10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-K

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

For the Fiscal Year Ended December 31, 2006

O R

¨ 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)

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

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

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

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes ¨    No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ¨    No x

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ¨

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

Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨

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

On June 30, 2006, the aggregate market value of the Registrant’s voting stock held by nonaffiliates was $146,915,454 based on the New York Stock Exchange closing price on that date. For purposes of this calculation, the Registrant has assumed that its directors and executive officers are affiliates.

On February 28, 2007, there were 16,333,907 shares of Common Stock outstanding, exclusive of treasury shares.

DOCUMENTS INCORPORATED BY REFERENCE

Part III incorporates information by reference from the definitive Proxy Statement distributed in connection with the Registrant’s Annual Meeting of Stockholders to be held on April 26, 2007.

The exhibit index is located on pages 30-31.

INDEX TO ANNUAL REPORT ON FORM 10-K

Year Ended December 31, 2006

		Page Number
PART I
Item 1.	Business	1
Item 1A.	Risk Factors	3
Item 1B.	Unresolved Staff Comments	5
Item 2.	Properties	5
Item 3.	Legal Proceedings	5
Item 4.	Submission of Matters to a Vote of Security Holders	6
	Executive Officers of the Registrant	7
PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	8
Item 6.	Selected Financial Data	10
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	25
Item 8.	Financial Statements and Supplementary Data	26
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	26
Item 9A.	Controls and Procedures	26
Item 9B.	Other Information	26
PART III
Item 10.	Directors, Executive Officers and Corporate Governance	28
Item 11.	Executive Compensation	28
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	28
Item 13.	Certain Relationships and Related Transactions, and Director Independence	28
Item 14.	Principal Accounting Fees and Services	28
PART IV
Item 15.	Exhibits, Financial Statement Schedules	29
	Signatures	32

The information called for by Items 10, 11, 12, 13 and 14, to the extent not included in this document, is incorporated herein by reference to such information included in the Company’s definitive Proxy Statement to be filed with the Securities and Exchange Commission and distributed in connection with Lydall, Inc.’s 2007 Annual Meeting of Stockholders to be held on April 26, 2007.

PART I

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

Item 1. BUSINESS

Lydall, Inc. has been incorporated in Delaware since 1987 after originally being incorporated in Connecticut in 1969. The Company’s principal executive offices are located in Manchester, Connecticut. The Company’s subsidiaries design and manufacture specialty engineered automotive thermal and acoustical barriers, passive and active industrial thermal and insulating solutions, air and liquid filtration media, medical filtration media and devices and biopharmaceutical processing components for demanding thermal/acoustical and filtration/separation applications.

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

Sales to the automotive market represented 52 percent of Lydall’s net sales in 2006, 54 percent of net sales in 2005 and 47 percent in 2004. Lydall’s Thermal and Acoustical products are used on a variety of automotive platforms and in various other applications. Sales to DaimlerChrysler were $55.9 million, or 17 percent of Lydall’s net sales in 2006. No other single customer accounted for more than 10 percent of the Company’s net sales in 2006.

Foreign and export sales were 43 percent of the Company’s net sales in 2006, 45 percent in 2005 and 47 percent in 2004. Export sales primarily to Europe, Asia, Mexico and Canada were $45.1 million, $47.3 million and $51.2 million in 2006, 2005 and 2004, respectively. Foreign sales were $96.0 million, $91.1 million and $86.6 million for the years ended December 31, 2006, 2005 and 2004, respectively. The decrease in export sales during 2006 was primarily related to decreased automotive sales to Canada. The increase in foreign sales during 2006 was primarily related to incremental European automotive sales.

Foreign operations generated operating income of $10.3 million, $9.9 million and $4.2 million for the years ended December 31, 2006, 2005 and 2004, respectively. Total foreign assets were $87.2 million at December 31, 2006 compared with $79.4 million at December 31, 2005 and $90.4 million at December 31, 2004. The increase in foreign assets as of December 31, 2006 was primarily due to the strengthening of the Euro in 2006, compared to 2005.

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

The Company’s Code of Ethics and Business Conduct for all employees and its Code of Ethics for the Chief Executive Officer, Senior Financial Officers and All Accounting and Financial Personnel can be obtained free of charge on the Company’s website under the Corporate Governance section or by contacting the Office of the General Counsel, P.O. Box 151, One Colonial Road, Manchester, CT 06045-0151.

SEGMENTS

Lydall has organized its business into two primary reportable segments – Thermal/Acoustical and Filtration/Separation. All other businesses are aggregated in Other Products and Services. Segments are defined by the grouping of similar products and services. The Company’s Notes to its Consolidated Financial Statements include additional segment financial information.

Thermal/Acoustical

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

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Lydall’s automotive thermal and acoustical barriers, including ZeroClearance^®, AMS^®, dB-Lyte^®, dBCore^® and LyTherm^® products, are comprised of organic and inorganic fiber composites, fiber and metal combinations and all metal components that are used in cars, trucks, sport utility vehicles and vans. The Company holds patents on several of these products 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.

The Company’s passive thermal business features products such as LyTherm^® and Manniglas^® that are employed as linings for ovens, kilns and furnaces in glass and metal manufacturing and in consumer appliances, as well as heating, ventilating and air-conditioning systems. At the very coldest temperatures (approaching absolute-zero), CryoTherm^® cryogenic materials, composed of inorganic fibers, are used for super-insulating applications.

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

Thermal/Acoustical Segment net sales represented 68.0 percent of the Company’s net sales in 2006, 68.7 percent in 2005 and 62.5 percent in 2004. Net sales generated by international operations of the Thermal/Acoustical Segment accounted for 32.0 percent, 33.1 percent and 33.2 percent of segment net sales in 2006, 2005 and 2004, respectively.

Filtration/Separation

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

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

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

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

Net sales from the Filtration/Separation Segment represented 23.0 percent of the Company’s net sales in 2006 compared with 22.3 percent in 2005 and 28.0 percent in 2004. Net sales generated by the international operation of the Filtration/Separation Segment accounted for 33.4 percent, 34.4 percent and 29.7 percent of segment net sales in 2006, 2005 and 2004, respectively.

Other Products and Services

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

OPS net sales were 9.0 percent of the Company’s net sales in 2006 compared with 9.0 percent in 2005 and 9.5 percent in 2004. There were no significant sales generated outside of the United States for OPS.

GENERAL BUSINESS INFORMATION

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

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

The Company invested $8.6 million in 2006, $8.8 million in 2005 and $8.5 million in 2004, or approximately 3 percent of net sales for each year, to develop new products and to improve existing products. Most of the Company’s investment in research and development is application specific. There were no significant customer-sponsored research and development activities during the past three years.

Lydall’s backlog was $45.8 million at December 31, 2006, $38.9 million at December 31, 2005 and $42.9 million at December 31, 2004. Backlog at January 31, 2007 was $51.1 million. The increase in backlog at December 31, 2006 compared with December 31, 2005 was mainly due to the German automotive business and strengthening of the Euro in 2006, partially offset by net decreases in backlog at the domestic automotive businesses and filtration businesses due to the timing of orders. The decrease in backlog at December 31, 2005 compared with December 31, 2004 was mainly due to the weakening of the Euro in 2005, compared with 2004, and to a lesser extent, a net decrease in backlog at domestic and foreign operations due to the timing of orders. There are minimal seasonal aspects to Lydall’s backlog as of the end of the Company’s fiscal years.

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

Lydall believes that its plants and equipment are in substantial compliance with applicable federal, state and local provisions that have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment.

As of December 31, 2006, Lydall employed approximately 1,400 people. Four unions with contracts expiring on March 31, 2009 represent approximately 60 of the Company’s employees in the United States. All employees at the Company’s facilities in France are covered under a National Collective Bargaining Agreement. Certain salaried and all hourly employees at the operation in Germany are also covered under a National Collective Bargaining Agreement. Lydall considers its employee relationships to be satisfactory and did not have any actual or threatened work stoppages due to union-related activities in 2006.

There are no significant anticipated operating risks related to foreign investment law, expropriation, inflation effects or availability of material, labor or energy. However, the Company was impacted by increased material and energy costs in 2006. 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.

Item 1A. RISK FACTORS

The Company’s financial condition, operating results and cash flows can be impacted by a number of factors, including, but not limited to those described below, any one of which could cause Lydall’s actual results to vary materially from recent results or from the Company’s anticipated future results.

A Major Downturn of the North American or European Automotive Markets – Approximately 52 percent of Lydall’s total net sales in 2006 were to the automotive market. Lydall’s automotive products are thermal and acoustical barriers employed both inside and under the body of vehicles. Most of Lydall’s products are supplied to meet unique, niche applications. Lydall may have a number of components on a particular automotive platform and applications can range across all types of vehicles from sport utility models to trucks, vans and cars. Thus, there is not necessarily a direct correlation between the number of Lydall products sold and the number of vehicles being built by automotive manufacturers. During the third and fourth quarters of 2006, certain domestic automakers announced facility closures and other restructuring actions that may impact future automobile production for platforms that include Company content. While the domestic automakers have lost market share to foreign automakers, the Company continued efforts to establish its position with Asian automotive transplants in North America to offset any declines with North American automakers. The Hamptonville facility was approved in 2006 as an official supplier by certain Asian automotive transplants. This approval does not give the Company business, but it puts the Company in a position to quote and gain business in the future. No assurances can be given on how successful the Company will be in expanding its business with Asian automotive

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transplants. The Company can also be affected when automotive manufacturers discontinue production of specific models that contain Lydall’s products. Conversely, Lydall benefits from the introduction of new models that contain the Company’s products. Although Lydall’s automotive sales are not solely contingent on the strength of the automotive market, a significant downturn of the North American or European automotive industries or a major decline in production of specific vehicles on which Lydall has significant content could have a material impact on Lydall’s results of operations and cash flows.

Dependence on Large Customers – The automotive business is dependent on large OEM customers that have substantial bargaining power with respect to price and other commercial terms. There can be no assurance that the Company will be able to offset any reduction of prices to these customers with reductions in its costs. In addition, in the event that certain domestic automakers experience further critical operating and profitability issues there can be no assurance that the Company will not lose all or a portion of sales to its large volume customers. The Company typically has significant amounts of accounts receivable from domestic automakers outstanding at any point in time. Should a domestic automaker not be able to pay the Company the amounts owed as they become due, results of operations and cash flows could be materially affected.

Pricing for Automotive Products – From time to time the Company’s prices may be “market tested” by its automotive customers as a way for those automotive customers to ensure global competitiveness. This can cause the Company to reduce prices prospectively on some parts, depending on the results of the customer study, possibly resulting in reduced gross margin on the effected parts, or if prices are not reduced the Company could potentially lose the business from the automotive customer.

Raw Material Pricing and Supply – Raw material pricing and supply issues affect all of Lydall’s businesses and can influence results in the future. The Thermal/Acoustical Segment uses aluminum and other metals to manufacture most automotive heat shields. Also, various fibers are used in Thermal/Acoustical as well as Filtration/Separation products. The Company experienced higher aluminum costs during the last half of 2006, compared to the first two quarters of 2006, which impacted profitability. Further increases in aluminum prices or other raw materials in 2007 could lower operating income in future periods, should the Company not have the ability to pass some or all of these incremental costs on to its customers. In addition, an interruption in the supply of these materials could decrease the sales of the affected products and thereby also reduce the profitability of the Company.

Energy Pricing – Increases in energy pricing affect all of Lydall’s businesses and can influence results in the future. Higher energy costs at Lydall’s Thermal/Acoustical and Filtration/Separation manufacturing plants or higher energy costs passed on from the Company’s vendors could impact each segment’s profitability. In addition, higher energy costs can impact the Company’s transport business and profitability of Other Products and Services.

International Operations – The Company believes that in order to be competitive and grow its businesses, it needs to maintain significant international operations. Foreign sales were $96.0 million, $91.1 million and $86.6 million in 2006, 2005 and 2004, respectively. Operations outside the United States are subject to inherent risks, including fluctuations in exchange rates, political and economic conditions in various countries, unexpected changes in regulatory requirements, longer accounts receivable collection cycles and potentially adverse tax consequences. These factors may have a material adverse effect on the Company’s ability to generate sales outside the United States and, consequently, on its business and results of operations.

Expansion into New Geographical Regions – The Company began to establish its presence in China and leased warehouse space for filtration products in 2006. The near-term goal is to set up a sales and service company with the capability of performing finishing operations in addition to acting as the central distribution and service facility for filtration products for Asia. The Company is also focusing on establishing an Asian presence for its Thermal/Acoustical products in this important market. There is no guarantee that the Company will be successful in establishing its presence in China or any other new geographical regions in the future.

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

Product Performance – In the event that Lydall’s products fail to perform as expected, the Company may be subject to warranty claims from its customers. If such failure results in, or is alleged to result in, bodily injury and/or property damage or other losses, the Company may be subject to product liability lawsuits, product recalls, and other claims. These types of claims could have a material impact on results of operations and cash flows.

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Compliance with Environmental Laws and Regulations – The Company is subject to federal, state, local and foreign environmental, and health and safety laws and regulations that affect ongoing operations. In order to maintain compliance with such requirements, the Company may incur increased capital costs and operating expenses. In addition, new laws and regulations, discovery of previously unknown contamination, or the imposition of new clean-up requirements could require the Company to incur costs or become subject to new or increased liabilities that could have a material impact on results of operations and cash flows.

Strategic Initiatives – As part of Lydall’s business strategy, the Company continues to review various strategic and business opportunities to grow the business and also reviews its existing businesses to determine whether any of them should be modified, or otherwise restructured. In addition, the Company continually explores its core markets for suitable strategic acquisitions, joint ventures, alliances and licensing agreements to supplement growth. The Company cannot predict with certainty whether any future strategic transactions will be beneficial to the Company.

Company Size – The industries in which the Company sells its products are highly competitive and many of the Company’s competitors are affiliated with entities which are substantially larger and which have greater financial, technical and marketing resources than the Company possesses. Because of the Company’s size and product mix, the Company may not be able to capitalize on changes in technology, competition and pricing as fully as the Company’s competitors.

Item 1B. UNRESOLVED STAFF COMMENTS

None

Item 2. PROPERTIES

The principal properties of the Company as of December 31, 2006 are situated at the following locations and have the following characteristics:

Location	Primary Business Segment/General Description	Type of Interest
Hamptonville, North Carolina	Thermal/Acoustical – Product Manufacturing	Owned
St. Johnsbury, Vermont	Thermal/Acoustical – Product Manufacturing	Leased
Meinerzhagen, Germany	Thermal/Acoustical – Product Manufacturing	Owned
Ossipee, New Hampshire	Thermal/Acoustical – Product Manufacturing	Owned
Green Island, New York	Thermal/Acoustical – Product Manufacturing	Owned
Saint-Nazaire, France	Thermal/Acoustical – Product Manufacturing	Leased
Rochester, New Hampshire	Filtration/Separation – Specialty Media Manufacturing	Owned
Saint-Rivalain, France	Filtration/Separation – Specialty Media Manufacturing	Owned
Winston-Salem, North Carolina	Filtration/Separation – Biomedical Products Manufacturing	Leased
Newport News, Virginia	Other Products and Services – Warehouse and Office Facility	Leased
Glen Allen, Virginia	Other Products and Services – Transport and Office Facility	Leased
Monson, Massachusetts	Other Products and Services – Transport and Warehouse Facility	Leased
Manchester, Connecticut	Corporate Office	Owned

For information regarding lease obligations, see Note 14 in “Notes to Consolidated Financial Statements.” Lydall considers its properties to be in good operating condition and suitable and adequate for its present needs. All properties are being appropriately utilized consistent with experience and demand for the Company’s products. In addition to the properties listed above, the Company has several additional leases for sales offices and warehouses in the United States, Europe and Asia.

Item 3. LEGAL PROCEEDINGS

On July 18, 2003, a lawsuit was filed in the Superior Court in Hartford, Connecticut by the Company against a former employee alleging improper use of confidential Company information. On November 2, 2004 the Connecticut Superior Court rendered its decision on this matter, fully sustaining the Company’s claims against the former employee. The Court held an additional hearing at which it found the former employee to be liable to the Company for actual damages, punitive damages and payment of the Company’s attorney fees. The Court’s rulings were appealed by the former employee and the appeal was heard by the Connecticut Supreme Court in the second quarter of 2006. At this time, the Company cannot determine the outcome of the appeal. The final resolution of this matter may have a material impact on the future results of operations and cash flows of the Company.

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A suit was filed against a subsidiary in the Caledona Superior Court, Caledona County, Vermont on March 31, 2005 by a non-employee temporary worker. The claim relates to an injury to the plaintiff and alleges that the subsidiary removed safety equipment that would have prevented the injury and seeks indemnity through a contract between the subsidiary and a safety equipment supplier. This claim is insured and therefore the Company believes its maximum exposure is the applicable deductible of $250,000. No reserve has been recorded related to this claim as of December 31, 2006 as the Company believes the allegations are without merit.

In November 2004, the Company filed suit against the purchaser of certain assets of the fiberboard operation. The suit was to protect its claim on a note receivable from the purchaser as it was expected that the purchaser would file for bankruptcy. During the third quarter of 2004, the Company recorded a reserve of $0.5 million for the remaining balance of the note receivable as the Company believed that the purchaser did not have the financial ability to pay the remaining amount owed to the Company. The purchaser filed for bankruptcy during the first quarter of 2005 and subsequently filed a counter claim against the Company for $1.6 million alleging a breach of contract by the Company related to the purchase of the assets. A provisional court hearing was held in January 2007 and the court set a trial date for January 2008. No reserve has been recorded related to this counterclaim as of December 31, 2006, as the Company believes the counterclaim is without merit.

See Note 14 in “Notes to Consolidated Financial Statements” for discussion of other contingencies and environmental matters.

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

There were no matters submitted to a vote of security holders during the fourth quarter of 2006.

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EXECUTIVE OFFICERS OF THE REGISTRANT

The executive officers of Lydall, Inc. or its subsidiaries, together with the offices presently held by them, their business experience since January 1, 2002, and their age as of February 28, 2007, the record date of the Company’s 2007 Annual Meeting, are as follows:

Name	Age	Title	Other Business Experience Since 2002
David Freeman	62	President and Chief Executive Officer and Director	Professor of International Business at Central Connecticut State University
Thomas P. Smith	49	Vice President, Chief Financial Officer and Treasurer	Vice President – Controller of Lydall, Inc.
Mona G. Estey	52	Vice President, Human Resources
Mary A. Tremblay	46	Vice President, General Counsel and Secretary
Randall L. Byrd	49	President, Lydall Thermal/Acoustical Sales, LLC	Chief Operation Officer, Formed Fiber Technologies; Vice President, Flooring, Acoustics and Overhead Systems, LEAR Corporation
Peter V. Ferris	47	President, Charter Medical Ltd.	Vice President of Strategic Marketing, Tyco International; Vice President Corporate Marketing, Tyco International
Bill W. Franks, Jr.	48	President, Lydall Transport, Ltd.
Kevin T. Longe	47	President, Lydall Filtration/Separation, Inc.	Vice President, General Manager - Filtration/Separation; President, SightPoint LLC; Senior Vice President, Electro Scientific Industries
Bertrand Ploquin	42	President, Lydall Thermique/Acoustique, S.A.S.	Managing Director, Lydall Gerhardi; President, Lydall Thermique/Acoustique
John F. Tattersall	48	President, Industrial Thermal Solutions, Inc.	Vice President, General Manager, Lydall Industrial Thermal Solutions; Vice President, Marketing/Sales – Green Island Operation

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PART II

Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

PRICE RANGE OF COMMON STOCK AND DIVIDEND HISTORY

The Company’s Common Stock is traded on the New York Stock Exchange (NYSE) under the symbol LDL. Shares totaling 7,604,800 and 4,490,300 were traded during 2006 and 2005, respectively. The table below shows the range of reported sale prices on the NYSE Composite Tape for the Company’s Common Stock for the periods indicated. As of February 28, 2007, the record date for the Company’s 2007 Annual Meeting, 3,564 stockholders of record held 16,333,907 shares of Lydall’s Common Stock, $.10 par value. As of the record date, there were no shares outstanding of the Company’s Preferred Stock, $1.00 par value.

	High		Low		Close
2006
First Quarter	$	10.02	$	8.15	$	9.65
Second Quarter		9.79		8.62		9.22
Third Quarter		9.35		8.08		8.90
Fourth Quarter		11.19		8.56		10.81
2005
First Quarter	$	11.90	$	10.40	$	11.10
Second Quarter		11.12		7.94		8.62
Third Quarter		9.72		8.38		8.93
Fourth Quarter		9.82		7.61		8.15

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

The information regarding the Company’s equity compensation plans required to be disclosed by Item 201(d) of Regulation S-K is incorporated by reference from the Company’s 2007 definitive Proxy Statement into Item 12 of Part III of this report.

STOCK REPURCHASE PROGRAM

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 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. Under the current terms and conditions of its domestic revolving credit facility, the Company’s stock repurchase activity is limited to no more than $1.8 million in any fiscal quarter and no more than $5 million during any fiscal year. The Company intends to take advantage of the safe harbor protections afforded by Rule 10b-18 promulgated under the Exchange Act, and to engage in future repurchase activity in accordance with the provisions of the Exchange Act. As of December 31, 2006, there were 867,336 shares remaining available for purchase under the Repurchase Program. There was no repurchase activity during the first three quarters of 2006. The following table details the activity for the fourth quarter ended December 31, 2006.

Period	Total Number of Shares Purchased	Average Price per Share		Total Number of Shares Purchased as Part of a Publicly Announced Program	Maximum Number of Shares Remaining Available for Purchase Under the Plans or Programs
Activity October 1, 2006 - October 31, 2006	—		—	—	—
Activity November 1, 2006 - November 30, 2006	81,900	$	10.37	81,900	867,336
Activity December 1, 2006 - December 31, 2006	—		—	—	—
Total	81,900	$	10.37	81,900	867,336

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PERFORMANCE GRAPH

The following graph compares the cumulative return on the Company’s shares over the past five years with the cumulative total return on shares of companies comprising the Standard & Poor’s SmallCap 600 Index and the Russell 2000 Index. Cumulative total return is measured assuming an initial investment of $100 on December 31, 2001, including reinvestment of dividends. Due to the diversity of niche businesses that the Company participates in, it is difficult to identify a reasonable peer group or one industry or line-of-business index for comparison purposes. Thus, Lydall has chosen to compare its performance to the Standard & Poor’s SmallCap 600 Index (which includes Lydall as a constituent) and to the Russell 2000 Index.

