10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-Q

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

For the quarterly period ended June 30, 2008

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	06042
(Address of principal executive offices)	(zip code)

(860) 646-1233

(Registrant’s telephone number, including area code)

None

(Former name, former address and former fiscal year, if changed since last report)

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

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

Large accelerated filer  ¨        Accelerated filer  x        Non-accelerated filer  ¨        Smaller reporting company  ¨

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common stock $.10 par value per share.
Total Shares outstanding July 23, 2008	16,649,279

LYDALL, INC.

INDEX

			Page Number
Part I.	Financial Information
	Item 1.	Financial Statements
		Condensed Consolidated Statements of Operations	3
		Condensed Consolidated Balance Sheets	5
		Condensed Consolidated Statements of Cash Flows	6
		Notes to Condensed Consolidated Financial Statements	7
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	28
	Item 4.	Controls and Procedures	28
Part II.	Other Information
	Item 1.	Legal Proceedings	28
	Item 1A.	Risk Factors	29
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29
	Item 5.	Other Information	29
	Item 6.	Exhibits	30
Signature			31
Exhibit Index			32

2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

LYDALL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands Except Per Share Data)

	Quarter Ended June 30,
	2008			2007
	(Unaudited)
Net sales	$	88,908		$	87,754
Cost of sales		68,772			67,368
Gross margin		20,136			20,386
Selling, product development and administrative expenses		15,457			14,637
Operating income		4,679			5,749
Interest expense		129			113
Other (income) expense, net		(51	)		32
Income before income taxes		4,601			5,604
Income tax expense		1,703			2,083
Net income	$	2,898		$	3,521
Earnings per share:
Basic	$	.18		$	.22
Diluted	$	.17		$	.21
Weighted average number of common shares outstanding:
Basic		16,439			16,294
Diluted		16,610			16,585

See accompanying Notes to Condensed Consolidated Financial Statements.

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LYDALL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands Except Per Share Data)

	Six Months Ended June 30,
	2008			2007
	(Unaudited)
Net sales	$	183,186		$	171,469
Cost of sales		141,571			133,230
Gross margin		41,615			38,239
Selling, product development and administrative expenses		31,878			30,361
Operating income		9,737			7,878
Interest expense		244			221
Other (income) expense, net		(179	)		28
Income before income taxes		9,672			7,629
Income tax expense		3,579			2,832
Net income	$	6,093		$	4,797
Earnings per share:
Basic	$	.37		$	.30
Diluted	$	.37		$	.29
Weighted average number of common shares outstanding:
Basic		16,422			16,225
Diluted		16,516			16,501

See accompanying Notes to Condensed Consolidated Financial Statements.

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LYDALL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In Thousands)

	June 30, 2008			December 31, 2007
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	26,615		$	15,716
Accounts receivable, net		50,418			49,539
Inventories, net		37,608			37,181
Prepaid expenses and other current assets, net		5,579			7,542
Total current assets		120,220			109,978
Property, plant and equipment, at cost		246,240			234,611
Accumulated depreciation		(137,838	)		(127,279	)
Net, property, plant and equipment		108,402			107,332
Goodwill		30,884			30,884
Other assets, net		11,832			10,390
Total assets	$	271,338		$	258,584
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt	$	1,598		$	1,452
Accounts payable		27,747			27,586
Accrued payroll and other compensation		9,041			7,450
Other accrued liabilities		9,259			9,984
Total current liabilities		47,645			46,472
Long-term debt		8,267			8,377
Deferred tax liabilities		15,944			16,354
Pension and other long-term liabilities		6,573			6,928
Commitments and contingencies
Stockholders’ equity:
Preferred stock		—			—
Common stock		2,308			2,301
Capital in excess of par value		51,339			50,105
Retained earnings		194,789			188,696
Accumulated other comprehensive income		9,374			4,252
Treasury stock, at cost		(64,901	)		(64,901	)
Total stockholders’ equity		192,909			180,453
Total liabilities and stockholders’ equity	$	271,338		$	258,584

See accompanying Notes to Condensed Consolidated Financial Statements.

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LYDALL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

	Six Months Ended June 30,
	2008			2007
	(Unaudited)
Cash flows from operating activities:
Net income	$	6,093		$	4,797
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization		7,845			7,607
Deferred income taxes		834			530
Stock based compensation		457			462
Loss on disposition of property, plant and equipment		117			48
Changes in operating assets and liabilities:
Accounts receivable		543			(11,820	)
Inventories		816			(1,702	)
Accounts payable		(587	)		1,386
Accrued payroll and other compensation		1,267			(2,641	)
Other, net		(2,123	)		1,987
Net cash provided by operating activities		15,262			654
Cash flows from investing activities:
Capital expenditures		(5,287	)		(5,301	)
Net cash used for investing activities		(5,287	)		(5,301	)
Cash flows from financing activities:
Debt proceeds		—			26,950
Debt repayments		(710	)		(25,423	)
Common stock issued		825			2,436
Net cash provided by financing activities		115			3,963
Effect of exchange rate changes on cash		809			94
Increase (decrease) in cash and cash equivalents		10,899			(590	)
Cash and cash equivalents at beginning of period		15,716			6,402
Cash and cash equivalents at end of period	$	26,615		$	5,812

See accompanying Notes to Condensed Consolidated Financial Statements.

6

LYDALL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Financial Statement Presentation

Lydall designs and manufactures specialty engineered automotive thermal and acoustical barriers, filtration media, industrial thermal insulating solutions, temperature-control equipment, medical filtration media and devices and biopharmaceutical processing components for demanding thermal/acoustical, filtration/separation and biopharmaceutical applications. Lydall also provides transport, distribution and warehousing services primarily to the paper and printing industries.

The accompanying condensed consolidated financial statements include the accounts of Lydall, Inc. and its subsidiaries (collectively, the “Company” or the “Registrant”). All financial information is unaudited for the interim periods reported. All significant intercompany transactions have been eliminated in the condensed consolidated financial statements. The condensed consolidated financial statements have been prepared, in all material respects, in accordance with the same accounting principles followed in the preparation of the Company’s annual financial statements for the year ended December 31, 2007. The year-end condensed consolidated balance sheet was derived from the December 31, 2007 audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. Management believes that all adjustments, which include only normal recurring adjustments necessary to fairly present the Company’s consolidated financial position, results of operations and cash flows for the periods reported, have been included. For further information, refer to the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.

2. Inventories

Inventories, net of valuation reserves, as of June 30, 2008 and December 31, 2007 were as follows:

In thousands	June 30, 2008			December 31, 2007
Raw materials	$	15,156		$	14,469
Work in process		12,041			12,891
Finished goods		10,960			9,990
		38,157			37,350
Less: Progress billings		(549	)		(169	)
Total inventories	$	37,608		$	37,181

Raw materials, work in process and finished goods inventories were net of valuation reserves of $2.0 million as of June 30, 2008 and December 31, 2007. Progress billings relate to tooling inventory, which is included in work in process inventory in the above table. Total tooling inventories, net of progress billings and valuation reserves, were $5.3 million and $6.9 million at June 30, 2008 and December 31, 2007, respectively.

3. Earnings Per Share

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

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

	Quarter Ended June 30, 2008						Quarter Ended June 30, 2007
In thousands except per share amounts	Net Income		Average Shares	Per Share Amount			Net Income		Average Shares	Per Share Amount
Basic earnings per share	$	2,898	16,439	$	.18		$	3,521	16,294	$	.22
Effect of dilutive options and awards		—	171		(.01	)		—	291		(.01	)
Diluted earnings per share	$	2,898	16,610	$	.17		$	3,521	16,585	$	.21
	Six Months Ended June 30, 2008						Six Months Ended June 30, 2007
In thousands except per share amounts	Net Income		Average Shares	Per Share Amount			Net Income		Average Shares	Per Share Amount
Basic earnings per share	$	6,093	16,422	$	.37		$	4,797	16,225	$	.30
Effect of dilutive options and awards		—	94		—			—	276		(.01	)
Diluted earnings per share	$	6,093	16,516	$	.37		$	4,797	16,501	$	.29

Options to purchase approximately 27,000 and 67,000 shares of common stock were excluded from the quarter ended computation of diluted earnings per share for June 30, 2008 and 2007, respectively. Options to purchase approximately 97,000 and 87,000 shares of common stock were excluded from the six months ended computations of diluted earnings per share for June 30, 2008 and 2007, respectively. These options were excluded because the exercise price was greater than the average market price of the Company’s common stock.

4. Equity Compensation Plans

The Company has stock-based compensation plans under which incentive and non-qualified stock options and restricted shares may be granted to employees and outside directors from authorized but unissued shares of common stock or treasury shares. Options issued by the Company under its stock option plans have a term of ten years and generally vest ratably over a period of four years. Restricted stock grants are expensed over the vesting period of the award, which is typically four years. Stock options issued under the current plan must have an exercise price that may not be less than the fair market value of the Company’s common stock on the date of grant.

The Company recognizes expense on a straight-line basis over the vesting period of the entire award. Stock-based compensation expense includes the estimated effects of forfeitures, and estimates of forfeitures are adjusted over the requisite service period to the extent actual forfeitures differ, or are expected to differ, from such estimates. The effect of changes in estimated forfeitures are recognized in the period of change and also impact the amount of expense to be recognized in future periods. The Company estimates the fair value of option grants based on the Black-Scholes option-pricing model. Expected volatility and expected term are based on historical information. The Company has determined that its future volatility and expected term are not likely to differ from the Company’s historical stock price volatility and historical exercise data, respectively.

The Company incurred compensation expense of $0.2 million for each of the quarters ended June 30, 2008 and June 30, 2007, and compensation expense of $0.5 million for each of the six month periods ended June 30, 2008 and June 30, 2007, for all stock-based compensation plans, including restricted stock awards.

8

Stock Options

The following table is a summary of option activity of the Company’s plans during the six months ended June 30, 2008:

In thousands except per share amounts	Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (years)	Aggregate Intrinsic Value
Outstanding at December 31, 2007	921		$	10.12
Granted	32		$	11.39
Exercised	(68	)	$	9.74
Forfeited/Cancelled	(73	)	$	11.18
Outstanding at June 30, 2008	812		$	10.11	6.4	$	2,089
Options exercisable at June 30, 2008	499		$	10.26	5.0	$	1,195

There were 31,544 and 15,148 options granted during the quarter and six months ended June 30, 2008 and 2007, respectively. The total intrinsic value of options exercised during the quarter ended June 30, 2008 was $0.2 million and the amount of cash received from the exercise of stock options was $0.6 million. The total intrinsic value of options exercised during the six months ended June 30, 2008 was $0.2 million and the amount of cash received from the exercise of stock options was $0.7 million. The total intrinsic value of options exercised during the quarter ended June 30, 2007 was $0.5 million and the amount of cash received from the exercise of stock options was $0.8 million. The total intrinsic value of options exercised during the six months ended June 30, 2007 was $0.9 million and the amount of cash received from the exercise of stock options was $2.1 million. At June 30, 2008, the total unrecognized compensation cost related to non-vested stock option awards was approximately $1.2 million, with a weighted average expected amortization period of 2.7 years.

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 for the quarters ended:

	Quarter Ended June 30,
	2008		2007
Risk-free interest rate	4.91	%	4.52	%
Expected life	5.8 years		6.5 years
Expected volatility	44	%	43	%
Expected dividend yield	0	%	0	%

Restricted Stock

At June 30, 2008, the total unrecognized compensation cost related to non-vested restricted stock awards was approximately $1.2 million, with a weighted average expected amortization period of 3.0 years. The following is a summary of the status of the Company’s non-vested restricted shares as of June 30, 2008:

In thousands except per share amounts	Shares		Weighted- Average Grant- Date Fair Value
Non-vested at December 31, 2007	180		$	10.20
Granted	—			—
Vested	—			—
Forfeited	(5	)	$	9.99
Non-vested at June 30, 2008	175		$	10.21

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5. Employer Sponsored Benefit Plans

As of June 30, 2008, the Company maintains three defined benefit pension plans (“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. Lydall closed its non-union pension plans to new employees hired after December 31, 2005 and, effective June 30, 2006, benefits under these pension plans stopped accruing for all eligible employees not covered under a collective bargaining agreement. Concurrently, the Board of Directors approved an increase in the Company’s matching cash contribution to the Company’s 401(k) 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 expects to contribute up to $0.6 million in cash to its defined benefit pension plans in 2008. Contributions of $0.2 million were made during the second quarter of 2008 and for the six months ended June 30, 2008. There were no contributions made during the second quarter of 2007 and $1.7 million of contributions were made during the six months ended June 30, 2007.

