and diluted earnings per common share are calculated in accordance with the provisions of Statement of Financial Accounting Standards No. 128, “Earnings per Share.” Basic earnings per common share are equal to income from continuing operations and net income divided by the weighted average number of common shares outstanding during the period. Diluted earnings per common share are equal to income from continuing operations and net income divided by the weighted average number of common shares outstanding during the period, including the effect of stock options and stock awards, if such effect is dilutive.

Income taxes – The provision for income taxes is based upon income reported in the accompanying financial statements. Deferred income taxes reflect the impact of temporary differences between the amounts of income and expense recognized for financial reporting purposes and such amounts recognized for tax purposes.

Translation of foreign currencies – Assets and liabilities of foreign subsidiaries are translated at exchange rates prevailing on the balance sheet date. Any resulting translation gains or losses are reported in Other Comprehensive Income. Revenues and expenses are translated at average exchange rates prevailing during the period.

F-8

Derivative instruments – The Company accounts for derivative instruments under Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended (FAS 133). FAS 133 established accounting and reporting standards for derivative instruments and hedging activities and requires the Company to recognize these instruments as either assets or liabilities on the balance sheet and measure them at fair value.

Stock options – As described in Note 11, the Company has stock option plans under which employees and directors have options to purchase Common Stock. The Company applies APB Opinion 25, “Accounting for Stock Issued to Employees” and related interpretations in accounting for its stock option plans. Accordingly, compensation cost is not recognized in the financial statements on the grant date or over the life of the stock options as the exercise price, set at the time of the grant, is not less than the fair market value per share at the date of grant. Options issued under the stock option plans have a term of ten years and generally vest ratably over a period of four years. Restricted share grants are expensed over the vesting period of the award.

The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 2003, 2002 and 2001: zero dividend yield for all years; expected volatility of 47 percent, 54 percent and 52 percent, respectively; risk-free interest rates of 3.8 percent for 2003 and 2002 and 5.1 percent for 2001; and an expected seven year life for 2003 and eight-year life for 2002 and 2001.

The following table illustrates the effect on net income and earnings per share had compensation cost been recognized based on the fair value of the options at the grant dates for awards under those plans consistent with Statement of Financial Accounting Standards No. 123 (FAS 123), “Accounting for Stock-Based Compensation” using the Black-Scholes fair value method for option pricing:

		For the years ended December 31,
In thousands except per share data		2003			2002			2001
Net income — as reported	$	7,553		$	11,512		$	6,967
Add: Stock-based employee compensation expense included in net income, net of related tax effects		166			—			—
Less: Total stock-based employee compensation expense under FAS 123, as determined under using the fair value method, net of related tax effects		(1,891	)		(1,923	)		(1,361	)
Net income — pro forma	$	5,828		$	9,589		$	5,606
Basic earnings per common share:
Net income — as reported	$	.47		$	.72		$	.43
Net income — pro forma		.36			.60			.35
Diluted earnings per common share:
Net income — as reported	$	.47		$	.71		$	.43
Net income — pro forma		.36			.59			.35

Recently issued accounting standards – In December 2003, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits (revised 2003)” (FAS 132, as revised). FAS 132, as revised, requires additional disclosures about pension plans and other postretirement benefit plans compared with those required in the original FASB Statement 132. These disclosures require that additional information be provided related to assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. FAS 132, as revised, also requires that information be provided regarding the types of plan assets, investment strategy and measurement date(s). Most of the required disclosures under FAS 132, as revised, that are pertinent to the Company were effective for annual periods ending after December 15, 2003 and interim periods beginning after December 15, 2003. The adoption of this standard did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

In April 2003, the FASB issued Statement of Financial Accounting Standards No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” (FAS 149). FAS 149 amended Statement of Financial Accounting Standards No. 133,

F-9

“Accounting for Derivative Instruments and Hedging Activities,” for certain decisions made by the FASB as part of the Derivatives Implementation Group process. FAS 149 was effective for applicable contracts entered into or modified after June 30, 2003 and should be applied prospectively, except for certain provisions specifically referenced within the pronouncement. The adoption of this standard did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

In December 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities (revised December 2003), an interpretation of ARB No. 51.” This interpretation requires variable interest entities to be consolidated by the primary beneficiary if the equity investment at risk is not sufficient to permit an entity to finance its activities without support from other parties or the equity investors lack certain specified characteristics of a controlling financial interest. The Company does not currently have any accounting or disclosure requirements under the provisions of this interpretation.

Reclassification of financial information – Certain prior year components of the financial statements have been reclassified to be consistent with current year presentation.

2. Financial Instruments

The Company did not hold any material investments in financial instruments at December 31, 2003 or 2002. No material gains or losses on investments were realized in 2003, 2002 or 2001. For the purpose of computing realized gains and losses, cost is determined on the specific identification basis.

The Company utilizes letters of credit in the ordinary course of business and to satisfy self-insurance security deposit requirements. Outstanding letters of credit were $2.1 million and $2.4 million as of December 31, 2003 and 2002, respectively. The Company does not expect any material losses to result from these instruments, as performance is not expected to be required.

The carrying amounts and fair values of financial instruments as of December 31, 2003 and 2002 were as follows:

		2003					2002
In thousands		Carrying Amount		Fair Value		Carrying Amount			Fair Value
Financial Liabilities:
Current portion of long-term debt	$	4,951	$	4,993	$	9,686		$	9,686
Long-term debt		21,026		21,616		16,228			16,228

The above fair values were computed based on comparable transactions, quoted market prices, discounted future cash flows or an estimate of the amount to be received or paid to terminate or settle the agreement, as applicable. The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximate fair value as of December 31, 2003 and 2002.

In July 1999, the Company entered into an interest rate swap agreement to convert the base rate component of the interest rate on its term loan to a fixed rate of 3.45 percent. On January 1, 2001, the Company adopted FAS 133. In accordance with the transition provisions, the Company recorded a $.2 million, net of tax, cumulative-effect adjustment to Other Comprehensive Income as of January 1, 2001 representing the fair value of the interest rate swap, which was designated as a cash flow hedge, and recorded the fair value of the swap on the balance sheet. Subsequent changes in the fair value of the swap are reported in Other Comprehensive Income as the scheduled maturity dates are identical to the payment schedule of the borrowings. The fair values of the interest rate swap at December 31, 2003 and 2002 were liabilities of $14 thousand and $46 thousand, respectively.

In January 2003, the Company entered into an interest rate swap agreement to convert the variable base rate on certain borrowings with an initial principal amount of $6.0 million under its domestic credit facility to a fixed rate of 2.2 percent. The swap, with a final maturity on September 15, 2005, has scheduled maturity dates that are identical to the payment schedule of the borrowings. The swap is designated as a cash flow hedge. The fair value of the interest rate swap at December 31, 2003 was a liability of $45 thousand.

F-10

The interest rate swaps are not significant to the Company’s consolidated financial position.

The Company reassesses the effectiveness of its derivative instruments on an ongoing basis. If it is determined that a derivative instrument has ceased to be highly effective as a hedge, the Company will discontinue hedge accounting prospectively and changes in the fair value of the derivative instrument will then be reported in current period earnings.

By nature, all financial instruments involve market and credit risks. The Company enters into derivative and other financial instruments with major investment grade financial institutions and has policies to monitor the credit risk of those counterparties. The Company does not anticipate non-performance by any of its counterparties.

3. Long-term Debt and Financing Arrangements

The Company amended and restated its $50 million domestic revolving credit facility with a group of five banking institutions on August 29, 2003. The credit agreement continues to have the same maturity date of September 30, 2005 and, other than specific modifications made to certain covenants, was renewed under similar terms and conditions as previously in place under the prior arrangement. The modifications to the restrictive and financial covenants provide the Company with increased flexibility to reacquire its stock under the Stock Repurchase Program and to fund the capital requirements of the new European automotive operation. At December 31, 2003, the Company was in compliance with all financial covenants contained in the loan agreement and there was $6.0 million outstanding under the facility.

In conjunction with the amendment and restatement of its $50 million domestic credit facility on August 29, 2003, the Company obtained a €9.0 million four-year Euro-denominated term loan, which matures in 2007, from the same group of banking institutions. As of December 31, 2003, $11.3 million (€9.0 million) was outstanding under this term loan. The proceeds of this term loan were used to settle amounts outstanding under a €10.2 million line of credit maintained by the Company’s German operating subsidiary. This line of credit was subsequently cancelled and replaced with a €6.0 million credit agreement. This new credit agreement, which has a maturity date of September 30, 2007, was completed under similar terms and conditions to those in place under the prior agreement. The outstanding balance under the €6.0 million credit agreement was $3.2 million (€2.5 million) as of December 31, 2003.

The Company has a Euro-denominated term loan, with an outstanding balance of $2.9 million (€2.3 million). In addition, during 2003 the Company’s German operating subsidiary financed certain real estate assets purchased in 2002 with two term loans in a total amount of $2.4 million (€2.0 million) obtained from a local banking institution.

One of the Company’s French subsidiaries has a line of credit totaling $1.9 million (€1.5 million). This agreement, which has no fixed maturity date, had no amounts outstanding as of December 31, 2003.

Total outstanding debt consists of:

			December 31,
In thousands	Effective Rate	Maturity	2003				2002
Credit Agreement, revolving credit facility	3.19%	2005		$	6,000			$	13,800
Credit Agreement, 1999 term loan, collateralized by German subsidiary stock	4.45%	2004			2,909				7,284
Credit Agreement, 2003 term loan, collateralized by German subsidiary stock	3.69%	2007			11,320				—
Credit Agreement, Deutsche Bank as Agent, collateralized by certain fixed assets	5.40%	2007			3,155				4,830
Volksbank Meinerzhagen eG, collateralized by certain real estate	5.98%	2007			629				—
Volksbank Meinerzhagen eG, collateralized by certain real estate	5.95%	2013			1,814				—
City of Winston Salem NC, collateralized by certain fixed assets	4.00%	2010			150				—
					25,977				25,914
Less portion due within one year					(4,951	)			(9,686	)
Total long-term debt				$	21,026			$	16,228

F-11

As of December 31, 2003, total debt maturing in 2004, 2005, 2006, 2007 and 2008 was $4.9 million, $10.0 million, $4.0 million, $5.9 million and $.2 million, respectively. There was $1.0 million of debt outstanding that matures after 2008.

The weighted average interest rate on long-term debt, including the effect of interest rate swaps, was 3.9 percent for the year ended December 31, 2003 compared with 3.7 percent for 2002.

In conjunction with the plan to construct a new facility in St. Nazaire, France to manufacture engineered thermal/acoustical solutions for automotive applications, a wholly owned subsidiary of the Company entered into a financing agreement on December 18, 2003 that will provide a long term capital lease upon the facility’s completion in early 2004. The agreement, completed with the leasing subsidiaries of two French banks, calls for the Company to lease the facility for twelve years, and provides an option to purchase the facility at the end of the lease for a nominal amount. The cost to construct the facility is being funded by the leasing subsidiaries of the banks. The estimated present value of the capital lease obligation of the Company was $6.3 million (€5.0 million) as of December 31, 2003, and lease payments are expected to begin in the second quarter of 2004. In connection with this financing, the Company is required to pay interest, EONIA (Euro Overnight Index Average) plus one percentage point, on the amounts disbursed by the banks toward the construction of the facility in advance of the capital lease becoming effective. Additionally, the Company was required to hold cash in the amount of $2.5 million related to this agreement as of December 31, 2003. It is expected that such restricted cash will be released to the Company in the first quarter of 2004 upon the formalization of certain assurances by Lydall, Inc.

4. Property, Plant and Equipment

			December 31,
In thousands	Estimated Useful Lives		2003			2002
Land	—	$	1,878		$	1,782
Buildings and improvements	10-35 years		35,655			30,514
Machinery and equipment	5-25 years		99,353			92,467
Office equipment	2-8 years		30,364			28,227
Vehicles	3-6 years		529			557
			167,779			153,547
Accumulated depreciation			(84,242	)		(72,568	)
			83,537			80,979
Assets in progress			7,491			4,822
Total property, plant and equipment		$	91,028		$	85,801

For the years ended December 31, 2003 and 2001, the Company capitalized $.2 million of interest. The Company capitalized $.3 million of interest in 2002.

Depreciation expense was $13.1 million in 2003, $11.2 million in 2002, and $9.9 million in 2001.

5. Inventories

Inventories as of December 31, 2003 and 2002 were as follows:

		December 31,
In thousands		2003		2002
Raw materials	$	10,067	$	9,932
Work in process		16,103		11,021
Finished goods		11,163		11,058
Total inventories	$	37,333	$	32,011

F-12

Raw materials, work in process and finished goods inventories were net of valuation reserves of $1.4 million and $.8 million as of December 31, 2003 and 2002, respectively.

6. Goodwill and Intangible Assets

Effective January 1, 2002, the Company discontinued the amortization of goodwill in accordance with FAS 142. The following table presents reported results adjusted to exclude amounts no longer amortized:

		For the years ended December 31,
In thousands except per share data		2003		2002		2001
Net income — as reported	$	7,553	$	11,512	$	6,967
Goodwill amortization		—		—		1,252
Tax effect of deductible goodwill		—		—		(416	)
Net income — pro forma	$	7,553	$	11,512	$	7,803
Basic earnings per share:
Net income — as reported	$	0.47	$	0.72	$	0.43
Goodwill amortization, net of tax		—		—		0.06
Net income — pro forma	$	0.47	$	0.72	$	0.49
Diluted earnings per share:
Net income — as reported	$	0.47	$	0.71	$	0.43
Goodwill amortization, net of tax		—		—		0.05
Net income — pro forma	$	0.47	$	0.71	$	0.48

Goodwill was approximately $30.9 million as of December 31, 2003 and 2002, net of accumulated amortization of $7.1 million for both years. As of December 31, 2003 and 2002, $26.2 million of goodwill was allocated to the Thermal/Acoustical Segment. Goodwill of $4.7 million was allocated to the Filtration/Separation Segment at both December 31, 2003 and 2002. There were no impairments or dispositions of goodwill recorded during 2003 or 2002. Additional goodwill of approximately $1.1 million was recorded in the Thermal/Acoustical Segment during 2002 related to the Affinity Industries Inc. acquisition.

The table below presents the gross carrying amount and, as applicable, the accumulated amortization of the Company’s acquired intangible assets other than goodwill included in “Other assets, net” in the Consolidated Balance Sheets as of December 31, 2003 and 2002:

	December 31, 2003					December 31, 2002
In thousands	Gross Carrying Amount		Accumulated Amortization			Gross Carrying Amount		Accumulated Amortization
Amortized intangible assets:
Customer lists	$	180	($	133	)	$	1,995	($	1,888	)
License agreements		377		(122	)		377		(91	)
Patents		649		(264	)		608		(213	)
Non-compete agreements		145		(64	)		245		(135	)
Other		31		(5	)		329		(325	)
Total amortized intangible assets	$	1,382	($	588	)	$	3,554	($	2,652	)
Unamortized intangible assets:
Trademarks	$	450				$	450

F-13

Amortization of intangible assets for the year ended December 31, 2003 and 2002 was $.2 million for both years. The following table presents estimated amortization expense for intangible assets for each of the next five years:

In thousands	2004		2005		2006		2007		2008
Estimated amortization expense	$	200	$	150	$	100	$	100	$	100

7. Restructuring

As part of a strategic evaluation initiated in the fourth quarter of 2003, the Company decided to implement a plan to respond to the automotive market demands for increasingly faster, technologically advanced, cost-effective solutions. As a result of this decision, the Company determined that it would consolidate the operations of the Columbus, Ohio plant into other Lydall facilities. The consolidation of the automotive manufacturing operations supports long-term growth strategies for this business and positions the Company to more efficiently respond to current and projected market demands. In line with announced corporate organizational structure changes, the consolidation of the automotive business is expected to improve flexibility, lower costs and leverage overall capacity of existing facilities more effectively. The Company plans to initiate the process of transferring equipment and product lines by the end of the first quarter of 2004 and expects to complete these restructuring activities by the end of 2004. As a result of this plan, the Company recorded a pre-tax charge to cost of sales of approximately $.3 million for the acceleration of depreciation on certain assets during December 2003. Additionally, during December 2003 the Company recorded an after-tax charge of approximately $.5 million related to the write-off of deferred tax assets that are not expected to be realized as a result of the restructuring. The expected remaining pre-tax charges of approximately $4.6 million are comprised of severance and related costs of approximately $1.1 million, accelerated depreciation of approximately $2.1 million and facility exit and move costs of approximately $1.4 million. Approximately 90 percent of all restructuring costs are expected to be recorded in cost of sales and 10 percent are expected to be recorded in selling, product development and administrative expenses. Approximately 85 percent of restructuring costs are expected to be recorded in the Thermal/Acoustical Segment and 15 percent are expected to be recorded as Corporate Office expenses, which for segment reporting purposes are included under Reconciling Items. The remaining pre-tax charges described above are expected to be recorded or accrued throughout 2004, in accordance with the provisions of FASB Statement of Financial Accounting Standards No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.”

8. Acquisitions and Dispositions

Acquisitions

On October 19, 2001, the Company acquired for cash certain assets and assumed certain liabilities of Affinity Industries Inc. During 2002, additional goodwill of approximately $1.1 million was recorded related to this acquisition as certain contingencies contained in the agreement were resolved and final payment occurred.

Dispositions

In February 2001, the Company’s Board of Directors adopted a plan to discontinue the operations of the Paperboard Segment, consisting principally of the Southern Products and Lydall & Foulds operations. Accordingly, the operating results of this discontinued Segment were segregated from continuing operations and reported as discontinued operations for 2001.

During 2001, the disposition of the Paperboard Segment resulted in a gain, net of tax, of $.3 million, or $.02 per diluted share. The sale of the Southern Products operation resulted in a gain, net of tax, of $3.6 million, or $.23 per diluted share. The closing of the Lydall & Foulds operation resulted in a loss, net of tax, of $3.3 million, or $.21 per diluted share, representing operating losses incurred from the measurement date, an estimate of other exit costs to be incurred during the phase-out period and an adjustment to the net realizable value for certain assets.

In the fourth quarter of 2002, the Company recorded a pre-tax charge of approximately $.4 million, or $.01 per diluted share for additional costs incurred during the phase-out period. At December 31, 2002, Paperboard Segment net assets to be disposed of, consisting primarily of property, plant and equipment of the Lydall & Foulds operation, with a total net realizable value of approximately $1.0 million, were classified in the Consolidated Balance Sheet as “Net investment in discontinued operations.”

F-14

During the third quarter of 2003, the Company recorded a pre-tax charge of $1.3 million, or $.05 per diluted share for additional shutdown costs and the write-off of the remaining book value of assets of the previously discontinued Paperboard Segment.

9. Assets Held for Sale

In November 2000, the Company’s Board of Directors formalized a plan to dispose of the fiberboard operation. During 2001, the Company sold certain assets related to this operation and announced that the operation would close on June 1, 2001. As a result, the Company recorded a pre-tax charge of $3.4 million, or $.13 per diluted share for estimated closing costs, severance benefits and the impairment of remaining assets. During 2002, the Company paid all remaining liabilities previously accrued, sold certain assets and recorded an additional final non-cash charge of approximately $.3 million to write-off the remaining assets that could not be sold. For the year ended December 31, 2001 sales and loss from operations related to the fiberboard operation were $1.6 million and $.1 million, respectively.

10. Capital Stock

Preferred stock – The Company has authorized Serial Preferred Stock with a par value of $1.00. None of the 500,000 authorized shares have been issued.

Common stock – As of December 31, 2003, approximately 1,510 Lydall stockholders of record held 16,276,931 shares of Common Stock.

Stockholder rights plan – In the second quarter of 1999, the Company’s Board of Directors adopted a Stockholder Rights Plan by granting a dividend of one preferred share purchase right for each common share to stockholders of record at the close of business on June 30, 1999. Under certain conditions, each right entitles the holder to purchase one one-thousandth of a Series A Junior Participating Preferred Share. The rights cannot be exercised or transferred apart from the related common shares unless a person or group acquires 10 percent or more of the Company’s outstanding common shares. The rights will expire May 15, 2009 if they are not redeemed.

Earnings per share – The following table provides a reconciliation of income and shares used to determine basic and diluted earnings per share:

	For the Year Ended 2003				For the Year Ended 2002					For the Year Ended 2001
In thousands except per share data		Income From Continuing Operations	Average Shares	Per Share Amount		Income from Continuing Operations	Average Shares	Per Share Amount			Income from Continuing Operations	Average Shares	Per Share Amount
Basic earnings per share	$	8,372	16,105	$    .52	$	11,732	16,003	$    .73		$	7,069	15,899	$    .44
Effect of dilutive stock options		—	124	—		—	289	(.01	)		—	112	—
Diluted earnings per share	$	8,372	16,229	$    .52	$	11,732	16,292	$    .72		$	7,069	16,011	$    .44
	For the Year Ended 2003				For the Year Ended 2002					For the Year Ended 2001
In thousands except per share data	Net Income		Average Shares	Per Share Amount	Net Income		Average Shares	Per Share Amount		Net Income		Average Shares	Per Share Amount
Basic earnings per share	$	7,553	16,105	$    .47	$	11,512	16,003	$    .72		$	6,967	15,899	$    .43
Effect of dilutive stock options		—	124	—		—	289	(.01	)		—	112	—
Diluted earnings per share	$	7,553	16,229	$    .47	$	11,512	16,292	$    .71		$	6,967	16,011	$    .43

Options to purchase approximately 529,000, 457,000 and 609,000 shares of Common Stock were excluded from the 2003, 2002, and 2001 computations of diluted earnings per share, respectively, because the exercise price was greater than the average market price of the Common Stock.