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Item 6. SELECTED FINANCIAL DATA

FIVE-YEAR SUMMARY

In thousands except per share amounts and ratio data	2006		2005			2004			2003		2002
Financial results from continuing operations
Net sales	$	326,358	$	306,485		$	293,602		$	272,233	$	254,267
Income (loss) from continuing operations		10,228		5,443			(537	)		8,523		11,525
Common stock per share data
Diluted income (loss) continuing operations		$.63		$.34			$(.03)			$.52		$.70
Cumulative effect of change in accounting principle		—		(.02	)		—			—		—
Diluted net income (loss)		$.63		$.32			$(.03)			$.47		$.69
Financial position
Total assets	$	241,173	$	248,249		$	259,605		$	222,517	$	209,582
Working capital		50,610		57,705			54,249			55,116		43,615
Long-term debt, net of current maturities		8,914		30,256			32,941			21,026		16,228
Total stockholders’ equity		161,217		143,229			144,504			143,596		130,165
Property, plant and equipment
Net property, plant and equipment	$	103,469	$	103,458		$	108,946		$	91,028	$	85,801
Capital expenditures		11,182		15,175			24,678			15,852		14,171
Depreciation		15,130		15,020			15,964			13,132		11,183
Performance and other ratios
Gross margin		22.3%		20.9%			19.6%			23.6%		25.5%
Operating margin		4.7%		2.5%			0.1%			5.1%		7.0%
Current ratio		2.2:1		2.4:1			2.2:1			2.6:1		2.1:1
Total debt to total capitalization		5.9%		18.9%			20.9%			15.3%		16.6%

The results of operations of the discontinued Paperboard Segment have been excluded from the Selected Financial Data table for all applicable periods. The Paperboard Segment’s balance sheet items have been excluded from calculations of the “Performance and other ratios” section for all applicable periods, except for the current ratio. See Item 15 “Exhibits, Financial Statement Schedules” for additional information. See additional discussion under Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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

CAUTIONARY NOTE CONCERNING FACTORS THAT MAY AFFECT FUTURE RESULTS

This report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. In general, any statements contained in this report that are not statements of historical fact may be deemed to be forward-looking statements within the meaning of Section 21E. From time to time, oral or written forward-looking statements may also be included in other materials released to the public. Investors should be aware that such forward-looking statements are intended to provide management’s current expectations for the future operating and financial performance of the Company based on assumptions believed to be valid at the time. Without limiting the generality of the foregoing, the words “believes,” “anticipates,” “plans,” “projects,” “expects,” “estimates,” “forecasts,” “targets,” and other similar expressions are intended to identify forward-looking statements in connection with the discussion of future operating or financial performance. These include, among others, statements relating to:

• Future earnings and other measurements of financial performance

• Future cash flow and uses of cash

• Competitive factors in the industries and geographic markets in which the Company competes or may compete

• Significant changes in the North American or European automotive markets

• The cost and availability of raw materials and energy

• Product development and new business opportunities

• Benefits realized from savings and operating efficiency improvements as a result of Lean Six Sigma and operational excellence initiatives

• Restructuring costs and savings

• Future amounts of stock-based compensation expense

• Pension plan assumptions and future expense and contributions

• Future levels of indebtedness and capital spending

• Future effective income tax rates

• The outcome of contingencies

• Future repurchases of the Company’s common stock

All forward-looking statements are inherently subject to a number of risks and uncertainties that could cause the actual results of the Company to differ materially from those reflected in forward-looking statements.

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

OVERVIEW AND OUTLOOK

Business Environment Overview

Lydall designs and manufactures specialty engineered automotive thermal and acoustical barriers, passive and active industrial thermal and insulating solutions, filtration media, medical filtration media, devices and biopharmaceutical processing components for demanding thermal/acoustical and filtration/separation applications. Lydall’s Thermal/Acoustical and Filtration/Separation 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. In addition, the Company continually explores its core markets for suitable strategic acquisitions, joint ventures, alliances and licensing agreements to supplement growth. As many of Lydall’s operations conduct business on a worldwide basis, Lydall’s results can be impacted by global, regional and industry economic and political factors.

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Global automotive net sales represented approximately 52 percent of the Company’s 2006 net sales. During the third and fourth quarters of 2006, certain domestic automakers announced facility closures and other restructuring actions that may impact future automobile production for platforms that include Company content. Excluding the impact of foreign currency translation, the Company experienced a reduction in automotive parts sales of approximately $1.5 million in the fourth quarter of 2006, compared to the same period in 2005. While the Company experienced approximately 3 percent growth in global automotive net sales in 2006 compared with 2005, a reduction in vehicle production volumes, or a major decline in the production of specific vehicles in which Lydall has significant content, could have a material adverse effect on the Company’s profitability in future quarters.

Global environmental and economic conditions could also impact Lydall’s business segments. Significant increases in energy costs, as well as increases in raw material pricing, specifically, aluminum used in most of the Company’s heat-shield products and various fibers used in a number of the Company’s thermal/acoustical and filtration/separation products, could increase manufacturing costs. The Company incurred higher aluminum costs during the second half of 2006, compared to the first two quarters of 2006, which lowered operating income during that period. Further increases in aluminum prices in the future could negatively impact the Company, should the Company not have the ability to pass some or all of these incremental costs on to its customers.

Operational Matters

The air filtration business, which faced an increasingly price competitive environment during 2005 and 2006, benefited from aggressive marketing activities and began to regain market share in the fourth quarter of 2006. The Company strengthened its marketing team during the year and worked closely with customers both domestically and abroad to deliver value-added products for their specific needs. Net sales in the air filtration business increased by approximately $1.6 million, net of foreign currency translation impact, during the fourth quarter of 2006 compared to the same quarter of 2005. The Company expects to regain additional market share in 2007, however, the financial impact of these efforts cannot be determined at this time.

During the third and fourth quarters of 2006, efforts at the Vital Fluids’ business, which is part of the Company’s Filtration/Separation Segment, to address the operational issues that caused an operating loss during 2005 and 2006, have started to achieve results. Changes in management, higher sales and operational efficiency improvements, during the third and fourth quarters of 2006, contributed to the Vital Fluids’ financial improvement as compared to the first half of 2006. In addition, the Vital Fluids’ business successfully completed the follow-up Federal Drug Administration audit related to the 2005 product recall with no deficiencies noted.

The Company has continued to focus on Lean Six Sigma and operational excellence initiatives. The Company benefited from savings and operating efficiency improvements as a result of the Company’s ongoing Lean Six Sigma program. As this process continues, the Company anticipates that these efforts will continue to identify ways to improve processes and work flow, reduce costs and leverage synergies across the organization. While management has started to see a positive impact on operating margins as a result of Lean Six Sigma and operational excellence initiatives, the Company cannot determine the timing and future impact of these initiatives at this time.

The Company increased its focus on working capital management throughout 2006. The combination of the results of operations, lower cash cycle days (average days of inventory plus average days of receivables minus average days of payables) and containing capital expenditures allowed the Company to reduce outstanding debt by $23.3 million during 2006. As of December 31, 2006, the Company has no borrowings outstanding under its domestic revolving credit facility.

The Company began establishing its presence in China and leased warehouse space for filtration products during the fourth quarter of 2006. The near-term goal is to set up a sales and service company with the capability of performing finishing operations in addition to acting as the central distribution and service facility for filtration products for Asia. The Company is also focusing on establishing an Asian presence for Lydall’s Thermal/Acoustical products in this important market. The Company cannot determine the timing and future financial impact of these initiatives at this time.

The Company continued efforts to establish its position with Asian automotive transplants in North America. The process is a long one. The Hamptonville facility was approved in 2006 as an official supplier by certain Asian automotive transplants. This is a very important step forward. This approval does not give the Company business, but it puts the Company in position to quote and gain business in the future. The future financial impact of these efforts to expand business with Asian transplants cannot be determined at this time.

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CONSOLIDATED RESULTS OF OPERATIONS

Net Sales

(in thousands of dollars)	2006		Percent Change		2005		Percent Change		2004
Net Sales	$	326,358	6.5	%	$	306,485	4.4	%	$	293,602

The increase in net sales in 2006 of $19.9 million, compared with 2005, was primarily the result of increased net sales from Thermal/Acoustical segment of $11.4 million, which included increases in automotive net sales of $4.8 million and increases in passive thermal products net sales of $5.7 million. The Filtration/Separation segment net sales increased by $6.7 million, primarily as a result of an increase of $4.0 million in Vital Fluids’ products net sales and filtration products net sales of $2.6 million. Other products and services net sales increased by $1.8 million in 2006, as compared with 2005. Foreign currency translation increased net sales by $1.1 million for the current year, compared with 2005, primarily impacting the Thermal/Acoustical group by $0.9 million.

The increase in net sales in 2005 of $12.9 million, compared with 2004, was primarily the result of increased sales from the automotive businesses of the Thermal/Acoustical segment of $26.3 million, partially offset by a decrease in sales in the Filtration/Separation segment of $13.8 million. Foreign currency translation had a minimal impact on net sales in 2005, compared to 2004. The increase in automotive sales occurred at both the domestic and European automotive businesses. The decrease in the Filtration/Separation segment was primarily attributable to an $8.5 million decrease in filtration sales and a $5.3 million decrease in sales of Vital Fluids’ products.

Gross Margin

(in thousands of dollars)	2006			2005			2004
Gross margin	$	72,797		$	63,921		$	57,530
Percentage of Sales		22.3	%		20.9	%		19.6	%

The increase in gross margin percentage in 2006 to 22.3 percent from 20.9 percent in the same period of 2005 was principally due to increased gross margins in the Company’s Thermal/Acoustical segment, primarily related to improved margins on automotive products of 2.8%, offset by a small decrease in gross margin percentage for the Filtration/Separation segment. Overall, gross margin percentage increased due to manufacturing process improvements, resulting from Lean Six Sigma and operational excellence initiatives, partially offset by higher raw material and commodity pricing in 2006.

The improvement in gross margin percentage in 2005 to 20.9 percent from 19.6 percent in 2004 was due to the absence of certain 2004 charges that had an unfavorable impact on 2004 gross margin percentage. Restructuring charges related to the consolidation of the domestic automotive facilities and the negative gross margin performance related to the start-up activity of the automotive operation in France, reduced the 2004 gross margin percentage from 21.5 percent to 19.6 percent. After excluding these charges from 2004 results, the gross margin percentage in 2005 decreased by 0.6 percentage points compared to 2004. The decrement in gross margin percentage was primarily attributable to lower sales volumes and the resultant higher per-unit manufacturing costs in the filtration business.

Selling, Product Development and Administrative Expenses

(in thousands of dollars)	2006			2005			2004
Selling, product development and administrative expenses	$	57,466		$	56,256		$	57,205
Percentage of Sales		17.6	%		18.4	%		19.5	%

The increase in selling, product development and administrative expenses of $1.2 million in 2006, compared to 2005, was primarily due to increases in incentive compensation expense of $1.6 million, sales commission expense of $0.8 million, stock based compensation expense of $0.5 million, primarily from the adoption of Statement of Financial Accounting Standards (SFAS) 123R, “Share-Based Payment,” and salaries and benefits expense of $0.3 million. Offsetting these increases were decreases of $1.6 million in compliance costs related to the Sarbanes-Oxley Act and employee severance related expenses of $0.4 million. The increase in net sales for the year, compared to the prior year, contributed to higher sales commission expense in the current year. The increase in incentive compensation expense was primarily due to improved profitability by the Company in 2006 compared to 2005. Higher salaries and benefits expense was primarily due to annual wage adjustments and increased health insurance costs, offset by a reduction in benefit plan expense of $0.7 million, as a result of previously announced changes to the Company’s benefit plans.

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The decrease in selling, product development and administrative expenses of $0.9 million in 2005, compared to 2004, was primarily due to lower costs in 2005 related to Sarbanes-Oxley Section 404 compliance of $2.0 million and lower legal costs associated with litigation against a former employee of $1.9 million in 2004, offset by $0.8 million recorded in 2005 related to the elimination of the chief operating officer position and increases in salaries and commissions of $1.8 million. In addition, the Company made investments in product development of $8.8 million in 2005, compared with $8.5 million in 2004. Excluding the Sarbanes-Oxley Section 404 compliance costs, legal fees associated with a former employee and costs related to the elimination of the chief operating officer position, in the respective periods, selling, product development and administrative expenses as a percentage of net sales for 2005 was essentially the same as for 2004.

Restructuring Activities

(in thousands of dollars)	2006		2005		2004
Restructuring Charges	$	—	$	102	$	5,074

As part of a strategic evaluation initiated in the fourth quarter of 2003, the Company implemented a plan to maximize production capacity utilization, reallocate administrative costs to more beneficial operational efforts and more effectively respond to market demands for increasingly faster, technologically advanced cost-effective solutions. As a result, the Company consolidated the operations of the Columbus manufacturing operation into existing Lydall facilities. The Company substantially completed the restructuring and consolidation of its domestic automotive manufacturing operations as of December 31, 2004. The total costs related to the restructuring effort recorded through December 31, 2005 were approximately $5.4 million, which included $0.7 million of severance and related costs, $2.2 million of accelerated depreciation and $2.5 million of facility exit and move costs. Approximately 95 percent of all restructuring costs incurred were recorded in cost of sales and 5 percent were recorded in selling, product development and administrative expenses. Approximately 87 percent of restructuring costs were recorded in the Thermal/Acoustical Segment and 13 percent were recorded as Corporate Office expenses.

Interest Expense

(in thousands of dollars)	2006			2005			2004
Interest expense	$	1,363		$	1,676		$	1,200
Weighted average interest rate during the year		5.6	%		5.1	%		4.0	%

The decrease in interest expense in 2006 was due to lower average debt levels in 2006 compared to 2005, partially offset by higher interest rates and accretion of interest expense of approximately $0.1 million on the Company’s liabilities for asset retirement obligations. The increase in interest expense during 2005 was primarily related to correspondingly higher average debt levels combined with higher interest rates.

Other Income and Expense

(in thousands of dollars)	2006			2005			2004
Other income, net	$	(27	)	$	(1,071	)	$	(120	)

The amounts included in other income, net, in 2006 are primarily related to investment income and net foreign currency transaction gains and losses. For the year ended December 31, 2005, other income, net, consisted primarily of income of approximately $1.3 million related to the reversal of an environmental accrual connected with previously divested facilities in Germany. In accordance with SFAS No. 5, “Accounting for Contingencies,” the Company determined that it was no longer probable, but remote, that the Company would incur any environmental remediation expense related to the divested facilities.

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Income Taxes

	2006		2005		2004
Effective income tax rate	26.9	%	22.9	%	28.9	%

The effective tax rate for the year ended December 31, 2006 was 26.9 percent compared with 22.9 percent for the same period of 2005. Income tax expense for 2006 includes a tax benefit of $1.2 million recorded in the third quarter ended September 30, 2006. The benefit related to the completion of certain tax audits during the third quarter and additional tax benefits identified during the preparation of the Company’s 2005 tax returns, primarily related to changes in estimates of certain export sales benefits. These third-quarter adjustments primarily contributed to reducing the Company’s effective tax rate for the year ended December 31, 2006, as compared to the federal statutory tax rate on earnings.

The effective tax rates for 2005 and 2004 were impacted favorably by benefits derived from the recognition of deferred tax assets in foreign jurisdictions as well as tax-exempt export income. The 2005 effective tax rate was also favorably impacted by the completion of a tax audit at one of the Company’s foreign locations, adjustments for foreign taxes, and benefits recognized on certain state credits and state loss carryforwards. The 2005 and 2004 effective rates were negatively impacted by certain state franchise and alternative taxes, which do not directly fluctuate with the level of income.

For 2007, the Company expects its effective tax rate to be approximately 36 to 37 percent, as the Company is not aware of any items that would cause a significant difference from the statutory tax rates.

In 2004, the American Jobs Creation Act (AJCA) was signed into law by the President of the United States. This Act provided for a phase-out of the Extraterritorial Income program (ETI) as provided for in the United States Internal Revenue Code and also allows for certain tax benefits for U.S. manufacturers that are intended to offset the ETI phase-out. During 2006, 2005 and 2004, the ETI benefit decreased the Company’s effective tax rate by approximately 1.7 percentage points, 2.6 percentage points and 46.3 percentage points, respectively. At this time, the Company does not expect that the ETI phase-out and implementation of the manufacturer benefit system will have a material impact on the Company’s results of operations and cash flows in future periods.

Net Income (loss) and Earnings (loss) Per Share

(in thousands of dollars, except per share amounts)	2006		2005			2004
Income (loss) before cumulative effect of change in accounting principle	$	10,228	$	5,443		$	(537	)
Cumulative effect of a change in accounting principle		—		(342	)		—
Net income (loss)	$	10,228	$	5,101		$	(537	)
Diluted Earnings (loss) per Share:
Income (loss) before cumulative change in accounting principle	$	.63	$	.34		$	(.03	)
Cumulative effect of a change in accounting principle		—		(.02	)		—
Net income (loss)	$	.63	$	.32		$	(.03	)

In March 2005, the Financial Accounting Standards Board (FASB) issued Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations, an interpretation of FASB Statement No. 143” (FIN 47). This interpretation clarified the timing of liability recognition for legal obligations associated with the retirement of tangible long-lived assets when the timing and/or method of settlement of the obligation are conditional on a future event. FIN 47 requires that the fair value of a liability for a conditional asset retirement obligation be recognized in the period in which it occurred if a reasonable estimate of fair value can be made. The Company determined that conditional legal obligations exist for certain of the Company’s owned and leased facilities related primarily to building materials and leasehold improvements. The Company adopted FIN 47 on October 1, 2005, which resulted in a non-cash cumulative effect of change in accounting principle charge to the results of operations of approximately $0.3 million, net of income taxes, and a liability for conditional asset retirement obligations of approximately $0.6 million.

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SEGMENT RESULTS

Consolidated Net Sales	For the Years Ended December 31,
(in thousands)	2006			2005			2004
Thermal/Acoustical:
Automotive	$	169,889		$	165,097		$	138,832
Passive thermal		31,932			26,198			26,442
Active thermal		20,182			19,308			18,358
Thermal/Acoustical Segment net sales	$	222,003		$	210,603		$	183,632
Filtration/Separation:
Filtration	$	60,642		$	58,022		$	66,528
Vital Fluids		14,264			10,223			15,559
Filtration/Separation Segment net sales	$	74,906		$	68,245		$	82,087
Other Products and Services:
Transport, distribution and warehousing services	$	22,781		$	21,816		$	20,589
Specialty products		9,190			8,431			9,281
Other Products and Services net sales	$	31,971		$	30,247		$	29,870
Eliminations and Other		(2,522	)		(2,610	)		(1,987	)
Consolidated Net Sales	$	326,358		$	306,485		$	293,602
		For the Years Ended December 31,
		2006			2005			2004
Operating Income
Thermal/Acoustical	$	23,193		$	17,994		$	7,269
Filtration/Separation		4,566			4,852			11,045
Other Products and Services		3,038			1,961			2,457
Corporate Expenses		(15,466	)		(17,142	)		(20,446	)
Consolidated Totals	$	15,331		$	7,665		$	325

Thermal/Acoustical

Thermal/Acoustical Segment net sales increased by $11.4 million in 2006 compared with 2005. Foreign currency translation increased segment net sales by $0.9 million for the period. The increase in segment net sales primarily resulted from increased passive thermal products net sales of $5.7 million during 2006, compared to the same period in 2005. The increased sales were primarily related to products used in heating, ventilating and air conditioning systems, appliances and hearths due to greater global demand and market growth for these products. Also contributing to the increase in segment net sales in 2006, compared to 2005, was an increase in automotive parts net sales of approximately $5.2 million, net of impact of foreign currency translation, offset by lower automotive tooling net sales of $0.9 million for the comparable periods. Sales growth of automotive parts was achieved in both North America and in Europe through platform and content expansion during the first half of 2006. Part sales declined during the second half of 2006 due to lower production by domestic automakers and a slowdown in the French automotive market. Sales to the automotive industry accounted for approximately 77 percent of segment net sales in 2006, compared to approximately 78 percent in 2005. Sales of Affinity^® temperature-control active thermal products were higher by $0.9 million in 2006 compared to the prior year.

The increase in operating income in the Thermal/Acoustical Segment for 2006 of $5.2 million, as compared to 2005, was primarily due to an increase in operating income from the automotive operations of $5.8 million, and to a lesser extent from passive thermal products of $0.4 million, partially offset by a decrease of $1.0 million in active thermal operating income. The increase in automotive operating income was primarily due to higher volume of automotive part sales and increased gross margin percentages. Gross margin percentages improved due to manufacturing process improvements and cost reduction initiatives, as well as higher volumes during the period. The increase in operating income for passive thermal products was primarily due to increased net sales during 2006, compared to 2005, partially offset by increased selling, product development and administrative expenses. The decrease in operating income for active thermal products was due to lower gross margin percentage as a result of higher

16

manufacturing and warranty costs. Reducing segment operating income during 2006, compared to 2005, was increased selling, product development and administrative expenses of $2.0 million, primarily due to increased incentive compensation expense of $0.9 million and sales commission expense of $0.6 million, offset by lower benefit plan expense of $0.2 million.

Net sales in 2005 for the Thermal/Acoustical Segment increased by $27.0 million, or 14.7 percent, as compared to 2004. The impact of foreign currency translation was minimal on segment net sales for 2005. This increase in net sales was primarily the result of increased overall sales from the automotive businesses of $26.3 million during 2005, compared with 2004. Sales to the automotive industry accounted for approximately 78 percent of segment net sales in 2005, compared to approximately 76 percent in 2004. Sales growth of automotive products was achieved in both North America and in Europe through platform and content expansion. The Company is also benefiting from a strengthening collaboration between our European and domestic operations. This dynamic enables the Company to work with customers on a much broader basis, resulting in increased business with European transplants in the United States. Sales from the Industrial Thermal businesses increased by less than $1.0 million in 2005 compared with the prior year. Modest increases in sales of Affinity^® temperature-control active thermal products were partially offset by sales declines in passive thermal products such as building material products used principally in heating, ventilation and air conditioning (HVAC) applications.

Segment operating income and operating margin percentage in 2005 increased by $10.7 million and 4.5 percentage points, respectively, compared to 2004. A significant portion of these increases were due to the absence of certain 2004 charges that had an unfavorable impact on 2004 operating income and operating margin percentage. Restructuring charges related to the consolidation of the domestic automotive facilities and operating losses at the start-up activity of the automotive operation in France, reduced 2004 operating income by $7.4 million. After excluding these charges from 2004 results, operating income in 2005 increased by $3.3 million, or 22.7 percent and operating margin percentage increased by 0.5 percentage points compared to 2004. The increases in operating income and operating margin percentage were primarily the result of the European automotive operation’s significant improvements in overall profitability in 2005 with the transfer of business from the German operation to the St. Nazaire facility. This translated into improved absorption of overall costs in France and the elimination of certain incremental costs at the operation in Germany. Operating income of the Industrial Thermal businesses declined by $2.1 million in 2005 compared with 2004 primarily related to changes in product mix at the passive and active thermal businesses.

Filtration/Separation

Segment net sales increased by $6.7 million in 2006, compared with 2005. The impact of foreign currency translation in 2006 was minimal. The overall increase was related to increased sales for Vital Fluids’ products of $4.0 million and liquid filtration products of $3.3 million, partially offset by a decrease of air filtration media net sales of $0.7 million. The increase in Vital Fluids’ products net sales was primarily attributable to increased bioprocessing net sales of $2.3 million, and increased blood product net sales of $1.4 million. Bioprocessing net sales increased due to increased customer production campaigns. Blood product net sales were higher in the current year due to the prior year being impacted by the blood product recall. Liquid filtration net sales increased due to increased demand from existing and new customers and the introduction of new products. The decrease in air filtration media net sales was related to pricing competition in certain markets throughout most of 2006. During the fourth quarter of 2006, the Company’s air filtration business began to regain market share by working closely with its customers to deliver value-added products to meet their specific needs. Net sales for air filtration media increased $1.6 million, net of foreign currency translation, in the fourth quarter of 2006, as compared to the same period in 2005.