The following is a summary of the components of net periodic benefit cost for the quarters and six months ended June 30, 2008 and June 30, 2007:

	Quarter Ended June 30,						Six Months Ended June 30,
In thousands	2008			2007			2008			2007
Components of net periodic benefit cost:
Service cost	$	23		$	24		$	46		$	48
Interest cost		641			628			1,282			1,256
Expected return on assets		(787	)		(754	)		(1,574	)		(1,508	)
Amortization of actuarial loss and prior service cost		45			62			91			124
Net periodic benefit expense (income)	$	(78	)	$	(40	)	$	(155	)	$	(80	)

6. Income Taxes

The Company and its subsidiaries file a consolidated federal income tax return, as well as returns required by various state and foreign jurisdictions. In the normal course of business the Company is subject to examination by taxing authorities, including such major jurisdictions as the United States, France and Germany. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations for years before 2003. The Company adopted the provisions of the Financial Accounting Standards Board (FASB) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” (FIN 48) on January 1, 2007. This Interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes”.

As a result of the implementation of FIN 48, the Company recognized a $0.3 million increase in the liability for unrecognized tax benefits, which was accounted for as a reduction to the January 1, 2007 balance of retained earnings. As of June 30, 2008, the net amount of unrecognized tax benefits was $1.1 million. The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is $1.1 million. There have been no significant changes to these amounts during the quarter or six months ended June 30, 2008.

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7. Comprehensive Income

Comprehensive income for the periods ended June 30, 2008 and 2007 was as follows:

	Quarter Ended					Six Months Ended
	June 30,					June 30,
In thousands	2008			2007		2008			2007
Net income	$	2,898		$	3,521	$	6,093		$	4,797
Changes in accumulated other comprehensive income:
Foreign currency translation adjustments		(225	)		721		5,065			1,337
Pension liability adjustment, net of tax		29			15		58			77
Unrealized gain (loss) on derivative instruments, net of tax		51			7		(1	)		1
Total comprehensive income	$	2,753		$	4,264	$	11,215		$	6,212

8. Fair Value Measurements

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (FAS 157). This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements. FAS 157 defines fair value based upon an exit price model. A fair value measurement assumes that the transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability, or, in the absence of a principal market, the most advantageous market for the asset or liability. This Statement was effective for the Company beginning on January 1, 2008, except that FSP 157-2 delayed the effective date of FAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis, until fiscal years beginning after November 15, 2008.

The Company adopted FAS 157 on January 1, 2008, with the exception of the application of the Statement to non-recurring nonfinancial assets and liabilities measured at fair value which include: (i) goodwill impairment testing, (ii) initial measurement of the fair value of asset retirement obligations and (iii) measurement of impairment of long-lived assets.

FAS 157 establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on the Company’s assumptions used to measure assets and liabilities at fair value. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

The following table provides the assets and (liabilities) carried at fair value measured on a recurring basis as of June 30, 2008:

				Fair Value measurements at June 30, 2008 Using
In thousands	Total Carrying Value at June 30, 2008			Quoted prices In active markets (Level 1)		Significant other observable inputs (Level 2)			Significant unobservable inputs (Level 3)
Forward exchange contracts	$	(105	)	$	—	$	(105	)	$	—

Derivative valuations are based on observable inputs to a valuation model including interest rates and foreign currency exchange rates and are classified within Level 2 of the valuation hierarchy.

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In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Liabilities, including an amendment of FASB Statement No. 115”, (FAS 159). This Statement permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The Company adopted FAS 159 on January 1, 2008 and elected not to measure any additional financial instruments and other items at fair value. The adoption did not have a material effect on the Company’s consolidated financial position, results of operations or cash flows during the quarter and six months ended June 30, 2008.

9. Segment Information

Effective the first quarter of 2008, changes were made to the Company’s internal organization structure, including the basis upon which management makes operating decisions and assesses performance. Consequently, the Company was required to modify its reportable segments. The Company’s reportable segments are now Thermal/Acoustical and Performance Materials. The Thermal/Acoustical segment reports the results of the Company’s automotive businesses. The Performance Materials segment reports results of the filtration businesses and the Industrial thermal insulation business, (formerly the passive thermal business and specialty products). All other businesses are aggregated in Other Products and Services (“OPS”). OPS is comprised of the Company’s vital fluids business, Affinity^® temperature control equipment business, (formerly the active thermal business), and the transport, distribution and warehousing services business. The Company also changed allocations of corporate office overhead to certain businesses. The Company has restated the corresponding segment information for the quarter and six months ended June 30, 2007 to reflect changes made to segments in the first quarter of 2008.

Thermal/Acoustical Segment

The Thermal/Acoustical segment primarily provides automotive thermal and acoustical barriers, including ZeroClearance^®, AMS^® , dB-Lyte^®, dBCore^® and LyTherm^® products, which 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 that 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.

Performance Materials Segment

The Performance Materials Segment includes filtration media solutions for air, fluid power, industrial and life science applications and industrial thermal insulation solutions for building products, appliances, and energy and industrial markets.

Lydall air filtration products include LydAir^®MG (Micro-Glass), LydAir^®MB (Melt Blown) and LydAir^®SC (Synthetic Composite) media. These products constitute the critical media component of clean-air systems for applications in clean-space, commercial, industrial and residential HVAC, power generation, industrial processes and protection/respiratory devices. Lydall has leveraged its extensive technical expertise and applications knowledge into a suite of media products covering the vast liquid filtration landscape across the Engine & Industrial and Life Science fields. The LyPore^® and activated carbon containing ActiPure^® media series address a variety of application needs including hydraulic filters, air-water & air-oil coalescing, industrial fluid processes, diesel filtration, biopharmaceutical pre-filtration and clarification, diagnostic tests, and drinking water filtration.

The Company’s industrial thermal insulation business develops unique high performance non-woven veils, papers, mats and specialty composites for the building products, appliance, and energy and Industrial markets. The Manniglas^® brand is diverse in its product application ranging from high temperature seals and gaskets in ovens and ranges to specialty veils for HVAC and cavity wall insulation. Apply™ Mat has been developed to expand Lydall’s high temperature technology portfolio for broad application into the appliance market and supplements the Lytherm™ product brand, traditionally utilized in the Industrial market for kilns and furnaces used in metal processing. CryoTherm^®, a super insulation product, is an industry standard used by manufacturers of cryogenic equipment for liquid gas storage and transportation.

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Other Products and Services

The components of Other Products and Services (OPS) are Lydall’s vital fluids business, Affinity^® temperature control equipment business, formerly called the active thermal business, and the transport, distribution and warehousing business.

The Company’s vital fluids business serves the life science industry offering specialty products for blood transfusion and cell therapy applications as well as Bio-Pak^® single-use bioprocessing containers for containment of media, buffers and bulk intermediates used in Biotech, Pharmaceutical and Diagnostic reagent manufacturing processes. Additionally its medical filter materials products are utilized in traditional blood filtration devices such as cardiotomy reservoirs and autotransfusion filters.

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

Lydall’s transport, distribution and warehousing 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.

The table below presents net sales and operating income by segment for the quarters and six months ended June 30, 2008 and 2007 and also a reconciliation of total segment net sales and operating income to total consolidated net sales and operating income.

	Quarter Ended June 30,						Six Months Ended June 30,
In thousands	2008			2007			2008			2007
Thermal/Acoustical:
Automotive parts	$	41,239		$	42,619		$	84,155		$	83,238
Automotive tooling		3,743			4,412			12,127			8,775
Thermal/Acoustical Segment net sales	$	44,982		$	47,031		$	96,282		$	92,013
Performance Materials:
Filtration	$	19,856		$	16,995		$	38,819		$	33,621
Industrial Thermal Insulation		11,335			10,465			22,154			20,743
Performance Materials Segment net sales	$	31,191		$	27,460		$	60,973		$	54,364
Other Products and Services:
Vital Fluids	$	4,220		$	3,868		$	8,381		$	7,414
Affinity® temperature control equipment		3,892			5,403			8,908			9,273
Transport, distribution and warehousing services		5,385			5,119			10,168			10,667
Other Products and Services net sales	$	13,497		$	14,390		$	27,457		$	27,354
Eliminations and Other		(762	)		(1,127	)		(1,526	)		(2,262	)
Consolidated Net Sales	$	88,908		$	87,754		$	183,186		$	171,469
Operating income by segment was as follows:
	Quarter Ended June 30,						Six Months Ended June 30,
In thousands	2008			2007			2008			2007
Thermal/Acoustical	$	2,854		$	4,877		$	7,520		$	8,638
Performance Materials		4,864			4,831			9,476			8,337
Other Products and Services		(138	)		(299	)		(381	)		(710	)
Corporate Office Expenses		(2,901	)		(3,660	)		(6,878	)		(8,387	)
Consolidated Operating Income	$	4,679		$	5,749		$	9,737		$	7,878

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10. Commitments and Contingencies

On January 25, 2008, a suit was filed against the Company in the Connecticut Superior Court by a former employee. The complaint alleges that the Company breached the former employee’s employment agreement and stock option agreements and that the Company owes the employee approximately $0.8 million, plus any compensatory and punitive damages awarded by the Court. No reserve has been recorded as of June 30, 2008 related to this lawsuit as the Company believes that this suit is without merit and intends to defend it vigorously.

On February 22, 2008, the same former employee filed a lawsuit in Delaware Chancery Court seeking further indemnification and advancement from the Company in the amount of $0.9 million. The amount sought was for income taxes that he was expecting to incur as a result of payments made by the Company in 2007, related to prior litigation discussed in previous filings with the Securities and Exchange Commission. Management concluded that it was probable that a loss was incurred by the Company as of December 31, 2007. The Company recorded expense of approximately $0.9 million in the quarter ended December 31, 2007 related to this matter. On April 11, 2008, the Company entered into a settlement agreement with the former employee and paid $1.0 million, of which $0.9 million was expensed in prior periods, in settlement of the above indemnification matter.

During the quarter and six months ended June 30, 2008, the Company recorded expense of $0.1 million and $0.3 million, respectively, related to these matters.

11. Recently Issued Accounting Standards

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (FAS 157). This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements. FAS 157 defines fair value based upon an exit price model. A fair value measurement assumes that the transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability, or, in the absence of a principal market, the most advantageous market for the asset or liability. This Statement was effective for the Company beginning on January 1, 2008, except that FSP 157-2 delayed the effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis, until fiscal years beginning after November 15, 2008. The Company adopted FAS 157 on January 1, 2008 (See Note 8 to the Condensed Consolidated Financial Statements), with the exception of the application of the Statement to non-recurring nonfinancial assets and liabilities measured at fair value which include: (i) goodwill impairment testing, (ii) initial measurement of the fair value of asset retirement obligations and (iii) measurement of impairment of long-lived assets. The implementation of FAS 157 did not have a material effect on the Company’s consolidated financial position, results of operations or cash flows during the quarter and six months ended June 30, 2008, and is not expected to have a material effect on the Company upon full adoption in future periods.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Liabilities, including an amendment of FASB Statement No. 115”, (FAS 159). This Statement permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The Company adopted FAS 159 on January 1, 2008 and elected not to measure any additional financial instruments and other items at fair value. The adoption did not have a material effect on the Company’s consolidated financial position, results of operations or cash flows during the quarter and six months ended June 30, 2008.

In December 2007, the FASB issued SFAS No. 141R, “Business Combinations” (FAS 141R). FAS 141R amends FAS 141 and provides revised guidance requiring the acquirer to recognize and measure, at fair value on the acquisition date, identifiable assets and goodwill acquired, liabilities assumed, and any non-controlling interest in the acquiree. Transaction and restructuring costs generally will be expensed as incurred. The Statement also provides disclosure requirements to enable users of the financial statements to evaluate the nature and financial effects of the business combination. FAS 141R is effective for fiscal years beginning on or after December 15, 2008 and will be applied prospectively. The Company is currently evaluating the potential impact of this Statement.