F-15

11. Stock Option Plans

As of December 31, 2003, the Company had two stock option plans – the 1992 Stock Incentive Compensation Plan (1992 Plan) and the 2003 Stock Incentive Compensation Plan (2003 Plan), collectively, the “Plans” – under which employees and directors had options to purchase Common Stock. The 1992 Plan expired on May 13, 2002; therefore, no further options can be granted under this plan. However, the 1992 Plan shall continue to govern all outstanding awards under that plan until the awards themselves are exercised or terminate in accordance with their terms. Under these Plans options were/are granted at fair market value on the grant date and expire ten years after the grant date. In most cases, options vest at a rate of 25 percent per year starting with the first anniversary of the award. The Plans provide for automatic acceleration of vesting in the event of a change in control of the Company.

The Company applies APB Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations in accounting for its Plans. Accordingly, compensation cost is not recognized in the financial statements on the grant date or over the life of the stock options as the exercise price, set at the time of the grant, is not less than the fair market value per share at the date of grant. The effect on net income and earnings per share had compensation cost been recognized based on the fair value of the options at the grant dates for awards under those plans and the assumptions affecting the determination of fair value, consistent with Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation,” using the Black-Scholes fair value method for option pricing are detailed in Note 1 under “Stock options.”

The following is a summary of the status of the Company’s Plans as of December 31, 2003, 2002 and 2001 and changes during the years then ended:

In thousands except per share data	2003					2002					2001
Fixed Options	Shares			Weighted- Average Exercise Price		Shares			Weighted- Average Exercise Price		Shares
Outstanding at beginning of year		1,882		$	12.21		2,016		$	12.28		1,641
Granted		284			11.11		92			15.26		562
Exercised		(75	)		10.26		(97	)		9.76		(103	)
Forfeited/Cancelled		(551	)		11.61		(129	)		17.40		(84	)
Outstanding at end of year		1,540		$	12.31		1,882		$	12.21		2,016
Options exercisable at year-end		1,030					1,111					1,004
Shares reserved for grants		1,151					—					200
Weighted-average fair value per option granted during the year	$	6.05				$	9.60				$	6.19

For 2001, the weighted-average exercise price for options outstanding at the beginning and end of the year was $12.95 and $12.28, respectively. Options with weighted-average exercise prices of $9.84, $8.86 and $13.20 were granted, exercised and forfeited in 2001, respectively.

The following table summarizes information about stock options outstanding at December 31, 2003:

	Options Outstanding				Options Exercisable
Range of Exercise Prices	Number Outstanding (in thousands)	Weighted- Average Remaining Contractual Life (in years)		Weighted- Average Exercise Price	Number Exercisable (in thousands)		Weighted- Average Exercise Price
$ 6.50 — $10.08	804	6.4	$	9.26	528	$	9.12
10.38 — 11.75	338	7.4		11.21	152		10.94
13.13 — 19.81	269	3.5		16.99	221		17.37
22.63 — 26.00	129	1.7		24.46	129		24.46
$ 6.50 — $26.00	1,540	5.7	$	12.31	1,030	$	13.08

F-16

The Company granted 104,400 shares of restricted stock awards during 2003. The weighted average fair value per share of restricted stock granted in 2003 was $11.22. There were no restricted stock awards granted in 2002 or 2001.

12. Employer Sponsored Benefit Plans

As of December 31, 2003, the Company maintains three defined benefit pension plans that cover the majority of domestic Lydall employees. The pension plans are noncontributory and benefits are based on either years of service or eligible compensation paid while a participant is in a plan. The Company’s funding policy is to fund not less than the ERISA minimum funding standard and not more than the maximum amount that can be deducted for federal income tax purposes.

The Company uses a December 31^st measurement date for all of its pension plans.

		December 31,
In thousands		2003			2002
Change in benefit obligation:
Net benefit obligation at beginning of year	$	28,908		$	24,909
Service cost		1,382			1,167
Interest cost		2,015			1,887
Actuarial loss		2,502			2,567
Gross benefits paid		(1,166	)		(1,622	)
Net benefit obligation at end of year	$	33,641		$	28,908

	December 31,
In thousands	2003			2002
Change in plan assets:
Fair value of plan assets at beginning of year	$18,959		$	17,324
Actual return on plan assets	3,074			(2,618	)
Contributions	5,754			5,875
Gross benefits paid	(1,166	)		(1,622	)
Fair value of plan assets at end of year	$26,621		$	18,959
Funded status at end of year	($  7,020	)	($	9,949	)
Unrecognized net actuarial loss	11,740			11,315
Unrecognized prior service cost	111			112
Unrecognized net transition asset	—			(17	)
Net amount recognized	$  4,831		$	1,461
Amounts recognized in the consolidated balance sheets consist of:
Additional minimum liability	($  4,099	)	($	7,238	)
Intangible assets	199			216
Accumulated other comprehensive income	8,731			8,483
Net amount recognized	$  4,831		$	1,461

The accumulated benefit obligation for all defined benefit plans was $30.7 million and $26.2 million as of December 31, 2003 and 2002, respectively.

During 2003 and 2002 the Company contributed $5.8 million and $5.9 million, respectively, to its defined benefit pension plans.

The increase in the minimum pension liability (net of tax) included in comprehensive income was $.2 million and $3.9 million for the years ended December 31, 2003 and 2002, respectively.

F-17

Aggregated information for pension plans with an accumulated benefit obligation in excess of plan assets is provided in the table below:

		December 31,
		2003		2002
Projected benefit obligation	$	33,641	$	28,908
Accumulated benefit obligation	$	30,720	$	26,197
Fair value of plan assets	$	26,621	$	18,959

Components of net periodic benefit cost:

		For the years ended December 31,
In thousands		2003			2002			2001
Service cost	$	1,382		$	1,167		$	1,093
Interest cost		2,015			1,887			1,780
Expected return on plan assets		(1,679	)		(1,649	)		(1,837	)
Amortization of:
Transition asset		(17	)		(100	)		(100	)
Prior service cost		1			2			3
Unrecognized actuarial loss		682			227			10
Curtailment charges		—			—			139
Total net periodic benefit cost	$	2,384		$	1,534		$	1,088

The major assumptions used in determining the benefit obligation and net cost for pension plans are presented in the following table:

	Benefit Obligation		Net Cost
For the years ended December 31,	2003	2002	2003	2002	2001
Discount rate	6.25%	6.75%	6.75%	7.25%	7.50%
Salary scale	3.5% - 4.0%	3.5% - 4.5%	3.5% - 4.5%	3.5% - 4.5%	5.00%
Expected return on plan assets	—	—	8.75%	9.25%	9.25%

In determining the expected return on plan assets, the Company considers the relative weighting of plan assets, the historical performance of marketable debt and equity securities and economic and other indicators of future performance.

Investment management objectives include maintaining an adequate level of diversification to balance market risk and to provide sufficient liquidity for near-term payments of benefits accrued under the plan and to pay the expenses of administration.

The following table presents the target allocation of pension plan assets for 2004 and the actual allocation of plan assets as of December 31, 2003 and 2002 by major asset category:

	Target Allocation	Actual Allocation of Plan Assets December 31,
Asset Category	2004	2003	2002
Equity securities	40% - 75%	64%	50%
Debt securities	20% - 60%	31%	33%
Cash and cash equivalents	0% - 5%	5%	17%

The actual asset allocation for 2002 in comparison to the target allocation differed due to the timing of a significant contribution made in December 2002, which was subsequently invested in accordance with the investment policy.

F-18

Estimated Future Contributions and Benefit Payments

The Company expects to contribute approximately $1.7 million in cash to its defined benefit pension plans in 2004.

Estimated future benefit payments for the next 10 years are as follows:

In thousands	2004		2005		2006		2007		2008		2009-2013
Benefit payments	$	1,109	$	1,146	$	1,233	$	1,276	$	1,483	$	9,554

The Company also sponsors an Employee Stock Purchase Plan and 401(k) Plan. Employer contributions to these plans amounted to $1.4 million in 2003, $1.3 million in 2002 and $1.0 million in 2001.

13. Postemployment, Postretirement and Deferred Compensation

The Company maintains a defined benefit postretirement plan covering a limited number of retired and hourly employees. The plan provides health care benefits to certain groups of retired employees and postretirement life insurance benefits to certain hourly employees. The amount of expense reflected in the Company’s results of operations for these benefits was less than $.1 million for each of the last three years.

The Company has a deferred compensation plan, which was frozen as of December 31, 1996, that provides certain of the Company’s outside directors with compensation upon their retirement from service with the Board. In addition, the Company provides a Supplemental Executive Retirement Plan (SERP) that provides supplemental income payments after retirement to certain senior executives. The total expense related to the SERP plan was approximately $.2 million in 2003, 2002 and 2001.

14. Segment Information

Lydall’s reportable segments are: Thermal/Acoustical and Filtration/Separation. All other products are aggregated in Other Products and Services. Reconciling Items include Corporate Office operating expenses and intercompany eliminations. In February 2001, the Company discontinued the Paperboard Segment. This segment consisted primarily of the Company’s Southern Products and Lydall & Foulds operations. The results of the Paperboard Segment have been excluded from continuing operations for all years presented.

Lydall evaluates performance and allocates resources based on net sales and operating income. Net sales by segment reported below include intercompany transactions. Operating income is calculated using specific cost identification for most items, with certain allocations of overhead, based on sales volume.

Thermal/Acoustical

The Thermal/Acoustical Segment includes thermal and acoustical barriers, temperature-control units and insulating products that control and insulate within temperature environments ranging from -459°F (-237°C) to +3000°F (+1649°C).

Filtration/Separation

The Filtration/Separation Segment includes air and liquid filtration products for industrial and consumer applications, as well as vital fluids management systems for medical and biopharmaceutical applications.

Other Products and Services

The largest component of Other Products and Services is Lydall’s transport, distribution and warehousing business. This business specializes in time-sensitive shipments and has an in-depth understanding of the special nature and requirements of the paper and printing industries. Other Products and Services also include electrical insulation and assorted specialty products.

F-19

The table below presents net sales and operating income by segment as used by the Chief Executive Officer of the Company for the years ended December 31, 2003, 2002 and 2001 and also a reconciliation of total segment net sales and operating income to total consolidated net sales and operating income for the years ended December 31, 2003, 2002 and 2001.

In thousands for the years ended	Thermal/ Acoustical		Filtration/ Separation		Other Products and Services			Total Segments		Reconciling Items			Consolidated Totals
December 31, 2003
Net sales	$	168,444	$	74,851	$	29,817		$	273,112	($	1,727	)	$	271,385
Operating income		19,547		8,675		2,033			30,255		(16,645	)		13,610
December 31, 2002
Net sales	$	150,440	$	72,776	$	32,175		$	255,391	($	1,869	)	$	253,522
Operating income		20,449		10,597		2,187			33,233		(15,146	)		18,087
December 31, 2001
Net sales	$	125,741	$	66,638	$	33,260		$	225,639	($	2,080	)	$	223,559
Operating income (loss)		18,427		7,256		(431	)		25,252		(13,758	)		11,494

Asset information by reportable segment is not reported since the Chief Executive Officer does not use such information internally.

Net sales and long-lived asset information by geographic area as of and for the years ended December 31, 2003, 2002 and 2001 are as follows:

		Net Sales							Long-Lived Assets
In thousands		2003		2002		2001		2003			2002		2001
United States	$	203,747	$	200,556	$	182,850	$	100,720		$	101,597	$	98,612
France		21,302		17,625		15,342		13,676			8,714		6,770
Germany		46,336		35,341		25,367		18,767			14,787		10,195
Total	$	271,385	$	253,522	$	223,559	$	133,163		$	125,098	$	115,577

Foreign sales are based on the country in which the sales originated (i.e., where the legal entity is domiciled).

For 2003, 2002 and 2001, Lydall had two significant customers, which individually comprise greater than 10 percent of consolidated net sales, Ford Motor Company and DaimlerChrysler AG. Sales to Ford Motor Company in 2003, 2002 and 2001 were $45.1 million, $45.3 million and $34.3 million, respectively. Sales to DaimlerChrysler AG in 2003, 2002 and 2001 were $29.1 million, $32.9 million and $22.7 million, respectively. These sales were reported in the Thermal/Acoustical Segment.

F-20

15. Income Taxes

The provision for income taxes from continuing operations consists of the following:

		For the years ended December 31,
In thousands		2003			2002			2001
Current:
Federal	$	1,296		$	—		$	548
State		434			246			519
Foreign		283			201			388
Total current		2,013			447			1,455
Deferred:
Federal		13,820			5,002			2,003
State		1,112			229			(327	)
Foreign		(12,558	)		(7	)		(120	)
Total deferred		2,374			5,224			1,556
Provision for income taxes	$	4,387		$	5,671		$	3,011

The following is a reconciliation of the difference between the actual provision for income taxes from continuing operations and the provision computed by applying the federal statutory tax rate on earnings:

	For the years ended December 31,
In thousands	2003		2002		2001
Statutory federal income tax rate	34.0	%	34.0	%	34.0	%
State income taxes, net of federal tax deduction	1.4		0.7		0.9
Exempt export and foreign income	(2.2	)	(3.3	)	(6.0	)
Net benefit of recognition of foreign deferred tax assets	(6.2	)	—		—
Valuation allowance for domestic net operating losses and tax credits	6.4		—		—
Other and tax exempt income	1.0		1.2		1.0
Effective income tax rate	34.4	%	32.6	%	29.9	%

During 2003, the Company reversed a valuation allowance against foreign deferred tax assets as management expects that the assets, primarily net operating losses, will more likely than not be recognized. Upon recognition of the deferred tax assets in the foreign jurisdiction, the Company was required to record a domestic deferred tax liability to offset those same foreign assets as the foreign operation is treated as a disregarded entity for U.S. tax purposes. The benefit, calculated as the difference in the effective rate in the foreign jurisdiction and the effective rate in the U.S., has been reported as a net benefit at the end of 2003.

Management has provided a valuation allowance at the end of 2003 for certain state net operating loss carryforwards and tax credits primarily associated with the Columbus, Ohio plant. The benefits associated with the net operating losses and credits may not be fully utilized prior to the consolidation of the Columbus operation into other facilities. Additionally, there are other domestic state net operating loss carryforwards and tax credits that management has determined may not be utilized before their expiration. These valuation allowances have been included as a component of 2003 tax expense.

The Internal Revenue Service completed its examination of the Company’s 1999, 1998, and 1997 federal income tax returns during 2003, 2002, and 2001, respectively. The 2002 and 2001 effective tax rates include benefits from the settlements of these examinations; there was no impact on the 2003 effective rate. Excluding these settlements, the effective tax rates on income from continuing operations for 2002 and 2001 were 35.0 percent and 35.5 percent, respectively. The Company is not currently under examination by the IRS.

F-21

The following schedule presents net current and net long-term deferred tax assets and liabilities by tax jurisdiction as of December 31, 2003 and 2002:

		2003					2002
	Deferred Tax Assets/(Liabilities)					Deferred Tax Assets/(Liabilities)
In thousands	Current		Long-term			Current		Long-term
Federal	$	1,230	($	20,492	)	$	2,338	($	8,189	)
State		332		(1,640	)		573		(828	)
Foreign		1,626		9,620			79		(1,391	)
Totals	$	3,188	($	12,512	)	$	2,990	($	10,408	)

		December 31,
In thousands		2003		2002
Deferred tax assets:
Accounts receivable	$	213	$	326
Discontinued operations		731		546
Imputed interest expense		5,568		—
Inventories		884		963
Net operating loss carryforwards		9,423		10,998
Other accrued liabilities		1,080		1,156
Pension		2,720		4,803
Tax credits		835		831
Other, net		923		400
Total deferred tax assets		22,377		20,023
Deferred tax liabilities:
Domestic liability of foreign assets		11,703		—
Intangible assets		2,932		2,282
Property, plant and equipment		16,245		17,833
Total deferred tax liabilities		30,880		20,115
Valuation allowance		821		7,326
Net deferred tax liabilities	$	9,324	$	7,418

In connection with the filing of the German subsidiary’s prior years’ tax returns in 2003, such subsidiary’s December 31, 2002 deferred tax assets, liabilities and valuation allowance were adjusted. This adjustment, recorded in 2003, was to increase deferred tax assets by approximately $4.0 million, primarily related to the subsidiary’s 2000 net operating loss carryforward. Such increase was entirely offset by a valuation allowance of the same amount. The ultimate reversal of the subsidiary’s valuation allowance resulted in the requirement to record a domestic deferred tax liability, as discussed above.

For the years ended December 31, 2003, 2002 and 2001, income from continuing operations before income taxes was derived from the following sources:

		For the years ended December 31,
In thousands		2003		2002		2001
United States	$	9,395	$	13,713	$	7,404
Foreign		3,364		3,690		2,676
Total income from continuing operations before income taxes	$	12,759	$	17,403	$	10,080

At December 31, 2003, the Company has approximately $1.7 million and $5.8 million of federal regular and alternative minimum tax net operating loss carryforwards, respectively, approximately $20.5 million of foreign net operating loss carryforwards and approximately $11.7 million of state net operating loss carryforwards. The federal net operating loss carryforwards expire in 2020

F-22

and the state net operating loss carryforwards expire between 2014 and 2020. The majority of the foreign net operating loss carryforwards have no expiration. The Company has provided a valuation reserve against $4.2 million of state net operating losses relating to the consolidation of the Columbus, Ohio plant.

In addition, the Company has $.2 million and $1.0 million of federal and state tax credit carryforwards, respectively. The Company provided a valuation reserve against $.6 million of state income tax credits of which $.3 million related to the consolidation of the Columbus, Ohio plant.

16. Commitments and Contingencies

Leases

The Company has operating leases that resulted in an expense of $4.5 million in 2003, $3.8 million in 2002 and $2.9 million in 2001. These contracts include building, office equipment, vehicle and machinery leases, which require payment of property taxes, insurance, repairs and other operating costs.

In December 2003, the Company entered into an agreement to lease the land and building of the St. Nazaire operating facility in France. Capital lease payments are expected to begin in the second quarter of 2004. The facility is currently being constructed and the Company made certain payments during 2003 related to the building, which were recorded in “Other assets, net” as of December 31, 2003. Such payments were reimbursed to the Company in 2004. As of December 31, 2003, the estimated annual future lease payments under this capital lease are $.5 million for 2004, $.7 million for 2005 through 2008 and $5.0 million thereafter. Total imputed interest included in the estimated capital lease payments is approximately $2.0 million.

Approximate future minimum lease payments under noncancelable operating leases are:

		Payments Due by Period
In thousands		2004		2005		2006		2007		2008		Thereafter		Total
Operating lease payments	$	3,967	$	3,436	$	2,622	$	1,991	$	1,465	$	2,540	$	16,021

Environmental and Other Contingencies

The Company is, from time to time, subject to various legal actions, governmental audits and proceedings relating to various matters incidental to its business including product liability and environmental claims. While the outcome of such matters cannot be predicted with certainty, management, after reviewing such matters and consulting with the Company’s internal and external counsel and considering any applicable insurance or indemnification, does not expect any liability that may ultimately be incurred will materially affect the consolidated financial position, results of operations or cash flows of the Company.

17. Comprehensive Income (Loss)

The following table discloses the balance by classification within accumulated other comprehensive loss:

In thousands	Foreign Currency Translation Adjustment		Unrealized Gain (Loss) on Derivative Instrument		Minimum Pension Liability Adjustment		Accumulated Other Comprehensive (Loss) Income
Balance at January 1, 2001	($6,515	)	$  —		($    285	)	($	6,800	)
Change year-to-date	(155	)	18		(1,116	)		(1,253	)
Balance at December 31, 2001	(6,670	)	18		(1,401	)		(8,053	)
Change year-to-date	2,790		(49	)	(3,858	)		(1,117	)
Balance at December 31, 2002	(3,880	)	(31	)	(5,259	)		(9,170	)
Change year-to-date	4,613		(8	)	(153	)		4,452
Balance at December 31, 2003	$   733		($  39	)	($5,412	)	($	4,718	)

F-23

18. Quarterly Financial Information (Unaudited)

The following table summarizes quarterly financial results for 2003 and 2002. In management’s opinion, all adjustments necessary to present fairly the information for such quarters have been reflected.

		1st Quarter					2nd Quarter						3rd Quarter						4th Quarter
In thousands except per share data		2003		2002		2003			2002		2003				2002		2003		2002
Net sales	$	70,367	$	59,685	$	74,082		$	66,259	$	63,825			$	62,721	$	63,111	$	64,857
Gross margin		17,187		16,374		19,327			18,463		14,935				16,216		12,694		14,183
Income from continuing operations		2,114		3,099		4,130			3,774		1,903				3,266		225		1,593
Loss from discontinued operations		—		—		—			—		(819	)			—		—		(220	)
Net income	$	2,114	$	3,099	$	4,130		$	3,774	$	1,084			$	3,266	$	225	$	1,373
Basic earnings per share:
Continuing operations	$	.13	$	.19	$	.26		$	.24	$	.12			$	.20	$	.01	$	.10
Discontinued operations		—		—		—			—		(.05	)			—		—		(.01	)
Net income	$	.13	$	.19	$	.26		$	.24	$	.07			$	.20	$	.01	$	.09
Diluted earnings per share:
Continuing operations	$	.13	$	.19	$	.26		$	.23	$	.12			$	.20	$	.01	$	.10
Discontinued operations		—		—		—			—		(.05	)			—		—		(.01	)
Net income	$	.13	$	.19	$	.26		$	.23	$	.07			$	.20	$	.01	$	.09

F-24

Schedule II

LYDALL, INC.