Segment operating income decreased $0.3 million in 2006 compared with 2005. Higher selling, product development and administrative expenses of $1.0 million in 2006 compared to the same period in 2005 offset the improvement in segment gross margin. This increase in expense was primarily due to increases in salaries and wages expense of $0.4 million, incentive compensation of $0.3 million, sales commission expense of $0.2 million and severance expense of $0.3 million partially offset by a decrease in benefit plan expense of $0.2 million. Vital Fluid’s operating income was also negatively impacted by inventory obsolescence and a quality issue resulting in charges aggregating approximately $0.9 million in 2006. The decrease in overall segment operating income was also related to lower gross margin contribution by air filtration products, as a result of lower sales, partially offset by improvement in the liquid filtration business gross margin due to increased sales.

Segment net sales decreased by $13.8 million, or 16.9 percent, in 2005 compared to the prior year. The impact of foreign currency translation was minimal on segment net sales for 2005. The decrease was related to substantially lower sales of filtration media and Vital Fluids’ products of $8.5 million and $5.3 million, respectively, compared with 2004. The decline in filtration media was related to reductions in sales of air filtration media used in clean room filtration applications as a result of reduced clean room builds in Asia compared with 2004 levels. In addition, sales of other air filtration media decreased due to pricing competition in certain

17

markets. Vital Fluids’ sales decreased due to lower sales of blood transfusion and cell therapy products of $2.8 million, lower bio-processing products sales of $1.6 million, and lower sales of traditional OEM products of $0.9 million. The decrease in blood-related product sales was related to the product recall previously disclosed, delays in the resumption of shipping of these products due to the validation of the sterilization process and the phase out of certain other blood related products. The reduction in bio-processing sales was primarily related to the change in sales philosophy for these products in prior years from a direct sales approach to external distributors. This move proved ineffective and the Company has moved back to a direct sales force approach.

Segment operating income in 2005 decreased by $6.2 million, or 56.1 percent, from 2004 and operating margin percentage decreased to 7.1 percent in 2005 from 13.5 percent in the prior year. These declines were substantially related to lower sales of filtration media and Vital Fluids’ products and the corresponding reduction in gross margin contribution. Exacerbating this sales volume impact was the under absorption of manufacturing costs related to the reduced production runs during the period, resulting in higher per-unit product costs. The operating loss for the Vital Fluids’ business was $1.3 million greater in 2005 compared to a small operating loss in 2004.

Other Products and Services

The increase in Other Products and Services (OPS) net sales of $1.8 million in 2006, compared to 2005, was related to increased revenues from the trucking and warehousing operations of the transport business and specialty products. The trucking operations were able to post higher revenues compared with the same period of 2005 through expanded sales to current customers and negotiated price increases. The warehousing operations have benefited from a higher volume of activity. A stronger electrical market led to higher specialty product sales in 2006 compared to 2005.

Operating income from OPS increased by $1.1 million in 2006 compared to the same period in 2005. Operating margin percentage for OPS increased to 9.5 percent of net sales in 2006, compared with 6.5 percent of net sales in 2005. These increases were primarily due to increased net sales of trucking and warehousing operations and specialty products, as well as improved gross margin percentages for specialty products.

The increase in net sales from OPS of $0.4 million in 2005 was primarily related to increased revenue for the trucking operations of the transport business of $1.2 million, partially offset by decreased specialty product sales of $0.8 million. The increase in the transport business relates to increased business volume from certain customers and price increases.

Operating income from OPS decreased by $0.5 million for 2005 compared with the prior year. Operating margin percentage was 6.5 percent of net sales in 2005 compared with 8.2 percent in 2004. These decreases were primarily the result of product mix and higher than expected warehousing costs in 2005 compared to 2004.

LIQUIDITY AND CAPITAL RESOURCES

	For the Year Ended December 31,
(in thousands except ratio data)	2006			2005			2004
Cash and cash equivalents	$	6,402		$	2,162		$	1,580
Cash provided by operating activities	$	39,703		$	18,173		$	18,139
Cash used for investing activities	$	(11,182	)	$	(12,042	)	$	(21,937	)
Cash (used for) provided by financing activities	$	(25,183	)	$	(5,149	)	$	2,643
Depreciation and amortization	$	15,341		$	15,220		$	16,281
Capital expenditures	$	11,182		$	15,175		$	24,678
Total debt	$	10,106		$	33,441		$	38,113
Total capitalization (debt plus equity)	$	171,323		$	176,670		$	182,617
Total debt to total capitalization		6%			19%			21%

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, 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.

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Operating Cash Flows

Net cash provided by operating activities in 2006 was $39.7 million compared with $18.2 million in 2005. Operating cash flows in 2006 reflected improved financial results with net income growth of $5.1 million compared to 2005, as well as decreases in working capital of $7.1 million to $50.6 million as of December 31, 2006. During 2006, inventory levels decreased $6.3 million primarily as a result of the Company’s focus on managing inventory levels and Lean Six Sigma and operational excellence initiatives, as well as reduced amounts of in-process customer tooling projects at the automotive facilities. Working capital improvement also benefited from a decrease in accounts receivable of $6.0 million due to timing of tooling sales and collection efforts. Partially offsetting these decreases in working capital for 2006 were a decrease in the current portion of long-term debt of $2.0 million and an increase in cash and cash equivalents of $4.2 million.

Investing Cash Flows

Net cash used for investing activities was $11.2 million in 2006 compared with $12.0 million in 2005. For 2006, capital expenditures totaled $11.2 million compared with $15.2 million in 2005. The Company received $3.1 million in 2005 related to a sales leaseback transaction. Containing capital expenditures during 2006 contributed to the Company’s ability to reduce outstanding debt. The higher-than-normal capital expenditures in 2004 were primarily related to machinery and equipment purchases for the new St. Nazaire automotive facility.

Financing Cash Flows

In 2006, net cash used by financing activities was $25.2 million compared with net cash used by financing activities of $5.1 million in 2005. Debt repayments exceeded borrowings in 2006 by $23.7 million. Proceeds from common stock issuances were approximately $0.3 million in 2006 and $0.5 million in 2005. The Company repurchased $0.8 million of its Common Stock in the fourth quarter of 2006, compared with no repurchases in 2005. As of December 31, 2006, 867,336 shares remained eligible for repurchase under the Repurchase Program. 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.

Financing Arrangements

The Company amended its $50 million domestic revolving credit facility with a group of five banking institutions on February 1, 2005. The credit agreement’s maturity date is February 1, 2009. The modifications made to the restrictive and financial covenants were effective for the quarter ended December 31, 2004.

The Company was in compliance with all financial covenants related to its $50 million domestic revolving credit facility for the year ended December 31, 2006.

Certain foreign subsidiaries of the Company have available lines of credit totaling $11.3 million. As of December 31, 2006 there were no amounts outstanding under these arrangements.

As of December 31, 2006, the Company had unused borrowing capacity of $59.1 million under various credit facilities; all of which was available as of December 31, 2006. Management believes that current financing arrangements provide sufficient capacity to meet working capital requirements and fund future capital expenditures.

The Company does not have any off-balance sheet financing arrangements.

In April 2005, Lydall Gerhardi GmbH and Co. KG, a second-tier subsidiary of Lydall, Inc., entered into a capital lease agreement for a high speed manufacturing line with GEFA Leasing GmbH. The lease has a 7 year term, an effective interest rate of 4.25 percent and aggregate principal payments of €2,995,000. The lease also contains a purchase option, which provides the Company with the option to purchase the equipment anytime after the fourth year of the lease term for a stated percentage of the original purchase price. Principal and interest payments are required monthly. This lease was recorded as a capital lease during the second quarter of 2005 on the Company’s balance sheet.

Future Cash Requirements

At the end of 2006, total indebtedness was $10.1 million, or 5.9 percent of the Company’s total capital structure. Cash requirements for 2007 are expected to include the funding of ongoing operations, capital expenditures, pension plan contributions, share repurchases and debt service. Capital spending for 2007 is expected to be approximately $12.0 million to $15.0 million. The Company expects to finance its 2007 cash requirements from cash provided by operating activities and through borrowings under

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its existing credit agreements. The funded status of the Company’s defined benefit pension plans is dependent upon many factors, including returns on invested assets, levels of market interest rates and levels of voluntary contributions to the plans. The Company expects to contribute approximately $2.8 million to its defined benefit pension plans during 2007. The Company continually explores its core markets for suitable acquisitions, joint ventures, alliances and licensing agreements. If completed, such activities would be financed under the credit facility described under “Financing Arrangements” above or other forms of financing, as required.

Contractual Obligations

The following table summarizes the Company’s significant obligations as of December 31, 2006 and the effect such obligations are expected to have on the Company’s liquidity and cash flows in future periods. This table excludes amounts already recorded on the Consolidated Balance Sheet as current liabilities as of December 31, 2006:

	Payments Due by Period
In thousands	2007		2008		2009		2010		2011		After 5 years		Total
Contractual obligations:
Pension plan contributions	$	2,754	$	194	$	208	$	208	$	208	$	1,293	$	4,865
Operating leases		4,413		3,768		3,147		2,144		1,919		9,779		25,170
Capital leases*		1,407		1,407		1,407		1,407		1,407		3,262		10,297
Long-term debt*		296		296		297		291		268		328		1,776
Purchase obligations		8,565		—		—		—		—		—		8,565
Total contractual obligations	$	17,435	$	5,665	$	5,059	$	4,050	$	3,802	$	14,662	$	50,673

* includes estimated interest payments

Purchase obligations in the table above are primarily related to contracts to purchase aluminum at various automotive operations ($8.2 million in 2007). Purchase orders or contracts for normal purchases of raw materials and other goods and services are not included in the table above. The Company is not able to determine the aggregate amount of such purchase orders that represent contractual obligations, as purchase orders may represent authorizations to purchase rather than binding agreements. For purposes of this table, contractual obligations for purchase of goods or services are defined as agreements that are enforceable and legally binding on the Company and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transactions. The Company does not have significant agreements for the purchase of raw materials or other goods specifying minimum quantities or set prices that exceed expected requirements.

The Company’s long-term debt payments and interest rates for all of the Company’s outstanding debt were fixed as of December 31, 2006. Actual payments may vary significantly from those included in the table above depending on future debt levels, timing of debt repayments and sources of funding utilized.

The Company’s future pension plan contributions relate to the remaining contributions from the 2006 plan year and minimum contributions for the 2007 plan year based on the Company’s pension plan valuation at December 31, 2006. In addition, future amounts include contributions required under the Company’s Supplemental Executive Retirement Plan. See Note 11 in “Notes to Consolidated Financial Statements” for additional information regarding the Company’s pension plans.

In addition to the above contractual obligations, the Company utilizes letters of credit in the ordinary course of business for security deposit requirements. Outstanding letters of credit were $2.1 million and $2.2 million at December 31, 2006 and 2005, respectively. See Notes 3 and 14 in “Notes to Consolidated Financial Statements” for additional information regarding contractual obligations.

CRITICAL ACCOUNTING ESTIMATES

The preparation of the Company’s consolidated financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Note 1 in “Notes to Consolidated Financial Statements” describes the significant accounting policies used in the preparation of the consolidated financial statements. The Company’s management is

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required to make judgments and estimates about the effect of matters that are inherently uncertain. Actual results could differ from management’s estimates. The most significant areas involving management judgments and estimates are described below.

Intangible Assets and Goodwill

The Company accounts for business acquisitions under the purchase method whereby the assets and liabilities of acquired businesses are recorded at their estimated fair values at the date of acquisition. Goodwill represents the costs in excess of fair values assigned to the underlying net assets of acquired businesses. The Company had goodwill recorded of $30.9 million at December 31, 2006 and 2005.

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

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

The Vital Fluids’ business, which is part of the Company’s Filtration/Separation Segment and a reporting unit (as defined in FAS 142), has goodwill of $4.7 million recorded at December 31, 2006. In January 2005, the Company announced a product recall of certain of its blood transfer and storage products. The Company recorded expense related to this matter in the fourth quarter of 2004, which caused the Vital Fluids’ business to report an operating loss in 2004. The Vital Fluids’ business also reported operating losses in 2005 and 2006, as the recall resulted in lower sales of blood related products, as well as rework, revalidation and other direct and indirect recall related costs during those periods. In the third quarter of 2006, the Vital Fluids’ business successfully completed the follow-up Federal Drug Administration audit related to the 2005 product recall with no deficiencies noted. Also, in the third and fourth quarters of 2006, sales of blood related products began to approach levels achieved prior to the recall. In addition, there were changes in senior management, a strengthening of the sales force, an increased focus on product development, and operational efficiency improvements at the Vital Fluids’ business during the last two quarters of 2006. The Company expects that the return to more normal levels of blood product sales, the absence of additional recall related costs, as well as the other changes and improvements at the Vital Fluids’ business, will contribute to improved financial performance in future periods.

The Company’s 2006 annual goodwill impairment testing analysis (“analysis”) included projected operating income and positive cash flows for the Vital Fluids’ business over the next five years. Based on those projections and other assumptions used in the analysis, the Company concluded that the fair value of the Vital Fluids’ business exceeded the carrying value of its net assets, and there was no impairment of goodwill.

A one-percentage point increase in the discount rate used in the analysis would not change the Company’s conclusion. In addition, the analysis indicated that a reduction in the projected operating income of the Vital Fluids’ business (over the next five years) of approximately 40 percent, would require the Company to perform an additional step (as required by FAS 142) to measure the amount of an impairment loss, if any. The Company expects the Vital Fluids’ business to achieve these future levels of operating income and positive cash flows, however, if the Vital Fluids’ business does not achieve these results in the future there could be a partial or full impairment of its goodwill.

Pensions

In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R)” (FAS 158). This Statement amends FASB Statement No. 87, FASB Statement No. 88, FASB Statement No. 106, and FASB Statement No. 132

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(revised 2003), and other related accounting literature. An employer with publicly traded equity securities is required to initially recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the first fiscal year ending after December 15, 2006. The Company adopted FAS 158 on December 31, 2006 for its defined benefit pension plans and the impact was not material to the Company’s consolidated financial position, results of operations or cash flows as of or for the year ended December 31, 2006 (See Note 11 in Notes to Consolidated Financial Statements). Pension cost and the related obligations recognized in the consolidated financial statements are determined on an actuarial basis. The determination of such amounts is made in consultation with the Company’s outside actuary based on information and assumptions provided by the Company. A substantial portion of the Company’s pension amounts relate to its defined benefit plans in the United States.

On April 27, 2006, the Board of Directors of the Company approved an amendment to certain of the Company’s domestic defined benefit pension plans, effective June 30, 2006, which provided that benefits under these pension plans will stop accruing for all eligible employees not covered under a collective bargaining agreement. The amendment resulted in a pension curtailment loss of $15,000 during the second quarter of 2006. This amendment will significantly reduce pension cost in future years due to the majority of employees no longer accruing benefits under the domestic defined benefit pension plans.

A significant element in determining the Company’s pension cost is the expected return on plan assets. Based on a review of market trends, actual returns on plan assets and other factors, the Company’s expected long-term rate of return on plan assets of 8.50 percent will be utilized for determining 2007 pension cost, which was also used for 2006. The investment plan assets are stated at fair value, which is based on quoted market prices in an active market. The expected long-term rate of return on assets is applied to the value of plan assets at the beginning of the year and this produces the expected return on plan assets that is included in the determination of pension cost for that year. The difference between this expected return and the actual return on plan assets is deferred, within certain parameters, as discussed below. The Company continually evaluates its expected long-term rate of return and will adjust such rate as deemed appropriate.

At the end of each year, the Company determines the discount rate to be used to calculate the present value of plan liabilities, as well as the following year’s pension cost. The discount rate is an estimate of the current interest rate at which the pension liabilities could be effectively settled at the end of the year. In estimating this rate, the Company looks to rates of return on high-quality, bond indices. However, these indices give only an indication of the appropriate discount rate because the cash flows of the bonds comprising the indices do not match the projected benefit payment stream of the plan precisely. For this reason, the Company also considers the individual characteristics of the plan, such as projected cash flow patterns and payment durations, when setting the discount rate. At December 31, 2006, the Company determined this rate to be 5.90 percent, a decrease of 45 basis points from the rate used at April 30, 2006 to re-measure the pension plan liabilities at the pension amendment date, an increase of 25 basis points from the rate used at December 31, 2005 and identical to the discount rate used at December 31, 2004. Increases or decreases in the discount rate result in decreases and increases, respectively, in the projected benefit obligation. The net effect on pension liabilities from changes in the discount rate is deferred within certain parameters, as discussed below.

FAS 87 requires that gains or losses (as defined in FAS 87) be deferred unless the unrecognized net gain or loss at the end of a year exceeds a “corridor” (as defined in FAS 87). If the deferred gain or loss exceeds the corridor at the end of the year, then the amount in excess of the corridor is amortized over a period equal to the average remaining service period of active employees expected to receive benefits. Since benefit accruals were frozen on certain domestic defined benefit plans on June 30, 2006, these plan participants are considered inactive participants. Therefore, the gain/loss amortization for 2007 and beyond for these plans will be amortized over the average remaining life expectancy of all plan participants. As of December 31, 2006 and 2005, the net deferred loss exceeded the corridor. Consequently pension cost for 2007 will include amortization of a portion of the deferred loss in excess of the corridor. The amount of amortization in future years will be dependent on changes in the components of the deferred loss amount, particularly actual return on plan assets in relation to the estimated return on plan assets, as well as future increases or decreases in the discount rate.

For the year ended December 31, 2006, the Company recognized pension cost of $1.3 million net of a curtailment loss of less than $0.1 million related to the pension amendment described above. As discussed above, the Company’s discount rate was 5.90 percent at December 31, 2006 and was used for purposes of determining 2007 pension cost. Pension cost is expected to be minimal for 2007. See Note 11 in “Notes to Consolidated Financial Statements.”

The Company contributed approximately $4.3 million to its defined benefit pension plans during 2006 and expects to contribute approximately $2.8 million in 2007.

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Income Taxes

In September 2006, the Securities and Exchange Commission (SEC) staff issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements in Current Year Financial Statements” (SAB 108). SAB 108 was issued in order to eliminate the diversity of practice surrounding how public companies quantify financial statement misstatements. Traditionally, there have been two widely-recognized methods for quantifying the effects of financial statement misstatements: the “rollover” method and the “iron curtain” method. The rollover method focuses primarily on the impact of misstatements on the income statement, including the reversing effect of prior year misstatements, but its use can lead to the accumulation of misstatements in the balance sheet. The iron curtain method, on the other hand, focuses primarily on the effect of correcting the period-end balance sheet with less emphasis on the reversing effects of prior year errors on the income statement. Prior to the application of the guidance in SAB 108, Lydall used the rollover method for quantifying financial statement misstatements.

In SAB 108, the SEC staff established an approach that requires quantification of financial statement misstatements based on the effects of the misstatements on each of the company’s financial statements and the related financial statement disclosures. This model is commonly referred to as a “dual approach” because it requires quantifications of errors under both the iron curtain and rollover methods. SAB 108 permits existing public companies to initially apply its provision either by (i) restating prior financial statements as if the “dual approach” had always been used or (ii) recording the cumulative effect of initially applying the “dual approach” as adjustments to the carrying values of assets and liabilities as of January 1, 2006 with an offsetting adjustment recorded to the opening balance of retained earnings. The Company applied the provisions of SAB 108 using the cumulative effect transition method in connection with the preparation of its annual financial statements for the year ended December 31, 2006. Consequently, the Company recorded a decrease in net deferred income tax liabilities in the amount of $1.2 million and an increase in retained earnings of $1.2 million as of January 1, 2006. See Note 1 in “Notes to Consolidated Financial Statements.”

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

Deferred tax assets, net of valuation allowance, related to future tax benefits arising from deductible temporary differences and tax carryforwards were $17.0 million and $22.0 million at December 31, 2006 and 2005, respectively. Management believes that the Company’s earnings during the periods when the temporary differences become deductible will be sufficient to realize the related net future income tax benefits. For those jurisdictions where the projected operating results indicate that the ability to realize the future benefits is uncertain or not likely, a valuation allowance has been provided.

In assessing the need for a valuation allowance, the Company estimates future taxable income, considering the feasibility of ongoing tax planning strategies and the realizability of tax loss carryforwards. Valuation allowances related to deferred tax assets can be impacted by changes in tax law, changes in statutory tax rates and future levels of taxable income. In the event the Company were to determine that it would not be able to realize all or a portion of its deferred tax assets in the future, the Company would reduce such amounts through a charge to income in the period that such determination was made. Conversely, if the Company was to determine that it would be able to realize its deferred tax assets in the future in excess of the net carrying amounts, the Company would decrease the recorded valuation allowance and record an increase to income in the period that such determination was made. See Note 13 in “Notes to Consolidated Financial Statements.”

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

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

In 2004, the AJCA was signed into law by the President of the United States. This Act provided for a phase-out of the Extraterritorial Income program (ETI) as provided for in the United States Internal Revenue Code and also allows for certain tax benefits for U.S. manufacturers that are intended to offset the ETI phase-out. During 2006, 2005 and 2004, the ETI benefit decreased the Company’s effective tax rate by approximately 1.7 percentage points, 2.6 percentage points and 46.3 percentage points, respectively. At this

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time the Company does not expect that the ETI phase-out and implementation of the manufacturer benefit system will have a material impact on the Company’s results of operations and cash flows in future periods.

Equity Compensation Plans

The Company adopted SFAS No. 123(R), “Share-Based Payment,” on January 1, 2006 using the modified prospective method, and in connection therewith compensation expense was recognized in its consolidated statement of operations for the year ended December 31, 2006. The financial statements of prior periods do not reflect any restated amounts. 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 such estimates of forfeitures will be 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 will be recognized in the period of change and will 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 determined that its future volatility and expected term are not likely to materially differ from the Company’s historical stock price volatility and historical exercise data, respectively.

As a result of adopting SFAS 123(R) on January 1, 2006, the Company’s income before taxes and net income were reduced by $0.4 million and $0.3 million, respectively, for the year ended December 31, 2006, or $0.02 per diluted share. During the year ended December 31, 2006, the Company incurred approximately $0.5 million in expense for all stock-based compensation plans, including restricted stock awards, which was primarily recorded in selling, product development and administrative expense. The compensation cost recorded for these plans was $0.3 million and $0.4 million for 2005 and 2004 respectively, which represented compensation cost for restricted stock awards. No compensation costs were capitalized as part of inventory and no income tax benefit was recorded in 2005 and 2004 for compensation cost. At December 31, 2006, the total unrecognized compensation cost related to non-vested awards was approximately $2.2 million, with a weighted average expected amortization period of 3.3 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 years ended December 31:

	2006	2005	2004
Risk-free interest rate	4.7%	4.4%	4.3%
Expected life	7 years	7 years	7 years
Expected volatility	44%	47%	48%
Expected dividend yield	0%	0%	0%

RECENTLY ISSUED ACCOUNTING STANDARDS

In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments, an amendment of FASB Statements No. 133 and 140” (FAS 155). The Statement eliminates the exemption from applying Statement 133 to interests in securitized financial assets so that similar instruments are accounted for similarly regardless of the form of the instruments and also provides a fair value measurement election. FAS 155 is effective for all financial instruments acquired or issued during fiscal years beginning after September 15, 2006. The adoption of this Statement is not expected to have a material effect on the Company’s consolidated financial position, results of operations or cash flows.