14

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an amendment of Accounting Research Bulletin (ARB) No. 51” (FAS 160). FAS 160 requires that ownership interests in subsidiaries held by parties other than the parent, and the amount of consolidated net income, be clearly identified, labeled, and presented in the consolidated financial statements. It also requires once a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary be initially measured at fair value. Sufficient disclosures are required to clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. It is effective for fiscal years beginning on or after December 15, 2008 and requires retroactive adoption of the presentation and disclosure requirements for existing minority interests. All other requirements shall be applied prospectively. The adoption of FAS 160 is not expected to have a material effect on the Company’s consolidated financial position, results of operations or cash flows.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities-an amendment of FASB Statement No. 133” (FAS 161). FAS 161 is intended to improve financial reporting about derivative instruments and hedging activities by requiring disclosure of the fair values of derivative instruments and their gains and losses in a tabular format. It also provides more information about an entity’s liquidity by requiring disclosure of derivative features that are credit risk-related and finally, it requires cross-referencing within footnotes. It is effective for fiscal years beginning on or after November 15, 2008. The adoption of FAS 161 is not expected to have a material effect on the Company’s consolidated financial position, results of operations or cash flows.

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (FAS 162). This statement documents the hierarchy of the various sources of accounting principles and the framework for selecting the principles used in preparing financial statements. FAS 162 shall be effective 60 days following the Securities and Exchange Commission’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles”. The adoption of FAS 162 is not expected to have a material effect on the Company’s consolidated financial position, results of operations or cash flows.

15

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

Cautionary Note Concerning Factors That May Affect Future Results

In the interest of more meaningful disclosure, Lydall and its management make statements regarding the future outlook of the Company, which constitute “forward-looking statements” under the securities laws. These forward-looking statements are intended to provide management’s current expectations for the future operating and financial performance of the Company, based on assumptions and estimates currently believed to be valid. Forward-looking statements are included under the “Overview and Outlook” section of this Item and elsewhere within this report and are generally identified through the use of language such as “believes,” “expects,” “may,” “plans,” “projects,” “estimates,” “anticipates,” “targets,” “forecasts” and other words of similar meaning in connection with the discussion of future operating or financial performance. All forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the forward-looking statements.

Some of the factors that might cause such a difference include risks and uncertainties which are detailed in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Cautionary Note Concerning Factors That May Affect Future Results” and “Risk Factors” sections of the Company’s Annual Report on Form 10-K for the year ended December 31, 2007. Such risks include, among others: a major downturn of the automotive markets, which accounted for approximately 53 percent of Lydall’s 2008 year-to-date net sales, pricing for automotive products and dependence on large customers, including significant amounts of accounts receivable from automakers outstanding at any point in time. Other factors include: unforeseen changes in raw material pricing and supply, specifically, aluminum and other metals used in most of the Company’s heat-shield products and various fibers used in thermal/acoustical and performance materials products, increases in energy pricing, inherent risks at international operations, including fluctuations in foreign exchange rates, expansion into new geographic regions, the timing and performance of new-product introductions, compliance with environmental laws and regulations, outcomes of legal contingencies and strategic transactions can impact Lydall’s projected 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.

Effective the first quarter of 2008, changes were made to the Company’s internal organization structure, including the basis upon which management makes operating decisions and assesses performance. Consequently, the Company was required to modify its reportable segments. The Company’s reportable segments are now Thermal/Acoustical and Performance Materials. The Thermal/Acoustical segment reports the results of the Company’s automotive businesses. The Performance Materials segment reports results of the filtration businesses and the industrial thermal insulation business, formerly the passive thermal business and specialty products. All other businesses are aggregated in Other Products and Services (“OPS”). OPS is comprised of the Company’s vital fluids business, Affinity^® temperature control equipment business, formerly the active thermal business, and the transport, distribution and warehousing services business. The Company also changed allocations of corporate office overhead to certain businesses. The Company has restated the corresponding segment information for the quarter and six months ended June 30, 2007 to reflect changes made to segments in 2008.

Overview and Outlook

Lydall designs and manufactures specialty engineered automotive thermal and acoustical barriers, filtration media, industrial thermal insulating solutions, temperature-control equipment, medical filtration media and devices and biopharmaceutical processing components for demanding thermal/acoustical, filtration/separation and biopharmaceutical applications. Lydall also provides transport, distribution and warehousing services primarily to the paper and printing industries. Lydall’s businesses are in markets that present growth opportunities and the Company expects the businesses to grow over the long term, primarily through the introduction of new products, expansion of share in existing markets and penetration of new markets. The Company assesses its businesses and continually explores its core markets for suitable strategic acquisitions, joint ventures, alliances and licensing agreements to supplement growth.

16

As many of Lydall’s operations do business on a worldwide basis, Lydall’s results can be impacted by global, regional and industry economic and political factors. The Company is currently being impacted by weakness in the U.S. economy. Less demand for automobiles by consumers has resulted in lower production of automobiles by automakers in the U.S. According to CSM Worldwide, an automotive market forecasting service provided to suppliers, in the second quarter and first six months of 2008, production of cars and light trucks by North American OEM’s were lower by 16 percent and 12 percent, respectively, as compared to the comparable periods of 2007. Lower automobile production by North American OEM’s was expected to continue during the second half of 2008, when compared to the same period a year ago, which is expected to result in lower net sales for the Company’s North American automotive operations when compared to the second half of 2007. Also, certain automakers have indicated that they may increase the number of parts that they source from lower cost countries in the future which could negatively impact the Company going forward. In addition, the Company has significant accounts receivable from automakers at any point in time. Should an automaker not be able to pay the Company the amounts owed as they become due, or at all, results of operations and cash flows of the Company could be materially affected.

The Company continues to be negatively impacted by the slow-down in the construction of new home and commercial buildings markets (“construction market”) that began in 2007. Specifically, the Company’s insulation building products and appliance businesses, included in the Performance Materials segment, reported a slight reduction in net sales in the first half of 2008, as compared to the first six months of 2007. This trend is expected to continue during the remainder of 2008. In addition, the Company’s Affinity^® temperature control equipment business has been negatively impacted by a slow-down in 2008 of capital equipment spending in the semiconductor industry. This trend is also expected to continue during the remainder of 2008.

The Company has also been negatively impacted by increased raw material commodity pricing and energy costs. Specifically, costs of aluminum, used in most of the Company’s heat-shield automotive products and various fibers used in a number of the Company’s automotive and performance materials products. The Company continues to focus its efforts on mitigating the impact of higher raw material and energy costs to the extent possible through cost savings and operational efficiency gains, as well as passing commodity and energy cost increases to our customers. Further significant increases in raw material commodity and/or energy prices could continue to negatively impact the Company, to the extent the Company is not able to mitigate the cost increases through operational efficiency gains or increased prices.

The Company receives a material portion of its revenue from its foreign operations denominated in Euros. Therefore, Lydall’s reported results of operations and financial condition are subject to changes in the exchange relationship between the U.S. dollar and the Euro, which are beyond the control of the Company. 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. If the Company is not able to successfully hedge its currency exposure, changes in the rate of exchange between foreign currencies and the U.S. dollar may materially impact the Company’s results of operations and cash flow.

Thermal/Acoustical Segment

Due to lower consumer demand for automobiles in North America, the Company continues to be impacted by actions taken by certain domestic automakers, which include: (i) early termination of various automotive platforms, (ii) delays in launches of new automobile platforms, and (iii) lower production on current platforms. The Company’s North American automotive operations were also negatively impacted by work stoppages at certain other suppliers to the domestic automakers. Such work stoppages delayed the production of certain vehicles by the domestic automakers that contain Company parts. As a result of the above actions, automotive parts net sales by the Company’s North American operations decreased by $5.4 million in the second quarter of 2008, as compared to the same quarter of 2007. The Company expects the results of actions taken by domestic automakers to continue to negatively impact North American automotive parts net sales and profitability in the near-term.

In contrast to North America, production in the European automotive market that the Company serves was relatively stable in the second quarter and first half of 2008. In the current quarter, net sales of automotive parts by the Company’s European operations increased by $1.2 million, net of foreign currency translation, as compared to prior year’s second quarter. Negatively impacting operating results at the European automotive operations was an increase in aluminum costs as compared to the prior year’s second quarter.

17

During the second quarter of 2008, the Company realigned management in its global automotive business and reduced the workforce at certain automotive operations as a result of lower production requirements. The Thermal/Acoustical segment incurred $0.9 million of severance related charges in the second quarter of 2008 related to these actions, an increase of $0.8 million, as compared to the second quarter of 2007.

Performance Materials Segment

The Company continues to work with customers to deliver value-added products for their specific needs to differentiate its products from competitors. The Company’s filtration business reported an increase in net sales of $1.7 million, net of foreign currency translation, during the second quarter of 2008, as compared to the same quarter of 2007. Net sales of energy and industrial products increased by $1.0 million in the current quarter due to the continued strong demand in the electrical and cryogenic markets. However, net sales of building and appliance insulation products decreased by $0.2 million as compared to the second quarter of 2007 as the Company continues to be impacted by the slow-down in the construction of new home and commercial buildings markets.

During the second quarter of 2008, gross margins for all businesses throughout the Performance Materials segment were negatively impacted by increases in the costs of energy and raw materials, particularly fiber, which is expected to continue in the near-term. As a result, the Company announced price increases on certain products, effective in the second half of 2008, which are expected to mitigate a portion of the increased commodity pricing and energy costs during the remainder of 2008.

Other Products and Services

Net sales for the Company’s Affinity^® temperature control equipment business decreased by $1.5 million in the second quarter of 2008, as compared to the comparable quarter of 2007. This decrease was attributable to a slow-down in capital equipment spending in the semiconductor industry, which resulted in an operating loss of $0.5 million during the current quarter compared to an operating loss of $0.8 million in the second quarter of 2007. The Company expects to continue to be impacted by the slow-down in the semiconductor industry during the remainder of 2008.

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Results of Operations

The following table presents selected statement of operations line items for the quarter and six months ended June 30, 2008 on a comparative basis with the quarter and six months ended June 30, 2007 expressed as a relative percentage of consolidated net sales:

	Quarter Ended				Six Months Ended
In thousands	June 30, 2008		June 30, 2007		June 30, 2008		June 30, 2007
Net sales	100.0	%	100.0	%	100.0	%	100.0	%
Cost of sales	77.4	%	76.8	%	77.3	%	77.7	%
Gross margin	22.6	%	23.2	%	22.7	%	22.3	%
Selling, product development and administrative expenses	17.4	%	16.7	%	17.4	%	17.7	%
Operating income	5.3	%	6.6	%	5.3	%	4.6	%
Net income	3.3	%	4.0	%	3.3	%	2.8	%

Note: All of the following tabular comparisons, unless otherwise indicated, are for the three month periods ended June 30, 2008 (Q2-08) and June 30, 2007 (Q2-07) and for the six months ended June 30, 2008 (YTD-08) and June 30, 2007 (YTD-07).

Net Sales

	Quarter Ended				Percent Change		Six Months Ended				Percent Change
In thousands	Q2-08		Q2-07				YTD-08		YTD-07
Net sales	$	88,908	$	87,754	1.3	%	$	183,186	$	171,469	6.8	%

Excluding the impact of foreign currency translation, net sales for the current quarter decreased by $3.3 million, or 3.7 percent, when compared to the second quarter of 2007. In the Thermal/Acoustical segment, net sales decreased by $5.2 million, excluding the impact of foreign currency translation, in the current quarter when compared to the same quarter a year ago, as automotive parts net sales decreased by $4.2 million and tooling net sales declined by $1.0 million. Excluding the impact of foreign currency translation, the Performance Materials segment net sales increased by $2.5 million, or 9.0 percent, in the second quarter of 2008, as compared to the second quarter of 2007. Increased net sales of filtration products of $1.7 million and energy and industrial insulation products of $1.0 million were partially offset by lower net sales of building and appliance insulation products aggregating $0.2 million. Net sales of OPS in the second quarter of 2008 decreased by $0.9 million, or 6.2 percent, as compared to the same quarter a year ago. The Affinity^® temperature control equipment business posted decreased net sales of $1.5 million, partially offset by higher net sales from the Company’s vital fluids business of $0.3 million and transport, distribution and warehousing business of $0.3 million compared to the second quarter of 2007.