VALUATION AND QUALIFYING ACCOUNTS

FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001

				Additions
In thousands		Balance at January 1,		Charged to Costs and Expenses		Charged to Other Accounts		Deductions			Balance at December 31,
2003
Allowance for doubtful receivables	$	703	$	211	$	532	($	348	)1	$	619
Inventory valuation reserves		808		860		362		(329	)3		1,375
Reserve for future tax benefits		7,326		4,862		—		(11,367	)5		821
2002
Allowance for doubtful receivables	$	859	$	80	$	642	($	300	)1	$	703
Inventory valuation reserves		582		409		202		(203	)3		808
Reserve for future tax benefits		7,228		—		1,2852		(1,187	)4		7,326
2001
Allowance for doubtful receivables	$	644	$	345	$	—	($	130	)1,2	$	859
Inventory valuation reserves		293		878		—		(589	)3		582
Reserve for future tax benefits		13,882		—		—		(6,654	)4,6		7,228

¹ Uncollected receivables written off.

² Record foreign currency translation adjustments.

³ Write-off of obsolete inventory in 2003, 2002 and 2001 and adjustments to valuation reserves in 2003.

⁴ Reduction to income tax expense of $1.2 million and $.7 million for 2002 and 2001, respectively.

⁵ The Company reversed a valuation allowance of $7.3 million against foreign deferred tax assets as management expects that the assets, primarily net operating losses, will more likely than not be recognized. Upon recognition of the deferred tax assets in the foreign jurisdiction, the Company was required to record a domestic deferred tax liability to offset those same foreign assets as the Company treats the foreign operation as a disregarded entity for U.S. tax purposes. The benefit, calculated as the difference in the effective rate in the foreign jurisdiction and the effective rate in the U.S., has been reported as a net benefit at the end of the tax year. In connection with the filing of the German subsidiary’s prior years’ tax returns in 2003, such subsidiary’s December 31, 2002 deferred tax assets, liabilities and valuation allowance were adjusted. This adjustment, recorded in 2003, was to increase deferred tax assets by approximately $4.0 million, primarily related to the subsidiary’s 2000 net operating loss carryforward. Such increase was entirely offset by a valuation allowance of the same amount. The ultimate reversal of the subsidiary’s valuation allowance resulted in the requirement to record a domestic deferred tax liability, as discussed above.

⁶ Reduction to deferred tax assets related to rate reduction and other adjustments.

S-1

LYDALL OFFICERS, DIRECTORS

AND

STOCKHOLDER INFORMATION

Officers David Freeman President and Chief Executive Officer Christopher R. Skomorowski Executive Vice President and Chief Operating Officer Thomas P. Smith Vice President – Controller and Interim Chief Financial Officer Mona G. Estey Vice President – Human Resources Mary A. Tremblay Vice President, General Counsel and Secretary Subsidiary Officers Bill W. Franks, Jr. President Lydall Transport Lisa Krallis-Nixon Vice President, General Manager, Charter Medical James M. Posa Vice President, General Manager, Lydall Filtration/Separation Bertrand Ploquin Managing Director – Lydall Gerhardi and President, Lydall Thermique/Acoustique John F. Tattersall Vice President, General Manager, Lydall Industrial Thermal Solutions Board of Directors Roger M. Widmann ² Chairman of the Board Lydall, Inc. Senior Advisor Tanner & Co., Inc. Kathleen Burdett ³ Former Vice President and Chief Financial Officer Dexter Corporation Samuel P. Cooley ^{1, 3} Retired Executive Vice President and Senior Credit Approval Officer FleetBoston Financial W. Leslie Duffy, Esq. ^{1, 2} Partner Cahill Gordon & Reindel, LLP Matthew T. Farrell ³ Executive Vice President and Chief Financial Officer Alpharma Inc. David Freeman President and Chief Executive Officer Lydall, Inc. Suzanne Hammett ^{2, 3} Former Executive Vice President for J.P. Morgan Chase & Co. Christopher R. Skomorowski Executive Vice President and Chief Operating Officer Lydall, Inc. S. Carl Soderstrom, Jr. ^{1, 3} Senior Vice President and Chief Financial Officer ArvinMeritor, Inc. Elliott F. Whitely ¹ Retired Division President Lydall Technical Papers ¹ Corporate Governance Committee ² Compensation and Stock Option Committee ³ Audit Review Committee Annual Meeting Lydall’s annual meeting will be held on Thursday, April 22, 2004 at 11:00 a.m. in The Autorino Great Hall at The Bushnell Center for the Performing Arts, 166 Capitol Avenue, Hartford, Connecticut. Stockholders who are unable to attend the meeting are invited to mail any questions they might have about the Company to any of Lydall’s Officers. Questions may also be directed to the Audit Review Committee, in care of Lydall, Inc. Transfer Agent American Stock Transfer & Trust Company New York, New York Auditors PricewaterhouseCoopers LLP Hartford, Connecticut Stockholder Information Lydall Common Stock is traded on the New York Stock Exchange under the symbol LDL. During 2003 and 2002, 6,413,600 and 5,346,200 shares, respectively, were traded. The closing price on December 31, 2003 was $10.19. As of February 26, 2004, the record date of Lydall’s 2004 Annual Meeting, 1,586 Stockholders of Record held 16,226,443 shares of Common Stock. Any stockholder correspondence regarding change of address or other recordkeeping matters may be addressed to: Isaac Kagan American Stock Transfer & Trust Company 59 Maiden Lane New York, New York 10038 Telephone: 800-937-5449 All other stockholder correspondence — questions about the Company and requests for Lydall’s Annual Report and Form 10-K — may be directed to: Investor Relations Department Lydall, Inc. P.O. Box 151 Manchester, Connecticut 06045-0151 www.lydall.com investor@lydall.com Toll-free Investor Information Service 877-LDL-NYSE (535-6973) Lydall hires and promotes qualified employees in accordance with the law without regard to race, color, religion, creed, marital status, sexual orientation, gender (including pregnancy), national origin or place of birth, ancestry, age, genetic predisposition, genetic carrier disposition and disabilities, except where, in management’s view, a disability interferes with job performance or cannot be reasonably accommodated.

EX-3.1.I

Exhibit 3.1.i

RESTATED CERTIFICATE OF INCORPORATION OF LYDALL, INC.

The original Certificate of Incorporation of the Corporation was filed with the Secretary of State of the State of Delaware on August 26, 1987.

Article 1. The name of the corporation is Lydall, Inc. and is sometimes hereinafter referred to as the “Company.”

Article 2. The address of the Company’s registered office in the State of Delaware is Corporation Trust Center, 1209 Orange Street in the City of Wilmington, County of New Castle and the name of the Company’s registered agent at such address is The Corporation Trust Company.

Article 3. The nature of the business to be transacted and the purposes to be promoted or carried out by the Company are as follows:

To do a general manufacturing business and to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware.

Article 4. The designation of each class of stock, the authorized number of shares of each such class, and the par value of each share thereof, are as follows:

Designation	Authorized Number of Shares	Par Value
Common Stock	15,000,000	$  .10
Preferred Stock	500,000	$1.00

Article 5. The terms, limitations and relative rights and preferences of each class of shares and series thereof and an express grant of authority to the Board of Directors pursuant to Section 151 of the General Corporation Law of Delaware are as follows:

1

a) The holders of the Common Stock shall each be entitled to one vote per share.

b) The Board of Directors is authorized, subject to any limitations prescribed by law, to provide for the issuance of the shares of Preferred Stock in series, and by filing a certificate pursuant to the applicable law of the State of Delaware, to establish from time to time the number of shares to be included in each such series, and to fix the designation, powers, preferences and rights of the shares of each such series and any qualifications, limitations or restrictions thereof. The number of authorized shares of Preferred Stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the Common Stock, without a vote of the holders of the Preferred Stock, or of any series thereof, unless a vote of any such holders is required pursuant to the certificate or certificates establishing the series of Preferred Stock.

Article 6.

a) The Board of Directors shall consist of not less than three (3) nor more than fifteen (15) Directorships; the exact number of such Directorships to be determined by resolution of the Board of Directors. Each Director shall be elected for a term of one (1) year or until the first annual meeting thereafter and until another shall be elected in his stead. In the event the number of members of the Board is increased, the newly created directorships shall be filled by a vote of the holders of a majority of the shares of the capital stock entitled to vote in elections of Directors.

b) The affirmative vote of the holders of two-thirds (2/3) of the voting power of all classes of stock entitled to vote in elections of Directors, voting together as a single class, with each share of Common Stock having one vote and other shares having the number of votes to which such shares are entitled, shall be required for the removal, with or without cause, by stockholders, of any Director from the Board of Directors. Such affirmative vote or consent of the stockholders shall be in addition to the vote or consent of the holders of stock of the Company otherwise required by law or any agreement between the Company and any national securities exchange.

2

Article 7. Notwithstanding any other provisions of this Certificate of Incorporation or the By-Laws of the Company (and notwithstanding that a lesser percentage may be specified by law or the By-Laws of the Company), no provision of this Certificate of Incorporation shall be repealed or amended in any respect, nor shall any new provision be added to this Certificate of Incorporation unless such action is approved by the affirmative vote of the holders of not less than two-thirds (2/3) of the voting power of all classes of stock entitled to vote in elections of Directors, voting together as a single class with each share of Common Stock having one vote and other shares having the number of votes to which such shares are entitled.

Article 8. A Director of the Company shall not be personally liable to the Company or its stockholders for monetary damages for breach of fiduciary duty as a Director, except for liability (i) for any breach of the Director’s duty of loyalty to the Company or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the Director derived any improper personal benefit. If the Delaware General Corporation Law is amended after approval by the stockholders of this article to authorize corporate action further eliminating or limiting the personal liability of Directors, then the liability of a Director of the Company shall be eliminated or limited to the fullest extent permitted by the Delaware General Corporation Law, as so amended.

Any repeal or modification of the foregoing paragraph by the stockholders of the Company shall not adversely affect any right or protection of a Director of the Company existing at the time of such repeal or modification.

Article 9.

a) Each person who was or is made a party or is threatened to be made a party to or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a “proceeding”), by reason of the fact that he or she is or was a Director, officer, employee or agent of the Company or is or was serving at the request of the Company as a Director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to an employee benefit plan (hereinafter an “indemnitee”), whether the basis of such proceeding is alleged action in an official capacity as a Director, officer, employee or agent or in any other capacity where serving as a Director,

3

officer, employee or agent, shall be indemnified and held harmless by the Company to the fullest extent authorized by the Delaware General Corporation Law, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Company to provide broader indemnification rights than permitted prior thereto), against all expense, liability and loss (including attorneys’ fees, judgments, fines, ERISA excise taxes or penalties and amounts paid in settlement) reasonably incurred or suffered by such indemnitee in connection therewith and such indemnification shall continue as to an indemnitee who has ceased to be a Director, officer, employee, or agent and shall inure to the benefit of the indemnitee’s heirs, executors and administrators; provided, however, that, except as provided in paragraph (b) hereof with respect to proceedings to enforce rights to indemnification, the Company shall indemnify any such indemnitee in connection with a proceeding (or part thereof) initiated by such indemnitee only if such proceeding (or part thereof) was authorized by the Board of Directors of the Company. The right to indemnification conferred in this Article shall be a contract right and shall include the right to be paid by the Company the expenses incurred in defending any such proceeding in advance of its final disposition (hereinafter an “advancement of expenses”); provided, however, that, if the Delaware General Corporation Law requires, an advancement of expenses incurred by an indemnitee in his or her capacity as a Director or officer (and not in any other capacity in which service was or is rendered by such indemnitee, including, without limitation, service to an employee benefit plan) shall be made only upon delivery to the Company of an undertaking (hereinafter an “undertaking”), by or on behalf of such indemnitee, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no further right to appeal. (Hereinafter a “final adjudication”) that such indemnitee is not entitled to be indemnified for such expenses under this Article or otherwise.

b) If a claim under paragraph (a) of this Article is not paid in full by the Company within sixty days after a written claim has been received by the Company, except in the case of a claim for an advancement of expenses, in which case the applicable period shall be twenty days, the indemnitee may at any time thereafter bring suit against the Company to recover the unpaid amount of the claim. If successful in whole or in part in any such suit, or in a suit brought by the Company to recover an advancement of expenses pursuant to the terms of an undertaking, the indemnitee shall be entitled to be paid also the expense of prosecuting or defending such suit. In (i) any suit brought by the indemnitee to enforce a

4

right to indemnification hereunder (but not in a suit brought by the indemnitee to enforce a right to an advancement of expenses) it shall be a defense that, and (ii) in any suit by the Company to recover an advancement of expenses pursuant to the terms of an undertaking the Company shall be entitled to recover such expenses upon a final adjudication that, the indemnitee has not met the applicable standard of conduct set forth in the Delaware General Corporation Law. Neither the failure of the Company (including its Board of Directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such suit that indemnification of the indemnitee is proper in the circumstances because the indemnitee has met the applicable standard of conduct set forth in the Delaware General Corporation Law, nor an actual determination by the Company (including its Board of Directors, independent legal counsel, or its stockholders) that the indemnitee has not met such applicable standard of conduct, shall create a presumption that the indemnitee has not met the applicable standard of conduct or, in the case of such a suit brought by the indemnitee, be a defense to such suit. In any suit brought by the indemnitee to enforce a right to indemnification or to any advancement of expenses hereunder, or by the Company to recover an advancement of expenses pursuant to the terms of an undertaking, the burden of proving that the indemnitee is not entitled to be indemnified, or to such advancement of expenses, under this Article or otherwise shall be on the Company.

c) The rights to indemnification and to the advancement of expenses conferred in this Article shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, this certificate of incorporation, by-law, agreement, vote of stockholders of disinterested Directors or otherwise.

d) The Company may maintain insurance, at its expense, to protect itself and any Director, officer, employee or agent of the Company or another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not the Company would have the power to indemnify such person against such person against such expense, liability or loss under the Delaware General Corporation Law.

5

IN WITNESS WHEREOF, this Restated Certificate of Incorporation which restates and integrates and further amends the provisions of the Corporation’s Certificate of Incorporation, having been duly adopted in accordance with the provisions of Sections 242 and 245 of the Delaware General Corporation Law has been signed by Leonard R. Jaskol, its Chairman and Chief Executive Officer, and attested by Mary Adamwoicz, its Secretary, this 12^th day of May, 1993.

ATTEST:	LYDALL, INC.
/s/    MARY ADAMOWICZ	/s/    LEONARD R. JASKOL
Mary Adamowicz	Leonard R. Jaskol
Secretary	Chairman and Chief Executive Officer

6

EX-3.1.II

Exhibit 3.1.ii

CERTIFICATE OF AMENDMENT

OF

RESTATED CERTIFICATE OF INCORPORATION

OF

LYDALL, INC.

Lydall, Inc., a corporation organized and existing under the General Corporation Law of the State of Delaware (the “Corporation”), does hereby certify that:

The amendment to the Corporation’s Restated Certificate of Incorporation set forth in the following resolution approved by the Corporation’s Board of Directors and stockholders was duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware:

RESOLVED: That Article 4 of the Restated Certificate of Incorporation of this Corporation be amended to read as follows, in its entirety:

Article 4. The designation of each class of stock, the authorized number of shares of each such class, and the par value of each share thereof, are as follows:

Designation	Authorized Number of Shares	Par Value
Common Stock	30,000,000	$  .10
Preferred Stock	500,000	$1.00

IN WITNESS WHEREOF, Lydall, Inc. has caused this Certificate to be signed and attested by its duly authorized officers this 14^th day of August, 1995.

ATTEST:	LYDALL, INC
/s/    MARY ADAMOWICZ	By:	/s/    CAROLE F. BUTENAS
Mary Adamowicz Secretary		Carole F. Butenas Vice President

1

EX-3.1.III

Exhibit 3.1.iii

Series A Junior Participating Preferred Stock

(Liquidation Preference $1.00 Per Share)

CERTIFICATE OF DESIGNATION

LYDALL, INC.

Certificate of Designation of Board of Directors Classifying

and Designating a Series of Preferred Stock as

Series A Junior Participating Preferred Stock

and Fixing Distribution and

Other Preferences and Rights of Such Series

Dated as of May 20, 1999

1

LYDALL, INC.

Certificate of Designation of Board of Directors Classifying

and Designating a Series of Preferred Stock as

Series A Junior Participating Preferred Stock

and Fixing Distribution and

Other Preferences and Rights of Such Series

Lydall, Inc., a Delaware corporation, having its principal office in the State of Connecticut in the City of Manchester (the “Company”), hereby certifies that:

Pursuant to authority conferred upon the Board of Directors by the Certificate of Incorporation (“Charter”) and Bylaws of the Company, the Board of Directors pursuant to resolutions adopted on May 20, 1999 (i) authorized the creation and issuance of up to 20,000 shares of Series A Junior Participating Preferred Stock which stock was previously authorized but not issued and (ii) determined the voting powers, designations, preferences and relative, participating, optional or other special rights, qualifications, limitations or restrictions, and terms and conditions of redemption of the shares of such series and the dividend rate payable on such series. Such voting powers, designations, preferences and relative, participating, optional or other special rights, qualifications, limitations or restrictions, and terms and conditions of redemption, number of shares and dividend rate are as follows:

Section 1. Number of Shares and Designation. This class of Preferred Stock shall be designated the Series A Junior Participating Preferred Stock (the “Series A Preferred Shares”) and the number of shares which shall constitute such series shall be 20,000 shares, par value $1.00 per share. Such number of shares may be increased or decreased by resolution of the Board of Directors; provided, that no decrease shall reduce the number of Series A Preferred Shares to a number less than the number of shares then outstanding plus the number of shares reserved for issuance upon the exercise of outstanding options, rights or warrants or upon the conversion of any outstanding securities issued by the Company convertible into Series A Preferred Shares.

2

Section 2. Dividend Rights. (1) Subject to the rights of holders of any shares of any series of Preferred Stock (or any similar stock) ranking prior and superior to the Series A Preferred Shares with respect to dividends, the holders of Series A Preferred Shares shall be entitled prior to the payment of any dividends on shares ranking junior to the Series A Preferred Shares to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash on the first day of February, May, August and November in each year (each such date being referred to herein as a “Quarterly Dividend Payment Date”), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series A Preferred Shares, in an amount per share (rounded to the nearest cent) equal to the greater of (a) $1.00 or (b) subject to the provision for adjustment hereinafter set forth, 1000 times the aggregate per share amount of all cash dividends, and 1000 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions (other than a dividend payable in shares of common stock, par value $.10 per share, of the Company (the “Common Stock”) or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise)) declared on the Common Stock since the immediately preceding Quarterly Dividend Payment Date, or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Series A Preferred Shares. In the event the Company shall at any time (i) declare or pay any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the amount to which holders of Series A Preferred Shares were entitled immediately prior to such event under clause (b) of the preceding sentence shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event.

(2) The Company shall declare a dividend or distribution on the Series A Preferred Shares as provided in subparagraph (1) above immediately after it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock); provided that, in the event no dividend or distribution shall have been declared on the Common Stock during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, a dividend of $1.00 per share on the Series A Preferred Shares shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date.

3

(3) Dividends shall begin to accrue and be cumulative on outstanding Series A Preferred Shares from the Quarterly Dividend Payment Date next preceding the date of issue of such Series A Preferred Shares, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of Series A Preferred Shares entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the Series A Preferred Shares in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of Series A Preferred Shares entitled to receive payment of a dividend or distribution declared thereon, which record date shall be no more than 30 days prior to the date fixed for the payment thereof.

Section 3. Liquidation. (1) Upon any liquidation, dissolution or winding up of the Company, no distribution shall be made to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Shares unless, prior thereto, the holders of shares of Series A Preferred Shares shall have received $1.00 per share (the “Series A Liquidation Preference”), plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment. Following the payment of the full amount of the Series A Liquidation Preference, no additional distributions shall be made to the holders of shares of Series A Preferred Shares unless, prior thereto, the holders of shares of Common Stock shall have received an amount per share (the “Common Adjustment”) equal to the quotient obtained by dividing (i) the Series A Liquidation Preference by (ii) 1000 (as appropriately adjusted as set forth in subparagraph (3) below to reflect such events as stocks splits, stock dividends and recapitalizations with respect to the Common Stock) (such number in clause (ii), the “Adjustment Number”). Following the payment of the full amount of the Series A Liquidation Preference and the Common Adjustment in respect of all outstanding Series A Preferred Shares and shares of Common Stock, respectively, holders of Series A Preferred Shares and holders of shares of Common Stock shall receive their ratable and proportionate share of the remaining assets to be distributed in the ratio of

4

the Adjustment Number to 1 with respect to the Series A Preferred Shares and Common Stock, on a per share basis, respectively.

(2) In the event, however, that there are not sufficient assets available to permit payment in full of the Series A Liquidation Preference and the liquidation preferences of all other series of Preferred Stock, if any, which rank on a parity with the Series A Preferred Shares, then such remaining assets shall be distributed ratably to the holders of such parity shares in proportion to their respective liquidation preferences. In the event, however, that there are not sufficient assets available to permit payment in full of the Common Adjustment, then such remaining assets shall be distributed ratably to the holders of Common Stock.

(3) In the event the Company shall at any time (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the Adjustment Number in effect immediately prior to such event shall be adjusted by multiplying such Adjustment Number by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event.

Section 4. No Redemption. The Series A Preferred Shares shall not be redeemable.

Section 5. Voting Rights. The holders of Series A Preferred Shares shall have the following voting rights:

(1) Subject to the provision for adjustment hereinafter set forth, each Series A Preferred Share shall entitle the holder thereof to 1000 votes on all matters voted on at a meeting of the stockholders of the Company. In the event the Company shall at any time (i) declare or pay any dividend on Common Stock payable in shares of Common Stock, or (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the number of votes per share to which holders of Series A Preferred Shares were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event.

5

(2) Except as otherwise provided herein or by law, the holders of Series A Preferred Shares and the holders of shares of Common Stock and any other capital stock of the Company having general voting rights shall vote together as one voting group on all matters submitted to a vote of stockholders of the Company.

(3) Except as set forth herein or as otherwise provided by law, holders of Series A Preferred Shares shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action.

Section 6. Certain Restrictions.