In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109”. 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.” This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. This Interpretation is effective for fiscal years beginning after December 15, 2006. The adoption of this Interpretation is not expected to have a material effect on the Company’s consolidated financial position, results of operations or cash flows.

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. This Statement is effective for fiscal years beginning after November 15, 2007. The adoption of this Statement 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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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. FAS 159 is effective as of the beginning of fiscal year 2008. The adoption of FAS 159 is not expected to have a material effect on the Company’s consolidated financial position, results of operations or cash flows.

OTHER KEY FINANCIAL ITEMS

Cash and cash equivalents – Cash and cash equivalents increased to $6.4 million as of December 31, 2006 compared with $2.2 million as of December 31, 2005.

Accounts receivable – Accounts receivable, net of the allowance for doubtful receivables, were $47.9 million at the end of 2006 compared with $52.3 million at the end of 2005. The decrease was primarily related to a focused effort to reduce working capital and timing of collection of tooling revenues.

Inventories – Inventories were $31.6 million as of December 31, 2006 compared with $36.8 million as of December 31, 2005. The decrease was related to reduced amounts of finished goods and raw material inventories as a result of the Company’s focus on Lean Six Sigma and operational excellence initiatives, as well as reduced amounts of in-process customer tooling projects at the automotive facilities.

Working capital and current ratio – Working capital at December 31, 2006 was $50.6 million, compared to $57.7 million at December 31, 2005. The ratio of current assets to current liabilities in 2006 decreased to 2.2:1 from 2.4:1 in 2005.

Capital expenditures – Capital expenditures were $11.2 million in 2006, $15.2 million in 2005 and $24.7 million in 2004. Capital spending for 2007 is expected to be approximately $12 million to $15 million. The higher-than-normal capital expenditures in 2004 were primarily related to machinery and equipment purchases for the new St. Nazaire automotive facility.

Total debt to total capitalization – Total debt to total capitalization decreased to 5.9 percent in 2006 compared with 18.9 percent in 2005. The decrease was primarily due to lower debt levels in 2006 as compared with 2005. The Company reduced debt on the consolidated balance sheets from December 31, 2005 to December 31, 2006 by $23.3 million due to the repayment of debt from cash generated from operating activities of $39.7 million, as well as containment of capital expenditures.

Stockholders’ equity – Stockholders’ equity increased to $161.2 million at December 31, 2006 from $143.2 million at December 31, 2005. The increase in stockholders’ equity in 2006 was primarily due to net income of $10.2 million, foreign currency translation adjustments of $5.6 million, additional minimum pension liability and adoption of FAS 158 adjustments of $1.1 million, and stock based compensation expense of $0.5 million offset by common stock activity of $0.6 million. In addition, an adjustment due to the adoption of SAB No. 108 increased stockholders’ equity by $1.2 million in 2006 (See Note 1 in Notes to Consolidated Financial Statements). On a per share basis, stockholders’ equity increased to $9.92 at December 31, 2006 from $8.84 at December 31, 2005.

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

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

FOREIGN CURRENCY RISK

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

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

INTEREST RATE RISK

The Company’s interest rate exposure is most sensitive to fluctuations in interest rates in the United States and Europe, which impact interest paid on its debt. At December 31, 2006, the Company had no loans or lines of credit with variable interest rates outstanding, therefore, a 10 percent change in the weighted average interest rate on the Company’s variable rate debt would not have any impact to the Company’s consolidated financial position, results of operations or cash flows. The weighted average interest rate paid on variable rate debt was 6.4 percent in 2006, 5.1 percent in 2005 and 3.7 percent in 2004.

The weighted average interest rate on long-term debt, including the effect of the interest rate swaps, was 5.7 percent for the year ended December 31, 2006 compared with 5.1 percent for 2005 and 4.0 percent for 2004.

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The response to this Item is contained under Item 15 “Exhibits, Financial Statement Schedules.”

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

None

Item 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company’s management, including the Company’s President and Chief Executive Officer and Vice President, Chief Financial Officer and Treasurer, conducted an evaluation as of December 31, 2006 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 it 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 Company’s year ended December 31, 2006 that materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting. See “Management’s Report on Internal Control Over Financial Reporting” on page F-1, which is incorporated by reference to this Item, for further discussion of management’s assessment of internal controls related to Section 404 of the Sarbanes-Oxley Act.

Item 9B. OTHER INFORMATION

Lydall, Inc. 2007 Performance Bonus Program

On December 6, 2006, the Compensation and Stock Option Committee (the Committee) of the Board of Directors of the Company approved the Lydall, Inc. 2007 Performance Bonus Program (the Program), under which all domestic salaried employees and certain foreign salaried employees of the Company, including executive officers, are eligible to receive cash bonuses based upon the attainment of specified performance measures. Target bonus opportunities under the Program generally range from 5 percent to 60 percent of base compensation, and target bonus opportunities for executive officers range from 35 percent to 60 percent of base compensation. Actual bonuses paid under the Program may be more or less than these target amounts depending on the extent to which the Company and Program participants meet or exceed the specified performance measures.

26

The Program establishes three separate performance measures for each executive officer—a consolidated Lydall earnings per share measure, an individual operating unit performance measure and an individual participant performance measure—except that the performance measures for executive officers employed at the corporate office omit any reference to individual operating unit performance and give more weight to the consolidated corporate performance of the Company. The consolidated corporate performance measure is based upon the consolidated earnings per share of the Company. Individual operating unit performance measures are based upon the operating income of the participant’s business unit. Finally, individual participant performance measures are based upon, and relate closely to, the Company’s overall critical success factors. Among others, these include Lydall Lean Six Sigma (LLSS) benefits derived during the year, working capital improvement and new product development.

The consolidated Lydall earnings per share measure must be achieved before any bonuses can be paid under the Program, without regard to the achievement of the other specified performance measures. If the consolidated Lydall earnings per share measure is achieved, 30 percent of the target bonus is earned provided that the Business Unit has also achieved its individual operating unit performance measure. Business Units that have not met their operating unit performance measure will not earn the 30 percent bonus. However, such Business Units may be eligible for a discretionary bonus based on the discretion of the Chief Executive Officer and Chief Financial Officer. If the consolidated Lydall earnings per share measure is exceeded, a portion of the excess earnings will be allocated to a bonus pool. This bonus pool will be distributed based on the discretion of the Chief Executive Officer and Chief Financial Officer. Factors considered in determining the distribution of the bonus pool may include the Business Unit’s Operating Income performance compared to Plan, accomplishment of strategic objectives, LLSS benefits derived during the year, and working capital performance.

If earned, cash bonus payments relating to 2007 performance are expected to be paid within 30 days following the date on which Lydall’s independent auditors have completed their audit for the year ended December 31, 2007.

Participation in the program provides no guarantee that a bonus under the program will be paid. No bonus will be paid to the extent that it would cause the Company to violate any financial obligations it may have under any agreements. The Chief Executive Officer and the Chief Financial Officer, have the sole authority to modify, amend, or terminate the provisions of this Program at any time, subject to Board of Director approval.

The following table sets forth the target bonus opportunity, as well as the percentage of the target bonus opportunity that is based upon each performance measure, for each executive officer who is expected to be named in the Summary Compensation Table set forth in the proxy statement to be distributed in connection with the 2007 Annual Meeting of Stockholders:

Name	Target Bonus Opportunity (% of Base Compensation)		Percentage of Target Based on Company Goals		Percentage of Target Based on Business Unit Goals		Percentage of Target Based on Individual Goals
David Freeman	60	%	75	%	0	%	25	%
Thomas Smith	40	%	75	%	0	%	25	%
Randall Byrd	40	%	30	%	45	%	25	%
John Tattersall	40	%	30	%	45	%	25	%
Bertrand Ploquin	40	%	30	%	45	%	25	%

27

PART III

Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Information required by this Item is incorporated by reference from the sections entitled “Board of Directors,” “Corporate Governance,” “Communications with Directors,” “Fiscal Year 2006 Director Compensation” and “Fiscal Year 2006 Board Fees” of the definitive Proxy Statement of Lydall to be filed with the Commission in connection with its Annual Meeting of Stockholders to be held on April 26, 2007. Information regarding the Executive Officers of the Company is contained on page 7 of this report.

Item 11. EXECUTIVE COMPENSATION

Information required by this Item is incorporated by reference from the sections entitled “Compensation Discussion and Analysis,” “Compensation Committee Report on Executive Compensation,” “Fiscal Year 2006 Summary Compensation Table,” and “Grants of Plan-Based Awards For 2006” of the definitive Proxy Statement of Lydall to be filed with the Commission in connection with its Annual Meeting of Stockholders to be held on April 26, 2007.

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

Information required by this Item is incorporated by reference from the sections entitled “Equity Compensation Plan Information” and “Securities Ownership of Directors, Certain Officers and 5 Percent Beneficial Owners” of the definitive Proxy Statement of Lydall to be filed with the Commission in connection with its Annual Meeting of Stockholders to be held on April 26, 2007.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND   DIRECTOR INDEPENDENCE

Information required by this Item is incorporated by reference from the sections entitled “Compensation Committee Interlocks and Insider Participation” of the definitive Proxy Statement of Lydall to be filed with the Commission in connection with its Annual Meeting of Stockholders to be held on April 26, 2007.

Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

Information required by this Item is incorporated by reference from the sections entitled “Ratification of Appointment of Independent Auditors,” and “Principal Fees and Services” of the definitive Proxy Statement of Lydall to be filed with the Commission in connection with its Annual Meeting of Stockholders to be held on April 26, 2007.

28

PART IV

Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

	Page
Management’s Report on Internal Control Over Financial Reporting	F-1
a) 1, Financial Statements:
Report of Independent Registered Public Accounting Firm	F-2
Consolidated Statements of Operations for the years ended December 31, 2006, 2005 and 2004	F-3
Consolidated Balance Sheets at December 31, 2006 and 2005	F-4
Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004	F-5
Consolidated Statements of Changes in Stockholders’ Equity for each of the three years in the period ended December 31, 2006	F-6
Notes to Consolidated Financial Statements	F-7
a) 2, Financial Statement Schedule:
Schedule II – Valuation and Qualifying Accounts for the years ended December 31, 2006, 2005 and 2004	S-1

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

29

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

3.1	Certificate of Incorporation of the Registrant, as amended through the date of filing of this report, 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 Form 10-K dated March 12, 2004 and incorporated herein by this reference.
4.1	Certain long-term debt instruments, each representing indebtedness in an amount equal to less than 10 percent of the Registrant’s total consolidated assets, have not been filed as exhibits to this Annual Report on Form 10-K. The Registrant will file these instruments with the Commission upon request.
10.2	Waiver letter dated October 17, 2005 to the Company’s Credit Agreement, filed as Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q dated November 9, 2005 and incorporated herein by this reference.
10.3*	Lydall, Inc. Board of Directors Deferred Compensation Plan effective January 1, 1991, filed as Exhibit 10.17 to the Registrant’s Annual Report on Form 10-K dated March 26, 1991 and incorporated herein by this reference.
10.4*	Amendment No. 8 dated December 30, 2005, to the Lydall, Inc. Supplemental Executive Retirement Plan, filed as Exhibit 10.4 to the Registrant’s Annual Report on Form 10-K dated March 16, 2006 and incorporated herein by this reference.
10.5*	Amended and restated, 1992 Stock Incentive Compensation Plan, dated May 14, 1992, amended through March 10, 1999, filed as Exhibit 10.9 to the Registrant’s Annual Report on Form 10-K dated March 21, 2001 and incorporated herein by this reference.
10.6*	Lydall 2003 Stock Incentive Compensation Plan, with an effective date of October 24, 2002, filed as Exhibit A to the Company’s definitive Proxy Statement on March 26, 2003 and incorporated herein by this reference.
10.7	Asset Purchase and Sale Agreement between Lydall Filtration/Separation, Inc. and Bennett Fleet (Chambly), Inc., dated April 2, 2001, filed as Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q dated May 11, 2001 and incorporated herein by this reference.
10.8	Credit Agreement dated as of July 14, 1999, amended and restated as of May 13, 2002, and amended and restated as of August 29, 2003, filed as Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q dated November 7, 2003 and incorporated herein by this reference.
10.9	Amendment dated as of July 27, 2004 to the Credit Agreement dated as of July 14, 1999, amended and restated as of May 13, 2002 and amended and restated as of August 29, 2003, filed as Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q dated August 6, 2004, and incorporated herein by this reference.
10.10	First Amendment Agreement as of February 1, 2005 to the Credit Agreement dated as of July 14, 1999, amended and restated as of May 13, 2002, amended and restated as of August 29, 2003 and amended as of July 27, 2004, filed as Exhibit 10.10 to the Registrant’s Annual Report on Form 10-K dated March 15, 2005, and incorporated herein by this reference.
10.11	Contract for a Consortium Credit in the Amount of €6,000,000, filed as Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q dated November 7, 2003 and incorporated herein by this reference.
10.12*	Indemnification Agreement and Confidentiality Agreement with David Freeman dated January 10, 2007, filed as Exhibit 10.1 to the Registrant’s Form 8-K dated January 16, 2007 and incorporated herein by this reference.
10.13*	Employment Agreement and Indemnification Agreement with Thomas P. Smith dated January 10, 2007, filed as Exhibit 10.2 to the Registrant’s Form 8-K dated January 16, 2007 and incorporated herein by this reference.
10.14*	Employment Agreement with Mona G. Estey dated January 10, 2007, filed herewith.
10.15*	Employment Agreement with Mary A. Tremblay dated January 10, 2007, filed herewith.
10.16*	Employment Agreement with Randall L. Byrd dated January 10, 2007, filed herewith.
10.17*	Employment Agreement with Peter V. Ferris dated January 29, 2007, filed herewith.
10.18*	Employment Agreement with Bill W. Franks, Jr. dated January 10, 2007, filed as Exhibit 10.3 to the Registrant’s Form 8-K dated January 16, 2007 and incorporated herein by this reference.
10.19*	Employment Agreement with Kevin T. Longe dated January 10, 2007, filed as Exhibit 10.4 to the Registrant’s Form 8-K dated January 16, 2007 and incorporated herein by this reference.
10.20*	Letter of Understanding with Bertrand Ploquin regarding severance in the event of termination, filed as Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q dated August 4, 2005 and incorporated herein by this reference.
10.21*	Amendment to Letter of Understanding between Lydall, Inc. and Bertrand Ploquin dated January 10, 2007, filed as Exhibit 10.5 to the Registrant’s Form 8-K dated January 16, 2007 and incorporated herein by this reference.
10.22*	Employment Agreement with John Tattersall dated January 10, 2007, filed herewith.

30

10.23*	Agreement Covering Nonqualified Stock Option Award to the Chairman of the Board, dated May 8, 2002, filed as Exhibit 10.30 to the Registrant’s Annual Report on Form 10-K dated March 26, 2003 and incorporated herein by this reference.
10.24*	Restricted Stock Agreement dated July 1, 2003 between Lydall, Inc. and David Freeman, filed as Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q dated November 7, 2003 and incorporated herein by this reference.
10.25	Capital lease agreement between Lydall Thermique Acoustique S.A.S., CMCIC Lease and Natiocredimurs Societe en Nom Collectif, filed as Exhibit 10.5 to the Registrant’s Quarterly Report on Form 10-Q dated November 9, 2004 and incorporated herein by reference.
10.26*	Form of Nonqualified Stock Option Agreement (Under the Lydall 2003 Stock Incentive Plan), filed as Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q dated November 9, 2004 and incorporated herein by this reference.
10.27*	Form of Agreement Covering Annual Nonqualified Stock Option Awards to Outside Directors (Under the Lydall 2003 Stock Incentive Plan), filed as Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q dated November 9, 2004 and incorporated herein by this reference.
10.28*	Form of Agreement Covering Nonqualified Stock Option Awards to Outside Directors in Lieu of Cash-Based Retirement Benefits (Under the Lydall 2003 Stock Incentive Plan), filed as Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q dated November 9, 2004 and incorporated herein by this reference.
10.29*	Form of Incentive Stock Option Agreement (Under the Lydall 2003 Stock Incentive Plan), filed herewith.
10.30*	Form of Restricted Stock Award Agreement (Under the Lydall 2003 Stock Incentive Plan), filed herewith.
10.31*	Lydall, Inc. 2007 Performance Bonus Program, filed herewith.
14.1	Code of Ethics for the Chief Executive Officer, Senior Financial Officers and All Accounting and Financial Personnel, filed as Exhibit 14.1 to the Registrant’s Annual Report on Form 10-K dated March 12, 2004 and incorporated herein by this reference. This document can also be accessed on Lydall’s website at www.lydall.com under the Corporate Governance section.
18.1	Letter from PricewaterhouseCoopers LLP regarding the preferable change in the Company’s accounting for inventory effective January 1, 2004, filed as Exhibit 18.1 to the Registrant’s Quarterly Report on Form 10-Q dated May 7, 2004 and incorporated herein by this reference.
21.1	List of subsidiaries of the Registrant, filed herewith.
23.1	Consent of PricewaterhouseCoopers LLP, filed herewith.
24.1	Power of Attorney, dated March 6, 2007, authorizing David Freeman and/or Thomas P. Smith to sign this report on behalf of each member of the Board of Directors indicated therein, filed herewith.
31.1	Certification Pursuant to Rule 13a-14(a) and Rule 15d-14(a) under the Securities Exchange Act of 1934, filed herewith.
31.2	Certification Pursuant to Rule 13a-14(a) and Rule 15d-14(a) under the Securities Exchange Act of 1934, filed herewith.
32.1	Certifications Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, furnished herewith.
*	Management contract or compensatory plan.

31

SIGNATURES

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

	LYDALL, INC.
March 13, 2007	By:	/s/    JAMES V. LAUGHLAN
		James V. Laughlan Controller

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

Signature	Title	Date
/s/    DAVID FREEMAN David Freeman	President, Chief Executive Officer and Director (Principal Executive Officer)	March 13, 2007
/s/    THOMAS P. SMITH Thomas P. Smith	Vice President, Chief Financial Officer and Treasurer (on behalf of the Registrant as Principal Financial Officer)	March 13, 2007
/s/    THOMAS P. SMITH Thomas P. Smith Attorney-in-fact for:		March 13, 2007
David Freeman	President and Chief Executive Officer and Director
Lee A. Asseo	Director
Kathleen Burdett	Director
W. Leslie Duffy	Chairman of the Board of Directors
Matthew T. Farrell	Director
William D. Gurley	Director
Suzanne Hammett	Director
S. Carl Soderstrom, Jr.	Director

32

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management of Lydall is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). With the participation of the Chief Executive Officer and the Chief Financial Officer, management conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006 as required by Rule 13a-15(c) under the Securities Exchange Act of 1934. The Company utilized the criteria and framework established by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission in Internal Control – Integrated Framework in performing this assessment. Based on this evaluation, management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2006. Internal control over financial reporting is a process designed 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. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

Lydall’s independent auditor, PricewaterhouseCoopers LLP, an independent registered public accounting firm, has audited management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006 as stated in their report, which appears on page F-2 of this Annual Report on Form 10-K.

/s/    DAVID FREEMAN	/s/    THOMAS P. SMITH
David Freeman President and Chief Executive Officer	Thomas P. Smith Vice President, Chief Financial Officer and Treasurer

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and

Stockholders of Lydall, Inc.:

We have completed integrated audits of Lydall Inc.’s consolidated financial statements and of its internal control over financial reporting as of December 31, 2006, in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.

Consolidated financial statements and financial statement schedule

In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of Lydall, Inc. and its subsidiaries at December 31, 2006 and December 31, 2005, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2006 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for conditional asset retirement obligations in 2005.

Internal control over financial reporting

Also, in our opinion, management’s assessment, included in Management’s Report on Internal Control Over Financial Reporting appearing page F-1, that the Company maintained effective internal control over financial reporting as of December 31, 2006 based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control – Integrated Framework issued by the COSO. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/    PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP

Hartford, Connecticut

March 13, 2007

F-2

Lydall, Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS

		For the years ended December 31,
In thousands except per share data		2006			2005			2004
Net sales	$	326,358		$	306,485		$	293,602
Cost of sales		253,561			242,564			236,072
Gross margin		72,797			63,921			57,530
Selling, product development and administrative expenses		57,466			56,256			57,205
Operating income		15,331			7,665			325
Interest expense		1,363			1,676			1,200
Other income, net		(27	)		(1,071	)		(120	)
Income (Loss) before income taxes		13,995			7,060			(755	)
Income tax expense (benefit)		3,767			1,617			(218	)
Income (Loss) before cumulative effect of change in accounting principle		10,228			5,443			(537	)
Cumulative effect of change in accounting principle, net of tax benefit of $185		—			(342	)		—
Net income (loss)	$	10,228		$	5,101		$	(537	)
Basic earnings (loss) per common share:
Income (loss) before cumulative effect of change in accounting principle	$	.63		$	.34		$	(.03	)
Cumulative effect of change in accounting principle		—			(.02	)		—
Net income (loss)	$	.63		$	.32		$	(.03	)
Weighted average common shares outstanding		16,147			16,083			16,078
Diluted earnings (loss) per common share:
Income (loss) before cumulative effect of change in accounting principle	$	.63		$	.34		$	(.03	)
Cumulative effect of change in accounting principle		—			(.02	)		—
Net income (loss)	$	.63		$	.32		$	(.03	)
Weighted average common shares and equivalents outstanding		16,198			16,148			16,078

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

F-3

Lydall, Inc.