Excluding the impact of foreign currency translation, net sales for the six months ended June 30, 2008 increased by $2.6 million, or 1.5 percent, when compared to the first half of 2007. In the Thermal/Acoustical segment, net sales decreased by $2.5 million, excluding the impact of foreign currency translation, in the first six months of 2008 when compared to the same period a year ago, as automotive parts net sales decreased by $4.6 million, partially offset by higher tooling net sales of $2.1 million. Excluding the impact of foreign currency translation, Performance Materials segment net sales increased by $4.3 million, or 7.8 percent, in the first six months of 2008, as compared to the same period of 2007. Increased net sales of filtration products of $2.9 million and energy and industrial insulation products of $1.6 million were partially offset by lower net sales of building and appliance insulation products of $0.2 million that serve the construction market. Year-to-date net sales of OPS increased by $0.1 million compared to the first six months of 2007. Net sales from the Company’s vital fluids business increased by $1.0 million in the first half of 2008, which was nearly offset by lower net sales from the Company’s Affinity^® temperature control equipment and transport, distribution and warehousing businesses of $0.4 million and $0.5 million, respectively.

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Gross Margin

	Quarter Ended						Percent Change		Six Months Ended						Percent Change
In thousands	Q2-08			Q2-07					YTD-08			YTD-07
Gross margin	$	20,136		$	20,386		(1.2	%)	$	41,615		$	38,239		8.8	%
Percentage of sales		22.6	%		23.2	%				22.7	%		22.3	%

The decrease in gross margin percentage by 0.6 percentage points in the second quarter of 2008, as compared to the same period a year ago, was primarily caused by lower gross margin percentage from the Company’s Thermal/Acoustical segment, and to a lesser extent, the Performance Materials segment. Higher severance related charges of $0.3 million in the current quarter, related to reducing the workforce at certain operations as a result of lower production requirements, negatively impacted gross margin percentage by 40 basis points as compared to the second quarter of 2007. The remaining decrease in gross margin percentage in the current quarter was due to increases in raw material and energy costs in both the Thermal/Acoustical and Performance Materials segments. Specifically, higher aluminum costs used in most of the Company’s heat-shield automotive products, as well as higher costs of fibers used in performance materials products contributed to the reduction in gross margin as a percentage of net sales. Partially offsetting the increases in raw material and energy costs were cost savings generated from operational efficiency improvements.

The increase in gross margin percentage by 0.4 percentage points for the six months ended June 30, 2008 as compared to the six months ended June 30, 2007 was caused primarily by improved gross margin percentage from the Company’s Performance Materials segment, and to a lesser extent, Other Products and Services. Higher net sales in the Performance Materials segment, as well as improved absorption of fixed costs, contributed to an increase in the Company’s overall gross margin percentage in the first half of 2008, as compared to the first half of last year. Partially offsetting this increase was higher raw material and energy costs during 2008, as compared to 2007, that negatively impacted gross margin as a percentage of net sales.

Selling, Product Development and Administrative Expenses

	Quarter Ended						Percent Change		Six Months Ended						Percent Change
In thousands	Q2-08			Q2-07					YTD-08			YTD-07
Selling, product development and administrative expenses	$	15,457		$	14,637		5.6	%	$	31,878		$	30,361		5.0	%
Percentage of sales		17.4	%		16.7	%				17.4	%		17.7	%

Selling, product development and administrative expenses were 17.4 percent of net sales for the second quarter ended June 30, 2008 compared with 16.7 percent of net sales for the same quarter of 2007. Excluding the impact of foreign currency translation, selling, product development and administrative expenses increased by $0.3 million, in the current quarter as compared to the second quarter of 2007, due to increases in severance related charges primarily in the Thermal/Acoustical segment of $0.6 million, partially offset by lower corporate office litigation expense of $0.4 million.

Selling, product development and administrative expenses were 17.4 percent of net sales for the six months ended June 30, 2008 compared with 17.7 percent of net sales for the same period of 2007. Excluding the impact of foreign currency translation, selling, product development and administrative expenses increased by $0.6 million in the six months ended June 30, 2008, compared to the same period in 2007. Contributing to this increase were higher salaries and wages expenses of $0.9 million and severance related charges of $0.5 million, partially offset by lower corporate office litigation expense of $0.8 million. Higher salaries and wages expense was primarily due to annual wage adjustments.

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Interest Expense

	Quarter Ended						Percent Change		Six Months Ended						Percent Change
In thousands	Q2-08			Q2-07					YTD-08			YTD-07
Interest expense	$	129		$	113		14.2	%	$	244		$	221		10.4	%
Weighted average interest rate		5.2	%		5.3	%				5.2	%		5.3	%

Increases in interest expense for the quarter and six months ended June 30, 2008, as compared to the same periods from 2007, were primarily due to changes in foreign currency translation rates.

Other Income/Expense

Other income and expense for the quarters and six months ended June 30, 2008 and 2007 consisted of insignificant activity related to foreign exchange transaction gains and losses and investment income.

Income Taxes

The effective tax rate for the quarter ended June 30, 2008 was 37.0 percent compared with 37.2 percent for the second quarter of 2007. The effective tax rate for the six months ended June 30, 2008 was 37.0 percent compared with 37.1 percent for the same period of 2007. For 2008, the Company expects its effective tax rate to be approximately 37 to 38 percent.

As a result of the implementation of FIN 48, the Company recognized a $0.3 million increase in the liability for unrecognized tax benefits, which was accounted for as a reduction to the January 1, 2007, balance of retained earnings. As of June 30, 2008, the net amount of unrecognized tax benefits was $1.1 million. The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate is $1.1 million. There have been no significant changes to these amounts during the quarter and six months ended June 30, 2008.

21

Segment Results

The following table presents sales information for the key product and service groups included within each operating segment for the quarter and six months ended June 30, 2008 compared with the quarter and six months ended June 30, 2007:

In thousands	Quarter Ended June 30, 2008			Quarter Ended June 30, 2007			Dollar Change			Percentage Change
Thermal/Acoustical:
Automotive parts	$	41,239		$	42,619		$	(1,380	)	(3.2	)%
Automotive tooling		3,743			4,412			(669	)	(15.2	)%
Thermal/Acoustical Segment net sales	$	44,982		$	47,031		$	(2,049	)	(4.4	)%
Performance Materials:
Filtration	$	19,856		$	16,995		$	2,861		16.8	%
Industrial thermal insulation		11,335			10,465			870		8.3	%
Performance Materials Segment net sales	$	31,191		$	27,460		$	3,731		13.6	%
Other Products and Services:
Vital Fluids	$	4,220		$	3,868		$	352		9.1	%
Affinity® temperature control equipment		3,892			5,403			(1,511	)	(28.0	)%
Transport, distribution and warehousing services		5,385			5,119			266		5.2	%
Other Products and Services net sales	$	13,497		$	14,390		$	(893	)	(6.2	)%
Eliminations and Other		(762	)		(1,127	)		365		32.4	%
Consolidated Net Sales	$	88,908		$	87,754		$	1,154		1.3	%
In thousands	Six Months Ended June 30, 2008			Six Months Ended June 30, 2007			Dollar Change			Percentage Change
Thermal/Acoustical:
Automotive parts	$	84,155		$	83,238		$	917		1.1	%
Automotive tooling		12,127			8,775			3,352		38.2	%
Thermal/Acoustical Segment net sales	$	96,282		$	92,013		$	4,269		4.6	%
Performance Materials:
Filtration	$	38,819		$	33,621		$	5,198		15.5	%
Industrial thermal insulation		22,154			20,743			1,411		6.8	%
Performance Materials Segment net sales	$	60,973		$	54,364		$	6,609		12.2	%
Other Products and Services:
Vital Fluids	$	8,381		$	7,414		$	967		13.0	%
Affinity® temperature control equipment		8,908			9,273			(365	)	(3.9	)%
Transport, distribution and warehousing services		10,168			10,667			(499	)	(4.7	)%
Other Products and Services net sales	$	27,457		$	27,354		$	103		0.4	%
Eliminations and Other		(1,526	)		(2,262	)		736		32.5	%
Consolidated Net Sales	$	183,186		$	171,469		$	11,717		6.8	%

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Operating income by segment was as follows:

	Quarter Ended June 30, 2008					Quarter Ended June 30, 2007					Dollar Change			Percentage Change
In thousands	Operating Income			Operating Margin %		Operating Income			Operating Margin %
Thermal/Acoustical	$	2,854		6.3	%	$	4,877		10.4	%	$	(2,023	)	(41.5	)%
Performance Materials		4,864		15.6	%		4,831		17.6	%		33		0.7	%
Other Products and Services		(138	)	(1.0	)%		(299	)	(2.1	)%		161		53.8	%
Corporate Office Expenses		(2,901	)	—			(3,660	)	—			759		20.7	%
Consolidated Operating Income	$	4,679		5.3	%	$	5,749		6.6	%	$	(1,070	)	(18.6	)%
	Six Months Ended June 30, 2008					Six Months Ended June 30, 2007					Dollar Change			Percentage Change
In thousands	Operating Income			Operating Margin %		Operating Income			Operating Margin %
Thermal/Acoustical	$	7,520		7.8	%	$	8,638		9.4	%	$	(1,118	)	(12.9	)%
Performance Materials		9,476		15.5	%		8,337		15.3	%		1,139		13.7	%
Other Products and Services		(381	)	(1.4	)%		(710	)	(2.6	)%		329		46.3	%
Corporate Office Expenses		(6,878	)	—			(8,387	)	—			1,509		18.0	%
Consolidated Operating Income	$	9,737		5.3	%	$	7,878		4.6	%	$	1,859		23.6	%

Thermal/Acoustical

Thermal/Acoustical Segment net sales decreased to $45.0 million for the quarter ended June 30, 2008 compared with $47.0 million for the same period of 2007. Excluding the impact of foreign currency translation, net sales decreased in the current quarter by $5.2 million when compared to the same period a year ago. Automotive parts net sales decreased by $4.2 million and tooling net sales declined by $1.0 million. Automotive parts net sales in Europe increased by $1.2 million, net of foreign currency translation, while parts net sales in North America were lower by $5.4 million in the second quarter of 2008, as compared to the second quarter a year ago. The Company experienced a relatively stable automotive market in Europe in the second quarter of 2008. Due to weakness in the U.S. economy and lower consumer demand for automobiles, North American parts net sales were adversely impacted by domestic automakers early termination of various automotive platforms, delays in launches of new automobile platforms and lower production on current platforms.

For the current quarter, excluding the impact of foreign currency translation, operating income for the segment decreased by $2.2 million compared with the second quarter of 2007. This decrease was attributable to lower net sales, as well as reduced gross margin as a percent of net sales due to higher raw material costs and severance related charges. Operating income for the segment was negatively impacted by higher severance related charges of $0.8 million in the second quarter of 2008, as compared to the second quarter of 2007, related to realigning management in the global automotive business as well as reductions in workforce at certain operations as a result of lower production requirements.

Segment net sales increased to $96.3 million for the six months ended June 30, 2008 compared with $92.0 million for the same period of 2007. Excluding the impact of foreign currency translation, segment net sales decreased by $2.5 million in 2008 when compared to 2007. Automotive parts net sales decreased by $4.6 million, as compared to the same period a year ago, partially offset by higher tooling net sales of $2.1 million. Automotive parts net sales in Europe increased by $3.1 million, net of foreign currency translation, while parts net sales in North America were lower by $7.7 million in the first half of 2008, as compared to the same period a year ago. Increased European parts net sales were due to increased volumes on new platforms as well as a short-term replacement part opportunity in the first quarter of 2008. Due to a weakness in the U.S. economy and lower consumer demand for automobiles, North American parts net sales were adversely impacted by domestic automakers early termination of various automotive platforms, delays in launches of new automobile platforms and lower production on current platforms. The increase in tooling net sales was due to the completion of tooling for future automobile platforms in Europe.