(1) Whenever quarterly dividends or other dividends or distributions payable on the Series A Preferred Stock as provided in Section 2 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on Series A Preferred Shares outstanding shall have been paid in full, the Company shall not:

(i) declare or pay dividends on, make any other distributions on, or redeem or purchase or otherwise acquire for consideration any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Shares;

(ii) declare or pay dividends on or make any other distributions on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Shares, except dividends paid ratably on the Series A Preferred Shares and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled;

(iii) redeem or purchase or otherwise acquire for consideration shares of any stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Shares, provided that the Company may at any time redeem, purchase or otherwise acquire shares of any such parity stock in exchange for shares of any stock of the Company ranking junior (either as to dividends or upon dissolution, liquidation or winding up) to the Series A Preferred Shares; or

6

(iv) purchase or otherwise acquire for consideration any shares of Series A Preferred Shares or any shares of stock ranking on a parity with the Series A Preferred Shares, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes.

(2) The Company shall not permit any subsidiary of the Company to purchase or otherwise acquire for consideration any shares of stock of the Company unless the Company could, under subparagraph (1) of this Section 6, purchase or otherwise acquire such shares at such time and in such manner.

Section 7. Reacquired Shares. Any Series A Preferred Shares purchased or otherwise acquired by the Company in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock and may be reissued as part of a new series of Preferred Stock to be created by resolution or resolutions of the Board of Directors, subject to the conditions and restrictions on issuance set forth herein or in the Charter.

Section 8. Merger, Consolidation, etc. In case the Company shall enter into any merger, consolidation, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case each Series A Preferred Share shall at the same time be similarly exchanged or changed into an amount per share (subject to the provision for adjustment hereinafter set forth) equal to 1000 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event the Company shall at any time (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of Series A Preferred Shares shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and

7

the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event.

Section 9. Ranking. The Series A Preferred Shares shall rank, with respect to the payment of dividends and distribution of assets, junior to all series of any other class of the Company’s Preferred Stock unless the terms of any such series shall provide otherwise.

Section 10. Amendment. The Charter, including this Certificate of Designation establishing the rights and preferences of the Series A Preferred Shares, shall not be amended in any manner which would materially alter or change the powers, preferences or special rights of the Series A Preferred Shares so as to affect them adversely without the affirmative vote of the holders of a majority of the outstanding shares of Series A Preferred Shares, voting separately as one voting group.

Section 11. Fractional Shares. Series A Preferred Shares may be issued in fractions of a share which shall entitle the holder, in proportion to such holder’s fractional shares, to exercise voting rights, receive dividends, participate in distributions and to have the benefit of all other rights of holders of Series A Preferred Shares.

8

IN WITNESS WHEREOF, the Company has caused this Certificate of Designation to be signed in its name and on its behalf and attested to by the undersigned on this 20th day of May, 1999 and the undersigned acknowledges under the penalties of perjury that this Certificate of Designation is the corporate act of said Company and that to the best of his knowledge, information and belief, the matters and facts set forth herein are true in all material respects.

LYDALL, INC.
By:	/s/    CHRISTOPHER R.SKOMOROWSKI
	Name: Christopher R. Skomorowski Title: President and CEO

Attest:

/s/    MARY A. TREMBLAY        

Name: Mary A. Tremblay

Title: General Counsel and Secretary

9

EX-3.2

Exhibit 3.2

Bylaws of Lydall, Inc.

(a Delaware corporation),

as amended and restated as of December 11, 2003

TABLE OF CONTENTS

	Page
ARTICLE 1    Offices and Fiscal Year	1
Section 1.01    Registered Office	1
Section 1.02    Fiscal Year	1
ARTICLE 2    Notice—Waivers—Meetings	1
Section 2.01    Notice, What Constitutes	1
Section 2.02    Notice of Meetings of Board of Directors	2
Section 2.03    Notice of Meetings of Stockholders	2
Section 2.04    Advance Notice of Stockholder Nominations and Other Business	2
Section 2.05    Waivers of Notice	5
Section 2.06    Exception to Requirements of Notice	5
ARTICLE 3    Meetings of Stockholders	6
Section 3.01    Place of meeting	6
Section 3.02    Annual Meeting	6
Section 3.03    Special Meetings	6
Section 3.04    Quorum, Manner of Acting and Adjournmen	7
Section 3.05    Organization and Conduct of Meetings	8
Section 3.06    Voting	8
Section 3.07    Voting Lists	9
Section 3.08    Inspectors of Election	9
ARTICLE 4    Procedures For Action By Written Consent	10
Section 4.01    Request for Record Date	10
Section 4.02    Form of Consent	11
Section 4.03    Delivery of Consent	12
ARTICLE 5    Board of Directors	13
Section 5.01    Powers	13
Section 5.02    Number	13
Section 5.03    Term of Office	13
Section 5.04    Vacancies	13
Section 5.05    Resignations	13
Section 5.06    Organization	13
Section 5.07    Place of Meeting	14
Section 5.08    Regular Meetings	14
Section 5.09    Special Meetings	14
Section 5.10    Quorum, Manner of Acting and Adjournment	14
Section 5.11    Committees of the Board	15
Section 5.12    Compensation of Directors	15
Section 5.13    Qualifications and Election of Directors	16
Section 5.14    Voting of Stock	16
Section 5.15    Endorsement of Securities for Transfer	16
Section 5.16    Chairman and Vice Chairman of the Board	16
ARTICLE 6    Officers	17

- i -

Section 6.01    Number, Qualifications and Designation	17
Section 6.02    Election and Term of Office	17
Section 6.03    Subordinate Officers, Committees and Agents	17
Section 6.04    The Chairman of the Board	17
Section 6.05    The President	18
Section 6.06    The Secretary	18
Section 6.07    The Treasurer	18
Section 6.08    Officers' Bonds	18
Section 6.09    Salaries	18
ARTICLE 7    Certificates of Stock, Transfer, Etc	19
Section 7.01    Form and Issuance	19
Section 7.02    Transfer	19
Section 7.03    Lost, Stolen, Destroyed or Mutilated Certificates	19
Section 7.04    Record Holder of Shares	20
Section 7.05    Determination of Stockholders of Record	20
ARTICLE 8    General Provisions	20
Section 8.01    Dividends	20
Section 8.02    Contracts	21
Section 8.03    Corporate Seal	21
Section 8.04    Checks, Notes, Etc.	21
Section 8.05    Corporate Records	21
Section 8.06    Amendment of Bylaws	22

- ii -

BYLAWS

OF

LYDALL, INC.

(a Delaware corporation),

as amended and restated as of December 11, 2003

ARTICLE 1

Offices and Fiscal Year

Section 1.01 Registered Office.

The registered office of the corporation shall be in the City of Wilmington, County of New Castle, State of Delaware until otherwise established by resolution of the Board of Directors, and a certificate certifying the change is filed in the manner provided by statute.

Section 1.02 Fiscal Year.

The fiscal year of the corporation shall end on the 31st day of December in each year.

ARTICLE 2

Notice—Waivers—Meetings

Section 2.01 Notice, What Constitutes.

Whenever, under the provisions of the Delaware General Corporation Law (“DGCL”) or the certificate of incorporation or these Bylaws, notice is required to be given to any director or stockholder, it shall not be construed to require personal notice, but may be given by mail, by courier or other hand delivery, or by facsimile or another form of electronic transmission (as hereinafter defined); provided that in the case of notice to a stockholder given by electronic transmission, the form of electronic transmission has been consented to by the stockholder to whom the notice is given. Such notice shall be deemed given: (i) if by mail, when deposited in the mail, postage prepaid, directed to the stockholder at his or her address as it appears on the records of the corporation or, in the case of a director, to the address furnished by the director to the corporation for the purpose of giving notice, (ii) if by courier or by hand, when received at the foregoing address, (iii) if by facsimile, when directed to a number at which the stockholder has consented to receive notice or, in the case of a director, furnished by the director to the corporation for such purpose, (iv) if by electronic mail, when directed to an electronic mail address at which the stockholder has consented to receive notice or, in the case of a director, furnished to the corporation for such purpose or (v) if by any other form of electronic transmission, when directed to the stockholder or director in accordance with the instructions consented to by the stockholder or furnished by the director for such purpose.

For purposes of these Bylaws, the term “electronic transmission” means any form of communication, not involving the physical transmission of paper, that creates a record that may be retained, retrieved and reviewed by the recipient thereof, and may be directly reproduced in paper form by the recipient through an automated process. Notice by electronic transmission in compliance with this Section 2.01 shall be deemed to be written notice.

Section 2.02 Notice of Meetings of Board of Directors.

Notice of a regular meeting of the Board of Directors need not be given. Notice of every special meeting of the Board of Directors shall be given to each director in person or by telephone or in writing at least 24 hours (in the case of notice in person or by facsimile or electronic transmission) or 48 hours (in the case of notice by courier service or express mail) or five days (in the case of notice by first class mail) before the time at which the meeting is to be held. Every such notice shall state the time and place of the meeting. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the board need be specified in a notice of the meeting.

Section 2.03 Notice of Meetings of Stockholders.

Written notice of the place, date and hour of every meeting of the stockholders, whether annual or special, shall be given to each stockholder of record entitled to vote at the meeting not less than ten nor more than 60 days before the date of the meeting. Every notice of a special meeting shall state the purpose or purposes thereof.

Section 2.04 Advance Notice of Stockholder Nominations and Other Business.

(a) Annual Meetings of Stockholders.

(1) Nominations of persons for election to the Board of Directors of the corporation and the proposal of business to be considered by the stockholders may be made at an annual meeting of stockholders (A) pursuant to the corporation’s notice of meeting delivered pursuant to Section 2.03 of these Bylaws, (B) by and at the direction of the Board of Directors, or (C) by any stockholder for the corporation who is entitled to vote at the meeting, who complied with the notice procedures set forth in clauses (2) and (3) of this paragraph (a) and who was a stockholder of record at the time such notice was delivered to the Secretary of the corporation.

(2) For nominations or other business to be properly brought before an annual meeting by a stockholder pursuant to paragraph (a)(1)(C) above, the stockholder must have given timely notice thereof in writing to the Secretary of the corporation and such other business must otherwise be a proper matter for stockholder action. To be timely, a stockholder’s notice shall be delivered to the Secretary at the principal executive offices of the corporation not less than sixty (60) days nor more than ninety (90) days prior to the first anniversary of the preceding year’s annual meeting; provided, however, that in the event the date the annual meeting is called for is a date that is not within thirty (30) days before or after such anniversary date, notice by the stockholder to be timely must be so delivered not later than the close of business on the tenth (10th) day following

- 2 -

the day on which such notice of the date of the annual meeting was mailed or public announcement of the date of the annual meeting was made, whichever first occurs. In no event shall the public announcement of an adjournment or postponement of an annual meeting of stockholders commence a new time period (or extend any time period) for the giving of a stockholder’s notice as described above.

(b) Special Meetings of Stockholders. Only such business shall be conducted at a special meeting of stockholders as shall have been described in the corporation’s notice of meeting given pursuant to Section 2.03 of these Bylaws. Nominations of persons for election to the Board of Directors may be made at a special meeting of stockholders at which directors are to be elected pursuant to the corporation’s notice of meeting (1) by or at the direction of the Board of Directors or (2) by any stockholder of the corporation who is entitled to vote at the meeting, who complies with the notice procedures set forth in this Section and who is a stockholder of record at the time such notice is delivered to the Secretary of the corporation. In the event the corporation calls a special meeting of stockholders for the purpose of electing one or more directors to the Board of Directors, any such stockholder may nominate a person or persons (as the case may be), for election to such position(s) as are specified in the corporation’s Notice of Meeting, if the stockholder’s notice shall be delivered to the Secretary at the principal executive offices of the corporation not later than the close of business on the tenth (10th) day following the day on which public announcement is first made of the date of the special meeting. In no event shall the public announcement of an adjournment of a special meeting commence a new time period for the giving of a stockholder’s notice as described above.

(c) General

(1) Only persons who are nominated in accordance with the procedures set forth in this Section 2.04 shall be eligible to serve as directors and only such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this Section 2.04. Except as otherwise provided by law, the certificate of incorporation or these Bylaws, the chairman of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made in accordance with the procedures set forth in this Section 2.04 and, if any proposed nomination or business is not in accordance with this Section 2.04 (including whether the stockholder or beneficial owner, if any, on whose behalf the nomination is made solicits (or is part of a group which solicits), or fails to so solicit (as the case may be), proxies in support of such stockholder’s nominee in compliance with such stockholder’s representation as required by this Section 2.04), to declare that such defective proposal or nomination shall be disregarded. Any decision by the chairman of the meeting shall be conclusive and binding upon all stockholders of the corporation for any purpose.

(2) For purposes of this Section 2.04, “public announcement” shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the corporation with the Securities and Exchange Commission (the “SEC”) pursuant to

- 3 -

Section 13, 14 or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

(3) Notwithstanding the foregoing provisions of this Section 2.04, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this Section. Nothing in this Section 2.04 shall be deemed to affect any rights of stockholders to request inclusion of proposals in the corporation’s proxy statement pursuant to Rule 14a-8 under the Exchange Act.

(d) Contents of Stockholder’s Notice for Nominations of Directors. Any stockholder’s notice required by this Section 2.04 shall set forth as to each person whom the stockholder proposes to nominate for election or reelection as a director (i) the name, age, business address and residence address of the person, (ii) the principal occupation and employment of the person, (iii) the class or series and number of shares of capital stock of the corporation which are owned beneficially or of record by the person and (iv) any other information relating to the person that would be required to be disclosed in a proxy statement or other filing required to be made in connection with solicitations of proxies for election of directors pursuant to Section 14 of the Exchange Act, and the rules and regulations promulgated thereunder. Such stockholder’s notice further shall set forth as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (i) the name and address of such stockholder and of such beneficial owner, as they appear on the corporation’s books, (ii) the class and number of shares of the capital stock of the corporation which are owned beneficially and of record by such stockholder and such beneficial owner, as to the stockholder giving the notice, (iii) a description of all arrangements or understandings between such stockholder and each proposed nominee and any other person or persons (including their names) pursuant to which the nomination(s) are to be made by such stockholder, (iv) a representation that such stockholder intends to appear in person or by proxy at the annual meeting to nominate the person named in its notice, (v) a representation whether the stockholder or the beneficial owner, if any, intends or is part of a group which intends to (1) deliver a proxy statement and/or form of proxy to holders of at least the percentage of the corporation’s outstanding capital stock required to elect the nominee and/or (2) otherwise solicit proxies from stockholders in support of such nomination, and (vi) any other information relating to such stockholder that would be required to be disclosed in a proxy statement or other filing required to be made in connection with solicitations of proxies for election of directors pursuant to Section 14 of the Exchange Act, and the rules and regulations promulgated thereunder. Such notice must be accompanied by a written consent of each proposed nominee to being named as a nominee and to serving as a director if elected. The corporation may require any proposed nominee to furnish such other information as it may reasonably require to determine the eligibility of such proposed nominee to serve as a director of the corporation.

(e) Contents of Stockholder’s Notice for Proposed Business. Any stockholder’s notice required by this Section 2.04 shall set forth for each item of business that the stockholder proposes for consideration (i) a description of the business desired to be brought before the stockholder meeting, (ii) the text of the proposal or business

- 4 -

(including the text of any resolutions proposed for consideration and in the event that such business includes a proposal to amend the Bylaws of the corporation, the language of the proposed amendment), (iii) the reasons for conducting such business at the stockholder meeting, (iv) any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the proposal is made; and (v) any other information relating to the stockholder, the beneficial owner, or proposed business that would be required to be disclosed in a proxy statement or other filing in connection with solicitations of proxies relating to the proposed item of business pursuant to Section 14 of the Exchange Act, and the rules and regulations promulgated thereunder. Such stockholder’s notice further shall set forth as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the proposal is made (i) the name and address of such stockholder as they appear on the corporation’s books and of such beneficial owner, (ii) the class and number of shares of capital stock of the corporation which are owned beneficially and of record by such stockholder and such beneficial owners, (iii) a description of all arrangements or understandings between such stockholder and any other person or persons (including their names) pursuant to which the proposals are to be made by such stockholder, (iv) a representation that such stockholder intends to appear in person or by proxy at the annual meeting to propose the items of business set forth in the notice, (v) a representation whether the stockholder or the beneficial owner, if any, intends or is part of a group which intends to (1) deliver a proxy statement and/or form of proxy to holders of at least the percentage of the corporation’s outstanding capital stock required to approve or adopt the proposal and/or (2) otherwise solicit from stockholders in support of such proposal, and (vi) any other information relating to such stockholder, beneficial owner, or proposed business that would be required to be disclosed in a proxy statement or other filing required to be made in connection with solicitations of proxies in support of such proposal pursuant to Section 14 of the Exchange Act, and the rules and regulations promulgated thereunder. The corporation may require the stockholder to furnish such other information as it may reasonably require to determine whether each proposed item of business is a proper matter for stockholder action.

Section 2.05 Waivers of Notice.

(a) Written Waiver. Whenever notice is required to be given under any provisions of the DGCL or the certificate of incorporation or these Bylaws, a written waiver (which may be communicated by electronic transmission), signed by the person or persons entitled to the notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders, directors, or members of a committee of directors need be specified in any written waiver of notice of such meeting.

(b) Waiver by Attendance. Attendance of a person at a meeting, either in person or by proxy, shall constitute a waiver of notice of such meeting, except where a person attends a meeting for the express purpose of objecting at the beginning of the meeting to the transaction of any business because the meeting was not lawfully called or convened.

Section 2.06 Exception to Requirements of Notice.

- 5 -

(a) General Rule. Whenever notice is required to be given, under any provision of the DGCL or of the certificate of incorporation or these Bylaws, to any person with whom communication is unlawful, the giving of such notice to such person shall not be required and there shall be no duty to apply to any governmental authority or agency for a license or permit to give such notice to such person. Any action or meeting which shall be taken or held without notice to any such person with whom communication is unlawful shall have the same force and effect as if such notice had been duly given.

(b) Stockholders Without Forwarding Addresses. Whenever notice is required to be given, under any provision of the DGCL or the certificate of incorporation or these Bylaws, to any stockholder to whom (i) notice of two consecutive annual meetings, and all notices of meetings or of the taking of action by written consent without a meeting to such person during the period between such two consecutive annual meetings, or (ii) all, and at least two, payments (if sent by first class mail) of dividends or interest on securities during a 12 month period, have been mailed addressed to such person at his address as shown on the records of the corporation and have been returned undeliverable, the giving of such notice to such person shall not be required. Any action or meeting which shall be taken or held without notice to such person shall have the same force and effect as if such notice had been duly given. If any such person shall deliver to the corporation a written notice setting forth the person’s then current address, the requirement that notice be given to such person shall be reinstated.

ARTICLE 3

Meetings of Stockholders

Section 3.01 Place of meeting.

All meetings of the stockholders of the corporation shall be held at such place within or without the State of Delaware as shall be designated by the Board of Directors in the notice of such meeting in accordance with Section 3.02 or 3.03.

Section 3.02 Annual Meeting.

The Board of Directors may fix and designate the date and time of the annual meeting of the stockholders. At said meeting the stockholders then entitled to vote shall elect directors and shall transact such other business as may properly be brought before the meeting.

Section 3.03 Special Meetings.

Special meetings of the stockholders of the corporation may be called at any time by a majority of the Board of Directors. The Board of Directors shall have the sole power to determine the date, time and place of any special meeting of stockholders and the business to be transacted at such meeting. The Board of Directors shall have the sole power to set a record date for the determination of stockholders entitled to vote at any special meeting. Nothing contained in this Section 3.03 shall be construed as limiting,

- 6 -

fixing or affecting the time when a meeting of stockholders called by action of the Board of Directors may be held.

Section 3.04 Quorum, Manner of Acting and Adjournment.

(a) Quorum. The holders of a majority of the shares entitled to vote, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders except as otherwise provided by the DGCL, by the certificate of incorporation or by these Bylaws.

(b) Postponement, cancellation and adjournment of stockholder meetings. Any previously scheduled annual or special meeting of the stockholders may be postponed, and any previously scheduled annual or special meeting of the stockholders called by the Board may be canceled, by resolution of the Board of Directors upon public notice given prior to the time previously scheduled for such meeting of stockholders.

Any meeting of stockholders, annual or special, may be adjourned solely by the chair of the meeting from time to time to reconvene at the same or some other time, date and place. The stockholders present at a meeting shall not have authority to adjourn the meeting. Notice need not be given of any such adjourned meeting if the time, date and place thereof are announced at the meeting at which the adjournment is taken and if the adjournment is for not more than 30 days. If the time, date and place are not so announced, the Secretary of the corporation shall give written notice of the time, date and place of the adjourned meeting not less than ten days prior to the date of the adjourned meeting.

At any adjourned meeting at which a quorum is present, the stockholders may transact any business, which might have been transacted at the original meeting. Once a share is represented for any purpose at a meeting, it shall be present for quorum purposes for the remainder of the meeting and for any adjournment of that meeting unless a new record date is or must be set for the adjourned meeting. A new record date must be set if the meeting is adjourned in a single adjournment to a date more than 120 days after the original date fixed for the meeting. If after the adjournment a new record date is fixed for the adjourned meeting, notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the adjourned meeting consistent with the new record date.

(c) Manner of Acting. Directors shall be elected by a plurality of the votes of the shares present in person or represented by proxy and entitled to vote at the meeting on the election of directors. In all matters other than the election of directors, the affirmative vote of the majority of shares present in person or represented by proxy at the meeting and entitled to vote and voting thereon shall be the act of the stockholders, unless the question is one upon which, by express provision of the applicable statute, the certificate of incorporation or these Bylaws, a different vote is required in which case such express provision shall govern and control the decision of the question. The stockholders present in person or by proxy at a duly organized meeting can continue to do business until adjournment, notwithstanding withdrawal of enough stockholders to leave less than a quorum.

- 7 -

Section 3.05 Organization and Conduct of Meetings.