CONSOLIDATED BALANCE SHEETS

	December 31,
In thousands of dollars and shares	2006			2005
Assets
Current assets:
Cash and cash equivalents	$	6,402		$	2,162
Accounts receivable (including allowance for doubtful receivables of $1,219 and $925)		47,947			52,295
Inventories, net		31,579			36,754
Prepaid expenses and other current assets, net		4,947			4,379
Deferred tax assets		3,452			2,671
Total current assets		94,327			98,261
Property, plant and equipment, net		103,469			103,458
Goodwill		30,884			30,884
Deferred tax assets		6,015			8,151
Other assets, net		6,478			7,495
Total assets	$	241,173		$	248,249
Liabilities and Stockholders’ Equity
Current liabilities:
Current portion of long-term debt	$	1,192		$	3,185
Accounts payable		24,929			23,751
Accrued taxes		3,576			1,696
Accrued payroll and other compensation		8,524			5,681
Other accrued liabilities		5,496			6,243
Total current liabilities		43,717			40,556
Long-term debt		8,914			30,256
Deferred tax liabilities		16,397			17,332
Pension and other long-term liabilities		10,928			16,876
Commitments and contingencies (Note 14)
Stockholders’ equity:
Preferred stock		—			—
Common stock (par value $.10 per share; authorized 30,000 shares; issued 22,676 and 22,549 shares)		2,268			2,255
Capital in excess of par value		46,639			46,186
Unearned compensation		—			(330	)
Retained earnings		179,911			168,508
Accumulated other comprehensive loss		(2,771	)		(9,409	)
Treasury stock, 6,420 and 6,339 shares of common stock, respectively, at cost		(64,830	)		(63,981	)
Total stockholders’ equity		161,217			143,229
Total liabilities and stockholders’ equity	$	241,173		$	248,249

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

F-4

Lydall, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

	For the years ended December 31,
In thousands	2006			2005			2004
Cash flows from operating activities:
Net income (loss)	$	10,228		$	5,101		$	(537	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		15,341			15,220			16,281
Accretion of asset retirement obligations		98			9			—
Deferred income taxes		1,710			429			(673	)
Stock based compensation		544			258			414
Loss on disposition of property, plant and equipment, net		840			300			962
Curtailment gain		—			(302	)		—
Change in accounting principle		—			527			—
Changes in operating assets and liabilities:
Accounts receivable		6,037			(4,553	)		(7,814	)
Inventories		6,262			1,712			(5,228	)
Prepaid expenses and other assets		384			164			2,916
Accounts payable		430			(2,444	)		5,854
Accrued taxes		1,244			2,442			(346	)
Accrued payroll and other accrued liabilities		(2,993	)		(798	)		4,472
Other long-term liabilities		(422	)		108			1,838
Net cash provided by operating activities		39,703			18,173			18,139
Cash flows from investing activities:
Capital expenditures		(11,182	)		(15,175	)		(24,678	)
Proceeds from sale of assets of discontinued segment		—			—			225
Reimbursement of cash from leasing company		—			3,133			—
Release of restricted cash		—			—			2,516
Net cash used for investing activities		(11,182	)		(12,042	)		(21,937	)
Cash flows from financing activities:
Debt proceeds		80,300			97,335			64,320
Debt repayments		(104,044	)		(102,328	)		(59,940	)
Capital lease payments		(847	)		(668	)		(312	)
Common stock repurchased		(849	)		—			(2,844	)
Common stock issued		257			512			1,419
Net cash (used for) provided by financing activities		(25,183	)		(5,149	)		2,643
Effect of exchange rate changes on cash		902			(400	)		(273	)
Increase (decrease) in cash and cash equivalents		4,240			582			(1,428	)
Cash and cash equivalents at beginning of year		2,162			1,580			3,008
Cash and cash equivalents at end of year	$	6,402		$	2,162		$	1,580
Supplemental Schedule of Cash Flow Information
Cash paid during the year for:
Interest	$	1,622		$	1,962		$	1,508
Income taxes	$	1,959		$	387		$	915
Noncash transactions:
Pension liability adjustment	$	1,722		$	2,440		$	1,319
Capital lease obligation	$	—		$	754		$	6,430
Restricted stock issuances	$	—		$	41		$	60
SAB 108 adjustment	$	1,175		$	—		$	—

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

F-5

Lydall, Inc.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

In thousands	Common Stock Shares	Common Stock Amount		Capital in Excess of Par Value			Unearned Compen- sation			Retained Earnings			Accumulated Other Compre- hensive Loss			Treasury Stock			Total Stock- holders’ Equity
Balance at December 31, 2003	22,374	$	2,237	$	44,687		$	(912	)	$	163,944		$	(4,718	)	$	(61,642	)	$	143,596
Net loss											(537	)								(537	)
Other comprehensive income:
Foreign currency translation adjustments														3,315						3,315
Minimum pension liability adjustment, net of income tax benefits $501														(818	)					(818	)
Change in fair value of derivative instruments, net of income tax benefits of $22														(41	)					(41	)
Comprehensive income																				1,919
Stock repurchased																	(2,844	)		(2,844	)
Stock issued under employee plans	91		9		917			(57	)											869
Amortization of unearned compensation								414												414
Stock issued to Directors	67		7		543															550
Balance at December 31, 2004	22,532		2,253		46,147			(555	)		163,407			(2,262	)		(64,486	)		144,504
Net income											5,101									5,101
Other comprehensive income:
Foreign currency translation adjustments														(5,714	)					(5,714	)
Minimum pension liability adjustment, net of income tax benefits $926														(1,513	)					(1,513	)
Change in fair value of derivative instruments, net of income taxes of $43														80						80
Comprehensive income																				(2,046	)
Stock issued under employee plans	17		2		172			(33	)											141
Amortization of unearned compensation								258												258
Stock issued to Directors					(133	)											505			372
Balance at December 31, 2005	22,549		2,255		46,186			(330	)		168,508			(9,409	)		(63,981	)		143,229
SAB 108 Adjustment											1,175									1,175
Net income											10,228									10,228
Other comprehensive income:
Foreign currency translation adjustments														5,617						5,617
Minimum pension liability adjustment, net of income taxes of $755														1,204						1,204
Change in fair value of derivative instrument, net of income tax benefits of $22														(36	)					(36	)
Comprehensive income																				17,013
Adjustment to initially apply SFAS No. 158, net of income tax benefits of $90														(147	)					(147	)
Stock repurchased																	(849	)		(849	)
Stock issued under employee plans	109		11		67															78
Stock based compensation expense					214			330												544
Stock issued to Directors	18		2		172															174
Balance at December 31, 2006	22,676	$	2,268	$	46,639		$	—		$	179,911		$	(2,771	)	$	(64,830	)	$	161,217

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

F-6

Lydall, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Significant Accounting Policies

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

In September 2006, the Securities and Exchange Commission (SEC) staff issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements in Current Year Financial Statements” (SAB 108). SAB 108 was issued in order to eliminate the diversity of practice surrounding how public companies quantify financial statement misstatements. Traditionally, there have been two widely-recognized methods for quantifying the effects of financial statement misstatements: the “rollover” method and the “iron curtain” method. The rollover method focuses primarily on the impact of misstatements on the income statement, including the reversing effect of prior year misstatements, but its use can lead to the accumulation of misstatements in the balance sheet. The iron curtain method, on the other hand, focuses primarily on the effect of correcting the period-end balance sheet with less emphasis on the reversing effects of prior year errors on the income statement. Prior to the application of the guidance in SAB 108, Lydall used the rollover method for quantifying financial statement misstatements.

In SAB 108, the SEC staff established an approach that requires quantification of financial statement misstatements based on the effects of the misstatements on each of the company’s financial statements and the related financial statement disclosures. This model is commonly referred to as a “dual approach” because it requires quantifications of errors under both the iron curtain and rollover methods. SAB 108 permits existing public companies to initially apply its provision either by (i) restating prior financial statements as if the “dual approach” had always been used or (ii) recording the cumulative effect of initially applying the “dual approach” as adjustments to the carrying values of assets and liabilities as of January 1, 2006 with an offsetting adjustment recorded to the opening balance of retained earnings. The Company applied the provisions of SAB 108 using the cumulative effect transition method in connection with the preparation of its annual financial statements for the year ended December 31, 2006. Consequently, the Company recorded a decrease in net deferred income tax liabilities in the amount of $1.2 million and an increase in retained earnings of $1.2 million as of January 1, 2006.

The following table summarizes the effects up to January 1, 2006 of applying the guidance in SAB 108:

		Period in which the Misstatement Originated (1)
In thousands	Cumulative Prior to January 1, 2004			Year Ended December 31,				Adjustment Recorded as of January 1, 2006
				2004		2005
Deferred income taxes (2)	$	(1,175	)	$	—	$	—	$	(1,175	)
Impact on net income (3)	$	1,175		$	—	$	—
Retained earnings (4)								$	1,175

(1) Lydall previously quantified these errors under the roll-over method and concluded that they were immaterial – individually and in the aggregate.

(2) Amount relates primarily to Lydall recording excess deferred tax liabilities related to differences in income tax basis and financial reporting basis of certain property, plant and equipment, which resulted in the overstatement of deferred income tax liabilities prior to 2002.

(3) Represents the net understatement of net income for the indicated periods resulting from the deferred income taxes misstatement.

(4) Represents the net increase in retained earnings as of January 1, 2006 to record the initial application of SAB 108.

F-7

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

Cash and cash equivalents – Cash and cash equivalents include cash on hand and highly liquid investments with original maturities of three months or less at the date of purchase.

Concentrations of credit risk – Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and trade accounts receivable. The Company places its cash and cash equivalents in high-quality financial institutions and instruments. Concentrations of credit risk with respect to trade accounts receivable are limited by the large number of customers comprising the Company’s customer base and their dispersion across many different industries and geographies. Foreign and export sales were 43 percent of the Company’s net sales in 2006, 45 percent in 2005 and 47 percent in 2004. Export sales primarily to Europe, Asia, Mexico and Canada were $45.1 million, $47.3 million and $51.2 million in 2006, 2005 and 2004, respectively. The Company performs ongoing credit evaluations of its customers’ financial condition and generally does not require collateral. Sales to the automotive market were approximately 52 percent of the Company’s net sales in 2006, 54 percent in 2005 and 47 percent in 2004. Sales to DaimlerChrysler were approximately 17 percent, 13 percent and 14 percent of Lydall’s total net sales in 2006, 2005 and 2004, respectively. No other customer accounted for more than 10 percent of total net sales in 2006, 2005 or 2004.

Inventories – Inventories are valued at lower of cost or market, cost being determined using the first-in, first-out (FIFO) cost method. Inventories in excess of requirements for current or anticipated orders have been reserved as appropriate.

Pre-production design and development costs – The Company enters into contractual agreements with certain customers to design and develop molds, dies and tools (collectively, “tooling”). All such tooling contracts relate to products that the Company will supply to its customers under long-term supply agreements. The Company accounts for these pre-production design and development costs pursuant to Emerging Issues Task Force Issue No. 99-5, “Accounting for Pre-Production Costs Related to Long-Term Supply Arrangements” (EITF 99-5). The Company recognizes revenue on tooling contracts in accordance with the provisions of SAB 104, “Revenue Recognition” (SAB 104). For tooling sales arrangements, applicable costs are recorded in inventory as incurred and subsequently recognized, along with the related revenue, upon customer acceptance of the tooling in accordance with SAB 104.

Periodically, the Company enters into contractually guaranteed reimbursement arrangements related to the sale of tooling to customers. Under these arrangements, revenue is recognized upon acceptance of the tooling by the customer and amounts due under such arrangements are settled over the part supply arrangement, in accordance with the specific terms of the arrangement. The amounts due from the customer in such transactions are recorded in “Prepaid expenses and other current assets” or “Other assets, net” based upon the expected term of the reimbursement arrangement.

Occasionally, the Company incurs costs in excess of those contractually reimbursed. In those cases, the Company capitalizes these costs when the customer provides the Company the non-cancelable right to use the tooling during the part supply arrangement; otherwise, such non-reimbursed costs are expensed as incurred. These capitalized costs are then amortized over the expected life of the part supply arrangement. For such part supply arrangements, tooling costs are recorded in inventory as incurred and, upon customer acceptance of the tooling, the related revenue and costs are recorded, as applicable, and any non-reimbursed portion of the costs is reclassified to “Other assets, net” and amortized over the life of the part supply arrangement (typically not to exceed three years). As of December 31, 2006 and 2005, there were no costs recorded on the Company’s balance sheet related to a non-cancelable right to use a tool during the part supply arrangement.

The Company also may progress bill on certain tooling being constructed. These billings are recorded as progress billings (a reduction of the associated inventory) until the appropriate revenue recognition criteria have been met.

The following tooling related assets were included in the Consolidated Balance Sheets as of December 31, 2006 and 2005:

		December 31,
In thousands		2006		2005
Inventories, net of progress billings and reserves	$	4,655	$	5,823
Prepaid expenses and other current assets, net		641		546
Other assets, net		887		963
Total tooling related assets	$	6,183	$	7,332

F-8

Amounts included in “Prepaid expenses and other current assets, net” include the short-term portion of receivables due under reimbursement arrangements and amounts included in “Other assets, net” represent the long-term portion of those receivables. Included in the inventory balance was an offset for progress billings of approximately $1.1 million and $0.6 million at December 31, 2006 and 2005, respectively. Company owned tooling is recorded in “Property, plant and equipment, net” and was not material at December 31, 2006 or 2005.

Property, plant and equipment – Property, plant, and equipment are stated at cost. Assets held under capital leases are recorded at the lower of the net present value of the minimum lease payments or the fair value of the leased asset at the inception of the lease. Property, plant and equipment, including property, plant and equipment under capital leases, are depreciated over their estimated useful lives using the straight-line method. Leasehold improvements are depreciated on a straight-line basis over the term of the lease or the life of the asset, whichever is shorter. The cost and accumulated depreciation accounts applicable to assets sold or otherwise disposed of are removed from the asset and accumulated depreciation accounts and any net gain or loss is included in the Consolidated Statements of Operations. Expenses for maintenance and repairs are charged to expense as incurred.

Goodwill and other intangible assets – Goodwill and other intangible assets are accounted for in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 142 “Goodwill and Other Intangible Assets” (FAS 142). Goodwill represents costs in excess of fair values assigned to the underlying net assets of acquired companies, net of accumulated amortization recorded prior to the implementation of FAS 142. Goodwill and other intangible assets with indefinite lives are subject to annual impairment tests. All other intangible assets are amortized over their estimated useful lives, which range from 3 to 30 years.

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

Employer Sponsored Benefit Plans – In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R)” (FAS 158). This Statement amends FASB Statement No. 87, FASB Statement No. 88, FASB Statement No. 106, and FASB Statement No. 132 (revised 2003), and other related accounting literature. An employer with publicly traded equity securities is required to initially recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the first fiscal year ending after December 15, 2006. The Company adopted FAS 158 on December 31, 2006 and the impact was not material to the Company’s consolidated financial position, results of operations or cash flows as of or for the year ended December 31, 2006 (See Note 11).

Asset Retirement Obligations – The Company adopted FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations, an interpretation of FASB Statement No. 143” (FIN 47), on October 1, 2005. This interpretation clarified the timing of liability recognition for legal obligations associated with the retirement of tangible long-lived assets when the timing and/or method of settlement of the obligation are conditional on a future event. FIN 47 requires that the fair value of a liability for a conditional asset retirement obligation be recognized in the period in which it occurred if a reasonable estimate of fair value can be made. The Company has conditional legal obligations for certain of the Company’s owned and leased facilities related primarily to building materials and leasehold improvements. Upon adoption of FIN 47 on October 1, 2005, the Company recorded a non-cash cumulative effect of change in accounting principle charge to the results of operations of approximately $0.3 million, net of income taxes, and a liability for conditional asset retirement obligations of approximately $0.6 million.

Accrued liabilities for conditional asset retirement obligations as of December 31, 2006 were as follows:

In thousands	Total
Balance as of December 31, 2005	$	620
Accretion		98
Other		40
Balance as of December 31, 2006	$	758

F-9

The following table illustrates the effect on net income (loss) and earnings (loss) per share as if FIN 47 had been applied during the periods presented:

		For the years ended December 31,
In thousands except per share data		2005			2004
Net income (loss) — as reported	$	5,443		$	(537	)
Less: Total depreciation and interest accretion costs, net of tax		(30	)		(35	)
Net income (loss) — pro forma	$	5,413		$	(572	)
Basic earnings (loss) per common share:
Net income (loss) — as reported	$	.34		$	(.03	)
Net income (loss) — pro forma		.34			(.04	)
Diluted earnings (loss) per common share:
Net income (loss) — as reported	$	.34		$	(.03	)
Net income (loss) — pro forma		.34			(.04	)

Revenue recognition – The Company recognizes revenue in accordance with SAB 104 which requires revenue to be recognized: (1) once evidence of an arrangement exists; (2) product delivery has occurred; (3) pricing is fixed or determinable; and (4) collection is reasonably assured. The four criteria required to recognize revenue by SAB 104 are considered to be met, and the passage of title to the customer occurs, at the respective FOB point and, therefore, revenue is recognized at that time. The Company’s standard sales and shipping terms are FOB shipping point, therefore, substantially all revenue is recognized upon shipment. However, in limited circumstances, the Company conducts business with certain customers on FOB destination terms and in these instances revenue is recognized upon receipt by the customer. The Company generally does not provide specific customer inspection or acceptance provisions in its sales terms, with the exception of tooling sales discussed in “Pre-production design and development costs” above.

Sales returns and allowances are recorded as identified or communicated by the customer and internally approved. The Company does not provide customers with general rights of return for products sold; however, in limited circumstances, the Company will allow sales returns and allowances from customers if the products sold do not conform to specifications.

Shipping and handling costs consist primarily of costs incurred to deliver products to customers and internal costs related to preparing products for shipment and are recorded in cost of sales. Amounts billed to customers as shipping and handling are classified as revenue.

Research and development – Research and development costs are charged to expense as incurred and amounted to $8.6 million in 2006, $8.8 million in 2005 and $8.5 million in 2004. Research and development costs were primarily comprised of development personnel salaries, prototype material costs and testing and trials of new products.

Earnings per share – Basic and diluted earnings per common share are calculated in accordance with the provisions of 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, if such effect is dilutive.

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

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

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

F-10

Stock options and share grants – The Company adopted SFAS No. 123(R), “Share-Based Payment” on January 1, 2006 using the modified prospective method. SFAS No. 123(R) requires that companies account for awards of equity instruments under the fair value method of accounting and recognize such amounts in the statements of operations. In connection therewith, compensation expense was recognized in the Company’s Consolidated Statement of Operations during 2006. The financial statements of prior periods presented do not reflect any restated amounts. 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 such estimates of forfeitures will be 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 will be recognized in the period of change and will 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 determined that its future volatility and expected term are not likely to materially differ from the Company’s historical stock price volatility and historical exercise data, respectively.

As a result of adopting SFAS 123(R) on January 1, 2006, the Company’s income before taxes and net income were reduced by $0.4 million and $0.3 million, respectively, for the year ended December 31, 2006, or $0.02 per diluted share. During the year ended December 31, 2006, the Company incurred approximately $0.5 million in expense for all stock-based compensation plans, including restricted stock awards, which was primarily recorded in selling, product development and administrative expense.

Prior to January 1, 2006, the Company recorded stock-based compensation in accordance with the provisions of APB Opinion 25. The Company estimated the fair value of stock option awards in accordance with SFAS No. 123, “Accounting for Stock-Based Compensation,” and disclosed the resulting estimated compensation effect on net income on a pro forma basis. Forfeitures of employee awards were provided in the pro forma effects as they occurred. Stock-based employee compensation included in net income (loss) in prior periods was related to the amortization of expense for restricted stock awards.

The following table illustrates the effect on net income (loss) and earnings (loss) per share had compensation cost been recognized based on the fair value of the options at the grant dates for awards under those plans consistent with FAS 123(R) using the Black-Scholes fair value method for option pricing:

		For the years ended December 31,
In thousands except per share data		2005			2004
Net income (loss) — as reported	$	5,101		$	(537	)
Add: Stock-based employee compensation expense included in net income (loss), net of related tax effects		165			264
Less: Total stock-based employee compensation expense under FAS 123, as determined under the fair value method, net of related tax effects		(2,151	)		(1,270	)
Net income (loss) — pro forma	$	3,115		$	(1,543	)
Basic earnings (loss) per common share:
Net income (loss) — as reported	$	.32		$	(.03	)
Net income (loss) — pro forma		.19			(.10	)
Diluted earnings (loss) per common share:
Net income (loss) — as reported	$	.32		$	(.03	)
Net income (loss) — pro forma		.19			(.10	)

Compensation for restricted stock is recorded based on the market value of the stock on the grant date and amortized to expense over the vesting period of the award. Prior to January 1, 2006, the Company capitalized the full amount of the restricted stock as unearned compensation with an offset to additional paid-in capital. Upon adoption of SFAS 123(R) on January 1, 2006, the Company eliminated the unamortized balance of $0.3 million against additional paid-in capital.

Recently issued accounting standards – In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments, an amendment of FASB Statements No. 133 and 140” (FAS 155). The Statement eliminates the exemption from applying Statement 133 to interests in securitized financial assets so that similar instruments are accounted for similarly regardless of the form of the instruments and also provides a fair value measurement election. FAS 155 is effective for all financial instruments acquired or issued during fiscal years beginning after September 15, 2006. The adoption of this Statement is not expected to have a material effect on the Company’s consolidated financial position, results of operations or cash flows.

F-11

In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109”. 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.” This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. This Interpretation is effective for fiscal years beginning after December 15, 2006. The adoption of this Interpretation is not expected to have a material effect on the Company’s consolidated financial position, results of operations or cash flows.

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. This Statement is effective for fiscal years beginning after November 15, 2007. The adoption of this Statement is not expected to have a material effect on the Company’s consolidated financial position, results of operations or cash flows.

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. FAS 159 is effective as of the beginning of fiscal year 2008. The adoption of FAS 159 is not expected to have a material effect on the Company’s consolidated financial position, results of operations or cash flows.

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

The Company reclassified in its 2005 Consolidated Statements of Cash Flows the reimbursement of cash from leasing company of $3.1 million from a cash flow from financing activities to a cash flow from investing activities.

2. Financial Instruments

The Company did not hold any material investments in financial instruments at December 31, 2006 or 2005. No material gains or losses on investments were realized in 2006, 2005 or 2004. For the purpose of computing realized gains and losses, cost is determined on the specific identification basis.

The Company utilizes letters of credit in the ordinary course of business to satisfy security deposit requirements. Outstanding letters of credit were $2.1 million as of December 31, 2006 and $2.2 million as of December 31, 2005.

The carrying amounts and fair values of financial instruments as of December 31, 2006 and 2005 were as follows:

		2006				2005
In thousands		Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial Liabilities:
Current portion of long-term debt	$	1,192	$	1,187	$	3,185	$	3,213
Long-term debt	$	8,914	$	8,928	$	30,256	$	30,538

The above fair values were computed based on quoted market rates and discounted future cash flows. The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximate fair value as of December 31, 2006 and 2005.

The Company periodically enters into foreign currency forward exchange contracts to mitigate exposure to foreign currency risk. The fair values of these contracts are not considered material to the Company’s consolidated financial position as of December 31, 2006 and 2005.

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

F-12

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

3. Long-term Debt and Financing Arrangements

The Company amended its $50 million domestic revolving credit facility with a group of five banking institutions on February 1, 2005. The credit agreement’s maturity date is February 1, 2009. The modifications made to the restrictive and financial covenants were effective for the quarter ended December 31, 2004. Interest is charged at the prime rate or, at the option of the Company, at LIBOR plus a margin ranging from 1% to 2.25% depending on the financial leverage of the Company. The Company also pays a commitment fee ranging from ..225% to .375% per annum on the unused portion of the revolving credit facility.

The Company was in compliance with all financial covenants related to its $50 million domestic revolving credit facility for the year ended December 31, 2006.

During 2004, the Company finalized the capital lease arrangement related to the building and land of the automotive facility in St. Nazaire, France. The agreement, completed with the leasing subsidiaries of two French banks, calls for the Company to lease the facility for 12 years, and provides an option to purchase the facility at the end of the lease for a nominal amount.

In April 2005, Lydall Gerhardi GmbH and Co. KG, a second tier subsidiary of Lydall, Inc., entered into a capital lease agreement for a high speed manufacturing line with GEFA Leasing GmbH. The lease has a 7 year term, an effective interest rate of 4.25 percent and aggregate principal payments of €2,995,000. The lease also contains a purchase option, which provides the Company with the option to purchase the equipment anytime after the fourth year of the lease term for a stated percentage of the original purchase price. Principal and interest payments are required monthly. This lease was recorded as a capital lease during the second quarter of 2005 on the Company’s balance sheet.