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Excluding the impact of foreign currency translation, year-to-date operating income for the segment decreased by $1.7 million compared with the first six months of 2007. Lower parts net sales and a reduction in gross margin percentage due to higher raw material costs, as well as severance related charges of $0.3 million, contributed to the decrease in operating income in the first six months of 2008, as compared to the same period of 2007. In addition, net of foreign currency translation, selling, product development and administrative expenses increased by $0.8 million in the first six months of 2008, as compared to the first six months of 2007. This increase was primarily attributable to higher severance related charges of $0.5 million, and to a lesser extent, higher salaries and wages expense for the six months ended June 30, 2008 compared to the same period of 2007.

Performance Materials

Performance Materials segment net sales were $31.2 million in the current quarter compared with $27.5 million in the same period last year. Excluding the impact of foreign currency translation, segment net sales increased by $2.5 million, or 9.0 percent, in the current quarter. This increase was primarily related to increased net sales of filtration media of $1.7 million, net of foreign currency translation, specifically increased volumes of air filtration media to various customers as well as to customers who supply filtration products to clean room manufacturers in Asia. Net sales of industrial thermal insulation products increased by $0.8 million in the current quarter as a result of increased energy and industrial products net sales of $1.0 million partially offset by lower building and appliance insulation products net sales of $0.2 million, as compared to second quarter of 2007. Energy and industrial products net sales increased due to the continued strong demand in the electrical markets as well as increased net sales to manufacturers of cryogenic equipment for liquid gas storage and transportation. The Company continues to be impacted by the slow-down in the U.S. construction of new home and commercial buildings markets resulting in a decrease in building and appliance insulation products net sales.

Excluding the impact of foreign currency translation, operating income for the segment was essentially flat for the second quarter of 2008 compared with the second quarter of 2007. The increase in net sales during the current quarter was offset by a lower gross margin as a percentage of net sales. Increased raw material and energy costs contributed to the reduction in gross margin percentage, and to a lesser extent, product mix. In addition, excluding the impact of foreign currency translation, selling, product development and administrative expenses increased by $0.3 million in the second quarter of 2008, as compared to the second quarter of 2007. This increase was primarily attributable to higher salaries and incentive compensation expense and product development expenses.

Segment net sales were $61.0 million in the first half of 2008 compared with $54.4 million in the same period last year. Excluding the impact of foreign currency translation, segment net sales increased by $4.3 million, or 7.8 percent, in the first six months of 2008. This increase was primarily related to higher net sales of filtration media of $2.9 million, net of foreign currency translation. The majority of the increase was due to sales of media to customers who supply filtration products to clean room manufacturers in Asia. Net sales of industrial thermal insulation products increased by $1.4 million in the first half of 2008, as a result of increased energy and industrial products net sales of $1.6 million partially offset by lower building and appliance insulation products net sales of $0.2 million, as compared to the first six months of 2007. Net sales for energy and industrial products increased due to the continued strong demand in the electrical markets as well as increased net sales to manufacturers of cryogenic equipment for liquid gas storage and transportation. Due to the slow-down in the new home and commercial buildings construction markets in the U.S., the Company’s net sales of building and appliance insulation products decreased during the first six months of 2008 as compared to the same period of 2007.

Excluding the impact of foreign currency translation, operating income for the segment increased by $0.8 million, or 9.9 percent, for the first six months of 2008 compared with the same period of 2007. Operating income was positively impacted by higher net sales, partially offset by increased selling, product development and administrative expenses of $0.6 million net of foreign currency translation, primarily related to higher salaries and incentive compensation expense and product development expenses.

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Other Products and Services

The decrease in OPS net sales of $0.9 million in the second quarter of 2008, compared to the same quarter of 2007, was due to decreased volumes of net sales from the Company’s Affinity^® business of $1.5 million, partially offset by higher vital fluids and transport business net sales of $0.3 million and $0.3 million, respectively. The decrease in Affinity^® temperature control equipment net sales during the current quarter was primarily attributable to a slow-down in capital equipment spending in the semiconductor industry. The increase in vital fluids’ products net sales was attributable to increased volumes of blood and OEM product net sales. The increase in transport business net sales was primary due to new warehousing business.

Operating loss from OPS was $0.1 million for the second quarter of 2008, compared to an operating loss of $0.3 million for the second quarter 2007. The Affinity^® business reported an operating loss of $0.5 million in the second quarter of 2008, due to lower net sales, compared to an operating loss of $0.8 million in the second quarter of 2007, which was impacted by higher per unit manufacturing costs. The second quarter of 2008 operating loss at Affinity^® was partially offset by operating income reported by the transport and vital fluids’ businesses.

The increase in OPS net sales of $0.1 million for the six months ended June 30, 2008, compared to the same period of 2007, was primarily related to higher vital fluids’ business net sales of $1.0 million, partially offset by decreased volumes of net sales from the Company’s Affinity^® business and transport businesses of $0.4 million and $0.5 million, respectively. The greater vital fluids’ products net sales were attributable to equal increases in volumes of blood and OEM product net sales. The decrease in Affinity^® temperature control equipment net sales was primarily attributable to a slow-down in capital equipment spending in the semiconductor industry. The decrease in transport business net sales was primary due to lower trucking business net sales from certain customers, partially offset by increased net sales from the warehousing business.

Operating loss from OPS was $0.4 million for the first six months 2008, compared to an operating loss of $0.7 million for the six months ended June 30, 2007. The Affinity^® business reported an operating loss of $1.0 million in the first half of 2008, due to lower net sales, compared to an operating loss of $1.7 million in the comparable period of 2007. Operating income at the transport business decreased by $0.3 million in the first six months of 2008 as compared to the same period of 2007 due to lower net sales and a reduction in gross margin percentage.

Corporate Office Expenses

Corporate office expenses were $2.9 million in the second quarter of 2008, compared to $3.7 million for the second quarter of 2007. This decrease was due to the lower litigation expense of $0.4 million, as well as lower salaries and benefits expense, primarily from reductions in personnel, and lower travel and meeting expenses in the second quarter of 2008, as compared to the second quarter of 2007.

Corporate office expenses were $6.9 million in the first six months of 2008, compared to $8.4 million for the same period of 2007. This decrease was primarily due to the lower litigation expense of $0.8 million as well as lower travel and meeting expenses and other professional services provided to the Company.

Liquidity and Capital Resources

The Company assesses its liquidity in terms of its ability to generate cash to fund operating, investing and financing activities. The principal source of liquidity is operating cash flows. In addition to operating cash flows, other significant factors that affect the overall management of liquidity include capital expenditures, investments in businesses, common stock repurchases, income tax payments, pension funding and availability of lines of credit and long-term financing. The Company manages worldwide cash requirements considering available funds among domestic and foreign subsidiaries. The Company believes that its currently available resources, together with its capacity for growth and its accessibility to debt financing sources, are sufficient to satisfy its cash requirements for the foreseeable future.

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Operating Cash Flows

Net cash provided by operating activities in the first six months of 2008 was $15.3 million. The combination of higher net income of $1.3 million, in the first six months of 2008 as compared to the same period a year ago, and operating net assets remaining flat with amounts at December 31, 2007, contributed to the improved cash flows from operations in the first half of 2008 as compared to the same period of 2007.

Investing Cash Flows

Capital expenditures were $5.3 million for the first six months of each of 2008 and 2007. Capital spending for 2008 is expected to be approximately $11.0 million to $13.0 million.

Financing Cash Flows

In the first six months of 2008, net cash provided by financing activities was $0.1 million. Debt repayments were $0.7 million in the first six months of 2008, primarily due to capital lease payments. Proceeds from common stock issuances were $0.8 million during the first six months of 2008 due to the exercise of stock options.

As of June 30, 2008, the Company had unused borrowing capacity of $60.2 million under various credit facilities.

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 of the “Notes to Consolidated Financial Statements” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007 and the “Notes to Condensed Consolidated Financial Statements” of this report describe the significant accounting policies and critical accounting estimates 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. As discussed in Note 8 to the Condensed Consolidated Financial Statements, the Company adopted SFAS No. 157, “Fair Value Measurements” (FAS 157) as of January 1, 2008, with the exception of the application of the statement to nonrecurring nonfinancial assets and nonfinancial liabilities, the deferral of which was permitted under FSP 157-2. Other than this change, there have been no significant changes in the Company’s critical accounting estimates during the quarter and six months ended June 30, 2008.

Recently Issued Accounting Standards

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (FAS 157). This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements. FAS 157 defines fair value based upon an exit price model. A fair value measurement assumes that the transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability, or, in the absence of a principal market, the most advantageous market for the asset or liability. This Statement was effective for the Company beginning on January 1, 2008, except that FSP 157-2 delayed the effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis, until fiscal years beginning after November 15, 2008. The Company adopted FAS 157 on January 1, 2008 (See Note 8 to the Condensed Consolidated Financial Statements), with the exception of the application of the Statement to non-recurring nonfinancial assets and liabilities measured at fair value which include: (i) goodwill impairment testing, (ii) initial measurement of the fair value of asset retirement obligations and (iii) measurement of impairment of long-lived assets. The implementation of FAS 157 did not have a material effect on the Company’s consolidated financial position, results of operations or cash flows during the quarter and six months ended June 30, 2008, and is not expected to have a material effect on the Company upon full adoption in future periods.

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In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Liabilities, including an amendment of FASB Statement No. 115”, (FAS 159). This Statement permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The Company adopted FAS 159 on January 1, 2008 and elected not to measure any additional financial instruments and other items at fair value. The adoption did not have a material effect on the Company’s consolidated financial position, results of operations or cash flows during the quarter and six months ended June 30, 2008.

In December 2007, the FASB issued SFAS No. 141R, “Business Combinations” (FAS 141R). FAS 141R amends FAS 141 and provides revised guidance requiring the acquirer to recognize and measure, at fair value on the acquisition date, identifiable assets and goodwill acquired, liabilities assumed, and any non-controlling interest in the acquiree. Transaction and restructuring costs generally will be expensed as incurred. The Statement also provides disclosure requirements to enable users of the financial statements to evaluate the nature and financial effects of the business combination. FAS 141R is effective for fiscal years beginning on or after December 15, 2008 and will be applied prospectively. The Company is currently evaluating the potential impact of this Statement.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an amendment of Accounting Research Bulletin (ARB) No. 51” (FAS 160). FAS 160 requires that ownership interests in subsidiaries held by parties other than the parent, and the amount of consolidated net income, be clearly identified, labeled, and presented in the consolidated financial statements. It also requires once a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary be initially measured at fair value. Sufficient disclosures are required to clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. It is effective for fiscal years beginning on or after December 15, 2008 and requires retroactive adoption of the presentation and disclosure requirements for existing minority interests. All other requirements shall be applied prospectively. The adoption of FAS 160 is not expected to have a material effect on the Company’s consolidated financial position, results of operations or cash flows.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities-an amendment of FASB Statement No. 133” (FAS 161). FAS 161 is intended to improve financial reporting about derivative instruments and hedging activities by requiring disclosure of the fair values of derivative instruments and their gains and losses in a tabular format. It also provides more information about an entity’s liquidity by requiring disclosure of derivative features that are credit risk-related and finally, it requires cross-referencing within footnotes. It is effective for fiscal years beginning on or after November 15, 2008. The adoption of FAS 161 is not expected to have a material effect on the Company’s consolidated financial position, results of operations or cash flows.

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (FAS 162). This statement documents the hierarchy of the various sources of accounting principles and the framework for selecting the principles used in preparing financial statements. FAS 162 shall be effective 60 days following the Securities and Exchange Commission’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles”. The adoption of FAS 162 is not expected to have a material effect on the Company’s consolidated financial position, results of operations or cash flows.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

There have been no material changes in market risks from those disclosed in Item 7A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.

Item 4. 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, Chief Financial Officer and Treasurer, conducted an evaluation as of June 30, 2008 of the effectiveness of the design and operation 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, Chief Financial Officer and Treasurer 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 such material information has been properly recorded, processed, summarized and reported, as required.