At every meeting of the stockholders, the Chairman of the Board, if there be one, or in the case of a vacancy in the office or absence of the Chairman of the Board, the President, shall act as chairman of the meeting, and the Secretary, or, in the absence of the Secretary, an Assistant Secretary or in the absence of the Secretary and the Assistant Secretaries, a person appointed by the chairman of the meeting, shall act as secretary of the meeting. The date and time of the opening and the closing of the polls for each matter upon which the stockholders will vote at a meeting shall be determined by the chair of the meeting and announced at the meeting. The Board of Directors may adopt by resolution such rules, regulations, and procedures for the conduct of the meeting of stockholders as it shall deem appropriate. Except to the extent inconsistent with such rules and regulations as adopted by the Board of Directors, the chair of any meeting of stockholders shall have the exclusive right and authority to prescribe such rules, regulations and procedures and to do all such acts as, in the judgment of such chair, are appropriate for the proper conduct of the meeting. Such rules, regulations or procedures, whether adopted by the Board of Directors or prescribed by the chair of the meeting, may include, without limitation, the following: (i) the establishment of an agenda or order of business for the meeting; (ii) rules and procedures for maintaining order at the meeting and the safety of those present; (iii) limitations on attendance at or participation in the meeting to stockholders of record of the corporation, their duly authorized and constituted proxies or such other persons as the chair of the meeting shall determine; (iv) restrictions on entry to the meeting after the time fixed for the commencement thereof; and (v) limitations on the time allotted to questions or comments by participants. Unless and to the extent determined by the Board of Directors or the chair of the meeting, meetings of stockholders shall not be required to be held in accordance with the rules of parliamentary procedure.

Section 3.06 Voting.

(a) General Rule. Unless otherwise provided in the certificate of incorporation, each stockholder shall be entitled to one vote, in person or by proxy, for each share of capital stock having voting power held by such stockholder.

(b) Voting and Other Action by Proxy.

(1) A stockholder may execute a written document authorizing another person or persons to act for the stockholder as proxy. Such execution may be accomplished by the stockholder or the authorized officer, director, employee or agent of the stockholder signing such document or causing his or her signature to be affixed to such document by any reasonable means including, but not limited to, by facsimile signature. A stockholder may authorize another person or persons to act for the stockholder as proxy by transmitting or authorizing the transmission of a telegram, facsimile, telephone call, electronic mail, or other means of electronic transmission to the person who will be the holder of the proxy or to a proxy solicitation firm, proxy support service organization or like agent duly authorized by the person who will be the holder of the proxy to receive such transmission if such telegram, facsimile, telephone call,

- 8 -

electronic mail, or other means of electronic transmission sets forth or is submitted with information from which it can be determined that the telegram, facsimile, telephone call, electronic mail, or other electronic transmission was authorized by the stockholder.

(2) No proxy shall be voted or acted upon after three years from its date unless the proxy provides for a longer period.

(3) A duly executed proxy shall be irrevocable if it states that it is irrevocable and if, and only so long as, it is coupled with an interest sufficient in law to support an irrevocable power. A proxy may be made irrevocable regardless of whether the interest with which it is coupled is an interest in the stock itself or an interest in the corporation generally.

Section 3.07 Voting Lists.

The officer who has charge of the stock ledger of the corporation shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting. The list shall be arranged in alphabetical order, showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present.

Section 3.08 Inspectors of Election.

(a) Appointment. All elections of directors shall be by written ballot; the vote upon any other matter need not be by ballot. In advance of any meeting of stockholders the Board of Directors may appoint one or more inspectors, who need not be stockholders to act at the meeting and to make a written report thereof. The Board of Directors may designate one or more persons as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate is able to act at a meeting of stockholders, the person presiding at the meeting shall appoint one or more inspectors to act at the meeting. Each inspector, before entering upon the discharge of his or her duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the person’s best ability.

(b) Duties. The inspectors shall ascertain the number of shares outstanding and the voting power of each, determine the shares represented at the meeting and the validity of proxies and ballots, count all votes and ballots, determine and retain for a reasonable period a record of the disposition of any challenges made to any determination by the inspectors, and certify their determination of the number of shares represented at the meeting and their count of all votes and ballots. The inspectors may appoint or retain

- 9 -

other persons or entities to assist the inspectors in the performance of the duties of the inspectors.

(c) Polls. The date and time of the opening and the closing of the polls for each matter upon which the stockholders will vote at a meeting shall be announced at the meeting. No ballot, proxies or votes, nor any revocations thereof or changes thereto, shall be accepted by the inspectors after the closing of the polls unless the Court of Chancery upon application by a stockholder shall determine otherwise.

(d) Reconciliation of Proxies and Ballots. In determining the validity and counting of proxies and ballots, the inspectors shall be limited to an examination of the proxies, any envelopes submitted with those proxies, any information transmitted in accordance with section 3.06, ballots and the regular books and records of the corporation, except that the inspectors may consider other reliable information for the limited purpose of reconciling proxies and ballots submitted by or on behalf of banks, brokers, their nominees or similar persons which represent more votes than the holder of a proxy is authorized by the record owner to cast or more votes than the stockholder holds of record. If the inspectors consider other reliable information for the limited purpose permitted herein, the inspectors at the time they make their certification pursuant to subsection (b) shall specify the precise information considered by them including the person or persons from whom they obtained the information, when the information was obtained, the means by which the information was obtained and the basis for the inspectors’ belief that such information is accurate and reliable.

ARTICLE 4

Procedures For Action By Written Consent

Section 4.01 Request for Record Date.

(a) The record date for determining stockholders entitled to express consent to corporate action in writing without a meeting shall be as fixed by the Board of Directors or as otherwise established under this Section 4.01. Any person seeking to have the stockholders authorize or take corporate action by written consent without a meeting shall, by written notice addressed to the Secretary and delivered to the corporation and signed by a stockholder of record, request that a record date be fixed for such purpose. The written notice shall contain at a minimum the information set forth in Section 4.01 (b) below. The Board of Directors shall have ten (10) days following the date of receipt of the notice to determine the validity of the request. Following the determination of the validity of the request, and (subject to Section 4.01(b) no later than ten (10) days after the date on which such request is received by the corporation, the Board of Directors may fix a record date for such purpose which shall be no more than ten (10) days after the date upon which the resolution fixing the record date is adopted by the Board of Directors and shall not precede the date such resolution is adopted. If the Board of Directors fails within ten (10) days after the date the corporation receives such notice to fix a record date for such purpose, the record date shall be the day on which the first written consent is delivered to the corporation in the manner described in Section 4.03 below unless prior

- 10 -

action by the Board of Directors is required under the DGCL, in which event the record date shall be at the close of business on the day on which the Board of Directors adopts the resolution taking such prior action.

(b) Any stockholder’s notice required by this Section 4.01 shall describe each action that the stockholder proposes to take by consent. For each such proposal, the notice shall set forth (i) the text of the proposal (including the text of any resolutions to be adopted by consents and the language of any proposed amendment to the Bylaws of the corporation), (ii) the reasons for soliciting consent for the proposal, (iii) any material interest in the proposal held by the stockholder and the beneficial owner, if any, on whose behalf the action is to be taken, and (iv) any other information relating to the stockholder, the beneficial owner, or the proposal that would be required to be disclosed in filings in connection with the solicitation of proxies or consents pursuant to Section 14 of the Exchange Act and the rules and regulations promulgated thereunder. To the extent the proposed action by consent involves the election of directors, the notice shall set forth as to each person whom the stockholder proposes to elect as a director (i) the name, age, business address, residence address and nationality of the person, (ii) the principal occupation and employment of the person, (iii) the class or series and number of shares of capital stock of the corporation which are owned beneficially or of record by the person and (iv) any other information relating to the person that would be required to be disclosed in filings required to be made in connection with solicitations of proxies or consents for the election of directors pursuant to Section 14 of the Exchange Act and the rules and regulations promulgated thereunder. In addition to the foregoing, the notice shall set forth as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the notice is given (i) the name and address of such stockholder as they appear on the corporation’s books, and the name and address of such beneficial owner, (ii) the class and number of shares of capital stock of the corporation which are owned beneficially and of record by such stockholder and such beneficial owner, (iii) a description of all arrangements or understandings between such stockholder and any other person or persons relating to the proposed action by consent, (iv) a representation whether the stockholder or the beneficial owner, if any, intends or is part of a group which intends to (1) deliver a proxy statement and/or consent solicitation statement to holders of at least the percentage of the corporation’s outstanding capital stock required to effect the action by consent either to solicit consents or to solicit proxies to execute consents, and/or (2) otherwise solicit proxies or consents from stockholders in support of the action to be taken by consent, and (v) any other information relating to such stockholder and beneficial owner that would be required to be disclosed in filings required to be made in connection with solicitation of proxies or consents relating to the proposed action by consent pursuant to Section 14 of the Exchange Act and the rules and regulations promulgated thereunder. During the ten (10) day period following the date of the receipt of the notice required under Section 4.01(a), the corporation may require the stockholder of record and/or beneficial owner requesting a record date for proposed stockholder action by consent to furnish such other information as it may reasonably require to determine the validity of the request for a record date.

Section 4.02 Form of Consent.

- 11 -

Every written consent purporting to take or authorize the taking of corporate action and/or related revocations (a “Consent”) shall bear the date of signature of each stockholder who signs the Consent, and no Consent shall be effective to take the corporate action referred to therein unless, within 60 days of the earliest date the Consent is delivered in the manner required by Section 2.07, Consents signed by a sufficient number of stockholders to take such action are so delivered to the corporation.

Section 4.03 Delivery of Consent.

A Consent shall be delivered to the corporation by delivery to its registered office in the State of Delaware or to the Secretary of the corporation at the corporation’s principal place of business. Delivery to the corporation’s registered office shall be made by hand or by certified or registered mail, return receipt requested.

In the event of the delivery to the corporation of a Consent, the Secretary of the corporation shall provide for the safe-keeping of such Consent and shall promptly conduct such ministerial review of the sufficiency of the Consents and of the validity of the action to be taken by stockholder consent as the Secretary deems necessary or appropriate, including, without limitation, whether the holders of a number of shares having the requisite voting power to authorize or take the action specified in the Consent have given consent; provided, however, that if the corporate action to which the Consent relates is the removal or replacement of one or more members of the Board of Directors, the Secretary of the corporation shall promptly designate two persons, who shall not be members of the Board of Directors, to serve as inspectors with respect to such Consent and such inspectors shall discharge the functions of the Secretary of the corporation under this Section 4.03. If after such investigation the Secretary or the inspectors (as the case may be) shall determine that the Consent is valid and that the action therein specified has been validly authorized, that fact shall forthwith be certified on the records of the corporation kept for the purpose of recording the proceedings of meetings of stockholders, and the Consent shall be filed in such records, at which time the Consent shall become effective as stockholder action. In conducting the investigation required by this Section 4.03, the Secretary or the inspectors (as the case may be) may, at the expense of the corporation retain special legal counsel and any other necessary or appropriate professional advisors, and such other personnel as they may deem necessary or appropriate to assist them, and shall be fully protected in relying in good faith upon the opinion of such counsel or advisors.

No action by written consent without a meeting shall be effective until such date as the Secretary or the inspectors (as the case may be) certify to the corporation that the Consents delivered to the corporation in accordance with this Section 4.03 represent at least the minimum number of votes that would be necessary to take the action. To the extent the proposed action by consent involves the election of directors, if such consent is less than unanimous, such action by written consent may be in lieu of holding an annual meeting only if all of the directorships to which directors could be elected at an annual meeting held at the effective time of such action are vacant and are filled by such action.

- 12 -

Nothing contained in Section 4.01, 4.02 or 4.03 shall in any way be construed to suggest or imply that the Board of Directors or any stockholder shall not be entitled to contest the validity of any Consent or revocation thereof, whether before or after such certification by the Secretary or the inspectors, or to take any other action (including, without limitation, the commencement, prosecution, or defense of any litigation with respect thereto, and the seeking of injunctive relief in such litigation).

ARTICLE 5

Board of Directors

Section 5.01 Powers.

All powers vested by law in the corporation shall be exercised by or under the authority of, and the business and affairs of the corporation shall be managed under the direction of, the Board of Directors.

Section 5.02 Number.

Subject to the provisions of the certificate of incorporation, the Board of Directors shall consist of such number of directors as may be determined from time to time by resolution adopted by a vote of a majority of the entire Board of Directors.

Section 5.03 Term of Office.

Directors of the corporation shall hold office until the next annual meeting of stockholders and until their successors shall have been elected and qualified, except in the event of death, resignation or removal.

Section 5.04 Vacancies.

Vacancies may be filled by a majority of the directors then in office, though less than a quorum, or by a sole remaining director, and a director so chosen shall hold office until the next annual election of the class for which such director shall have been elected and until a successor is duly elected and qualified. If there are no directors in office, then an election of directors may be held in the manner provided by statute.

Section 5.05 Resignations.

Any director may resign at any time upon written notice to the Chairman, President or Secretary of the corporation. The resignation shall be effective upon receipt thereof by the corporation or at such subsequent time as shall be specified in the notice of resignation and, unless otherwise specified in the notice, the acceptance of the resignation shall not be necessary to make it effective.

Section 5.06 Organization.

- 13 -

At every meeting of the Board of Directors, the Chairman of the Board, if there be one, or, in the case of a vacancy in the office or absence of the Chairman of the Board, one of the following officers present in the order stated: the President, the Vice Chairman, if one has been appointed, the vice presidents in their order of rank and seniority, or a chairman chosen by a majority of the directors present, shall preside, and the Secretary, or, in the absence of the Secretary, an Assistant Secretary, or in the absence of the Secretary and the Assistant Secretaries, any person appointed by the chairman of the meeting, shall act as secretary of the meeting.

Section 5.07 Place of Meeting.

Meetings of the Board of Directors, both regular and special, shall be held at such place within or without the State of Delaware as the Board of Directors may from time to time determine, or as may be designated in the notice of the meeting.

Section 5.08 Regular Meetings.

Regular meetings of the Board of Directors shall be held without notice at such time and place as shall be designated from time to time by resolution of the Board of Directors.

Section 5.09 Special Meetings.

Special meetings of the Board of Directors shall be held whenever called by the Chairman or by a majority of the directors.

Section 5.10 Quorum, Manner of Acting and Adjournment.

(a) General Rule. At all meetings of the board a majority of the total number of directors in office shall constitute a quorum for the transaction of business. The vote of a majority of the directors present at any meeting at which a quorum is present shall be the act of the Board of Directors, except as may be otherwise specifically provided by the DGCL or by the certificate of incorporation. If a quorum is not present at any meeting of the Board of Directors, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present.

(b) Unanimous Written Consent. Unless otherwise restricted by the certificate of incorporation, these Bylaws or the DGCL, any action required or permitted to be taken at any meeting of the Board of Directors or any committee thereof may be taken without a meeting, if all members of the board consent thereto in writing (including a writing by electronic transmission), and the writing or writings are filed with the minutes of proceedings of the board.

(c) Telephonic Meetings. Members of the Board or any committee thereof may participate in a meeting by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting

- 14 -

can hear each other and participation in a meeting in this manner shall constitute presence at the meeting.

Section 5.11 Committees of the Board.

(a) Establishment. The Board of Directors may, by resolution adopted by a majority of the entire board, establish one or more committees, each committee to consist of one or more directors. The board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee.

(b) Powers. Any such committee, to the extent provided by law or in the resolution or charter establishing such committee, shall have and may exercise all the power and authority of the Board of Directors in the management of the business and affairs of the corporation and may authorize the seal of the corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to the following matters: (i) approving or adopting, or recommending to the stockholders, any action or matter expressly required by the DGCL to be submitted to stockholders for approval or (ii) adopting, amending or repealing any Bylaw of the corporation. Such committees shall have such name or names as may be determined from time to time by resolution adopted by the Board of Directors. Each committee so formed shall keep regular minutes of its meetings and report the same to the Board of Directors when required.

(c) Committee Procedures. The term “Board of Directors” or “board,” when used in any provision of these Bylaws relating to the organization or procedures of or the manner of taking action by the Board of Directors, shall be construed to include and refer to any committee of the board.

(d) Audit Committee Financial Expert. The designation of any director as an “audit committee financial expert” pursuant to Item 401(h) of Regulation S-K promulgated by the SEC shall not confer on such director any duty or obligation to the corporation not conferred on members of the Board of Directors generally under the DGCL.

Section 5.12 Compensation of Directors.

Unless otherwise restricted by the certificate of incorporation, the Board of Directors shall have the authority to fix the compensation of directors. The directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors and may be paid a fixed sum for attendance at each meeting of the Board of Directors or a stated fee as director. No such payment shall preclude any director from serving the corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings. Additional fees may be paid to compensate members of the Board of Directors who serve as the chair of any special or standing committee, who undertake specific projects at the request of the Board of Directors or who serve as Chairman or

- 15 -

Vice Chairman of the Board of Directors. Unless otherwise determined by the Board of Directors, such compensation shall be deemed to be additional director’s fees

Section 5.13 Qualifications and Election of Directors.

(a) All directors of the corporation shall be natural persons of full age, but need not be residents of Delaware or stockholders of the corporation. Except in the case of vacancies, directors shall be elected by the stockholders.

(b) Nominations of persons for election to the Board of Directors of the corporation may be made at a meeting of stockholders by or at the direction of the Board of Directors.

(c) Nominations of persons for election to the Board of Directors of the corporation may also be made by any stockholder of the corporation entitled to vote for the election of directors at the meeting who complies with the notice procedures set forth in Section 2.04.

Section 5.14 Voting of Stock.

Unless otherwise ordered by the Board of Directors, each of the Chairman of the Board, the President, and the principal accounting officer (as identified in the corporation’s most recent report filed with the United States Securities and Exchange Commission) shall have full power and authority, on behalf of the corporation, to attend and to act and vote, in person or by proxy, at any meeting of the stockholders of any company in which the corporation may hold stock, and at any such meeting shall possess and may exercise any and all of the rights and powers incident to the ownership of such stock which, as the owner thereof, the corporation might have possessed and exercised if present. The Board of Directors, by resolution adopted from time to time, may confer like powers upon any other person or persons.

Section 5.15 Endorsement of Securities for Transfer.

Each of the Chairman of the Board, the President, and the principal accounting officer shall have the power to endorse and deliver for sale, assignment or transfer certificates for stock, bonds or other securities, registered in the name of or belonging to the corporation, whether issued by the corporation or by any other corporation, government, state or municipality or agency thereof, and the Board of Directors from time to time may confer like power upon any other officer, agent or person by resolution adopted from time to time. Every such endorsement shall be countersigned by the Treasurer or an Assistant Treasurer.

Section 5.16 Chairman and Vice Chairman of the Board.

The Board of Directors may elect from its members a Chairman of the Board and, if the Board of Directors so determines, a Vice Chairman of the Board. The Chairman of the Board and any Vice Chairman shall not be deemed to be officers or employees of the corporation unless otherwise specifically determined by the Board of Directors. The

- 16 -

Chairman of the Board shall preside at all of the meetings of the stockholders and of the Board of Directors. If the Board of Directors has elected a Vice Chairman of the Board of Directors, the Vice Chairman shall, in the absence of the Chairman of the Board of Directors, preside at all meetings of the stockholders and of the Board of Directors, and shall perform such other duties as may be assigned to him or her by the Board of Directors or the Chairman of the Board of Directors.

ARTICLE 6

Officers

Section 6.01 Number, Qualifications and Designation.

The officers of the corporation shall be chosen by the Board of Directors and shall include a President, one or more Vice Presidents, a Secretary, and such other officers as may be elected in accordance with the provisions of this Article. Any number of offices may be held by the same person. Officers may, but need not, be directors, stockholders or employees of the corporation.

Section 6.02 Election and Term of Office.

The officers of the corporation, except as elected by delegated authority pursuant to Section 6.03 of these Bylaws, shall be elected annually by the Board of Directors, and each such officer shall hold office for a term of one year and until a successor is elected and qualified, or until his or her earlier resignation or removal. Any officer may resign at any time upon written notice to the corporation.

Section 6.03 Subordinate Officers, Committees and Agents.

The Board of Directors may from time to time elect such other officers and appoint such committees, employees or other agents as it deems necessary, who shall hold their offices for such terms and shall exercise such powers and perform such duties as are provided in these Bylaws, or as the Board of Directors may from time to time determine. The Board of Directors may delegate to any officer or committee the power to elect subordinate officers and to retain or appoint employees or other agents, or committees thereof, and to prescribe the authority and duties of such subordinate officers, committees, employees or other agents.

Section 6.04 The Chairman of the Board.

If the Board of Directors has determined that the Chairman of the Board shall be an officer of the corporation, he or she shall have in such capacity all of the authority and responsibilities described in Section 5.16 of these Bylaws.

- 17 -

Section 6.05 The President.

Unless otherwise determined by the Board of Directors, the President shall be the most senior executive, the Chief Executive Officer, of the corporation. Under the supervision of the Board of Directors, the President shall have general oversight over the administration and operation of the corporation’s business and its policies and affairs. The President shall, in the absence of or because of the inability to act of the Chairman of the Board or any Vice Chairman, perform all duties of the Chairman of the Board and preside at all meetings of stockholders and of the Board of Directors. The President shall perform such other duties as may from time to time be assigned to him by the Board of Directors or by the Chairman of the Board.

Section 6.06 The Secretary.

The Secretary, or an Assistant Secretary, shall attend all meetings of the stockholders and of the Board of Directors and shall record the proceedings of the stockholders and of the directors in a book or books to be kept for that purpose; shall see that notices are given and records and reports properly kept and filed by the corporation as required by law; shall be the custodian of the seal of the corporation and see that it is affixed to all documents to be executed on behalf of the corporation under its seal; and, in general, shall perform all duties incident to the office of Secretary, and such other duties as may from time to time be assigned by the Board of Directors or the Chairman of the Board.