Total outstanding debt consists of:

				December 31,
In thousands	Effective Rate	Maturity		2006			2005
Credit Agreement, revolving credit facility, uncollateralized	—	2009	$	—		$	20,600
Credit Agreement, 2003 term loan, collateralized by German subsidiary stock	—	2006		—			1,777
Volksbank Meinerzhagen eG, collateralized by certain real estate	—	2007		—			592
Volksbank Meinerzhagen eG, collateralized by certain real estate	5.95%	2013		1,396			1,413
City of Winston Salem NC, collateralized by certain fixed assets	4.00%	2010		100			124
Line of Credit, uncollateralized	—	2006		—			414
Capital Lease, Meinerzhagen, Germany	4.25%	2012		3,064			3,211
Capital Lease, St. Nazaire, France	5.44%	2016		5,546			5,310
				10,106			33,441
Less portion due within one year				(1,192	)		(3,185	)
Total long-term debt			$	8,914		$	30,256

The Company’s foreign subsidiaries have various credit arrangements totaling $11.3 million. As of December 31, 2006, there were no amounts outstanding under these arrangements. The Company had unused borrowing capacity of $59.1 million under various credit facilities as of December 31, 2006.

As of December 31, 2006, total debt maturing in 2007, 2008, 2009, 2010 and 2011 was $1.2 million, $1.4 million, $1.4 million, $1.4 million and $1.5 million, respectively. There was $3.2 million of debt outstanding that matures after 2011.

The weighted average interest rate on long-term debt, including the effect of interest rate swaps, was 5.7 percent for the year ended December 31, 2006 compared with 5.1 percent for 2005 and 4.0 percent for 2004.

F-13

4. Property, Plant and Equipment

Property, plant and equipment as of December 31, 2006 and 2005 were as follows:

			December 31,
In thousands	Estimated Useful Lives		2006			2005
Land	—	$	1,914		$	1,836
Buildings and improvements	10-35 years		41,129			38,524
Machinery and equipment	5-25 years		122,787			116,691
Office equipment	2-8 years		32,913			32,634
Vehicles	3-6 years		772			698
Assets under capital leases:
Land	—		664			596
Buildings and improvements	10-35 years		5,706			5,105
Machinery and Equipment	5-25 years		3,954			3,546
			209,839			199,630
Accumulated depreciation			(109,508	)		(100,310	)
Accumulated amortization on capital leases			(1,366	)		(653	)
			98,965			98,667
Construction in progress			4,504			4,791
Total property, plant and equipment		$	103,469		$	103,458

For the years ended December 31, 2006, 2005 and 2004, the Company capitalized $0.2 million, $0.3 million and $0.3 million of interest, respectively.

Depreciation expense was $15.1 million in 2006, $15.0 million in 2005 and $16.0 million in 2004.

5. Inventories

Inventories as of December 31, 2006 and 2005 were as follows:

		December 31,
In thousands		2006			2005
Raw materials	$	12,151		$	14,295
Work in process		12,120			12,017
Finished goods		8,389			11,077
		32,660			37,389
Less: Progress billings		(1,081	)		(635	)
Total inventories	$	31,579		$	36,754

Raw materials, work in process and finished goods inventories were net of valuation reserves of $1.9 million and $3.2 million as of December 31, 2006 and 2005, respectively. Progress billings on tooling inventory were $1.1 million and $0.6 million at December 31, 2006 and 2005, respectively. Total tooling inventory, net of progress billings and valuation reserves, were $4.7 million and $5.8 million at December 31, 2006 and 2005, respectively.

6. Goodwill and Intangible Assets

Goodwill was $30.9 million as of December 31, 2006 and 2005. As of December 31, 2006 and 2005, $26.2 million of goodwill was allocated to the Thermal/Acoustical Segment and $4.7 million was allocated to the Filtration/Separation Segment. The Company completed its required annual impairment testing in the fourth quarter of each of 2006 and 2005 and determined in each case that the carrying value of goodwill and other intangible assets with indefinite lives were not impaired.

F-14

The Vital Fluids’ business, which is part of the Company’s Filtration/Separation Segment and a reporting unit (as defined in FAS 142), has goodwill of $4.7 million recorded at December 31, 2006. In January 2005, the Company announced a product recall of certain of its blood transfer and storage products. The Company recorded expense related to this matter in the fourth quarter of 2004, which caused the Vital Fluids’ business to report an operating loss in 2004. The Vital Fluids’ business also reported operating losses in 2005 and 2006, as the recall resulted in lower sales of blood related products, as well as rework, revalidation and other direct and indirect recall related costs during those periods. In the third quarter of 2006, the Vital Fluids’ business successfully completed the follow-up Federal Drug Administration audit related to the 2005 product recall with no deficiencies noted. Also, in the third and fourth quarters of 2006, sales of blood related products began to approach levels achieved prior to the recall. In addition, there were changes in senior management, a strengthening of the sales force, an increased focus on product development, and operational efficiency improvements at the Vital Fluids’ business during the last two quarters of 2006. The Company expects that the return to more normal levels of blood product sales, the absence of additional recall related costs, as well as the other changes and improvements at the Vital Fluids’ business, will contribute to improved financial performance in future periods.

The Company’s 2006 annual goodwill impairment testing analysis (“analysis”) included projected operating income and positive cash flows for the Vital Fluids’ business over the next five years. Based on those projections and other assumptions used in the analysis, the Company concluded that the fair value of the Vital Fluids’ business exceeded the carrying value of its net assets, and there was no impairment of goodwill.

A one-percentage point increase in the discount rate used in the analysis would not change the Company’s conclusion. In addition, the analysis indicated that a reduction in the projected operating income of the Vital Fluids’ business (over the next five years) of approximately 40 percent, would require the Company to perform an additional step (as required by FAS 142) to measure the amount of an impairment loss, if any. The Company expects the Vital Fluids’ business to achieve these future levels of operating income and positive cash flows, however, if the Vital Fluids’ business does not achieve these results in the future there could be a partial or full impairment of its goodwill.

The table below presents the gross carrying amount and, as applicable, the accumulated amortization of the Company’s acquired intangible assets other than goodwill included in “Other assets, net” in the Consolidated Balance Sheets as of December 31, 2006 and 2005:

		December 31, 2006					December 31, 2005
In thousands		Gross Carrying Amount		Accumulated Amortization			Gross Carrying Amount		Accumulated Amortization
Amortized intangible assets:
License agreements	$	377	$	(221	)	$	377	$	(184	)
Patents		783		(418	)		788		(381	)
Non-compete agreements		145		(145	)		145		(122	)
Other		78		(26	)		73		(18	)
Total amortized intangible assets	$	1,383	$	(810	)	$	1,383	$	(705	)
Unamortized intangible assets:
Trademarks	$	450				$	450

Amortization of intangible assets for the years ended December 31, 2006 and 2005 was $0.1 million. Estimated amortization expense for intangible assets for each of the next five years is approximately $0.1 million.

7. Restructuring

In thousands	December 31,
	2006		2005		2004
Restructuring charges	$	—	$	102	$	5,074

As part of a strategic evaluation initiated in the fourth quarter of 2003, the Company implemented a plan to maximize production capacity utilization, reallocate administrative costs to more beneficial operational efforts and more effectively respond to market demands for increasingly faster, technologically advanced cost-effective solutions. As a result, the Company consolidated the operations of the Columbus manufacturing operation into existing Lydall facilities. The Company substantially completed the

F-15

restructuring and consolidation of its domestic automotive manufacturing operations as of December 31, 2004. The total costs related to the restructuring effort recorded through December 31, 2005 were approximately $5.4 million, which included $0.7 million of severance and related costs, $2.2 million of accelerated depreciation and $2.5 million of facility exit and move costs. Approximately 95 percent of all restructuring costs incurred were recorded in cost of sales and 5 percent were recorded in selling, product development and administrative expenses. Approximately 87 percent of restructuring costs were recorded in the Thermal/Acoustical Segment and 13 percent were recorded as Corporate Office expenses.

8. Earnings per share

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

	For the Year Ended 2006					For the Year Ended 2005							For the Year Ended 2004
In thousands except per share data	Net Income		Average Shares	Per Share Amount		Net Income			Average Shares	Per Share Amount			Net Loss			Average Shares	Per Share Amount
Basic earnings (loss) per share before the cumulative effect of a change in accounting principle	$	10,228	16,147	$	.63	$	5,443		16,083	$	.34		$	(537	)	16,078	$	(.03	)
Cumulative effect of change in accounting principle		—	—		—		(342	)	16,083		(.02	)		—		—		—
Effect of dilutive stock options		—	51		—		—		65		—			—		—		—
Diluted earnings (loss) per share	$	10,228	16,198	$	.63	$	5,101		16,148	$	.32		$	(537	)	16,078	$	(.03	)

Dilutive stock options totaling approximately 0.6 million shares of Common Stock were excluded from the diluted per share computation for 2004 as the Company reported a net loss during 2004 and, therefore, the dilutive effect of these options was not included in the calculation of diluted loss per share in accordance with FAS 128. Options to purchase approximately 0.8 million, 0.8 million and 0.5 million shares of Common Stock were excluded from the 2006, 2005 and 2004 computations of diluted earnings per share, respectively, because the assumed proceeds from the exercise were greater than the average market price of the Company’s common stock.

9. Capital Stock

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

Common stock – As of December 31, 2006, 3,456 Lydall stockholders of record held 16,255,520 shares of Common Stock.

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

10. Equity Compensation Plans

As of December 31, 2006, the Company had two stock option plans – the 1992 Stock Incentive Compensation Plan (1992 Plan) and the 2003 Stock Incentive Compensation Plan (2003 Plan), collectively, the “Plans” – under which employees and directors had options to purchase Common Stock. The 1992 Plan expired in May 2002; however, the 1992 Plan shall continue to govern all outstanding awards under that plan until the awards themselves are exercised or terminate in accordance with their terms. The 2003 Plan authorized 1.5 million share options and restricted shares for employees and outside directors. 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 grants and share options are expensed over the vesting period of the award in accordance with SFAS No. 123(R). Stock options issued under the current plan must have an exercise price that may not be less than the fair market value of a share of the Company’s common stock on the date of grant. The Plans provide for automatic acceleration of vesting in the event of a change in control of the Company.

F-16

On December 7, 2005, the Compensation and Stock Option Committee (the “Committee”) of the Board of Directors of the Company approved the acceleration of the vesting of certain outstanding unvested stock options granted to current employees, including officers of the Company, under the Company’s 2003 Stock Incentive Compensation Plan. Specifically, the Committee approved the acceleration of the vesting of stock options which were; (i) granted prior to December 7, 2005, (ii) had an exercise price in excess of $7.65 (the closing price of the Company’s common stock on December 7, 2005) and (iii) would have been unvested on December 31, 2005. Options to purchase approximately 216,000 shares of the Company’s common stock (of which options to purchase approximately 103,000 shares were held by officers) became vested that otherwise would have vested, on average, approximately 1.8 years from the effective date of the acceleration. The options had exercise prices ranging from $11.08 to $11.46 and a weighted average exercise price of $11.20. Aside from the acceleration of the vesting date, the terms and conditions of the stock option agreement governing the accelerated stock options remain unchanged. The Committee did not accelerate the vesting of options held by non-employee Directors of the Company. For purposes of APB No. 25, there was no intrinsic value for the stock options subject to the acceleration described above, as the market value of the Company’s common stock was less than the exercise prices of the accelerated options. Thus, no compensation expense was recognized in the Company’s financial statements for the fourth quarter ended December 31, 2005 related to the acceleration of these options. However, had compensation cost been recognized based on the fair value of the options at the grant dates, consistent with FAS 123, approximately $1.2 million would have been recognized as compensation expense in the fourth quarter 2005 as a result of the acceleration.

The Company adopted SFAS No. 123(R), “Share-Based Payment,” on January 1, 2006 using the modified prospective method, and in connection therewith compensation expense was recognized in its consolidated statement of operations for the year ended December 31, 2006. The financial statements of prior periods do not reflect any restated amounts. 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 such estimates of forfeitures will be 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 will be recognized in the period of change and will 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 determined that its future volatility and expected term are not likely to materially differ from the Company’s historical stock price volatility and historical exercise data, respectively.

As a result of adopting SFAS 123(R) on January 1, 2006, the Company’s income before taxes and net income were reduced by $0.4 million and $0.3 million, respectively, for the year ended December 31, 2006, or $0.02 per diluted share. During the year ended December 31, 2006, the Company incurred approximately $0.5 million in expense for all stock-based compensation plans, including restricted stock awards, which was primarily recorded in selling, product development and administrative expense. The compensation cost recorded for these plans was $0.3 million and $0.4 million for 2005 and 2004 respectively, which represented compensation cost for restricted stock awards. No compensation costs were capitalized as part of inventory and no income tax benefit was recorded in 2005 and 2004 for compensation cost. At December 31, 2006, the total unrecognized compensation cost related to non-vested awards was approximately $2.2 million, with a weighted average expected amortization period of 3.3 years.

Stock Options

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 years ended December 31:

	2006	2005	2004
Risk-free interest rate	4.7%	4.4%	4.3%
Expected life	7 years	7 years	7 years
Expected volatility	44%	47%	48%
Expected dividend yield	0	0%	0%

The following is a summary of the option activity as of December 31, 2006 and changes during the year then ended:

In thousands
Fixed Options	Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (years)	Aggregate Intrinsic Value
Outstanding at December 31, 2005	1,169		$	10.47
Granted	115		$	10.44
Exercised	(12	)	$	7.19
Forfeited/Cancelled	(146	)	$	12.19
Outstanding at December 31, 2006	1,126		$	10.29	6.45	$	1,223
Options exercisable at December 31, 2006	802		$	10.85	5.42	$	600

F-17

The weighted-average grant-date fair value of options granted during the years 2006, 2005 and 2004 was $5.47, $4.23 and $6.10 respectively. The total intrinsic value of options exercised during the years ended 2006 and 2005 was minimal and during 2004 was $0.2 million. For the years ended December 31, 2006, 2005, and 2004, the amount of cash received from the exercise of stock options was $0.1 million, $0.3 million and $ 1.1 million, respectively. The associated tax benefit realized was minimal in all periods presented.

Restricted Stock

Compensation for restricted stock is recorded based on the market value of the stock on the grant date and amortized to expense over the vesting period of the award. Prior to January 1, 2006, the Company capitalized the full amount of the restricted stock as unearned compensation with an offset to additional paid-in capital. Upon adoption of SFAS 123(R) on January 1, 2006, the Company eliminated the unamortized balance of $0.3 million against additional paid-in capital.

The Company granted 99,900, 5,400 and 5,400 shares of restricted stock during 2006, 2005 and 2004, respectively. The weighted average fair value per share of restricted stock granted was $10.87, $7.65 and $11.08 during 2006, 2005, and 2004, respectively. During 2006, 2005 and 2004, respectively, there were 1,800 shares, 1,200 shares and 400 shares of restricted stock forfeited. The fair value of awards for which restrictions lapsed during the year ended December 31, 2006, 2005, and 2004 was $0.7 million, $0.4 million and $0.2 million, respectively.

The following is a summary of the Company’s nonvested restricted shares as of December 31, 2006 and changes during the year ended December 31, 2006:

In thousands
Nonvested Restricted Shares	Shares		Weighted-Average Grant-Date Fair Value
Nonvested at December 31, 2005	74			$10.95
Granted	100		$	10.87
Vested	(20	)	$	11.21
Forfeited	(2	)	$	10.40
Nonvested at December 31, 2006	152		$	10.87

11. Employer Sponsored Benefit Plans

As of December 31, 2006, the Company maintains three defined benefit pension plans that cover the majority of domestic Lydall employees. The pension plans are noncontributory and benefits are based on either years of service or eligible compensation paid while a participant is in a plan. The Company’s funding policy is to fund not less than the ERISA minimum funding standard and not more than the maximum amount that can be deducted for federal income tax purposes. Effective January 1, 2006, Lydall closed the non-union pension plans to new employees hired after December 31, 2005.

On April 27, 2006, the Board of Directors of the Company approved an amendment to certain of the Company’s domestic defined benefit pension plans, effective June 30, 2006, which provided that benefits under these pension plans will stop 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 to 100 percent of employee pretax contributions up to 6 percent of compensation. The amendment resulted in a pension curtailment loss of $15,000 during the second quarter of 2006.

The Company also provides an unfunded Supplemental Executive Retirement Plan (SERP) that provides supplemental income payments after retirement to certain former senior executives. The Company recorded a curtailment gain of $0.3 million related to its SERP during the year ended December 31, 2005 to account for the impact on the SERP resulting from the departure of the Company’s Chief Operating Officer. On December 7, 2005, the Company amended the SERP and no additional participants are eligible to participate in the SERP and no further benefits will accrue under the SERP after December 31, 2005.

The Company adopted FAS 158 on December 31, 2006, which required the Company to quantify the pension plans’ funding status as an asset or liability on the Company’s consolidated balance sheets at December 31, 2006. The impact was not material to the Company’s consolidated financial position, results of operations or cash flows as of or for the year ended December 31, 2006.

F-18

The following table represents the incremental effect of adopting FAS 158 on the Company’s domestic defined benefit pension plans at December 31, 2006:

	Incremental Effects of Adopting FAS 158
In thousands		Before Adopting FAS 158			Adoption Adjustments			After Adopting FAS 158
Assets:
Intangible asset	$	257		$	(257	)	$	—
Deferred tax asset		3,915			90			4,005
Liabilities:
Current benefit liability		146			—			146
Non-current benefit liability		8,072			(20	)		8,052
Total benefit liability	$	8,218		$	(20	)	$	8,198
Shareholders’ Equity:
Accumulated Other Comprehensive Income	$	(6,388	)	$	(147	)	$	(6,535	)

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

		December 31,
In thousands		2006			2005
Change in benefit obligation:
Net benefit obligation at beginning of year	$	46,271		$	40,670
Service cost		971			1,925
Interest cost		2,492			2,459
Plan amendments		(3,033	)		179
Actuarial (gain) loss		(1,874	)		3,267
Curtailments (1)		—			(701	)
Gross benefits paid		(1,632	)		(1,528	)
Net benefit obligation at end of year	$	43,195		$	46,271

⁽¹⁾ Curtailments are a result of the departure of the Chief Operating Officer in 2005.

		December 31,
In thousands		2006			2005
Change in plan assets:
Fair value of plan assets at beginning of year	$	28,939		$	27,635
Actual return on plan assets		3,394			1,616
Contributions		4,296			1,216
Gross benefits paid		(1,632	)		(1,528	)
Fair value of plan assets at end of year	$	34,997		$	28,939
Reconciliation of funded status (1):
Plan assets less benefit obligation at year end	$	(8,198	)	$	(17,332	)
Unrecognized net actuarial loss		—			16,339
Unrecognized prior service cost		—			290
Net amount recognized	$	(8,198	)	$	(703	)
(1)    After adoption of FAS 158 on December 31, 2006, these amounts are recorded and this reconciliation is no longer required.
Amounts recognized in the statement of financial position consist of:
Accrued benefit liability	$	(8,198	)	$	(1,702	)
Additional minimum liability		—			(11,840	)
Intangible assets		—			350
Accumulated other comprehensive income		—			12,489
Net amount recognized	$	(8,198	)	$	(703	)
Amounts recognized in accumulated other comprehensive loss, net of tax consist of:
Net actuarial loss	$	6,376		$	—
Prior service cost		159			—
Net amount recognized	$	6,535		$	—

F-19

At December 31, 2006, in addition to the accrued benefit liability of $8.2 million recognized for the Company’s domestic defined benefit pension plans, the Company also has an accrued benefit liability of $0.2 million and accumulated other comprehensive loss, net of tax, of $0.2 million related to a foreign regulatory labor agreement.

The pension liability (net of tax) included in Other Comprehensive loss decreased by $1.1 million for the year ended December 31, 2006 and increased $1.5 million for the year ended December 31, 2005.

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

		December 31,
In thousands		2006		2005
Projected benefit obligation	$	43,195	$	46,271
Accumulated benefit obligation	$	43,195	$	42,478
Fair value of plan assets	$	34,998	$	28,939

Components of net periodic benefit cost:

		For the years ended December 31,
In thousands		2006			2005			2004
Service cost	$	971		$	1,925		$	1,663
Interest cost		2,492			2,459			2,176
Expected return on plan assets		(2,686	)		(2,400	)		(2,284	)
Special termination benefit charge		—			—			54
Curtailment loss (gain)		15			(301	)		—
Amortization of:
Prior service cost		18			—			1
Unrecognized actuarial loss		441			834			763
Total net periodic benefit cost	$	1,251		$	2,517		$	2,373

SERP expense of $0.2 million for the year ended December 31, 2004 was not included in this table.

The estimated amounts that will be amortized from accumulated other comprehensive loss into net periodic benefit costs in 2007 are as follows:

In thousands	Pension Benefits
Actuarial (gain)/loss	$	229
Prior service (credit)/cost		20
Total	$	249

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

	Benefit Obligation		Net Cost
For the years ended December 31,	2006	2005	2006	2005	2004
Discount rate	5.90%	5.65%	5.65%	5.90%	6.25%
Salary scale	—	4.0% - 4.5%	4.0%	3.5% - 4.5%	3.5% - 4.0%
Expected return on plan assets	8.50%	8.50%	8.50%	8.75%	8.75%

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

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

F-20

The following table presents the target allocation of pension plan assets for 2007 and the actual allocation of plan assets as of December 31, 2006 and 2005 by major asset category:

	Target Allocation	Actual Allocation of Plan Assets December 31,
Asset Category	2007	2006	2005
Equity securities	60% – 80%	71%	72%
Fixed income securities	20% – 40%	24%	23%
Cash and cash equivalents and other	0% – 5%	5%	5%

Estimated Future Contributions and Benefit Payments

The Company expects to contribute approximately $2.8 million in cash to its defined benefit pension plans in 2007.

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

In thousands	2007		2008		2009		2010		2011		2012-2016
Benefit payments	$	1,507	$	1,653	$	1,769	$	1,848	$	1,965	$	11,957

Employee Savings Plans

The Company also sponsors an Employee Stock Purchase Plan and a 401(k) Plan. Employer contributions to these plans amounted to $1.8 million in 2006, $1.3 million in 2005 and $1.3 million in 2004.

12. Segment Information

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

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

Thermal/Acoustical

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

Filtration/Separation

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

Other Products and Services

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

F-21

The table below presents net sales and operating income by segment as used by the Chief Executive Officer of the Company for the years ended December 31, 2006, 2005 and 2004 and also a reconciliation of total segment net sales and operating income to total consolidated net sales and operating income for the years ended December 31, 2006, 2005 and 2004.