Changes in Internal Controls

There have not been any changes in the Company’s internal controls over financial reporting during the six months ended June 30, 2008 that materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

On January 25, 2008, a suit was filed against the Company in the Connecticut Superior Court by a former employee. The complaint alleges that the Company breached the former employee’s employment agreement and stock option agreements and that the Company owes the employee approximately $0.8 million, plus any compensatory and punitive damages awarded by the Court. No reserve has been recorded as of June 30, 2008 related to this lawsuit as the Company believes that this suit is without merit and intends to defend it vigorously.

On February 22, 2008, the same former employee filed a lawsuit in Delaware Chancery Court seeking further indemnification and advancement from the Company in the amount of $0.9 million. The amount sought was for income taxes that he was expecting to incur as a result of payments made by the Company in 2007, related to prior litigation discussed in previous filings with the Securities and Exchange Commission. Management concluded that it was probable that a loss was incurred by the Company as of December 31, 2007. The Company recorded expense of approximately $0.9 million in the quarter ended December 31, 2007 related to this matter. On April 11, 2008, the Company entered into a settlement agreement with the former employee and paid $1.0 million, of which $0.9 million was expensed in prior periods, in settlement of the above indemnification matter.

During the quarter and six months ended June 30, 2008, the Company recorded expense of $0.1 million and $0.3 million, respectively, related to these matters.

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Item 1A. Risk Factors

There have been no material changes from risk factors as previously disclosed in Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.

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

In August 2003, the Company’s Board of Directors approved a Stock Repurchase Program (the “Repurchase Program”) to mitigate the potentially dilutive effects of stock options and shares of restricted and unrestricted stock granted by the Company. Under the approved Repurchase Program, shares may be purchased by the Company up to the quantity of shares underlying options and other equity-based awards granted after January 1, 2003 under shareholder approved plans. There were approximately 1.2 million shares that remained available for repurchase under the Repurchase Program as of June 30, 2008. No shares were repurchased in the quarter and six months ended June 30, 2008.

Item 5. Other Information

On August 1, 2008, the Company entered into a relocation agreement (“Agreement”) with Dale Barnhart, President and CEO. Such Agreement states that the Company will reimburse Mr. Barnhart for the difference between the cost basis of his current residence and the actual sale price up to $50,000, assuming the sale price is less than the costs basis. Should such difference exceed $50,000, then the Company will additionally reimburse Mr. Barnhart for 70% of that difference, providing however that the total amount reimbursed to Mr. Barnhart will not exceed $100,000. The total amount reimbursed will then be grossed-up for applicable income taxes.

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Item 6. Exhibits

Exhibit Number	Description
3.1	Certificate of Incorporation of the Registrant, as amended, filed as Exhibit 3.1 to the Registrant’s Annual Report on Form 10-K dated March 12, 2004 and incorporated herein by this reference.
3.2	Bylaws of the Registrant, as amended and restated as of December 11, 2003, filed as Exhibit 3.2 to the Registrant’s Annual Report on 10-K dated March 12, 2004 and incorporated herein by this reference.
10.1	Employment agreement, dated June 26, 2008, between the Company and Joseph Wilsted, filed herewith.
10.2	Dale Barnhart Relocation Agreement, dated August 1, 2008, 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.

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SIGNATURE

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

	LYDALL, INC.
August 4, 2008	By:	/s/ James V. Laughlan
		James V. Laughlan
		Controller and Principal Accounting Officer
		(On behalf of the Registrant and as Principal Accounting Officer)

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LYDALL, INC.

Index to Exhibits

Exhibit Number
3.1	Certificate of Incorporation of the Registrant, as amended, filed as Exhibit 3.1 to the Registrant’s Annual Report on Form 10-K dated March 12, 2004 and incorporated herein by this reference.
3.2	Bylaws of the Registrant, as amended and restated as of December 11, 2003, filed as Exhibit 3.2 to the Registrant’s Annual Report on 10-K dated March 12, 2004 and incorporated herein by this reference.
10.1	Employment agreement, dated June 26, 2008, between the Company and Joseph Wilsted, filed herewith
10.2	Dale Barnhart Relocation Agreement, dated August 1, 2008, 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.

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EX-10.1

Exhibit 10.1

EMPLOYMENT AGREEMENT

THIS AGREEMENT is made and entered into as of the 26th day of June, 2008, by and between Lydall Thermal/Acoustical, Inc., a Delaware corporation (the “Company”), and Joseph K. Wilsted (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.

1.1 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.

1.2 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.

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 President of its global automotive business 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. The Executive will have such duties as are appropriate to his position, 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”) or a committee thereof.

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 Two Hundred Ninety-Five Thousand Dollars ($295,000). 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, other than in connection with an across-the-board decrease affecting substantially all members of senior management of the Company on substantially the same proportional basis. The Chief Executive Officer of the Company shall meet with the Executive annually to review the Executive’s performance, objectives and compensation, including salary and bonus compensation, and the Chief Executive Officer shall then meet with the Compensation Committee of the Board 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 members of senior management of the Company.

3.2 Annual Bonus. 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 members of senior management of the Company in all employee benefit plans and programs of the Company (other than any severance plan, program or policy), subject to any restrictions or eligibility requirements under such plans and programs, from time to time in effect for the benefit of senior management of the Company, including, but not limited to, retirement plans, profit sharing plans, stock incentive and annual bonus plans, group life insurance, hospitalization and surgical and major medical coverages (excluding the Lydall Thermal/Acoustical, Inc. Executive Medical Plan), short-term and long-term disability.

3.4 Vacations and Holidays. During the Employment Period, the Executive will be entitled to vacation leave of two weeks during 2008 and three (3) weeks per year thereafter, at full pay or such greater vacation benefits as may be provided for by the Company’s vacation policies applicable to senior management. 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 allowance in accordance with Company policy.

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 in accordance with the policies of the Company, provided that 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 Termination by the Company Other Than For Disability or Cause. The Company may terminate the Executive’s employment at any time other than (i) by reason of the Executive’s 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 18 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 18 months following a Change of Control.

5.2 Termination Due to Disability. If the Executive incurs a 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 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, as reduced, to be paid in accordance with the standard payroll practices of the Company; (ii) a prorata bonus for the calendar year of termination, calculated as the product of (x) the annual performance-based bonus that would have been payable to the Executive for the calendar year of termination (determined as of the end of such calendar year) and (y) a fraction, the numerator of which is the number of days in the current calendar year through the date of termination and the denominator of which is 365 (366 if a leap year), to be paid at the normal time for payment of such bonus in the calendar year following the calendar year to which the bonus relates; (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 to the extent not previously paid, 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 the Consolidated Omnibus Budget Reconciliation Act (“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 the Executive becomes eligible for health insurance benefits under the group health plan of another employer, 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 members of senior management generally. 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 becomes eligible for life insurance benefits from another employer, the Company will continue to provide

–2–

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 members of senior management 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 Section 5.2, becomes eligible to receive health and/or life insurance benefits from another employer. In the event that the Executive’s participation in the Company’s group life insurance plan is barred, the Company shall arrange to provide the Executive with comparable life insurance coverage to the extent available at a cost not to exceed 125% of the cost of the group life insurance coverage offered to the Executive through the Company’s group life insurance plan; provided that the Executive shall pay the same proportionate share of the premium for such coverage that members of senior management of the Company generally are required to pay for group life insurance coverage under the Company’s group life insurance plan, if any.

For purposes of this Agreement, the Executive shall be considered to have incurred a Disability if and only if the Executive is by reason of any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than 12 months (i) unable to engage in any substantial gainful activity, or (ii) receiving income replacement benefits for a period of not less than 3 months under an accident and health plan covering employees of the Company.

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 by the Executive relating to the performance of his services to the Company; (ii) a breach by the Executive of his duties or responsibilities under this Agreement resulting in significant demonstrable injury to the Company or any of its subsidiaries; (iii) the Executive’s conviction of a felony or any crime involving moral turpitude; (iv) the Executive’s material failure (for reasons other than death or Disability) to perform his duties under this Agreement 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 failure or insubordination and the Executive has failed to cure such conduct, where susceptible to cure, within ten days following such notice; or (v) a breach by the Executive of any provision of any material policy of the Company or of his obligations under the confidentiality, non-competition and invention ownership agreement executed by the Executive and attached hereto as Exhibit A (the “Confidentiality Agreement”). 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 in a lump sum no later than the next payroll date following the Executive’s date of termination to the extent not previously paid, (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 at the normal time for payment of such compensation and benefits to the extent not previously paid and (iii) any reimbursement amounts owing under Section 4.

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 18 months following a Change of Control, or (ii) the benefits described in Section 9 if such termination of employment occurs within 18 months following a Change of Control. For purposes of this Agreement, Good Reason shall mean, without the Executive’s written consent, (i) a significant reduction in the scope of the Executive’s authority, functions, duties or responsibilities from that which is contemplated by this Agreement; provided that a change in scope solely as a result of the Company no longer being public or becoming a subsidiary of another corporation shall not constitute Good Reason, (ii) any reduction in the Executive’s base salary, other than an across-the-board reduction affecting substantially all members of senior management of the Company on substantially the same proportional basis, or (iii) 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 Confidentiality Agreement, in each case, 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 18

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months following a Change of Control, 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 30 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 30-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 in a lump sum no later than the next payroll date following the Executive’s date of termination to the extent not previously paid, (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 at the normal time for payment of such compensation and benefits to the extent not previously paid, 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 in a lump sum no later than the next payroll date following the Executive’s date of termination to the extent not previously paid, (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 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 to the extent not previously paid, 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.

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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 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 18 months following a Change of Control of the Company, 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 in a lump sum no later than the next payroll date following the Executive’s date of termination to the extent not previously paid, 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, any such compensation and benefits to be paid at the normal time for payment of such compensation and benefits to the extent not previously paid.

(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 in effect immediately preceding his termination of employment, and (ii) the average of his annual bonuses earned under the Company’s annual 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 (the “Severance Benefit”). The Severance Benefit installments shall be paid at the times that salary payments are normally made by the Company; provided that, if at the time of the Executive’s termination of employment, the Executive is a “specified employee” as defined in Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”), and the regulations and guidance issued thereunder (a “Specified Employee”), then fifty percent (50%) of the Severance Benefit shall be paid in a lump sum on the first payroll date that occurs six (6) months after the date of the Executive’s termination of employment, and the remaining fifty percent (50%) of the Severance Benefit shall be paid in equal installments spread over six (6) months at the times that salary payments are normally made by the Company, beginning on the second payroll date that occurs six (6) months after the date of the Executive’s termination of employment.

(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 the Executive becomes eligible for health insurance benefits under the group health plan of another employer, 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 members of senior management 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 becomes eligible for life insurance benefits from another employer, 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 members of senior management 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), becomes eligible to receive health and/or life insurance benefits from another employer. In the event that the Executive’s participation in the Company’s group life insurance plan is barred, the Company shall arrange to provide the Executive with comparable life insurance coverage to the extent available at a cost not to exceed 125% of the cost of the group life insurance coverage offered through the Company’s group life insurance plan; provided that the Executive shall pay the same proportionate share of the premium for such coverage that members of senior management of the Company generally are required to pay for group life insurance coverage under the Company’s group life insurance plan, if any.

(e) The Company will pay to the outplacement services provider reasonably selected by the Executive an amount not to exceed $10,000 for outplacement services costs incurred by Executive within the twelve months following the Executive’s termination of employment.

(f) The Company’s obligation to provide the severance benefits set forth in Sections 8(c), (d) and (e) upon the Executive’s termination of employment without Cause or for Good Reason, which does not occur within 18 months following a Change of Control, is subject to the Executive’s execution without revocation of a valid release in substantially the form attached to this Agreement as Exhibit B (the “Release”).

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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 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 18 months following a Change of Control of the Company, 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 in a lump sum no later than the next payroll date following the Executive’s date of termination to the extent not previously paid, 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, any such compensation and benefits to be paid at the normal time for payment of such compensation and benefits to the extent not previously paid.

(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 in effect immediately preceding his termination of employment, and (ii) the average of his three highest annual bonuses earned under the Company’s annual 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 (the “COC Severance Benefit”). The COC Severance Benefit shall be paid in a lump sum within 30 days after the date of such termination of employment; provided that, if at the time of the Executive’s termination of employment, the Executive is a Specified Employee, then the COC Severance Benefit shall be paid in a lump sum on the date that is six (6) months 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 target bonus opportunity under the Company’s annual 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 bonus plan for the calendar year immediately preceding the calendar year of the termination of the Executive’s employment, with deferred bonuses 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; provided that, if at the time of the Executive’s termination of employment, the Executive is a Specified Employee, then such payment shall be made in a lump sum on the date that is six (6) months after the date of such termination of employment, and the Executive shall have no right to any further bonuses under said plan.