Section 6.07 The Treasurer.

The Treasurer, or an Assistant Treasurer, if either has been chosen by the Board of Directors, shall have or provide for the custody of the funds or other property of the corporation; shall collect and receive or provide for the collection and receipt of moneys earned by or in any manner due to or received by the corporation; shall deposit all funds in his or her custody as Treasurer in such banks or other places of deposit as the Board of Directors may from time to time designate; whenever so required by the Board of Directors, shall render an account showing his or her transactions as Treasurer and the financial condition of the corporation; and, in general, shall discharge such other duties as may from time to time be assigned by the Board of Directors or the Chairman of the Board.

Section 6.08 Officers’ Bonds.

No officer of the corporation need provide a bond to guarantee the faithful discharge of the officer’s duties unless the Board of Directors shall by resolution so require a bond in which event such officer shall give the corporation a bond (which shall be renewed if and as required) in such sum and with such surety or sureties as shall be satisfactory to the Board of Directors for the faithful performance of the duties of office.

Section 6.09 Salaries.

- 18 -

The salaries of the officers and agents of the corporation elected by the Board of Directors shall be fixed from time to time by the Board of Directors.

ARTICLE 7

Certificates of Stock, Transfer, Etc.

Section 7.01 Form and Issuance.

(a) Issuance. The shares of the corporation shall be represented by certificates unless the Board of Directors shall by resolution provide that some or all of any class or series of stock shall be uncertificated shares. Any such resolution shall not apply to shares represented by a certificate until the certificate is surrendered to the corporation. Notwithstanding the adoption of any resolution providing for uncertificated shares, every holder of stock represented by certificates and upon request every holder of uncertificated shares shall be entitled to have a certificate signed by, or in the name of the corporation by, the Chairman or Vice Chairman of the Board of Directors, or the President or Vice President, and by the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary, representing the number of shares registered in certificate form.

(b) Form and Records. Stock certificates of the corporation shall be in such form as approved by the Board of Directors. The stock record books and the blank stock certificate books shall be kept by the Secretary or by any agency designated by the Board of Directors for that purpose. The stock certificates of the corporation shall be numbered and registered in the stock ledger and transfer books of the corporation as they are issued.

(c) Signatures. Any of or all the signatures upon the stock certificates of the corporation may be a facsimile. In case any officer, transfer agent or registrar who has signed, or whose facsimile signature has been placed upon, any share certificate shall have ceased to be such officer, transfer agent or registrar, before the certificate is issued, it may be issued with the same effect as if the signatory were such officer, transfer agent or registrar at the date of its issue.

Section 7.02 Transfer.

Transfers of shares shall be made on the share register or transfer books of the corporation upon surrender of the certificate therefor, endorsed by the person named in the certificate or by an attorney lawfully constituted in writing.

Section 7.03 Lost, Stolen, Destroyed or Mutilated Certificates.

The Board of Directors may direct a new certificate of stock or uncertificated shares to be issued in place of any certificate theretofore issued by the corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new certificate or certificates, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or certificates, or the legal representative of the owner, to give the

- 19 -

corporation a bond sufficient to indemnify against any claim that may be made against the corporation on account of the alleged loss, theft or destruction of such certificate or the issuance of such new certificate or uncertificated shares.

Section 7.04 Record Holder of Shares.

The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware.

Section 7.05 Determination of Stockholders of Record.

(a) Meetings of Stockholders. In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall not be more than 60 nor less than ten days before the date of such meeting. If no record date is fixed by the Board of Directors, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting unless the Board of Directors fixes a new record date for the adjourned meeting.

(b) Dividends and other Lawful Action. In order that the corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action (other than stockholder action by written consent), the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall be not more than 60 days prior to such action. If no record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto.

ARTICLE 8

General Provisions

Section 8.01 Dividends.

- 20 -

Subject to the restrictions contained in the DGCL and any restrictions contained in the certificate of incorporation, the Board of Directors may declare and pay dividends upon the shares of capital stock of the corporation.

Section 8.02 Contracts.

Except as otherwise provided in these Bylaws, the Board of Directors may authorize any officer or officers including the Chairman and Vice Chairman of the Board of Directors, or any agent or agents, to enter into any contract or to execute or deliver any instrument on behalf of the corporation and such authority may be general or confined to specific instances. Any officer so authorized may, unless the authorizing resolution otherwise provides, delegate such authority to one or more subordinate officers, employees or agents, and such delegation may provide for further delegation.

Section 8.03 Corporate Seal.

The corporation shall have a corporate seal, which shall have inscribed thereon the name of the corporation, the year of its organization and the word “Delaware”. The seal may be used by causing it or a facsimile thereof to be impressed or affixed or in any other manner reproduced.

Section 8.04 Checks, Notes, Etc. All checks, notes and evidences of indebtedness of the corporation shall be signed by such person or persons as the Board of Directors may from time to time designate.

Section 8.05 Corporate Records.

(a) Examination by Stockholders. Every stockholder shall, upon written demand under oath stating the purpose thereof, have a right to examine, in person or by agent or attorney, during the usual hours for business, for any proper purpose, the stock ledger, list of stockholders, books or records of account, and records of the proceedings of the stockholders and directors of the corporation, and to make copies or extracts therefrom. A proper purpose shall mean a purpose reasonably related to such person’s interest as a stockholder. In every instance where an attorney or other agent shall be the person who seeks the right to inspection, the demand under oath shall be accompanied by a power of attorney or such other writing which authorizes the attorney or other agent to so act on behalf of the stockholder. The demand under oath shall be directed to the corporation at its registered office in Delaware or at its principal place of business. Where the stockholder seeks to inspect the books and records of the corporation, other than its stock ledger or list of stockholders, the stockholder shall first establish (1) that the stockholder has complied with the provisions of this section respecting the form and manner of making demand for inspection of such documents; and (2) that the inspection sought is for a proper purpose. Where the stockholder seeks to inspect the stock ledger or list of stockholders of the corporation and has complied with the provisions of this section respecting the form and manner of making demand for inspection of such documents, the burden of proof shall be upon the corporation to establish that the inspection sought is for an improper purpose.

- 21 -

(b) Examination by Directors. Any director shall have the right to examine the corporation’s stock ledger, a list of its stockholders and its other books and records for a purpose reasonably related to the person’s position as a director.

Section 8.06 Amendment of Bylaws.

Except as otherwise provided herein, these Bylaws may be altered, amended or repealed or new Bylaws may be adopted, if notice thereof is contained in the notice of the meeting, either (1) by majority vote of the stockholders at a duly organized annual or special meeting of stockholders or (2) by vote of a majority of the entire Board of Directors at any regular or special meeting of directors.

- 22 -

EX-10.19

- 1 -

Exhibit 10.19

EMPLOYMENT AGREEMENT

THIS AGREEMENT is made and entered into as of the 1^st day of March, 2000, by and between LYDALL, INC., a Delaware corporation (the “Company”), and Bill W. Franks (the “Executive”).

W  I  T  N  E  S  S  E  T  H

WHEREAS, the Company and the Executive (the “Parties”) have agreed to enter into this agreement (the “Agreement) relating to the employment of the Executive by the Company and/or one of its subsidiaries;

NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein and for other good and valuable consideration, the Parties, intending to be legally bound, agree as follows:

1. Term of Employment; Termination of Prior Agreement.

(a) The Company and/or one of its subsidiaries agrees to continue to employ the Executive, and the Executive agrees to remain in the employment of the Company and/or one of its subsidiaries, in accordance with the terms and provisions of this Agreement.

(b) The Employment Period under this Agreement shall be the period commencing as of the date of this Agreement and ending on the date of termination of the Executive’s employment pursuant to Section 5, 6 or 7 below, whichever is applicable.

(c) Immediately upon the commencement of the Executive’s employment pursuant to the terms of this Agreement, that certain Agreement by and between the Executive and the Company dated as of February 1, 2000 shall terminate and shall be of no further force or effect.

2. Duties. It is the intention of the Parties that during the term of the Executive’s employment under this Agreement, the Executive will serve as Division President of a subsidiary of the Company or in such other senior management position as the Company shall determine. During the Employment Period, the Executive will devote his full business time and attention and best efforts to the affairs of the Company and its subsidiaries and his duties as Division President. The Executive will have such duties as are appropriate to his position as Division President, and will have such authority as required to enable the Executive to perform these duties. Consistent with the foregoing, the Executive shall comply with all reasonable instructions of the Board of Directors of the Company (the “Board”).

- 2 -

3. Compensation and Benefits.

3.1 Salary. During the Employment Period, the Company will pay the Executive a base salary at an initial annual rate of One Hundred Seventy-Five Thousand Dollars ($175,000). The Company may, in its sole and absolute discretion, increase the Executive’s base salary in light of the Executive’s performance, inflation, changes in the cost of living and other factors deemed relevant by the Company. The Executive’s base salary may not be decreased during the term of this Agreement. The Chief Executive Officer of the Company shall meet with the Executive annually to review the Executive’s performance, objectives and compensation, including salary, bonus and stock options, and the Chief Executive Officer shall then meet with the Compensation and Stock Option Committee of the Board (the “Compensation Committee”) to discuss the same. If the Compensation Committee determines that any adjustments thereto are appropriate, such committee shall make a recommendation to the full Board and the Board shall make such adjustments, if any, as the Board deems appropriate and consistent with this Agreement. The Executive’s base salary will be paid in accordance with the standard practices for other corporate executives of the Company.

3.2 Bonuses. During the Employment Period, the Executive will be eligible to receive annually or otherwise such bonus awards, if any, as shall be determined by the Board in its sole and absolute discretion after receiving the recommendation of the Compensation Committee.

3.3 Benefit Programs. During the Employment Period, the Executive will be entitled to participate on substantially the same terms as other senior executives of the Company in all employee benefit plans and programs of the Company (subject to any restrictions or eligibility requirements under such plans and programs) from time to time in effect for the benefit of senior executives of the Company, including, but not limited to, pension and other retirement plans, profit sharing plans, stock incentive and annual incentive bonus plans, group life insurance, hospitalization and surgical and major medical coverages (excluding the Lydall, Inc. Executive Medical Plan), short-term and long-term disability, and such other benefits as are or may be made available from time to time to senior executives of the Company.

3.4 Vacations and Holidays. During the Employment Period, the Executive will be entitled to vacation leave of five (5) weeks per year at full pay or such greater vacation benefits as may be provided for by the Company’s vacation policies applicable to senior executives. The Executive will be entitled to such holidays as are established by the Company for all employees.

3.5 Automobile. During the Employment Period, the Company will provide the Executive with an automobile in accordance with Company policy.

- 3 -

4. Business Expenses. The Executive will be entitled to prompt reimbursement for all reasonable, documented and necessary expenses incurred by the Executive in performing his services hereunder, provided the Executive properly accounts therefor in accordance with the policies and procedures established by the Company.

5. Termination of Employment by the Company.

5.1 Involuntary Termination by the Company Other Than For Permanent and Total Disability or Cause. The Company may terminate the Executive’s employment at any time other than (i) by reason of the Executive’s Permanent and Total Disability (as defined in Section 5.2) or (ii) for Cause (as defined in Section 5.3), by giving the Executive a written notice of termination at least 30 days before the date of termination (or such lesser notice period as the Executive may agree to). In the event of such a termination of employment pursuant to this Section 5.1, the Executive shall be entitled to receive (i) the benefits described in Section 8 if such termination of employment does not occur within 12 months following a “Change of Control” (as defined in Section 10), or (ii) the benefits described in Section 9 if such termination of employment occurs within 12 months following a “Change of Control” (as defined in Section 10).

5.2 Termination Due to Permanent and Total Disability. If the Executive incurs a Permanent and Total Disability, as defined below, the Company may terminate the Executive’s employment by giving the Executive written notice of termination at least 30 days before the date of such termination (or such lesser notice period as the Executive may agree to). In the event of such termination of the Executive’s employment because of Permanent and Total Disability, the Executive shall be entitled to receive (i) his base salary pursuant to Section 3.1 through the date which is twelve months following the date of such termination of employment, reduced by any amounts paid to the Executive under any disability program maintained by the Company, such base salary to be paid at the normal time for the payment of such base salary, (ii) a bonus for the year of termination of employment and for the next succeeding year (to be paid at the normal time for payment of such bonuses) in an amount equal to the average of the three highest annual bonuses earned by the Executive under the Company’s annual incentive bonus plan for any of the five calendar years preceding the calendar year of his termination of employment (or, if the Executive was not eligible for a bonus for at least three calendar years in such five-year period, then the average of such bonuses for all of the calendar years in such five-year period for which the Executive was eligible), with any deferred bonuses counting for the year earned rather than the year paid; (iii) any other compensation and benefits to the extent actually earned by the Executive under any other benefit plan or program of the Company as of the date of such termination of employment, such compensation and benefits to be paid at the normal time for payment of such compensation and benefits, and (iv) any reimbursement amounts owing under Section 4. In addition, if the Executive elects to continue coverage under the Company’s health plan pursuant to COBRA, the Com-

- 4 -

pany for a period of twelve months following termination of the Executive’s employment by reason of Permanent and Total Disability will pay the same percentage of the Executive’s premium for COBRA coverage for the Executive and, if applicable, his spouse and dependent children, as the Company paid at the applicable time for coverage under such plan for actively employed senior executives generally. For the period of twelve months following the termination of the Executive’s employment by reason of Permanent and Total Disability, the Company will continue to provide the life insurance benefits that the Company would have provided to the Executive if the Executive had continued in employment with the Company for such period, but only if the Executive timely pays the portion of the premium for such coverage that senior executives of the Company generally are required to pay for such coverage, if any. For purposes of this Agreement, the Executive shall be considered to have incurred a Permanent and Total Disability if and only if the Executive has incurred a disability entitling the Executive to disability benefits under the Company’s long-term disability plan.

5.3 Termination for Cause. The Company may terminate the Executive’s employment immediately for Cause for any of the following reasons: (i) an act or acts of dishonesty or fraud on the part of the Executive resulting or intended to result directly or indirectly in substantial gain or personal enrichment to which the Executive was not legally entitled at the expense of the Company or any of its subsidiaries; (ii) a willful material breach by the Executive of his duties or responsibilities under this Agreement resulting in demonstrably material injury to the Company or any of its subsidiaries; (iii) the Executive’s conviction of a felony or any crime involving moral turpitude, (iv) habitual neglect or insubordination (defined as refusal to execute or carry out directions from the Board or its duly appointed designees) where the Executive has been given written notice of the acts or omissions constituting such neglect or insubordination and the Executive has failed to cure such conduct, where susceptible to cure, within thirty days following such notice, or (v) a material breach by the Executive of any of his obligations under the Lydall Employee Agreement executed by the Executive and attached hereto as Exhibit A. The Company shall exercise its right to terminate the Executive’s employment for Cause by giving the Executive written notice of termination specifying in reasonable detail the circumstances constituting such Cause. In the event of such termination of the Executive’s employment for Cause, the Executive shall be entitled to receive only (i) his base salary pursuant to Section 3.1 earned through the date of such termination of employment plus his base salary for the period of any vacation time earned but not taken for the year of termination of employment, such base salary to be paid at the normal time for payment of such base salary, (ii) any other compensation and benefits to the extent actually earned by the Executive under any other benefit plan or program of the Company as of the date of such termination of employment, such compensation and benefits to be paid and at the normal time for payment of such compensation and benefits and (iii) any reimbursement amounts owing under Section 4.

- 5 -

6. Termination of Employment by the Executive.

(a) Good Reason. The Executive may terminate his employment for Good Reason by giving the Company a written notice of termination at least 30 days before the date of such termination (or such lesser notice period as the Company may agree to) specifying in reasonable detail the circumstances constituting such Good Reason. In the event of the Executive’s termination of his employment for Good Reason, the Executive shall be entitled to receive (i) the benefits described in Section 8 if such termination of employment does not occur within 12 months following a “Change of Control” (as defined in Section 10), or (ii) the benefits described in Section 9 if such termination of employment occurs within 12 months following a “Change of Control” (as defined in Section 10). For purposes of this Agreement, Good Reason shall mean (i) a significant reduction in the scope of the Executive’s authority, functions, duties or responsibilities from that which is contemplated by this Agreement, (ii) any reduction in the Executive’s base salary, (iii) a significant reduction in the employee benefits provided to the Executive (excluding the Lydall, Inc. Executive Medical Plan) other than in connection with an across-the-board reduction similarly affecting substantially all senior executives of the Company, or (iv) any material breach by the Company of any provision of this Agreement without the Executive having committed any material breach of the Executive’s obligations hereunder or under the Lydall Employee Agreement which breach is not cured within thirty days following written notice thereof to the Company of such breach. In addition, in the case of a termination of employment within 12 months following a “Change of Control” (as defined in Section 10), Good Reason shall also include the relocation of the Executive’s office location to a location more than 50 miles away from the Executive’s then current principal place of employment. If an event constituting a ground for termination of employment for Good Reason occurs, and the Executive fails to give notice of termination within 90 days after the occurrence of such event, the Executive shall be deemed to have waived his right to terminate employment for Good Reason in connection with such event (but not for any other event for which the 90-day period has not expired).

(b) Other. The Executive may terminate his employment at any time and for any reason, other than pursuant to subsection (a) above, by giving the Company a written notice of termination to that effect at least 30 days before the date of termination (or such lesser notice period as the Company may agree to); provided, however, that the Company following receipt of such notice from the Executive may elect to have the Executive’s employment terminate immediately following its receipt of such notice. In the event of the Executive’s termination of his employment pursuant to this subsection (b), the Executive shall be entitled to receive only (i) his base salary pursuant to Section 3.1 earned through the date of such termination of employment plus his base salary for the period of vacation time earned but not taken for the year of termination of employment, such base salary to be paid at the normal time for payment of such base salary, (ii) any other compensation and benefits to the extent actually earned by the Executive under any other benefit plan or program of the Company as

- 6 -

of the date of such termination of employment, such compensation and benefits to be paid at the normal time for payment of such compensation and benefits, and (iii) any reimbursement amounts owing under Section 4.

7. Termination of Employment By Death. In the event of the death of the Executive during the course of his employment hereunder, the Executive’s estate (or other person or entity having such entitlement pursuant to the terms of the applicable plan or program) shall be entitled to receive (i) the Executive’s base salary pursuant to Section 3.1 earned through the date of the Executive’s death plus the Executive’s base salary for the period of vacation time earned but not taken for the year of the Executive’s death, such base salary to be paid at the normal time for payment of such base salary, (ii) a bonus for the year of the Executive’s death (to be paid within 90 days after the Executive’s death) in an amount equal to a pro rata portion of the average of the three highest annual bonuses earned by the Executive under the Company’s annual incentive bonus plan for any of the five calendar years preceding the calendar year of the Executive’s death (or, if the Executive was not eligible for a bonus for at least three calendar years in such five-year period, then the average of such bonuses for all of the calendar years in such five-year period for which the Executive was eligible), with any deferred bonuses counting for the year earned rather than the year paid and with the pro rata portion being determined by dividing the number of days of the Executive’s employment during such calendar year up to his death by 365 (366 if a leap year), (iii) any other compensation and benefits to the extent actually earned by the Executive under any other benefit plan or program of the Company as of the date of such termination of employment, such compensation and benefits to be paid at the normal time for payment of such compensation and benefits, and (iv) any reimbursement amounts owing under Section 4. In addition, in the event of such death, the Executive’s beneficiaries shall receive any death benefits owed to them under the Company’s employee benefit plans. If the Executive’s spouse and/or dependent children elect to continue coverage under the Company’s health plan following the Executive’s death pursuant to COBRA, the Company for a period of 12 months following the Executive’s death will pay the same percentage of the premium for COBRA coverage for the Executive’s spouse and/or dependent children, as applicable, as the Company would have paid in respect of the Executive’s coverage under such plan if the Executive had continued in employment with the Company for such period.

8. Benefits Upon Termination Without Cause or For Good Reason (No Change of Control). If (a) the Executive’s employment hereunder shall terminate (i) because of termination by the Company other than for Cause or Permanent and Total Disability pursuant to Section 5.1, or (ii) because of termination by the Employee for Good Reason pursuant to Section 6(a), and (b) such termination of employment does not occur within 12 months following a “Change of Control” of the Company (as defined in Section 10), the Executive shall be entitled to the following:

- 7 -

(a) The Company shall pay to the Executive his base salary pursuant to Section 3.1 earned through the date of such termination of employment and any other compensation and benefits to the extent actually earned by the Executive under any benefit plan or program of the Company as of the date of such termination of employment, such base salary, compensation and benefits to be paid at the normal time for payment of such base salary, compensation and benefits.

(b) The Company shall pay the Executive any reimbursement amounts owing under Section 4.

(c) The Company shall pay to the Executive in equal installments spread over the period of 12 months beginning on the date of the Executive’s termination of employment an amount equal in the aggregate to the sum of (i) the Executive’s annual rate of base salary immediately preceding his termination of employment, and (ii) the average of his annual bonuses earned under the Company’s annual incentive bonus plan for the three calendar years preceding his termination of employment (or, if the Executive was not eligible for a bonus in each of those three calendar years, then the average of such bonuses for all of the calendar years in such three-year period for which he was eligible), with any deferred bonuses counting for the year earned rather than the year paid. Such installments shall be paid at the times that salary payments are normally made by the Company.

(d) If the Executive elects to continue coverage under the Company’s health plan pursuant to COBRA, then for the period beginning on the date of the Executive’s termination of employment and ending on the earlier of (i) the date which is 12 months after the date of such termination of employment or (ii) the date on which the Executive commences substantially full-time employment as an employee of an employer that offers health benefits, the Company will pay the same percentage of the Executive’s premium for COBRA coverage for the Executive and, if applicable, his spouse and dependent children, as the Company paid at the applicable time for coverage under such plan for actively employed senior executives generally. In addition, for the period beginning on the date of the Executive’s termination of employment and ending on the earlier of (i) the date which is 12 months after the date of such termination of employment or (ii) the date on which the Executive commences substantially full-time employment as an employee of an employer that offers life insurance benefits, the Company will continue to provide the life insurance benefits that the Company would have provided to the Executive if the Executive had continued in employment with the Company for such period, but only if the Executive timely pays the portion of the premium for such coverage that senior executives of the Company generally are required to pay for such coverage, if any. The Executive shall notify the Company promptly if he, while eligible for benefits under this subsection (d), commences substantially full-

- 8 -

time employment as an employee of an employer that offers health and/or life insurance benefits.