Consolidated Net Sales		For the Years Ended December 31,
In thousands		2006			2005			2004
Thermal/Acoustical:
Automotive	$	169,889		$	165,097		$	138,832
Passive thermal		31,932			26,198			26,442
Active thermal		20,182			19,308			18,358
Thermal/Acoustical Segment net sales	$	222,003		$	210,603		$	183,632
Filtration/Separation:
Filtration	$	60,642		$	58,022		$	66,528
Vital Fluids		14,264			10,223			15,559
Filtration/Separation Segment net sales	$	74,906		$	68,245		$	82,087
Other Products and Services:
Transport, distribution and warehousing Services	$	22,781		$	21,816		$	20,589
Specialty products		9,190			8,431			9,281
Other Products and Services net sales	$	31,971		$	30,247		$	29,870
Eliminations and Other		(2,522	)		(2,610	)		(1,987	)
Consolidated Net Sales	$	326,358		$	306,485		$	293,602

Operating Income by Segment		For the Years Ended December 31,
In thousands		2006			2005			2004
Thermal/Acoustical	$	23,193		$	17,994		$	7,269
Filtration/Separation		4,566			4,852			11,045
Other Products and Services		3,038			1,961			2,457
Corporate Office Expenses		(15,466	)		(17,142	)		(20,446	)
Consolidated Operating Income	$	15,331		$	7,665		$	325

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

Net sales by geographic area for the years ended December 31, 2006, 2005 and 2004 and long-lived asset information by geographic area as of December 31, 2006 and 2005 are as follows:

		Net Sales						Long-Lived Assets
In thousands		2006		2005		2004		2006		2005
United States	$	230,339	$	215,371	$	206,960	$	94,364	$	100,216
France		39,274		38,199		28,601		25,218		21,162
Germany		56,745		52,915		58,041		27,264		28,610
Total	$	326,358	$	306,485	$	293,602	$	146,846	$	149,988

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

For 2006, 2005 and 2004, the only customer that individually comprised greater than 10 percent of the Company’s consolidated net sales was DaimlerChrysler. Sales to DaimlerChrysler in 2006, 2005 and 2004 were $55.9 million, $40.8 million and $39.6 million, respectively. These sales were reported in the Thermal/Acoustical Segment.

F-22

13. Income Taxes

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

		For the years ended December 31,
In thousands		2006			2005			2004
Current:
Federal	$	557		$	(121	)	$	(28	)
State		286			252			216
Foreign		1,214			1,057			267
Total current		2,057			1,188			455
Deferred:
Federal		(752	)		(1,053	)		(882	)
State		(70	)		(246	)		121
Foreign		2,532			1,728			88
Total deferred		1,710			429			(673	)
Provision for income taxes	$	3,767		$	1,617		$	(218	)

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

	For the years ended December 31,
In thousands	2006		2005		2004
Statutory federal income tax rate	34.0	%	34.0	%	34.0	%
State income taxes, net of federal tax deduction	1.5		(14.4	)	(23.0	)
Exempt export and foreign income	(1.7	)	(2.4	)	28.8
Net benefit of recognition of foreign deferred tax assets	(2.1	)	(2.6	)	25.2
Reserve for tax contingencies	(6.2	)	(3.2	)	(43.5	)
Adjustments from tax provision to final returns	(1.7	)	(2.1	)	1.0
Valuation allowance for domestic net operating losses and credits	0.7		11.4		6.3
Other	2.4		2.2		0.1
Effective income tax rate	26.9	%	22.9	%	28.9	%

The other line item above includes mainly non-deductible expenditures such as meals and entertainment and non-taxable income such as the increase in cash surrender value of officers’ life insurance.

Management has provided a valuation allowance at the end of 2006, 2005 and 2004 for certain state net operating loss carryforwards and tax credits including some associated with the former Columbus, Ohio plant. Due to consolidation of the Columbus operation into other facilities, the benefits associated with the net operating losses and credits will probably not be fully utilized. Additionally, there are other domestic state net operating loss carryforwards and state tax credits that management has determined may not be utilized before their expiration. These valuation allowances have been included as a component of 2006, 2005 and 2004 tax expense.

The following schedule presents net current and net long-term deferred tax assets and liabilities by tax jurisdiction as of December 31, 2006 and 2005:

	2006				2005
	Deferred Tax Assets				Deferred Tax Assets
In thousands	Current		Long-term		Current		Long-term
Federal	$	998	$	—	$	1,104	$	—
State		278		—		401		—
Foreign		2,178		6,015		1,166		8,151
Totals	$	3,454	$	6,015	$	2,671	$	8,151

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	2006				2005
	Deferred Tax Liabilities				Deferred Tax Liabilities
In thousands	Current		Long-term		Current		Long-term
Federal	$	—	$	15,329	$	—	$	15,946
State		—		1,068		—		1,386
Foreign		873		—		463		—
Totals	$	873	$	16,397	$	463	$	17,332

The net deferred tax liabilities consist of the following as of December 31, 2006 and 2005:

	December 31,
In thousands	2006		2005
Deferred tax assets:
Accounts receivable	$	302	$	314
Inventories		560		904
Net operating loss carryforwards		8,581		10,066
Other accrued liabilities		1,711		1,452
Pension		3,045		5,138
Tax credits		2,232		2,346
Other, net		2,394		3,401
Total deferred tax assets	$	18,825	$	23,621
Deferred tax liabilities:
Domestic liability of foreign assets	$	7,177	$	8,480
Intangible assets		6,049		5,546
Property, plant and equipment		11,610		14,990
Total deferred tax liabilities		24,836		29,016
Valuation allowance		1,790		1,578
Net deferred tax liabilities	$	7,801	$	6,973

For the years ended December 31, 2006, 2005 and 2004, income from continuing operations before income taxes was derived from the following sources:

	For the years ended December 31,
In thousands	2006		2005			2004
United States	$	4,994	$	(2,869	)	$	(1,135	)
Foreign		9,001		9,929			380
Total income from continuing operations before income taxes	$	13,995	$	7,060		$	(755	)

At December 31, 2006, the Company has approximately $5.5 million of alternative minimum tax net operating loss carryforwards, approximately $23.7 million of foreign net operating loss carryforwards and approximately $22.5 million of state net operating loss carryforwards. The alternative minimum tax net operating loss carryforwards will begin to expire in 2022 and the state net operating loss carryforwards expire between 2012 and 2025. The majority of the foreign net operating loss carryforwards have no expiration. The Company has provided a valuation reserve against $9.7 million of state net operating loss carry forwards relating mainly to the consolidation of the Columbus, Ohio plant.

In addition, the Company has $0.9 million and $1.3 million of federal and state tax credit carryforwards, respectively. The Company provided a valuation reserve against $1.3 million of state income tax credits of which $0.1 million related to the Columbus, Ohio plant.

United States income taxes have not been provided on undistributed earnings of international subsidiaries. It is not practicable to estimate the amount of tax that might be payable. Our intention is to reinvest these earnings permanently or to repatriate the

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earnings only when it is tax effective to do so. Accordingly, the Company believes that any U.S. tax on repatriated earnings would be substantially offset by U.S. foreign tax credits.

14. Commitments and Contingencies

Leases

The Company has operating leases that resulted in an expense of $5.4 million in 2006, $6.1 million in 2005 and $5.1 million in 2004. These contracts include building, office equipment, vehicle and machinery leases that require payment of property taxes, insurance, repairs and other operating costs.

In April 2005, Lydall Gerhardi GmbH and Co. KG, a second-tier subsidiary of Lydall, Inc., entered into a capital lease agreement for a high speed manufacturing line with GEFA Leasing GmbH. The lease has a 7 year term, an effective interest rate of 4.25 percent and aggregate principal payments of €2,995,000. The lease also contains a purchase option, which provides the Company with the option to purchase the equipment anytime after the fourth year of the lease term for a stated percentage of the original purchase price. Principal and interest payments are required monthly.

In December 2003, the Company entered into an agreement to lease the land and building of the St. Nazaire operating facility in France. Capital lease payments began in the third quarter of 2004.

Approximate future minimum lease payments under noncancelable leases are:

	Payments due by Period
In thousands	Operating Lease Payments		Capital Lease Payments			Total
2007	$	4,413	$	1,407		$	5,820
2008		3,768		1,407			5,175
2009		3,147		1,407			4,554
2010		2,144		1,407			3,551
2011		1,919		1,407			3,326
Thereafter		9,779		3,262			13,041
Total		25,170		10,297			35,467
Interest on capital leases		—		(1,687	)		(1,687	)
Total	$	25,170	$	8,610		$	33,780

Commitments and Contingencies

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

In December 2005, the Company recorded $1.3 million in other income, net, related to the reversal of an environmental accrual related to previously divested facilities in Germany. In accordance with SFAS No. 5, “Accounting for Contingencies,” the Company determined that it was no longer probable, but remote, that the Company would incur any environmental remediation expense related to the divested facilities.

In 2004, Lydall sold its Lydall & Foulds properties located in Manchester, CT. Under the direction of the Connecticut Department of Environmental Protection, there is an ongoing environmental program of groundwater sampling and soils remediation that will take place over the next four years, which is estimated to cost $0.3 million, which was previously accrued as part of the discontinuance of the Paperboard Segment.

In January 2005, the Charter Medical, Ltd. subsidiary of Lydall announced a voluntary product recall of certain of its blood transfer and storage products upon the discovery of procedural deficiencies in the sterilization validation process. Neither the Company nor

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Charter Medical was notified of any adverse events or reports from customers with regard to these products. The Company resumed shipment of these products during the third quarter of 2005. In 2006, Charter Medical successfully completed the follow-up Federal Drug Administration audit related to the 2005 product recall with no deficiencies noted.

15. Comprehensive Income (Loss)

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

In thousands	Foreign Currency Translation Adjustment			Unrealized Gain (Loss) on Derivative Instruments			Pension Liability Adjustment			Total Accumulated Other Comprehensive (Loss) Income
Balance at January 1, 2004	$	733		$	(39	)	$	(5,412	)	$	(4,718	)
Change year-to-date		3,315			(41	)		(818	)		2,456
Balance at December 31, 2004		4,048			(80	)		(6,230	)		(2,262	)
Change year-to-date		(5,714	)		80			(1,513	)		(7,147	)
Balance at December 31, 2005		(1,666	)		0			(7,743	)		(9,409	)
Change year-to-date		5,617			(36	)		1,204			6,785
Adjustment to initially apply SFAS No. 158		—			—			(147	)		(147	)
Balance at December 31, 2006	$	3,951		$	(36	)	$	(6,686	)	$	(2,771	)

16. Quarterly Financial Information (Unaudited)

The following table summarizes quarterly financial results for 2006 and 2005. In management’s opinion, all material adjustments necessary to present fairly the information for such quarters have been reflected.

	1st Quarter				2nd Quarter				3rd Quarter				4th Quarter
In thousands except per share data	2006		2005		2006		2005		2006		2005		2006		2005
Net sales	$	82,188	$	72,521	$	83,445	$	81,474	$	80,124	$	74,999	$	80,601	$	77,491
Gross margin		17,932		16,080		18,846		17,311		17,626		16,665		18,393		13,865
Income before Cumulative Effect of Change in Accounting Principle		1,912		643		2,473		2,092		3,718		1,365		2,125		1,343
Cumulative Effect of Change in Accounting Principle		—		—		—		—		—		—		—		(342	)
Net income	$	1,912	$	643	$	2,473	$	2,092	$	3,718	$	1,365	$	2,125	$	1,001
Basic earnings per share:
Income before Cumulative Effect of Change in Accounting Principle	$	0.12	$	0.04	$	0.15	$	0.13	$	0.23	$	0.08	$	0.13	$	0.08
Cumulative Effect of Change in Accounting Principle		—		—		—		—		—		—		—		(0.02	)
Net income	$	0.12	$	0.04	$	0.15	$	0.13	$	0.23	$	0.08	$	0.13	$	0.06
Diluted earnings per share:
Income before Cumulative Effect of Change in Accounting Principle	$	0.12	$	0.04	$	0.15	$	0.13	$	0.23	$	0.08	$	0.13	$	0.08
Cumulative Effect of Change in Accounting Principle		—		—		—		—		—		—		—		(0.02	)
Net income	$	0.12	$	0.04	$	0.15	$	0.13	$	0.23	$	0.08	$	0.13	$	0.06

The sum of the quarterly amounts for 2005 do not agree to the full year amounts in the Consolidated Statements of Operations due to rounding.

The results for the quarter ended December 31, 2005 include a $1.3 million adjustment to an environmental reserve (See Note 14). Also, during the quarter ended December 31, 2005, the Company adjusted its accounting for lease expenses at the Company’s transport, distribution and warehousing business and deferred tax assets at certain foreign jurisdictions. The impact of the latter adjustments was to increase cost of sales by $0.2 million and decrease income tax expense by $0.3 million.

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Schedule II

LYDALL, INC.

VALUATION AND QUALIFYING ACCOUNTS

FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004

In thousands	Balance at January 1,		Charges to Costs and Expenses			Charges (Deductions) to Other Accounts			Deductions			Balance at December 31,
2006
Allowance for doubtful receivables	$	925	$	548		$	35	2	$	(289	)1	$	1,219
Allowance for note receivable		480		—			—			—			480	5
Inventory valuation reserves		3,156		1,361			45	2		(2,702	)3		1,860
Reserve for future tax benefits		1,578		363			—			(151	)4		1,790
2005
Allowance for doubtful receivables	$	770	$	498		$	(52	)2	$	(291	)1	$	925
Allowance for note receivable		480		—			—			—			480	5
Inventory valuation reserves		1,567		2,373			(44	)2		(740	)3		3,156
Reserve for future tax benefits		982		832			—			(236	)4		1,578
2004
Allowance for doubtful receivables	$	619	$	478		$	33	2	$	(360	)1	$	770
Allowance for note receivable		—		480	5		—			—			480	5
Inventory valuation reserves		1,375		1,001			22	2		(831	)3		1,567
Reserve for future tax benefits		821		414			—			(253	)4		982

¹ Uncollected receivables written off and recoveries.

² Foreign currency translation adjustments.

³ Write-off of obsolete inventory and adjustments to valuation reserves.

⁴ Reduction to income tax expense.

⁵ A reserve for $0.5 million was recorded during 2004 for the remaining balance of the note receivable associated with the sale of certain assets of the fiberboard operation in 2001, which was included within “Prepaid expenses and other current assets, net” on the Consolidated Balance Sheets as of December 31, 2006 and 2005.

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EX-10.14

Exhibit 10.14

EMPLOYMENT AGREEMENT

THIS AGREEMENT is made and entered into by and between LYDALL, INC., a Delaware corporation (the “Company”), and Mona G. Estey (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.

Immediately upon the commencement of the Executive’s employment pursuant to the terms of this Agreement, that certain Agreement by and between the Executive and the Company dated as of March 1, 2000 shall terminate and shall be of no further force or effect, except that the Indemnification Agreement signed on March 1, 2000 will continue in full force and effect.”

2. Duties. It is the intention of the Parties that during the term of the Executive’s employment under this Agreement, the Executive will serve as Vice President Human Resources of the Company or in such other senior management position as the Company shall determine. During the Employment Period, the Executive will devote her full business time and attention and best efforts to the affairs of the Company and its subsidiaries and her duties. The Executive will have such duties as are appropriate to her 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 one hundred ninety-seven thousand Dollars ($197,000). 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 Bonuses.

(a) 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.

(b) Performance Bonus. If the Executive is employed by the Company on October 26, 2006, the Company will pay to the Executive a performance bonus equal to three (3) months’ base pay on the six-month anniversary of such date (the “Anniversary Date”), provided that (i) the Company does not terminate the Executive’s employment for Cause, the Executive does not terminate her employment with the Company (other than for Good Reason) or the Executive’s employment is not terminated due to her death or Disability prior to the Anniversary Date and (ii) the Executive maintains a satisfactory level of performance through the Anniversary Date as determined by the Compensation Committee in its sole discretion after receiving input from the CEO.

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, Inc. Executive Medical Plan), short-term and long-term disability.

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

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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, her 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 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 she, 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 her services to the Company; (ii) a breach by the Executive of her 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 her 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 her

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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) her base salary pursuant to Section 3.1 earned through the date of such termination of employment plus her 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 her 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 her 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 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 her 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).

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(b) Other. The Executive may terminate her 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 her employment pursuant to this subsection (b), the Executive shall be entitled to receive only (i) her base salary pursuant to Section 3.1 earned through the date of such termination of employment plus her 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 her 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 her 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 her 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 her termination of employment, and (ii) the average of her annual bonuses earned under the Company’s annual bonus plan for the three calendar years preceding her 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 she 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, her spouse and dependent children, as the Company paid at the applicable time for coverage under such plan for actively employed members of senior management

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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 she, 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”).

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 her 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.

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(c) The Company shall pay to the Executive as a severance benefit an amount equal to two (2) times the sum of (i) her annual rate of base salary in effect immediately preceding her termination of employment, and (ii) the average of her three highest annual bonuses earned under the Company’s annual bonus plan for any of the five calendar years preceding her 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 her 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 her 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 her 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 her 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, her 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 she, 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 her employment shall be fully vested and immediately exercisable and may be exercised by the Executive (or, following her 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 her 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

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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 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.

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(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 her 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, 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, Inc.
	P.O. Box 151
	One Colonial Road
	Manchester, CT 06045-0151
	Attn: Chief Executive Officer
To the Executive:	Mona G. Estey
	XXXXX
	XXXXX

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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.

13.4 No Disparagement. The Executive shall not during the period of her employment with the Company, nor following the date of termination of her 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 her 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.

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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. 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

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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.

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.

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LYDALL, INC.
By:	/s/ David Freeman	1/10/07
	David Freeman	Date
	President and Chief Executive Officer
	/s/ Mona G. Estey	1/10/07
	Mona G. Estey	Date
	Vice President – Human Resources

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EXHIBIT A

CONFIDENTIALITY AGREEMENT

LYDALL EMPLOYEE AGREEMENT

In consideration of my employment by any subsidiary or affiliated company of Lydall, Inc., (“Lydall”) and of the compensation and other benefits to be received by me from Lydall, I, Mona G. Estey agree that:

1. The term “Confidential Information” as used in this Agreement includes all business information and records which relate to Lydall 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 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 or otherwise, which relates to any activity or business in which Lydall is engaged or any process, equipment, material, product or method (including computer software) in which Lydall has any direct or indirect interest.

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

3. I grant to Lydall without further compensation, all my right, title and interest in and to any such Invention for the sole use and benefit of Lydall, 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 Lydall, I will at any time do what Lydall reasonably believes to be necessary to assist Lydall to vest full right and title to each such Invention in Lydall, Inc.; enable Lydall 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 Lydall may be involved concerning any such Invention. This will include preparing, executing and delivering any written document, drawings, flowcharts, or computer printouts. The provision of this paragraph will continue after I stop working for Lydall and shall be binding on my executors, administrators and assigns, unless waived in writing by Lydall.

4. I have not disclosed and will not disclose to Lydall, and I will not use, in the discharge of my duties as an employee of Lydall, 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 paragraph 4 shall not apply to matters which (a) are or become public knowledge, (b) were previously known to Lydall, (c) are subsequently received by Lydall from a third party, or (d) are independently derived by Lydall.

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

6. When I leave Lydall’s employ, or at any other time upon request by Lydall, I will promptly deliver to Lydall 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 Lydall, 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.

7. I acknowledge and agree that Lydall’s business competes upon a nationwide and worldwide basis, and that the degree of competition in that business is high; I recognize that Lydall may assign me responsibilities in geographic regions of Lydall’s selection. Accordingly, I agree that, unless I first obtain Lydall’s written consent, I will not during my employment with Lydall and for a period of two (2) years following the termination of my employment with Lydall (provided, however, that if I am employed by Lydall for less than two (2) years, the post-employment period to which this paragraph 7 applies shall be the greater of six (s) months or a period of time equal to the duration of my employment by Lydall in any capacity,¹) directly or indirectly:

(i) own, manage, operate, join, control or 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 Lydall in (a) any market in which the Division(s) of Lydall 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 such termination or (b) if Lydall has assigned me a specific geographic area for responsibility, within two hundred fifty (250) miles of any geographic location in which Lydall has assigned me responsibilities in the two (2) years preceding such termination;

(ii) induce or attempt to induce any person who is an employee of Lydall to terminate his or her employment with Lydall; or

(iii) induce or attempt to induce any person, business or entity which, as of the date of the termination of my employment, is a supplier of, a purchaser from , or a contracting party with Lydall to terminate any written or oral agreement, order or understanding with Lydall.

8. I further understand and agree that the remedy at law for any breach or threatened breach of my agreement not to compete contained in paragraph 7 would be inadequate and that any breach or attempted breach would result in irreparable damage to Lydall, 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 contained in paragraph 7, in addition to any and all other legal or equitable remedies which may be available, Lydall may obtain preliminary injunctive relief to remedy damage caused by such breach or threatened breach, and that Lydall shall be entitled to recover from me its costs and expenses including reasonable attorney fees incurred in remedying such breach or threatened breach.

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9. Should any claim or dispute relating to this agreement arise, I agree that the claim will be settled by arbitration in the state of the Division of Lydall for which I was last working, in accordance with the Commercial Arbitration Rules of the American Arbitration Association, and judgment will be binding and may be entered in any court with jurisdiction.

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

11. In consideration of my employment, I agree to conform to the policies of Lydall. 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 Lydall or me, and will remain so unless a written agreement for a specific term is entered into and executed by me and Lydall’s CEO. No other representations or agreements have been made regarding the term or termination of my employment. I understand that no employee of Lydall other than its CEO has the authority to enter into any agreement, commitment or guarantees binding on Lydall regarding my employment and then only by a signed, written document.

12. This Agreement, which is ancillary to any other agreement I may have with Lydall, (a) is intended as the complete and exclusive statement of my agreement with Lydall with respect to its subject matter; (b) shall be binding upon my heirs, executors and administrators; (c) shall not be modified unless in writing and signed by me and Lydall; and (d) shall be governed by and construed in accordance with the law of the State of Connecticut, Lydall’s home office state.

13. Should any part of this Employee Agreement be found invalid by any court, the remainder shall be valid and enforceable in law and equity.

¹ individually; or as a member, employee or agent of any partnership; or as an officer, agent, employee, director, or investor of any other corporation or entity; or as a stockholder (except of not more than two percent (2%) of the outstanding stock of any company listed on a national securities exchange or actively traded in the over-the-counter securities market) or investor of any other corporation or entity;

Signed at                         Manchester, CT                                                                                       on             7/21/97            

                                             (City/State)                                                                                                            (Date)

Employee’s Name:                     Mona G. Estey		Lydall	Corporate                 Division
	(Print or Type)
By:	/s/ Mona G. Estey	By	/s/ Leonard R. Jaskol
	(Employee Signature)		(Division President)
S.S.#	###-##-####	Witness:	/s/ Nancy H. Poulin

Acknowledgement of Receipt

I acknowledge receipt of a copy of this document on             7/21/1997                

                                                                                                       (date)

Employee’s Signature         /s/ Mona G. Estey                              

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EXHIBIT B

TERMINATION, VOLUNTARY RELEASE AND WAIVER OF RIGHTS AGREEMENT

I,                         , unqualifiedly accept and agree to the relinquishment of my title, responsibilities and obligations as an employee of Lydall, 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                         , 2006 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

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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.

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

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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.)

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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.

AFFIRMATION OF RELEASOR

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

I,                         , 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,                         , 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.

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Executed this              day of                         , 2006, at                                                  .

		NAME
STATE OF	)
	)	SS:
COUNTY OF	)

Subscribed and sworn to before me, a Notary Public in and for said County and State, this              day of                         , 2006, under the pains and penalties of perjury.

, Notary Public

My Commission Expires:

County of Residence:

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EX-10.15

Exhibit 10.15

EMPLOYMENT AGREEMENT

THIS AGREEMENT is made and entered into by and between LYDALL, INC., a Delaware corporation (the “Company”), and Mary A. Tremblay (the “Executive”).