(e) 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 24 months after the date of such termination of employment or (ii) the date the Executive becomes eligible for comparable benefits from another employer, 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 members of senior management of 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 comparable benefits to the extent available at a cost not to exceed 125% of the cost of providing benefits to the Executive under the Company’s plan or plans. The Executive shall notify the Company promptly if he, while eligible for benefits under this subsection (e) becomes eligible to receive benefits from another employer.

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

(g) The Company will pay to the outplacement services provider reasonably selected by the Executive an amount not to exceed $10,000 for outplacement services costs incurred by Executive within the twelve months following the Executive’s termination of employment.

(h) 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 Section 9 or to defend against any claim or assertion in connection with this Section 9, but only if and to the extent that the Executive substantially prevails.

(i) The Company will pay to the Executive an automobile allowance, in an amount equal to the Executive’s monthly lease allowance at the time of termination, each 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; provided that, if at the time of the Executive’s termination of employment, the Executive is a Specified Employee, then twenty-five percent (25%) of the automobile allowance shall be paid in a lump sum on the date that is six (6) months after the date of termination, and the remaining seventy-five percent (75%) of the automobile allowance shall be paid in eighteen (18) equal monthly installments, beginning in the seventh month following the date of termination.

(j) The Company’s obligation to provide the severance benefits set forth in Sections 9(c), (d), (e), (f), (g), (h) and (i) upon the Executive’s termination of employment without Cause or for Good Reason within 18 months following a Change of Control is subject to the Executive’s execution of the Release.

10. Change of Control. For the purposes of this Agreement, a “Change of Control” shall be deemed to occur upon the consummation of any of the following events: (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) (i) the complete liquidation of the Company or (ii) 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, which liquidation, merger or consolidation has been approved by the shareholders of the Company; or (d) the sale or other disposition (in one transaction or a series of transactions) of all or substantially all of the assets of the Company pursuant to an agreement (or agreements) which has (have) been approved by the shareholders 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 Company or any of its affiliates would constitute an “excess parachute payment” within the meaning of Section 280G of the Code (“Excess Parachute Payment”), 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; 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

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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 and then the bonus described in Section 9(d), 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; provided that the Executive shall not be eligible to receive any benefits under any circumstances under any severance plan or policy of the Company, including, without limitation, the Lydall Thermal/Acoustical, Inc. Severance Plan.

13. General Provisions.

13.1 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.

13.2 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.

13.3 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 shall be delivered personally, sent by facsimile transmission with a copy deposited in the United States mail, registered or certified, return receipt requested, postage prepaid, or sent by overnight mail addressed as follows:

To the Company:	Lydall Thermal/Acoustical, Inc. P.O. Box 151 One Colonial Road
	Manchester, CT 06045-0151 Attn: Chief Executive Officer
To the Executive:	Joseph K. Wilsted
	XXXXXXX

or such other address as such party shall have specified most recently by written notice. Notice mailed as provided herein shall be deemed given when so delivered personally or sent by facsimile transmission, or, if sent by overnight mail, on the day after the date of mailing.

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13.4 No Disparagement. The Executive shall not during the period of his employment with the Company, nor following the date of termination of his employment for any reason, publish or communicate to any person or entity any Disparaging (as defined below) remarks, comments or statements concerning the Company, or any of its subsidiaries or affiliates or any of their shareholders, directors, officers, employees or agents. “Disparaging” remarks, comments or statements are those that impugn the character, honesty, integrity or morality or business acumen or abilities in connection with any aspect of the operation of business of the individual or entity being disparaged. 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.

13.5 Proprietary Information and Inventions. The Confidentiality Agreement is incorporated by reference in this Agreement, and the Executive agrees to continue to be bound thereby.

13.6 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 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.

13.7 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.

13.8 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 his 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.

13.9 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.

13.10 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 without the Executive’s consent.

13.11 Choice of Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Connecticut without regard to the conflicts of law provisions thereof.

13.12 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.

13.13 Right to Injunctive and Equitable Relief. The Executive’s obligations under Section 13.4 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.

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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 13.4 and this Section 13.13 are cumulative and in addition to, and not in lieu of, any obligations, rights, or remedies as created by applicable law. The Executive agrees that the terms of this Section 13.13 shall survive the term of this Agreement and the termination of the Executive’s employment.

13.14 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.

13.15 Entire Agreement. This Agreement, along with the Confidentiality Agreement, 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 Confidentiality 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 Confidentiality 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.

13.16 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.

13.17

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

Lydall Thermal/Acoustical, Inc.
By:	/s/ Dale G. Barnhart	6/26/08
	Dale G. Barnhart	Date
	Sole Director
	/s/ Joseph K. Wilsted	6/26/08
	Joseph K. Wilsted	Date

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EXHIBIT A

CONFIDENTIALITY AGREEMENT

In consideration of my employment by Lydall Thermal/Acoustical, Inc., or future employment with an affiliate to whom I am transferred (together the “Company”), the compensation and other benefits to be received by me from the Company, I agree that:

1. DEFINITIONS

The term “Confidential Information” as used in this Agreement includes all business information and records which relate to the Company or to parties working with the Company under a confidentiality agreement, and which are not known to the public generally, including, but not limited to, technical notebook records, technical reports, patent applications, machine equipment, computer software, models, process and product designs including any drawings and descriptions, unwritten knowledge and “know-how”, operating instructions, training manuals, production and development processes, production or other schedules, customer lists, customer buying records, product sales records, sales requests, territory listings, market surveys, plans including marketing plans and long-range plans, salary information, contracts, supplier lists, product costs, policy statements, policy procedures, policy manuals, flowcharts, computer printouts, program listings, reproductions and correspondence.

The term “Invention” as used in this Agreement includes any discovery, improvement, design or idea, patentable, copywriteable or otherwise, which relates to any activity or business in which the Company is engaged or any process, equipment, material, product or method (including computer software) in which the Company has any direct or indirect interest.

2. INVENTIONS

I will disclose promptly to the Company any Invention conceived, developed or perfected by me, either alone or jointly with another or others, while I am an employee, whether or not such conception, development or perfection occurs during the hours of my employment.

I grant to the Company without further compensation, all my right, title and interest in and to any such Invention for the sole use and benefit of the Company, together with all U.S. and foreign patents, trademarks or copyrights that may at any time be granted, and all reissues, renewals and extensions of such patents, trademarks or copyrights. At the request and expense of the Company, I will at any time do what the Company reasonably believes to be necessary to assist the Company to vest full right and title to each such Invention in the Company, enable the Company to obtain and maintain full right and title in any country, prosecute applications for and secure patents (including their reissue, renewal and extension), trademarks, copyrights and any other form of protection for each such Invention, and prosecute or defend any interference or opposition which may be declared involving any such application or patent and any litigation in which the Company may be involved concerning any such Invention. This will include preparing, executing and delivering any written document, drawings, flowcharts, or computer printouts. The provisions of this section will continue after I stop working for the Company and shall be binding on my executors, administrators and assigns, unless waived in writing by the Company.

3. CONFIDENTIAL INFORMATION

I have not disclosed and will not disclose to the Company, and I will not use, in the discharge of my duties as an employee of the Company, any trade secret or confidential information belonging to a former employer or other person and which has been classified by the former employer or other person as a trade secret or confidential information. The limitation set forth in this section shall not apply to matters which (a) are or become public knowledge, (b) were previously known to the Company, (c) are subsequently received by the Company from a third party, or (d) are independently derived by the Company.

I will not, directly or indirectly, during or at any time after the period of my employment by the Company, use for myself or others, or disclose to others, any Confidential Information, no matter how such information becomes known to me, unless I first obtain the Company’s written consent.

When I leave the Company’s employ, or at any other time upon request by the Company, I will promptly deliver to the Company all documents and records, including but not limited to those listed under the definition of Confidential Information, which are in my possession or under my control and which pertain to the Company, any of its activities or any of my activities while in the course of my employment and all copies thereof. I will not retain or deliver to any others copies of these documents or records.

–11–

THE FOLLOWING SECTION 4 ONLY RELATES TO SALARIED EXEMPT AND NON-EXEMPT EMPLOYEES

4. NON-COMPETITION

I acknowledge and agree that the Company’s business competes upon a worldwide basis, and that the degree of competition in that business is high. I recognize that the Company may assign me to duties in a geographic area or specific market. I agree that, unless I first obtain the Company’s written consent, I will not during my employment with the Company and for a period of two (2) years following the termination of my employment (provided, however, that if I am employed by the Company for less than two (2) years, the post-employment period to which this section applies shall be the greater of six (6) months or the length of my employment in any capacity), directly or indirectly or through others, individually, or as a member, officer, director, employee, agent, or investor of any partnership or entity (except ownership of not more than one percent (1%) of the outstanding publically traded stock of any company):

(i) participate in the ownership, management, operation or control of, or work for (as an employee, consultant or independent contractor) or have any material financial interest in, any business competitive with the Company in (a) any market in which the company for which I have worked in the two (2) preceding years has sold or attempted to sell any of its product in the two (2) years preceding my termination or (b) if the Company has assigned me to duties in a geographic area, within two hundred fifty (250) miles of any such geographic area in which I have worked in the two (2) years preceding my termination,

(ii) induce or encourage any employee of the Company to terminate his or her employment with the Company, or

(iii) solicit, induce or encourage any person, business or entity which is a supplier of, a purchaser from, or a contracting party with, the Company to terminate any written or oral agreement, order or understanding with the Company or to conduct business in a way that results in an adverse impact to the Company.

I further understand and agree that the remedy at law for any breach or threatened breach of my agreement not to compete contained in this section would be inadequate and that any breach or attempted breach would result in irreparable damage to the Company, the monetary amount of which would be impossible to ascertain. Thus, I agree that in the event of any breach or threatened breach of my agreement not to compete, in addition to all other available legal or equitable remedies, the Company may obtain injunctive relief to remedy damage caused by such breach or threatened breach, and that the Company shall be entitled to recover from me its costs and expenses, including reasonable attorney fees, incurred in remedying such breach or threatened breach.

5. GENERAL TERMS

I represent and agree that I have and will assume no obligations to others inconsistent with any of my obligations to the Company under this Agreement.

In consideration of my employment, I agree to conform to the policies of the Company. I understand that my employment is for an indefinite period and can be terminated at any time, with or without cause or prior notice by either the Company or me, and will remain so unless a written agreement for a specific term is entered into and executed by me and the Company’s CEO or CFO. No other representations or agreements have been made regarding the term or termination of my employment. I understand that no employee of the Company other than its CEO or CFO has the authority to enter into any agreement, commitment or guarantees binding on the Company regarding my employment and then only by a signed, written document.

This Agreement, which is ancillary to any other agreement I may have with the Company, (a) is intended as the complete and exclusive statement of my agreement with the Company with respect to its subject matter, (b) shall be binding upon my heirs, executors and administrators, (c) shall be assignable by the Company to its successors; (d) shall not be modified unless in writing and signed by me and the Company, (e) shall be governed by and construed in accordance with the law of the State of Connecticut, the Company ‘s home office state, and (f) if any part of this Agreement is found invalid by any court, the remainder shall be valid and enforceable in law and equity.

–12–

Lydall Thermal/Acoustical, Inc.
By:	/s/ Dale G. Barnhart	6/26/08
	Dale G. Barnhart	Date
	Sole Director
	/s/ Joseph K. Wilsted	6/26/08
	Joseph K. Wilsted	Date

–13–

EXHIBIT B

TERMINATION, VOLUNTARY RELEASE AND WAIVER OF RIGHTS AGREEMENT

I, Joseph K. Wilsted, unqualifiedly accept and agree to the relinquishment of my title, responsibilities and obligations as an employee of Lydall Thermal/Acoustical, Inc. (“the Company”), and concurrently and unconditionally agree to sever my relationship as an employee of the Company, in consideration for the voluntary payment to me by the Company of the separation benefits set forth in Section          of the Employment Agreement dated as of                      , 2008 by and between me and the Company (the “Employment Agreement”), which is made a part hereof.