(e) The Company will provide the Executive with outplacement services selected by the Executive, at the Company’s expense not to exceed $10,000.

9. Benefits Upon Termination Without Cause or For Good Reason (Change of Control). If (a) the Executive’s employment hereunder shall terminate (i) because of termination by the Company other than for Cause or Permanent and Total Disability pursuant to Section 5.1, or (ii) because of termination by the Employee for Good Reason pursuant to Section 6(a), and (b) such termination of employment occurs within 12 months following a “Change of Control” of the Company (as defined in Section 10), the Executive shall be entitled to the following:

(a) The Company shall pay to the Executive his base salary pursuant to Section 3.1 earned through the date of such termination of employment and any other compensation and benefits to the extent actually earned by the Executive under any benefit plan or program of the Company as of the date of such termination of employment, such base salary, compensation and benefits to be paid at the normal time for payment of such base salary, compensation and benefits.

(b) The Company shall pay the Executive any reimbursement amounts owing under Section 4.

(c) The Company shall pay to the Executive as a severance benefit an amount equal to two (2) times the sum of (i) his annual rate of base salary immediately preceding his termination of employment, and (ii) the average of his three highest annual bonuses earned under the Company’s annual incentive bonus plan for any of the five calendar years preceding his termination of employment (or, if the Executive was not eligible for a bonus for at least three calendar years in such five-year period, then the average of such bonuses for all of the calendar years in such five-year period for which the Executive was eligible), with any deferred bonuses counting for the year earned rather than the year paid. Such severance benefit shall be paid in a lump sum within 30 days after the date of such termination of employment.

(d) The Company shall pay to the Executive as a bonus for the year of termination of his employment an amount equal to a portion (determined as provided in the next sentence) of the Executive’s maximum bonus opportunity under the Company’s annual incentive bonus plan for the calendar year of termination of the Executive’s employment or, if none, such portion of the bonus awarded to the Executive under the Company’s annual incentive bonus plan for the calendar year immediately preceding the calendar year of the termination of his employment, with deferred bonuses

- 9 -

counting for the year earned rather than the year paid. Such portion shall be determined by dividing the number of days of the Executive’s employment during such calendar year up to his termination of employment by 365 (366 if a leap year). Such payment shall be made in a lump sum within 30 days after the date of such termination of employment, and the Executive shall have no right to any further bonuses under said plan.

(e) During the period of 24 months beginning on the date of the Executive’s termination of employment, the Executive (and, if applicable, the Executive’s spouse and dependent children) shall remain covered by the medical, dental, life insurance, and, if reasonably commercially available through nationally reputable insurance carriers, long-term disability plans of the Company that covered the Executive immediately prior to his termination of employment as if the Executive had remained in employment for such period; provided, however, that the coverage under any such plan is conditioned on the timely payment by the Executive (or his spouse or dependent children) of the portion of the premium for such coverage that actively employed senior executives with the Company generally are required to pay for such coverage. In the event that the Executive’s participation in any such plan is barred, the Company shall arrange to provide the Executive (and, if applicable, his spouse and dependent children) with substantially similar benefits (but, in the case of long-term disability benefits, only if reasonably commercially available).

(f) The Company shall supplement the benefits payable in respect of the Executive under the Company’s Pension Plan and Supplemental Executive Retirement Plan (and any successor plans thereto) (collectively, the “Pension Plans”) by paying the difference between (i) the benefits that the Executive would have been entitled to receive under the Pension Plans if he had been credited with two additional years of service (but no additional years of age) for purposes of the benefit accrual formula under the Pension Plans as of the date of termination of the Executive’s employment and (ii) the benefits that the Executive is entitled to receive under the Pension Plans determined without regard to this subsection (f). Such benefits shall be payable in the same form and at the same time as the benefits under the respective Pension Plans.

(g) Each stock option granted by the Company to the Executive and outstanding immediately prior to termination of his employment shall be fully vested and immediately exercisable and may be exercised by the Executive (or, following his death, by the person or entity to which such option passes) at any time prior to the expiration date of the applicable option (determined without regard to any earlier termination of the option that would otherwise occur by reason of termination of his employment). Each restricted stock award granted by the Company to the Executive and

- 10 -

outstanding immediately prior to termination of the Executive’s employment shall be fully vested upon such termination of employment.

(h) The Company will pay the Executive a car allowance of $500 per month for 24 months following termination of the Executive’s employment to replace the Company-leased automobile, which leased automobile will be returned to the Company by the Executive on the date of termination of the Executive’s employment.

(i) The Company will provide the Executive with out-placement services selected by the Executive, at the Company’s expense not to exceed $10,000.

(j) The Company shall promptly pay all reasonable attorneys’ fees and related expenses incurred by the Executive in seeking to obtain or enforce any right or benefit under this Agreement or to defend against any claim or assertion in connection with this Agreement, but only to the extent the Executive substantially prevails.

10. Change of Control. For the purposes of this Agreement, a “Change of Control” shall be deemed to have occurred if (a) any person or persons acting together which would constitute a “group” for purposes of Section 13(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), (other than the Company or any subsidiary of the Company) shall beneficially own (as defined in Rule 13d-3 of the Exchange Act), directly or indirectly, at least 25% of the total voting power of all classes of capital stock of the Company entitled to vote generally in the election of the Board; (b) Current Directors (as herein defined) shall cease for any reason to constitute at least a majority of the members of the Board (for this purpose, a “Current Director” shall mean any member of the Board as of the date hereof and any successor of a Current Director whose election, or nomination for election by the Company’s shareholders, was approved by at least a majority of the Current Directors then on the Board); (c) the shareholders of the Company approve (i) a plan of complete liquidation of the Company or (ii) an agreement providing for the merger or consolidation of the Company other than a merger or consolidation in which (x) the holders of the common stock of the Company immediately prior to the consolidation or merger have, directly or indirectly, at least a majority of the common stock of the continuing or surviving corporation immediately after such consolidation or merger or (y) the Board immediately prior to the merger or consolidation would, immediately after the merger or consolidation, constitute a majority of the board of directors of the continuing or surviving corporation; or (d) the shareholders of the Company approve an agreement (or agreements) providing for the sale or other disposition (in one transaction or a series of transactions) of all or substantially all of the assets of the Company.

11. Golden Parachute Excise Tax.

(a) In the event that any payment or benefit received or to be received by the Executive pursuant to this Agreement or any other plan, program or arrangement of the

- 11 -

Company or any of its affiliates would constitute an “excess parachute payment” within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the “Code”), then the payments under this Agreement shall be reduced (by the minimum possible amounts) until no amount payable to the Executive under this Agreement constitutes an “excess parachute payment” within the meaning of Section 280G of the Code; provided, however, that no such reduction shall be made if the net after-tax payment (after taking into account Federal, state, local or other income and excise taxes) to which the Executive would otherwise be entitled without such reduction would be greater than the net after-tax payment (after taking into account Federal, state, local or other income and excise taxes) to the Executive resulting from the receipt of such payments with such reduction. If, as a result of subsequent events or conditions (including a subsequent payment or absence of a subsequent payment under this Agreement or other plan, program or arrangement of the Company or any of its affiliates), it is determined that payments under this Agreement have been reduced by more than the minimum amount required to prevent any payments from constituting an “excess parachute payment”, then an additional payment shall be promptly made to the Executive in an amount equal to the additional amount that can be paid without causing any payment to constitute an excess parachute payment.

(b) All determinations required to be made under this Section 11 shall be made by a nationally recognized independent accounting firm mutually agreeable to the Company and the Executive (the “Accounting Firm”) which shall provide detailed supporting calculations to the Company and the Executive as requested by the Company or the Executive. All fees and expenses of the Accounting Firm shall be borne solely by the Company and shall be paid by the Company upon demand of the Executive as incurred or billed by the Accounting Firm. All determinations made by the Accounting Firm pursuant to this Section 11 shall be final and binding upon the Company and the Executive.

(c) To the extent any payment or benefit is to be reduced pursuant to this Section 11, the severance payment described in Section 8(c) or 9(c) will first be reduced, then the bonus described in Section 9(d), and then the supplemental pension benefits described in Section 9(f), in each case only to the extent necessary.

12. Entitlement to Other Benefits. Except as otherwise provided in this Agreement, this Agreement shall not be construed as limiting in any way any rights or benefits that the Executive or his spouse, dependents or beneficiaries may have pursuant to any other plan or program of the Company.

13. Indemnification. The parties agree to execute a separate Indemnification Agreement in the form attached as Exhibit B.

14. General Provisions.

- 12 -

14.1 No Duty to Seek Employment. The Executive shall not be under any duty or obligation to seek or accept other employment following termination of employment, and no amount, payment or benefits due to the Executive hereunder shall be reduced or suspended if the Executive accepts subsequent employment, except as expressly set forth herein.

14.2 Deductions and Withholding. All amounts payable or which become payable under any provision of this Agreement shall be subject to any deductions authorized by the Executive and any deductions and withholdings required by law.

14.3 Notices. All notices, demands, requests, consents, approvals or other communications (collectively “Notices”) required or permitted to be given hereunder or which are given with respect to this Agreement shall be in writing and may be personally served or may be faxed with a copy deposited in the United States mail, registered or certified, return receipt requested, postage prepaid, addressed as follows:

To the Company: Lydall, Inc. P.O. Box 151 One Colonial Road Manchester, CT 06045-0151 Attn: Chief Executive Officer

To the Executive: Bill W. Franks 103 Southpond Road South Glastonbury, CT 06073

or such other address as such party shall have specified most recently by written notice. Notice mailed as provided herein shall be deemed given on the fifth business day following the date so mailed or on the date of actual receipt, whichever is earlier.

14.4 No Disparagement. The Executive shall not during the period of his employment with the Company, nor during the two-year period beginning on the date of termination of his employment for any reason, disparage the Company or any of its subsidiaries or affiliates or any of their shareholders, directors, officers, employees or agents. The Executive agrees that the terms of this Section 14.4 shall survive the term of this Agreement and the termination of the Executive’s employment.

14.5 Proprietary Information and Inventions. The Lydall Employee Agreement previously executed by the Executive and attached hereto as Exhibit A is incorporated by reference in this Agreement, and the Executive agrees to continue to be bound thereby.

14.6 Covenant to Notify Management. The Executive agrees to abide by the ethics policies of the Company as well as the Company’s other rules, regulations, policies and

- 13 -

procedures. The Executive agrees to comply in full with all governmental laws and regulations as well as ethics codes applicable. In the event that the Executive is aware or suspects the Company, or any of its officers or agents, of violating any such laws, ethics, codes, rules, regulations, policies or procedures, the Executive agrees to bring all such actual and suspected violations to the attention of the Company immediately so that the matter may be properly investigated and appropriate action taken. The Executive understands that the Executive is precluded from filing a complaint with any governmental agency or court having jurisdiction over wrongful conduct unless the Executive has first notified the Company of the facts and permits it to investigate and correct the concerns.

14.7 Amendments and Waivers. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by the Executive and the Company. No waiver by either Party hereto at any time of any breach by the other Party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other Party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time.

14.8 Beneficial Interests. This Agreement shall inure to the benefit of and be enforceable by a) the Company’s successors and assigns and b) the Executive’s personal and legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive shall die while any amounts are still payable to him hereunder, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Executive’s devisee, legatee, or other designee or, if there be no such designee, to the Executive’s estate.

14.9 Successors. The Company will require any successors (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform.

14.10 Assignment. This Agreement and the rights, duties, and obligations hereunder may not be assigned or delegated by any Party without the prior written consent of the other Party and any attempted assignment or delegation without such prior written consent shall be void and be of no effect. Notwithstanding the foregoing provisions of this Section 14.10, the Company may assign or delegate its rights, duties and obligations hereunder to any affiliate or to any person or entity which succeeds to all or substantially all of the business of the Company or one of its subsidiaries through merger, consolation, reorganization, or other business combination or by acquisition of all or substantially all of the assets of the Company or one of its subsidiaries.

- 14 -

14.11 Choice of Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Connecticut.

14.12 Statute of Limitations. The Executive and the Company hereby agree that there shall be a one year statute of limitations for the filing of any requests for arbitration or any lawsuit relating to this Agreement or the terms or conditions of Executive’s employment by the Company. If such a claim is filed more than one year subsequent to the Executive’s last day of employment it shall be precluded by this provision, regardless of whether or not the claim has accrued at that time.

14.13 Right to Injunctive and Equitable Relief. The Executive’s obligations under Section 14.4 are of a special and unique character, which gives them a peculiar value. The Company cannot be reasonably or adequately compensated for damages in an action at law in the event the Executive breaches such obligations. Therefore, the Executive expressly agrees that the Company shall be entitled to injunctive and other equitable relief without bond or other security in the event of such breach in addition to any other rights or remedies which the Company may possess or be entitled to pursue. Furthermore, the obligations of the Executive and the rights and remedies of the Company under Section 14.4 and this Section 14.13 are cumulative and in addition to, and not in lieu of, any obligations, rights, or remedies as created by applicable law.

14.14 Severability or Partial Invalidity. The invalidity or unenforceability of any provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect.

14.15 Entire Agreement. This Agreement, along with the Lydall Employee Agreement and the Indemnification Agreement by and between the Executive and the Company, constitutes the entire agreement of the Parties and supersedes all prior written or oral and all contemporaneous oral agreements, understandings, and negotiations between the Parties with respect to the subject matter hereof. This Agreement may not be changed orally and may only be modified in writing signed by both Parties. This Agreement, along with the Lydall Employee Agreement and the Indemnification Agreement, is intended by the Parties as the final expression of their agreement with respect to such terms as are included herein and therein and may not be contradicted by evidence of any prior or contemporaneous agreement. The Parties further intend that this Agreement, along with the Lydall Employee Agreement and the Indemnification Agreement, constitutes the complete and exclusive statement of their terms and that no extrinsic evidence may be introduced in any judicial proceeding involving such agreements.

14.16 Counterparts. This Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed an original but all of which together shall constitute one and the same instrument.

- 15 -

IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its duly authorized officer and the Employee has hereunto set his hand as of the day and year first above written.

LYDALL, INC.
By:	/s/    Christopher R. Skomorowski	March 1, 2000
	Christopher R. Skomorowski President and Chief Executive Officer	Date
	/s/    Bill W. Franks, Jr.	March 1, 2000
	Bill W. Franks, Jr.	Date

- 1 -

Exhibit 10.19

EXHIBIT B

INDEMNIFICATION AGREEMENT

This Agreement, made and entered into this 1st day of March, 2000 (“Agreement”), by and between Lydall, Inc., a Delaware corporation (“Company”), and Bill W. Franks (“Indemnitee”):

WHEREAS, highly competent persons are becoming more reluctant to serve publicly-held corporations as directors or in other capacities unless they are provided with adequate protection through insurance or adequate indemnification against inordinate risks of claims and actions against them arising out of their service to and activities on behalf of the corporation; and

WHEREAS, the current impracticability of obtaining adequate insurance and the uncertainties relating to indemnification have increased the difficulty of attracting and retaining such persons;

WHEREAS, the Board of Directors of the Company has determined that the inability to attract and retain such persons is detrimental to the best interests of the Company’s stockholders and that the Company should act to assure such persons that there will be increased certainty of such protection in the future; and

WHEREAS, it is reasonable, prudent and necessary for the Company contractually to obligate itself to indemnify such persons to the fullest extent permitted by applicable law so that they will serve or continue to serve the Company free from undue concern that they will not be so indemnified; and

WHEREAS, Indemnitee is willing to serve, continue to serve and to take on additional service for or on behalf of the Company on the condition that he be so indemnified;

NOW, THEREFORE, in consideration of the premises and the covenants contained herein, the Company and Indemnitee do hereby covenant and agree as follows:

Section 1. Services by Indemnitee. Indemnitee agrees to serve (as a director, officer, employee, agent of the Company) (at the request of the Company, as a director, officer, employee, agent, fiduciary of another corporation, partnership, joint venture, trust employee benefit plan or other enterprise. Indemnitee may at any time and for any reason resign from such position (subject to any other contractual obligation or any obligation imposed by operation of law), in which event the Company shall have no obligation under this Agreement to continue Indemnitee in such position.

- 2 -

Section 2. Indemnification – General. The Company shall indemnify, and advance Expenses (as hereinafter defined) to, Indemnitee (a) as provided in this Agreement and (b) to the fullest extent permitted by applicable law in effect on the date hereof and as amended from time to time. The rights of Indemnitee provided under the preceding sentence shall include, but shall not be limited to, the rights set forth in the other Sections of this Agreement.

Section 3. Proceedings Other than Proceedings by or in the Right of the Company. Indemnitee shall be entitled to the rights of indemnification provided in this Section 3 if, by reason of his Corporate Status (as hereinafter defined), he is, or is threatened to be made, a party to any threatened, pending, or completed Proceeding (as hereinafter defined), other than a Proceeding by or in the right of the Company. Pursuant to this Section 3, Indemnitee shall be indemnified against all expenses, judgements, penalties, fines, and amounts paid in settlement actually and reasonably incurred by him or on his behalf in connection with such Proceeding or any claim, issue or matter therein, if he acted in good faith and in a manner be reasonably believed to be in or not opposed to the best interests of the Company and, with respect to any criminal Proceeding, had no reasonable cause to believe his conduct was unlawful.

Section 4. Proceedings by or in the Right of the Company. Indemnitee shall be entitled to the rights of indemnification provided in this Section 4 if, by reason of his Corporate Status, he is, or is threatened to be made, a party to any threatened, pending or completed Proceeding brought by or in the right of the Company to procure a judgment in its favor. Pursuant to this Section, Indemnitee shall be indemnified against all Expenses actually and reasonably incurred by him or on his behalf in connection with such Proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company; provided, however, that if applicable law so provides, no indemnification against such Expenses shall be made in respect of any claim, issue or matter in such Proceeding as to which Indemnitee shall have been adjudged to be liable to the Company unless and to the extent that the Court of Chancery of the State of Delaware, or the court in which such Proceeding shall have been brought or is pending, shall determine that such indemnification may be made.

Section 5. Indemnification for Expenses of a Party Who is Wholly or Partly Successful. Notwithstanding any other provision of this Agreement, to the extent that Indemnitee is, by reason of his Corporate Status, a party to and is successful, on the merits or otherwise, in any Proceeding, he shall be indemnified against all Expenses actually and reasonably incurred by him or on his behalf in connection therewith. If Indemnitee is not wholly successful in such Proceeding but is successful, on the merits or otherwise, as to one or more but less than all claims, issues or matters in such Proceeding, the Company shall indemnify Indemnitee against all expenses actually and reasonably incurred by him or on his behalf in connection with each successfully resolved claim, issue or matter. For purposes of

- 3 -

this Section and without limitation, the termination of any claim, issue or matter in such a Proceeding by dismissal, with or without prejudice, shall be deemed to be a successful result as to such claim, issue or matter.

Section 6. Indemnification for Expenses of a Witness. Notwithstanding any other provision of this Agreement, to the extent that Indemnitee is, by reason of his Corporate Status, a witness in any Proceeding to which Indemnitee is not a party, he shall be indemnified against all Expenses actually and reasonably incurred by him or on his behalf in connection therewith.

Section 7. Advancement of Expenses. The Company shall advance all reasonable Expenses incurred by or on behalf of Indemnitee in connection with any Proceeding within ten days after the receipt by the Company of a statement or statements from Indemnitee requesting such advance or advances from time to time, whether prior to or after final disposition of such Proceeding. Such statement or statements shall reasonably evidence the Expenses incurred by Indemnitee and shall include or be preceded or accompanied by an undertaking by or on behalf of Indemnitee to repay any Expenses advanced if it shall ultimately be determined that Indemnitee is not entitled to be indemnified against such Expenses.

Section 8. Procedures for Determination of Entitlement to Indemnification.

(a) To obtain indemnification under this Agreement, Indemnitee shall submit to the Company a written request, including therein or therewith such documentation and information as is reasonably available to Indemnitee and is reasonably necessary to determine whether and to what extent Indemnitee is entitled to indemnification. The Secretary of the Company shell, promptly upon receipt of such a request for indemnification, advise the Board of Directors in writing that Indemnitee has requested indemnification.

(b) Upon written request by Indemnitee for indemnification pursuant to the first sentence of Section 8(a) hereof, a determination, if required by applicable law, with respect to Indemnitee’s entitlement thereto shall be made in the specific case; (i)if a Change in Control (as hereinafter defined) shall be made in the Independent Counsel (as hereinafter defined) in a written opinion to the Board of Directors, a copy of which shall be delivered to Indemnitee; or (ii) if a Change of Control shall not have occurred, (A) by the Board of Directors by a majority vote of a quorum consisting of Disinterested Directors (as hereinafter defined), or (B) if a quorum of the Board of Directors consisting of Disinterested Directors is not obtainable or, even if obtainable, such quorum of Disinterested Directors so directs, by Independent Counsel in a written opinion to the Board of Directors, a copy of which shall be delivered to Indemnitee or (C) if so directed by the Board of Directors, by the stockholders of the Company; and, if it is so determined that Indemnitee is entitled to indemnification, payment to Indemnitee shall be made within ten (10) days after such determination. Indemnitee shall

- 4 -

cooperate with the person, persons or entity making such determination with respect to Indemnitee’s entitlement to indemnification, including providing to such person, persons or entity upon reasonable advance request any documentation or information which is not privileged or otherwise protected from disclosure and which is reasonably available to Indemnitee and reasonably necessary to such determination. Any costs or expenses (including attorneys’ fees and disbursements) incurred by Indemnitee in so cooperating with this person, persons or entity making such determination shall be borne by the Company (Irrespective of the determination as to Indemnitee’s entitlement to indemnification) and the Company hereby indemnifies and agrees to hold Indemnitee harmless therefrom.

(c) In the event the determination of entitlement to indemnification is to be made by Independent Counsel pursuant to Section 8(b) hereof, the Independent Counsel shall be selected as provided in this Section 8(c). If a Change of Control shall not have occurred, the Independent Counsel shall be selected by the Board of Directors, and the Company shall give written notice to Indemnitee advising him of the identity of the Independent Counsel so selected. If a Change of Control shall have occurred, the Independent Counsel shall be selected by Indemnitee (unless Indemnitee shall request that such selection be made by the Board of Directors, in which event the preceding sentence shall apply), and Indemnitee shall give written notice to the Company advising it of the identity of the Independent Counsel so selected. In either event, Indemnitee or the Company, as the case may be, may, within 10 days after such written notice of selection shall have been given, deliver to the Company or to Indemnitee, as the case may be, a written objection to such selection; provided, however, that such objection may be asserted only on the ground that the Independent Counsel so selected does not meet the requirements of “Independent Counsel” as defined in Section 17 of this Agreement, and the objection shall set forth with particularity the factual basis of such assertion. If such written objection is so made and substantiated, the Independent Counsel so selected may not serve as Independent Counsel unless and until such objection is withdrawn or a court has determined that such objection is without merit. If, within 20 days after submission by Indemnitee of a written request for indemnification pursuant to Section 8(a) hereof, no Independent Counsel shall have been selected and not objected to, either the Company or Indemnitee may petition the Court of Chancery of the State of Delaware or other court of competent jurisdiction for resolution of any objection which shall have been made the Company or Indemnitee to the other’s selection of Independent Counsel and/or for the appointment as Independent Counsel of a person selected by the Court of by such other person as the Court shall designate, and the person with respect to whom all objections are so resolved or the person so appreciated shall act as Independent Counsel under Section 8(b) hereof. The Company shall pay any and all reasonable fees and expenses of Independent Counsel incurred by such Independent Counsel in connection with acting pursuant to Section 8(b) hereof, and the Company shall pay all reasonable fees and expenses incident to the procedures of this Section 8(c), regardless of the manner in which such Independent Counsel was selected or appointed. Upon the due commencement of any judicial proceeding or

- 5 -

arbitration pursuant to Section 10(a)(iii) of this Agreement, Independent Counsel shall be discharged and relived of any further responsibility in such capacity (subject to the applicable standards of professional conduct then prevailing).

Section 9. Presumptions and Effect of Certain Proceedings.

(a) If a Change of Control shall have occurred, in making a determination with respect to entitlement to indemnification hereunder, the person or persons or entity making such determination shall presume that Indemnitee is entitled to indemnification under this Agreement if Indemnitee has submitted a request for indemnification in accordance with Section 8(a) of this Agreement, and the Company shall have the burden of proof to overcome that presumption in connection with the making by any person, persons or entity of any determination contrary to that presumption.

(b) The termination of any Proceeding or of any claim, issue or matter therein, by judgment, order, settlement of conviction, or upon a plea of nolo contendere or its equivalent, shall not (except as otherwise expressly provided in this Agreement) of itself adversely affect the right of Indemnitee to indemnification or create a presumption that Indemnitee did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Company or, with respect to any criminal Proceeding, that Indemnitee had reasonable cause to believe that his conduct was unlawful.

Section 10. Remedies of Indemnitee.

(a) In the event that (i) a determination is made pursuant to Section 8 of this Agreement that Indemnitee is not entitled to indemnification under this Agreement, (ii) advancement of Expenses is not timely made pursuant to Section 7 of this Agreement, (iii) no determination of entitlement to indemnification shall have been made pursuant to Section 8(b) of this Agreement within 90 days after receipt by the Company of the request for indemnification, (iv) payment of indemnification is not made pursuant to Section 5 or 6 of this Agreement within ten (10) days after receipt by the Company of a written request therefor, or (v) payment of indemnification is not made within 10 (10) days after a determination has been made that Indemnitee is entitled to indemnification, Indemnitee shall be entitled to an adjudication in an appropriate court of the State of Delaware, or in any other court of competent jurisdiction, of his entitlement to such indemnification or advancement of Expenses. Alternatively, Indemnitee, at his option, may seek an award in arbitration to be conducted by a single arbitrator pursuant to the Commercial Arbitration Rules of the American Arbitration Association. Indemnitee shall commence such proceeding seeking an adjudication or an award in arbitration within 180 days following the data on which Indemnitee first has the right to commence such proceeding pursuant to this Section 10(a);

- 6 -

provided, however, that the foregoing clause shall not apply in respect of a proceeding brought by Indemnitee to enforce his rights under Section 5 of this Agreement.

(b) In the event that a determination shall have been made pursuant to Section 8(b) of this Agreement that Indemnitee is not entitled to indemnification, any judicial proceeding or arbitration commenced pursuant to this Section 10 shall be conducted in all respects as a de novo trial, or arbitration, on the merits and Indemnitee shall not be prejudiced by reason of that adverse determination. If a Change of Control shall have occurred, in any judicial proceeding or arbitration commenced pursuant to this Section 10 the Company shall have the burden of proving that Indemnitee is not entitled to indemnification or advancement of Expenses, as the case may be.

(c) If a determination shall have been made pursuant to Section 8(b) of this Agreement that Indemnitee is entitled to indemnification, the Company shall be bound by such determination in any judicial proceeding or arbitration commenced pursuant to this Section 10, absent (i) a misstatement by Indemnitee of a material fact, or an omission of a material fact necessary to make Indemnitee’s statement not materially misleading, in connection with the request for indemnification, or (ii) a prohibition of such indemnification under applicable law.

(d) In the event that Indemnitee, pursuant to this Section 10, seeks a judicial adjudication of or an award in arbitration to enforce his rights under, or to recover damages for breach of, this Agreement, Indemnitee shall be entitled to recover from the Company, and shall be indemnified by the Company against, any and all expenses (of the types described in the definition of Expenses in Section 17 of this Agreement) actually and reasonably incurred by him in such judicial adjudication or arbitration, but only if he prevails therein. If it shall be determined in said judicial adjudication or arbitration that Indemnitee is entitled to receive part but not all of the indemnification or advancement of expenses sought, the expenses incurred by Indemnitee in connection with such judicial adjudication or arbitration shall be appropriately prorated.

Section 11. Non-Exclusivity; Survival of Rights; Insurance; Subrogation.

(a) The rights of indemnification and to receive advancement of Expenses as provided by this Agreement shall not be deemed exclusive of any other rights to which Indemnitee may at any time be entitled under applicable law, the Certificate of Incorporation, the By-Laws, any agreement, a vote of stockholders or a resolution of directors, or otherwise. No amendment, alteration or repeal of this Agreement or of any provision hereof shall limit or restrict any right of Indemnitee in his Corporate Status prior to such amendment, alteration or repeal.

- 7 -

(b) To the extent that the Company maintains an insurance policy or policies providing liability insurance for directors, officers, employees, or agents of the Company or of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise which such person serves at the request of the Company, Indemnitee shall be covered by such policy or policies in accordance with its or their terms to the maximum extent of the coverage available for any such director, officer, employee or agent under such policy or policies.

(c) In the event of any payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnities, who shall execute all papers required and take all action necessary to secure such rights, including execution of such documents as are necessary to enable the Company to bring suit to enforce such rights.

(d) The Company shall not be liable under this Agreement to make any payment of amounts otherwise indemnifiable hereunder if and to the extend that Indemnities has otherwise actually received such payment under any insurance policy, contract, agreement or otherwise.

Section 12. Duration of Agreement. This Agreement shall continue until and terminate upon the later of: (a)10 years after the date that Indemnities shall have ceased to serve as a director, officer, employee, or agent of the Company or of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise which Indemnitee served at the request of the Company; or (b) the final termination of any Proceeding then pending in respect of which Indemnitee is granted rights of indemnification or advancement of expenses hereunder and of any proceeding commenced by Indemnitee pursuant to Section 10 of this Agreement relating thereto. This Agreement shall be binding upon the Company and its successors and assigns and shall inure to the benefit of Indemnitee and his heirs, executors and administrators.

Section 13. Severability. If any provision or provisions of this Agreement shall be held to be invalid, illegal or unenforceable for any reason whatsoever: (a) the validity, legality and enforceability of the remaining provisions of this Agreement (including without limitation, each portion of any Section of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that is not itself invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby; and (b) to the fullest extent possible, the provisions of this Agreement (including, without limitation, each portion of any Section of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that is not itself invalid, illegal or unenforceable) shall be construed to as to give effect to the intent manifested thereby.

- 8 -

Section 14. Exception to Right of Indemnification or Advancement of Expenses. Notwithstanding any other provision of this Agreement, Indemnitee shall not be entitled to indemnification or advancement of Expenses under this Agreement with respect to any Proceeding brought by Indemnitee, or any claim therein prior to a Change in Control, unless the bringing of such Proceeding or making of such claim shall have been approved by the Board of Directors.

Section 15. Identical Counterparts. This agreement may be executed in one or more counterparts, each of which shall for all purposes be deemed to be an original but all of which together shall constitute one and the same Agreement. Only one such counterpart signed by the party against whom enforceability is sought needs to be produced to evidence the existence of this Agreement.

Section 16. Headings. The headings of the paragraphs of this Agreement re inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction thereof.

Section 17. Definitions. (a) The phrase “Change of Control,” as used in this Agreement, shall mean i) an acquisition of the Company by means of a merger or consolidation or purchase of substantially all of its assets if and when incident thereto (A) the composition of the Board of Directors of the Company (the “Board”) or its successor changes so that a majority of the Board is not comprised of individuals who were members of the board immediately prior to such merger, consolidation or purchase of assets or (B) the stockholders of the Company acquire a right to receive, in exchange for or upon surrender a majority of their stock, cash or other securities or a combination of the two; and/or ii) the acquisition by a person (as that term is hereafter defined) of the voting rights with respect to 25 percent or more of the outstanding Common Stock of the Company if such person was not an officer of director of the Company on the date of this Agreement; and/or iii) the election or appointment to the Board of any director or directors whose appointment or election or nomination for election was not approved by a vote of at least a majority of the directors then still in office who were either directors on the date hereof or whose election, appointment or nomination for election was previously so approved.

(b) “Corporate Status” describes the status of a person who is or was a director, officer, employee or agent of the Company or of any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise which such person is or was serving at the request of the Company.

(c) “Disinterested Director” means a director of the Company who is not and was not a party to the Proceeding in respect of which indemnification is sought by Indemnitee.

- 9 -

(d) “Effective Date” means March 1, 2000.

(e) “Expenses” shall include all reasonable attorney’s fees, retainers, court costs, transcript costs, fees of experts, witness fees, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees, and all other disbursements or expenses of the types customarily incurred in connection with prosecuting, defending, preparing to prosecute or defend, investigating, or being or preparing to be a witness in a Proceeding.

(f) “Independent Counsel” means a law firm, or a member of a law firm, that is experienced in matters of corporation law and neither presently is, nor in the past five years has been, retained to represent: (i) the Company or Indemnitee in any matter material to either such party, or (ii) any other party to the Proceeding giving rise to a claim for indemnification hereunder. Notwithstanding the foregoing, the term “Independent Counsel” shall not include any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Company or Indemnitee in an action to determine Indemnitee’s rights under this Agreement.

(g) “Proceeding” includes any action, suite, arbitration, alternate dispute resolution mechanism, investigation, administrative hearing or any other proceeding, whether civil, criminal, administrative, or investigative, except one (i) initiated by an Indemnitee pursuant to Section 10 of this Agreement to enforce his rights under this Agreement or (ii) pending on or before the Effective Date.

Section 18. Modification and Waiver. No supplement, modification or amendment of this Agreement shall be binding unless executed in writing by both of the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereof (whether or not similar) nor shall such waiver constitute a continuing waiver.

Section 19. Notice by Indemnitee. Indemnitee agrees promptly to notify the Company in writing upon being served with any summons, citation, subpoena, complaint, indictment, information or other document relating to any Proceeding or matter which may be subject to indemnification or advancement of Expenses covered hereunder.

Section 20. Notices. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if (i) delivered by hand and receipted for by the party to whom said notice or other communication shall have been directed, or (ii) mailed by certified or registered mail with postage prepaid, on the third business day after the date on which it is so mailed:

- 10 -

(a) If to Indemnitee, to:

Bill W. Franks

103 Southpond Road

South Glastonbury, CT 06073

(b) If to the Company to:

Mary Tremblay

General Counsel and Secretary

Lydall, Inc.

P.O. Box 151

One Colonial Road

Manchester, CT 06045-0151

or to such other address as may have been furnished to Indemnitee by the Company or to the Company by Indemnitee, as the case may be.

Section 21. Governing Law. The parties agree that this Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of Delaware.

Section 22. Miscellaneous. Use of the masculine pronoun shall be deemed to include usage of the feminine pronoun where appropriate.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the day and year first written.

ATTEST:		LYDALL, INC.,
	By	/s/ Christopher R. Skomorowski
		Christopher R. Skomorowski President and Chief Executive Officer

- 11 -

By:	/s/    Bill W. Franks, Jr.
	INDEMNITEE

Bill W. Franks

103 Southpond Road

South Glastonbury, CT 06073

- 1 -

AMENDMENT TO EMPLOYMENT AGREEMENT

BETWEEN LYDALL, INC. AND BILL FRANKS

Dated March 1, 2000

This is an Amendment of the Employment Agreement between Lydall, Inc. and Bill Franks dated March 1, 2000. This Amendment is made in consideration of the mutual agreements and promises hereinafter set forth and for other good and valuable consideration.

All provisions of the Employment Agreement are reaffirmed and will remain in full force and effect except that the following new section shall be added as noted:

9. Benefits Upon Termination Without Cause or For Good Reason (Change of Control).

(h) The Company will pay the Executive a car allowance, in an amount equal to Executive’s monthly lease allowance at the time of termination, per month for 24 months following termination of the Executive’s employment to replace the Company-leased automobile, which leased automobile will be returned to the Company by the Executive on the date of termination of the Executive’s employment.

This amendment will be effective as of August 1, 2000.

IN WITNESS WHEREOF, Lydall, Inc. and Bill Franks have caused this Amendment to the Agreement to be executed in duplicate.

LYDALL, INC.

By	/s/    Walter A. Ruschmeyer	/s/    Bill W. Franks, Jr.
	Walter A. Ruschmeyer Executive Vice President — Finance and Administration, Chief Financial Officer	Bill Franks

EX-14.1

Exhibit 14.1

Code of Ethics for the Chief Executive Officer, Senior Financial Officers and

All Accounting and Financial Personnel

One of Lydall’s core values is the ethical and professional conduct of finance personnel worldwide. Based on their roles and responsibilities, finance personnel have an obligation to ensure that all stakeholders’ interests are appropriately balanced, protected and preserved. This code sets forth the fundamental principles to which Lydall finance personnel are expected to adhere and uphold. Finance personnel are expected to unequivocally abide by this code as well as all other applicable Lydall policies and procedures relating to areas covered by this code. Any violations of this code may result in disciplinary action as appropriate.

All Lydall financial personnel will:

1. Act with honesty and integrity in good faith, with due care, competence and diligence.

2. Comply with laws, rules and regulations of federal, state, provincial and local governments, and other appropriate regulatory agencies.

3. Promote an environment of truthful disclosure and honesty.

4. Avoid actual or apparent conflicts of interest between personal and professional relationships and consult the Company policy or contact the Legal Department regarding conflict situations as they arise.

5. Maintain skills and knowledge important and relevant to their position.

6. Responsibly use and safeguard Company assets entrusted to them.

7. Report information that is accurate, complete, fairly stated, timely and understandable without misrepresenting or omitting material facts, including material information that may effect the Company’s public filings.

8. Respect the confidentiality of information acquired in the course of their work except when authorized or otherwise legally obligated to disclose. Confidential information acquired in the course of their work will not be used for personal advantage.

9. Promptly report any violation of: (i) applicable laws, (ii) this Code or the Company’s Code of Ethics and Business Conduct or (iii) fraud to an appropriate Finance manager, a member of the Disclosure Committee or a member of the Audit Review Committee, which can be done, if preferred, on an anonymous basis on the employee alert line.

10. Promptly report any significant deficiencies in internal controls to an appropriate Finance manager, a member of the Disclosure Committee or a member of the Audit Review Committee, which can be done, if preferred, on an anonymous basis on the employee alert line.

11. Proactively promote ethical behavior in the work environment.

The Board of Directors shall determine, or designate appropriate persons to determine, appropriate actions to be taken in the event of violations of this Code up to and including termination. Such actions shall be reasonably designed to deter wrongdoing and to promote accountability for adherence to this Code. In determining what action is appropriate in a particular case, the Board of Directors or such designee shall take into account all relevant information, including the nature and severity of the violation, whether the violation was a single occurrence or repeated occurrences, whether the violation appears to have been intentional or inadvertent, whether the individual in question had been advised prior to the violation as to the proper course of action and whether or not the individual in question had committed other violations in the past.

1

EX-21.1

Exhibit 21.1

LIST OF SUBSIDIARIES AS OF DECEMBER 31, 2003

I. Parent Company

Lydall, Inc.

II. First tier

Lydall Thermal/Acoustical, Inc.

Lydall Filtration/Separation, Inc.

Lydall FSC, Limited

Lydall Transport, Ltd.

Lydall Finance, Inc.

Lydall International, Inc.

Lydall France S.A.S.

Lydall Deutschland Holding GmbH

III. Second tier

Charter Medical, Ltd.

Lydall Thermal/Acoustical Sales, LLC

Lydall Industrial Thermal Solutions, Inc.

Trident II, Inc.

Lydall Distribution Services, Inc.

Lydall Filtration/Separation S.A.S.

Lydall Thermique/Acoustique S.A.S.

Lydall Gerhardi GmbH & Co. KG

IV. Third tier

Lydall Industrial Thermal Sales/Service, LLC

V. Fourth tier

Affinity Industries Asia LLC

EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT AUDITORS

We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (File Nos. 33-93768, 333-08886 and 333-109500) of Lydall, Inc. of our report dated February 6, 2004 relating to the financial statements and financial statement schedule, which appears in this Annual Report on Form 10-K for the year ended December 31, 2003.

/s/    PRICEWATERHOUSECOOPERS LLP        

PricewaterhouseCoopers LLP

Hartford, Connecticut

March 12, 2004

EX-24.1

Exhibit 24.1

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned directors and officers of Lydall, Inc. (the “Corporation”), does hereby constitute and appoint David Freeman and Thomas P. Smith, and each of them singly, as his agent and attorney-in-fact to do any and all things and acts in his name and in the capacities indicated below and to execute any and all instruments for him and in his name in the capacities indicated below which said David Freeman and Thomas P. Smith, or either of them, may deem necessary or advisable to enable the Corporation to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with the preparation and filing of the Corporation’s Annual Report on Form 10-K (the “Annual Report”) respecting the fiscal year ended December 31, 2003, including specifically, but not limited to, power and authority to sign for him in his name in the capacities indicated below the Annual Report and any and all amendments thereto, and each of the undersigned does hereby ratify and confirm all that said David Freeman and Thomas P. Smith, or either of them, shall do or cause to be done by virtue hereof.

IN WITNESS WHEREOF, each of the undersigned has executed this Power of Attorney as of the date indicated opposite his or her name.

/s/    ROGER M. WIDMANN         Roger M. Widmann	Chairman of the Board and Director	February 26, 2004
/s/    DAVID FREEMAN         David Freeman	President, Chief Executive Officer and Director	February 26, 2004
/s/    CHRISTOPHER R. SKOMOROWSKI         Christopher R. Skomorowski	Executive Vice President, Chief Operating Officer and Director	February 26, 2004
/s/    KATHLEEN BURDETT         Kathleen Burdett	Director	February 26, 2004
/s/    SAMUEL P. COOLEY         Samuel P. Cooley	Director	February 26, 2004
/s/    W. LESLIE DUFFY         W. Leslie Duffy	Director	February 26, 2004
/s/    MATTHEW T. FARRELL         Matthew T. Farrell	Director	February 26, 2004
/s/    SUZANNE HAMMETT         Suzanne Hammett	Director	February 26, 2004
/s/    S. CARL SODERSTROM, JR.         S. Carl Soderstrom, Jr.	Director	February 26, 2004
/s/    ELLIOTT F. WHITELY         Elliott F. Whitely	Director	February 26, 2004

EX-31.1

Exhibit 31.1

CERTIFICATION

I, David Freeman, certify that:

1. I have reviewed this annual report on Form 10-K of Lydall, Inc.;

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

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

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

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

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

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

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

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

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

March 12, 2004	/S/    DAVID FREEMAN
	David Freeman President and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Thomas P. Smith, certify that:

1. I have reviewed this annual report on Form 10-K of Lydall, Inc.;

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

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

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

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

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

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

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

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

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

March 12, 2004	/S/    THOMAS P. SMITH
	Thomas P. Smith Vice President–Controller and Interim Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATIONS PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Lydall, Inc. (the “Company”) on Form 10-K for the period ending December 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned officers of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to our knowledge:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

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

The foregoing certifications are accompanying the Form 10-K solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, chapter 63 of title 18, United States Code) and are not being filed as a part of this Form 10-K or as a separate disclosure document.

March 12, 2004	/S/    DAVID FREEMAN
	David Freeman President and Chief Executive Officer

March 12, 2004	/S/    THOMAS P. SMITH
	Thomas P. Smith Vice President – Controller and Interim Chief Financial Officer