1. In exchange for this consideration, which I understand that the Company is not otherwise obligated to provide to me, I voluntarily agree to waive and forego any and all claims, rights, interests, covenants, contracts, warranties, promises, undertakings, actions, suits, causes of action, obligations, debts, attorneys’ fees or other expenses, accounts, judgments, fines, fees, losses and liabilities, of any kind, nature or description, in law, equity or otherwise (collectively, “Claims”) that I may have against the Company and to release the Company and their respective affiliates, subsidiaries, officers, directors, employees, representatives, agents, successors and assigns (hereinafter collectively referred to as “Releasees”) from any obligations any of them may owe to me, accepting the aforestated consideration as full settlement of any monies or obligations owed to me by Releasees that may have arisen at any time prior to the date of my execution of this Termination, Voluntary Release and Waiver of Rights Agreement (the “Agreement”), except as specifically provided below in the following paragraph number 2.

2. I do not waive, nor has the Company asked me to waive, any rights arising exclusively under the Fair Labor Standards Act, except as such waiver may henceforth be made in a manner provided by law. I do not waive, nor has the Company asked me to waive, any vested benefits that I may have or that I may have derived from the course of my employment with the Company. I understand that such vested benefits will be subject to and administered in accordance with the established and usual terms governing same. I do not waive any rights which may in the future, after the execution of this Agreement, arise exclusively from a substantial breach by the Company of a material obligation of the Company expressly undertaken in consideration of my entering into this Agreement.

3. Except as set forth in paragraph 2, I do fully, irrevocably and forever waive, relinquish and agree to forego any and all Claims whatsoever, whether known or unknown, that I may have or may hereafter have against the Releasees or any of them arising out of or by reason of any cause, matter or thing whatsoever from the beginning of the world to the date hereof, including without limitation any and all matters relating to my employment with the Company and the cessation thereof and all matters arising under Title VII of the Civil Rights Act of 1964, 42 U.S.C. § 2000 et seq., the Americans with Disabilities Act of 1990, 42 U.S.C. § 12101 et seq., the Family and Medical Leave Act of 1993, 29 U.S.C. § 2601 et seq., the Age Discrimination in Employment Act of 1967, 29 U.S.C. § 621 et seq., the Employee Retirement Income Security Act of 1974, 29 U.S.C. § 1001 et seq., all as amended, or under any other laws, ordinances, executive orders, regulations or administrative or judicial case law arising under the statutory or common laws of the United States, the State of Connecticut or any other applicable county or municipal ordinance.

4. As a material inducement to the Company to enter into this Agreement, I, the undersigned, recognize that I may have been privy to certain confidential, proprietary and trade secret information of the Company which, if known to third parties, could be used in a manner that would reduce the value of the Company for its shareholders. In order to reduce the risk of that happening, I, the undersigned, agree that for a period of two (2) years after termination of employment, I, the undersigned, will not, directly or indirectly, assist, or be part of or have any involvement in, any effort to acquire control of the Company through the acquisition of its stock or substantially all of its assets, without the prior consent of the Board of Directors of the Company. This provision shall not prevent the undersigned from owning up to not more than one percent (1%) of the outstanding publicly traded stock of any company.

5. I further acknowledge pursuant to the Older Worker’s Benefit Protection Act (29 U.S.C. § 626(f)), I expressly agree that the following statements are true:

a. The payment of the consideration described in Section          of the Employment Agreement is in addition to the standard employee benefits and anything else of value which the Company owes me in connection with my employment with the Company or the separation of employment.

–14–

b. I have [twenty-one days] days from [date of receipt] to consider and sign this agreement. If I choose to sign this Agreement before the end of the [twenty-one] day period, that decision is completely voluntary and has not been forced on me by the Company.

c. I will have seven (7) days after signing the Agreement in which to revoke it, and the Agreement will not become effective or enforceable until the end of those seven (7) days.

d. I am now being advised in writing to consult an attorney before signing this Agreement.

I acknowledge that I have been given sufficient time to freely consult with an attorney or counselor of my own choosing and that I knowingly and voluntarily execute this Agreement, after bargaining over the terms hereof, with knowledge of the consequences made clear, and with the genuine intent to release claims without threats, duress, or coercion on the part of the Company. I do so understanding and acknowledging the significance of such waiver.

6. Further, in view of the above-referenced consideration voluntarily provided to me by the Company, after due deliberation, I agree to waive any right to further litigation or claim against any or all of the Releasees except as specifically provided in paragraph number 2 above. I hereby agree to indemnify and hold harmless the Releasees and their respective agents or representatives from and against any and all losses, costs, damages or expenses, including, without limitation, attorneys fees incurred by said parties, or any of them, arising out of any breach of this Agreement by me or by any person acting on my behalf, or the fact that any representation made herein by the undersigned was false when made.

7. As a material inducement to the Company to enter into this Agreement, I, the undersigned, understand and agree that if I should fail to comply with the conditions hereof or to carry out the agreement set forth herein, all amounts previously paid under this Agreement shall be immediately forfeited to the Company and that the right or claim to further payments and/or benefits hereunder would likewise be forfeited.

8. As a further material inducement to the Company to enter into this Agreement, the undersigned provides as follows:

First. I represent that I have not filed any complaints or charges against the Company, or any of the Releasees relating to the relinquishment of my former titles and responsibilities at the Company or the terms of my employment with the Company and that if any agency or court assumes jurisdiction of any complaint or charge against the Company or any of the Releasees on behalf of me concerning my employment with the Company, I understand and agrees that I have, by my knowing and willing execution of this Agreement waived my rights to any form of recovery or relief against the Company, or any of the Releasees, including but not limited to, attorney’s fees. Provided, however, that this provision shall not preclude the undersigned from pursuing appropriate legal relief against the Company for redress of a substantial breach of a material obligation of the Company expressly undertaken in consideration of my entering into this Agreement.

Second. I acknowledge and understand that the consideration for this release shall not be in any way construed as an admission by the Company or any of the Releasees of any improper acts or any improper employment decisions, and that the Company, specifically disclaims any liability on the part of itself, the Releasees, and their respective agents, employees, representatives, successors or assigns in this regard.

Third. I acknowledge and agree that this Agreement shall be binding upon me, upon the Company, and upon our respective administrators, representatives, executives, successors, heirs and assigns and shall inure to the benefit of said parties and each of them.

Fourth. I represent, understand and agree that this Agreement sets forth the entire agreement between the parties hereto, and fully supersedes any and all prior agreements or understandings between the parties pertaining to the subject matter hereof, except for the confidentiality and non-competition agreement previously executed by me, the terms of which retain their full force and effect, and which are in no way limited or curtailed by this Agreement. (A copy of that agreement is attached to the Employment Agreement as Exhibit A and is made a part hereof.)

–15–

Fifth. Modification. This Agreement may not be altered or changed except by an agreement in writing that has been properly executed by the party against whom any waiver, change, modification or discharge is sought.

Sixth. Severability. All provisions and terms of this Agreement are severable. The invalidity or unenforceability of any particular provision(s) or term(s) of this Agreement shall not affect the validity or enforceability of the other provisions and such other provisions shall be enforceable in law or equity in all respects as if such particular invalid or unenforceable provision(s) or term(s) were omitted. Notwithstanding the foregoing, the language of all parts of this Agreement shall, in all cases, be construed as a whole, according to its fair meaning, and not strictly for or against any of the parties.

Seventh. No Disparagement. Unless otherwise required by a court of competent jurisdiction or pursuant to any recognized subpoena power, I agree and promise that I will not make any oral or written statements or reveal any information to any person, company, or agency which is disparaging or damaging to the reputation or business of the Company, its subsidiaries, directors, officers or affiliates, or which would interfere in any way with the business relations between the Company or any of its subsidiaries or affiliates and any of their customers, suppliers or vendors whether present or in the future.

Eighth. Confidentiality. The Company and the undersigned agree to refrain from disclosing to third parties and to keep strictly confidential all details of this Agreement and any and all information relating to its negotiation, except as necessary to each party’s accountants or attorneys.

Ninth. Termination of Agreement. Notwithstanding anything to the contrary in this Agreement, this Agreement may be terminated by the Company and all further payment obligations of the Company will cease, if: (a) the undersigned is terminated for “Cause” prior to the undersigned’s separation date; or (b) facts are discovered after the undersigned’s separation date that would have supported a termination for “Cause” had such facts been discovered prior to the undersigned’s separation date.

–16–

AFFIRMATION OF RELEASOR

I, Joseph K. Wilsted, warrant that I am competent to execute this Termination, Voluntary Release and Waiver of Rights Agreement and that I accept full responsibility thereof.

I, Joseph K. Wilsted, warrant that I have had the opportunity to consult with an attorney of my choosing with respect to this matter and the consequences of my executing this Termination, Voluntary Release and Waiver of Rights Agreement.

I, Joseph K. Wilsted, have read this Termination, Voluntary Release and Waiver of Rights Agreement carefully and I fully understand its terms. I execute this document voluntarily with full and complete knowledge of its significance.

Executed this              day of                         , 2008 at                                                                                           .

Joseph K. Wilsted

STATE OF	)
	)	SS:
COUNTY OF	)

Subscribed and sworn to before me, a Notary Public in and for said County and State, this                  day of                 , 2008 under the pains and penalties of perjury.

, Notary Public

My Commission Expires:                                              

County of Residence:                                                   

–17–

EX-10.2

Exhibit 10.2

Dale Barnhart Relocation Agreement

1. The Company has a relocation policy that will apply to this relocation with certain exceptions as noted herein. The existing policy provides for broad reimbursement of home sales (and purchase) related expenses including the major cost element, real estate commission on the sale, which is then grossed-up for the executive. Hence, the financial impact of such expenses on the relocated executive is not adverse.

2. The Board will authorize the Company to reimburse Dale Barnhart for the difference on a 100% basis between the Barnhart Cost (“BC”) and the actual sale price up to $50,000, assuming a sale price is less the BC. To the extent that actual sale price is greater than $50,000 less than BC, the Company will additionally reimburse Dale Barnhart for 70% of that difference. Providing though the total amount reimbursed to Dale Barnhart will not exceed $100,000. That total amount reimbursed will then be grossed-up for applicable income taxes. Documentation to determine Barnhart Cost will be provided by Dale to the Company Finance Department. In addition, other eligible expenses will be grossed-up as specified in the Company policy. All payments to Dale Barnhart, including gross-up amounts, will be considered “relocation expenses” under Exhibit A (Lydall Relocation Repayment Agreement) of the Company’s relocation policy.

3. Funding per item 2 will occur concurrent with the purchase by the Barnhart’s of a home in Connecticut and after the sale of house in Ohio.

4. All Company borne expenses associated with Dale’s relocation will not be considered as a carve-out for the 2008, or any subsequent, Annual Incentive Plan.

5. This proposal is subject to review by Company advisors for tax implications. Should changes be required to mitigate negative tax effects, such changes will be incorporated without resulting to adverse consequences for Dale.

By:	/s/ William D. Gurley	8/1/08	By:	/s/ Dale G. Barnhart	8/1/08
	William D. Gurley	Date		Dale G. Barnhart	Date
	Chairman,			President and CEO
	Compensation Committee

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Dale G. Barnhart, certify that:

1. I have reviewed this quarterly report on Form 10-Q 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

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

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

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

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

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.

August 4, 2008	/s/ Dale G. Barnhart
	Dale G. Barnhart
	President and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Thomas P. Smith, certify that:

1. I have reviewed this quarterly report on Form 10-Q 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

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

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

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

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

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.

August 4, 2008	/s/ Thomas P. Smith
	Thomas P. Smith
	Vice President, Chief Financial Officer and Treasurer

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 Quarterly Report of Lydall, Inc. (the “Company”) on Form 10-Q for the period ending June 30, 2008 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-Q 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-Q or as a separate disclosure document.

August 4, 2008	/s/ Dale G. Barnhart
	Dale G. Barnhart
	President and Chief Executive Officer
August 4, 2008	/s/ Thomas P. Smith
	Thomas P. Smith
	Vice President, Chief Financial Officer and Treasurer