WITNESSETH

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.

Immediately upon the commencement of the Executive’s employment pursuant to the terms of this Agreement, that certain Agreement by and between the Executive and the Company dated as of March 1, 2000 shall terminate and shall be of no further force or effect, except that the Indemnification Agreement signed on March 1, 2000 will continue in full force and effect.

2. Duties. It is the intention of the Parties that during the term of the Executive’s employment under this Agreement, the Executive will serve as Vice President, General Counsel & Secretary of the Company or in such other senior management position as the Company shall determine. During the Employment Period, the Executive will devote her full business time and attention and best efforts to the affairs of the Company and its subsidiaries and her duties. The Executive will have such duties as are appropriate to her 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 thousand Dollars ($210,000). 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 Bonuses.

(a) 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.

(b) Performance Bonus. If the Executive is employed by the Company on October 26, 2006, the Company will pay to the Executive a performance bonus equal to three (3) months’ base pay on the six-month anniversary of such date (the “Anniversary Date”), provided that (i) the Company does not terminate the Executive’s employment for Cause, the Executive does not terminate her employment with the Company (other than for Good Reason) or the Executive’s employment is not terminated due to her death or Disability prior to the Anniversary Date and (ii) the Executive maintains a satisfactory level of performance through the Anniversary Date as determined by the Compensation Committee in its sole discretion after receiving input from the CEO.

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, Inc. Executive Medical Plan), short-term and long-term disability.

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3.4 Vacations and Holidays. During the Employment Period, the Executive will be entitled to vacation leave of four (4) weeks per year at full pay or such greater vacation benefits as may be provided for by the Company’s vacation policies applicable to senior 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 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 her 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) her 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

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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, her 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 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 she, 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 her services to the Company; (ii) a breach by the Executive of her 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 her 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 her

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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) her base salary pursuant to Section 3.1 earned through the date of such termination of employment plus her 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 her 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 her 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 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 her 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).

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(b) Other. The Executive may terminate her 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 her employment pursuant to this subsection (b), the Executive shall be entitled to receive only (i) her base salary pursuant to Section 3.1 earned through the date of such termination of employment plus her 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 her 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 her 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 her 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 her termination of employment, and (ii) the average of her annual bonuses earned under the Company’s annual bonus plan for the three calendar years preceding her 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 she 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, her spouse and dependent children, as the Company paid at the applicable time for coverage under such plan for actively employed members of senior management

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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 she, 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”).

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 her 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.

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(c) The Company shall pay to the Executive as a severance benefit an amount equal to two (2) times the sum of (i) her annual rate of base salary in effect immediately preceding her termination of employment, and (ii) the average of her three highest annual bonuses earned under the Company’s annual bonus plan for any of the five calendar years preceding her 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 her 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 her 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 her 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 her 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, her 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 she, 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 her employment shall be fully vested and immediately exercisable and may be exercised by the Executive (or, following her 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 her 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

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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 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.

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(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 her 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, 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, Inc.
	P.O. Box 151
	One Colonial Road
	Manchester, CT 06045-0151
	Attn: Chief Executive Officer
To the Executive:	Mary. A. Tremblay
	XXXXX
	XXXXX

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.

13.4 No Disparagement. The Executive shall not during the period of her employment with the Company, nor following the date of termination of her 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

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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 her 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

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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. 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.

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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.

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.

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LYDALL, INC.
By:	/s/ David Freeman	1/10/07
	David Freeman	Date
	President and Chief Executive Officer
	/s/ Mary A. Tremblay	1/10/07
	Mary A. Tremblay	Date
	Vice President, General Counsel & Secretary

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EXHIBIT A

CONFIDENTIALITY AGREEMENT

LYDALL EMPLOYEE AGREEMENT

In consideration of my employment by any subsidiary or affiliated company of Lydall, Inc., (“Lydall”) and of the compensation and other benefits to be received by me from Lydall, I, Mary A. Tremblay agree that:

1. The term “Confidential Information” as used in this Agreement includes all business information and records which relate to Lydall 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 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 or otherwise, which relates to any activity or business in which Lydall is engaged or any process, equipment, material, product or method (including computer software) in which Lydall has any direct or indirect interest.

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

3. I grant to Lydall without further compensation, all my right, title and interest in and to any such Invention for the sole use and benefit of Lydall, 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 Lydall, I will at any time do what Lydall reasonably believes to be necessary to assist Lydall to vest full right and title to each such Invention in Lydall, Inc.; enable Lydall 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 Lydall may be involved concerning any such Invention. This will include preparing, executing and delivering any written document, drawings, flowcharts, or computer printouts. The provision of this paragraph will continue after I stop working for Lydall and shall be binding on my executors, administrators and assigns, unless waived in writing by Lydall.

4. I have not disclosed and will not disclose to Lydall, and I will not use, in the discharge of my duties as an employee of Lydall, 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 paragraph 4 shall not apply to matters which (a) are or become public knowledge, (b) were previously known to Lydall, (c) are subsequently received by Lydall from a third party, or (d) are independently derived by Lydall.

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

6. When I leave Lydall’s employ, or at any other time upon request by Lydall, I will promptly deliver to Lydall 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 Lydall, 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.

7. I acknowledge and agree that Lydall’s business competes upon a nationwide and worldwide basis, and that the degree of competition in that business is high; I recognize that Lydall may assign me responsibilities in geographic regions of Lydall’s selection. Accordingly, I agree that, unless I first obtain Lydall’s written consent, I will not during my employment with Lydall and for a period of two (2) years following the termination of my employment with Lydall (provided, however, that if I am employed by Lydall for less than two (2) years, the post-employment period to which this paragraph 7 applies shall be the greater of six (s) months or a period of time equal to the duration of my employment by Lydall in any capacity,¹) directly or indirectly:

(i) own, manage, operate, join, control or participate in the ownership, management, operation or control of, or work for (as an employee, consultant or independent contractor) or have any material financial

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interest in, any business competitive with Lydall in (a) any market in which the Division(s) of Lydall 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 such termination or (b) if Lydall has assigned me a specific geographic area for responsibility, within two hundred fifty (250) miles of any geographic location in which Lydall has assigned me responsibilities in the two (2) years preceding such termination;

(ii) induce or attempt to induce any person who is an employee of Lydall to terminate his or her employment with Lydall; or

(iii) induce or attempt to induce any person, business or entity which, as of the date of the termination of my employment, is a supplier of, a purchaser from , or a contracting party with Lydall to terminate any written or oral agreement, order or understanding with Lydall.

8. I further understand and agree that the remedy at law for any breach or threatened breach of my agreement not to compete contained in paragraph 7 would be inadequate and that any breach or attempted breach would result in irreparable damage to Lydall, 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 contained in paragraph 7, in addition to any and all other legal or equitable remedies which may be available, Lydall may obtain preliminary injunctive relief to remedy damage caused by such breach or threatened breach, and that Lydall shall be entitled to recover from me its costs and expenses including reasonable attorney fees incurred in remedying such breach or threatened breach.

9. Should any claim or dispute relating to this agreement arise, I agree that the claim will be settled by arbitration in the state of the Division of Lydall for which I was last working, in accordance with the Commercial Arbitration Rules of the American Arbitration Association, and judgment will be binding and may be entered in any court with jurisdiction.

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

11. In consideration of my employment, I agree to conform to the policies of Lydall. 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 Lydall or me, and will remain so unless a written agreement for a specific term is entered into and executed by me and Lydall’s CEO. No other representations or agreements have been made regarding the term or termination of my employment. I understand that no employee of Lydall other than its CEO has the authority to enter into any agreement, commitment or guarantees binding on Lydall regarding my employment and then only by a signed, written document.

12. This Agreement, which is ancillary to any other agreement I may have with Lydall, (a) is intended as the complete and exclusive statement of my agreement with Lydall with respect to its subject matter; (b) shall be binding upon my heirs, executors and administrators; (c) shall not be modified unless in writing and signed by me and Lydall; and (d) shall be governed by and construed in accordance with the law of the State of Connecticut, Lydall’s home office state.

13. Should any part of this Employee Agreement be found invalid by any court, the remainder shall be valid and enforceable in law and equity.

¹ individually; or as a member, employee or agent of any partnership; or as an officer, agent, employee, director, or investor of any other corporation or entity; or as a stockholder (except of not more than two percent (2%) of the outstanding stock of any company listed on a national securities exchange or actively traded in the over-the-counter securities market) or investor of any other corporation or entity;

Signed at	Manchester, CT	on	6/23/1997
	(City/State)		(Date)

Employee’s Name:	Mary A. Tremblay	Lydall, Inc.
(Print or Type)

By:	/s/ Mary A. Tremblay	By	/s/ Leonard R. Jaskol
	(Employee Signature)		(Division President)

S.S.# ###-##-#### Witness: /s/ Nancy H. Poulin

Acknowledgement of Receipt

I acknowledge receipt of a copy of this document on

6/24/1997

(date)

Employee’s Signature /s/ Mary Tremblay

EXHIBIT B

TERMINATION, VOLUNTARY RELEASE AND WAIVER OF RIGHTS AGREEMENT

I,                     , unqualifiedly accept and agree to the relinquishment of my title, responsibilities and obligations as an employee of Lydall, 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                  , 2006 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

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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.

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

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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.)

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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.

AFFIRMATION OF RELEASOR

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

I,                     , 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,                     , 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.

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Executed this      day of              , 2006, at                                         .

		NAME
STATE OF	)
	)	SS:
COUNTY OF	)

Subscribed and sworn to before me, a Notary Public in and for said County and State, this      day of             , 2006, under the pains and penalties of perjury.

, Notary Public

My Commission Expires:

County of Residence:

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EX-10.16

Exhibit 10.16

EMPLOYMENT AGREEMENT

THIS AGREEMENT is made and entered into by and between LYDALL, INC., a Delaware corporation (the “Company”), and Randall L. Byrd (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.

1.3 Immediately upon the commencement of the Executive’s employment pursuant to the terms of this Agreement, that certain Agreement by and between the Executive and the Company dated as of October 17, 2005 shall terminate and shall be of no further force or effect.

2. Duties. It is the intention of the Parties that during the term of the Executive’s employment under this Agreement, the Executive will serve as President, North American Automotive, 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 Fifty Thousand Dollars ($250,000). 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 Bonuses.

(a) 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.

(b) Performance Bonus. If the Executive is employed by the Company on October 26, 2006, the Company will pay to the Executive a performance bonus equal to three (3) months’ base pay on the six-month anniversary of such date (the “Anniversary Date”), provided that (i) the Company does not terminate the Executive’s employment for Cause, the Executive does not terminate his employment with the Company (other than for Good Reason) or the Executive’s employment is not terminated due to his death or Disability prior to the Anniversary Date and (ii) the Executive maintains a satisfactory level of performance through the Anniversary Date as determined by the Compensation Committee in its sole discretion after receiving input from the CEO.

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, Inc. Executive Medical Plan), short-term and long-term disability.

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3.4 Vacations and Holidays. During the Employment Period, the Executive will be entitled to vacation leave of Four (4) weeks per year at full pay or such greater vacation benefits as may be provided for by the Company’s vacation policies applicable to senior 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 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

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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 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

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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 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).

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(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

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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”).

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.

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(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

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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 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.

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(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, 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, Inc.
	P.O. Box 151
	One Colonial Road
	Manchester, CT 06045-0151
	Attn: Chief Executive Officer
To the Executive:	Randall L. Byrd
	XXXXX
	XXXXX

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.

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

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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

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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. 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.

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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.

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.

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LYDALL, INC.
By:	/s/ David Freeman	1/10/07
	David Freeman	Date
	President and Chief Executive Officer
	/s/ Randall L. Byrd	1/10/07
	President, North American Automotive	Date

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EXHIBIT A

CONFIDENTIALITY AGREEMENT

Lydall Thermal/Acoustical Sales, LLC

(Also referred to as the “Company”)

Confidentiality and Non-Compete Agreement

In consideration of my employment by the Company, 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

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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.

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

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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

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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.

/s/ Randall L. Byrd    (Employee Signature)    /s/ Mona G. Estey    (Witness to Signature)

Randall L. Byrd    (Employee printed name)    10/18/05    (Date)

Lydall Industrial Thermal Sales/Service, LLC
By:	/s/ David Freeman
Name:	David Freeman
Title:	Manager

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EXHIBIT B

TERMINATION, VOLUNTARY RELEASE AND WAIVER OF RIGHTS AGREEMENT

I,                     , unqualifiedly accept and agree to the relinquishment of my title, responsibilities and obligations as an employee of Lydall, 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             , 2006 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

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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.

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

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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.)

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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.

AFFIRMATION OF RELEASOR

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

I,                     , 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,                     , 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.

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Executed this      day of             , 2006 at                                          .

                                                                  NAME

STATE OF                                 )

                                                     )            SS:

COUNTY OF                             )

Subscribed and sworn to before me, a Notary Public in and for said County and State, this      day of              , 2006 under the pains and penalties of perjury.

, Notary Public

My Commission Expires:

County of Residence:

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EX-10.17

Exhibit 10.17

AGREEMENT

THIS AGREEMENT is made and entered by and between LYDALL, INC., a Delaware corporation (the “Company”), and Peter Ferris (the “Employee”).

WITNESSETH

WHEREAS, the Company and the Employee (the “Parties”) have agreed to enter into this agreement (the “Agreement) relating to the termination of the employment of the Employee;

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. Termination of Employment by the Company.

1.1 Termination by the Company Other Than For Cause. The Company may terminate the Employee’s employment at any time other than for Cause (as defined in Section 1.2), by giving the Employee a written notice of termination at least 30 days before the date of termination (or such lesser notice period as the Employee may agree to). In the event of such a termination of employment pursuant to this Section 1.1, the Employee shall be entitled to receive (i) the benefits described in Section 3 if such termination of employment does not occur within 18 months following a “Change of Control” (as defined in Section 5), or (ii) the benefits described in Section 4 if such termination of employment occurs within 18 months following a Change of Control.

1.2 Termination for Cause. The Company may terminate the Employee’s employment immediately for Cause for any of the following reasons: (i) an act or acts of dishonesty or fraud by the Employee relating to the performance of his services to the Company; (ii) a breach by the Employee of his duties or responsibilities under this Agreement resulting in significant demonstrable injury to the Company or any of its subsidiaries; (iii) the Employee’s conviction of a felony or any crime involving moral turpitude; (iv) the Employee’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 Employee has been given written notice of the acts or omissions constituting such failure or insubordination and the Employee has failed to cure such conduct, where susceptible to cure, within ten days following such notice; or (v) a breach by the Employee 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 Employee and attached hereto as Exhibit A (the “Confidentiality Agreement”). The Company shall exercise its right to terminate the

Employee’s employment for Cause by giving the Employee written notice of termination specifying in reasonable detail the circumstances constituting such Cause. In the event of such termination of the Employee’s employment for Cause, the Employee shall be entitled to receive only (i) his base salary 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 Employee’s date of termination to the extent not previously paid, (ii) any other compensation and benefits to the extent actually earned by the Employee 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.

2. Termination of Employment by the Employee.

The Employee may terminate his employment at any time and for any reason 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 Employee may elect to have the Employee’s employment terminate immediately following its receipt of such notice. In the event of the Employee’s termination of his employment, the Employee shall be entitled to receive only (i) his base salary 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 Employee’s date of termination to the extent not previously paid, (ii) any other compensation and benefits to the extent actually earned by the Employee 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.

3. Benefits Upon Termination Without Cause (No Change of Control). If (a) the Employee’s employment hereunder shall terminate because of termination by the Company pursuant to Section 1.1 and (b) such termination of employment does not occur within 18 months following a Change of Control of the Company, the Employee shall be entitled to the following:

(a) The Company shall pay to the Employee his base salary earned through the date of such termination of employment in a lump sum no later than the next payroll date following the Employee’s date of termination to the extent not previously paid, and any other compensation and benefits to the extent actually earned by the Employee 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.

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(b) The Company shall pay the Employee any reimbursement amounts owing.

(c) The Company shall pay to the Employee 50% of the sum of (i) the Employee’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 Employee 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 shall be paid in installments at the times that salary payments are normally made by the Company; provided that, if at the time of the Employee’s termination of employment, the Employee 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 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 Employee’s termination of employment.

(d) If the Employee elects to continue coverage under the Company’s health plan pursuant to COBRA, then for the period beginning on the date of the Employee’s termination of employment and ending on the earlier of (i) the date which is 6 months after the date of such termination of employment or (ii) the date the Employee becomes eligible for health insurance benefits under the group health plan of another employer, the Company will pay the same percentage of the Employee’s premium for COBRA coverage for the Employee 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 management generally. In addition, for the period beginning on the date of the Employee’s termination of employment and ending on the earlier of (i) the date which is 6 months after the date of such termination of employment or (ii) the date on which the Employee 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 Employee if the Employee had continued in employment with the Company for such period, but only if the Employee timely pays the portion of the premium for such coverage that members of management of the Company generally are required to pay for such coverage, if any. The Employee 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 Employee’s participation in the Company’s group life insurance plan is barred, the Company shall arrange to provide the Employee 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 Employee 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 Employee an amount not to exceed $10,000 for outplacement services costs incurred by Employee within the twelve months following the Employee’s termination of employment.

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(f) The Company’s obligation to provide the severance benefits set forth in Sections 3(c), (d) and (e) upon the Employee’s termination of employment without Cause, which does not occur within 18 months following a Change of Control, is subject to the Employee’s execution without revocation of a valid release in substantially the form attached to this Agreement as Exhibit B (the “Release”).

4. Benefits Upon Termination Without Cause (Change of Control). If (a) the Employee’s employment hereunder shall terminate because of termination by the Company pursuant to Section 1.1 and (b) such termination of employment occurs within 18 months following a Change of Control of the Company, the Employee shall be entitled to the following:

(a) The Company shall pay to the Employee his base salary earned through the date of such termination of employment in a lump sum no later than the next payroll date following the Employee’s date of termination to the extent not previously paid, and any other compensation and benefits to the extent actually earned by the Employee 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 Employee any reimbursement amounts owing.

(c) The Company shall pay to the Employee as a severance benefit an amount equal to one (1) 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 Employee 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 Employee 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 Employee’s termination of employment, the Employee 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 Employee 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 Employee’s target bonus opportunity under the Company’s annual bonus plan for the calendar year of termination of the Employee’s employment or, if none, such portion of the bonus awarded to the Employee under the Company’s annual bonus plan for the calendar year immediately preceding the calendar year of the termination of the Employee’s employment, with deferred bonuses counting for the year earned rather than the year paid.

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Such portion shall be determined by dividing the number of days of the Employee’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 Employee shall have no right to any further bonuses under said plan; provided that, if at the time of the Employee’s termination of employment, the Employee 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 Employee shall have no right to any further bonuses under said plan.

(e) For the period beginning on the date of the Employee’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 Employee becomes eligible for comparable benefits from another employer, the Employee (and, if applicable, the Employee’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 Employee immediately prior to his termination of employment as if the Employee had remained in employment for such period; provided, however, that the coverage under any such plan is conditioned on the timely payment by the Employee (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 Employee’s participation in any such plan is barred, the Company shall arrange to provide the Employee (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 Employee under the Company’s plan or plans. The Employee shall notify the Company promptly if he, while eligible for benefits under this subsection (e) becomes eligible to receive benefits from another employer.

(f) Each stock option granted by the Company to the Employee and outstanding immediately prior to termination of his employment shall be fully vested and immediately exercisable and may be exercised by the Employee (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 Employee and outstanding immediately prior to termination of the Employee’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 Employee an amount not to exceed $10,000 for outplacement services costs incurred by Employee within the twelve months following the Employee’s termination of employment.

(h) The Company shall promptly pay all reasonable attorneys’ fees and related expenses incurred by the Employee in seeking to obtain or enforce any right or benefit under this Section 4 or to defend against any claim or assertion in connection with this Section 4, but only if and to the extent that the Employee substantially prevails.

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(i) The Company will pay to the Employee an automobile allowance, in an amount equal to the Employee’s monthly lease allowance at the time of termination, each month for 12 months following termination of the Employee’s employment to replace the Company-leased automobile, which leased automobile will be returned to the Company by the Employee on the date of termination of the Employee’s employment; provided that, if at the time of the Employee’s termination of employment, the Employee is a Specified Employee, then fifty percent (50%) 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 fifty percent (50%) of the automobile allowance shall be paid in six (6) 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 4(c), (d), (e), (f), (g), (h) and (i) upon the Employee’s termination of employment without Cause within 18 months following a Change of Control is subject to the Employee’s execution of the Release.

5. 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.

6. Golden Parachute Excise Tax.

(a) In the event that any payment or benefit received or to be received by the Employee 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

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to the Employee 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 Employee would otherwise be entitled without such reduction would be greater than the net after-tax payment (after taking into account Federal, state, local or other income and excise taxes) to the Employee 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 Employee 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 6 shall be made by a nationally recognized independent accounting firm mutually agreeable to the Company and the Employee (the “Accounting Firm”) which shall provide detailed supporting calculations to the Company and the Employee as requested by the Company or the Employee. 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 Employee as incurred or billed by the Accounting Firm. All determinations made by the Accounting Firm pursuant to this Section 6 shall be final and binding upon the Company and the Employee.

(c) To the extent any payment or benefit is to be reduced pursuant to this Section 6, the severance payment described in Section 3(c) or 4(c) will first be reduced and then the bonus described in Section 4(d), in each case only to the extent necessary.

7. 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 Employee or his spouse, dependents or beneficiaries may have pursuant to any other plan or program of the Company; provided that the Employee 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, Inc. Severance Plan.

8. General Provisions.

8.1 No Duty to Seek Employment. The Employee 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 Employee hereunder shall be reduced or suspended if the Employee accepts subsequent employment, except as expressly set forth herein.

8.2 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 Employee and any deductions and withholdings required by law.

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8.3 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, Inc.
	P.O. Box 151
	One Colonial Road
	Manchester, CT 06045-0151
	Attn: Chief Employee Officer
To the Employee:	Peter Ferris
	XXXXX
	XXXXX

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.

8.4 No Disparagement. The Employee 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 Employee agrees that the terms of this Section 8.4 shall survive the term of this Agreement and the termination of the Employee’s employment.

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

8.6 Covenant to Notify Management. The Employee agrees to abide by the ethics policies of the Company as well as the Company’s other rules, regulations, policies and procedures. The Employee agrees to comply in full with all governmental laws and regulations as well as ethics codes applicable. In the event that the Employee 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 Employee 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 Employee understands that the Employee is precluded from filing a complaint with any governmental agency or court having jurisdiction over wrongful conduct unless the Employee has first notified the Company of the facts and permits it to investigate and correct the concerns.

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8.7 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 Employee 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.

8.8 Beneficial Interests. This Agreement shall inure to the benefit of and be enforceable by (a) the Company’s successors and assigns and (b) the Employee’s personal and legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Employee 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 Employee’s devisee, legatee, or other designee or, if there be no such designee, to the Employee’s estate.

8.9 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.

8.10 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 8.10, 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 Employee’s consent.

8.8 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.

8.9 Statute of Limitations. The Employee 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 Employee’s employment by the Company. If such a claim is filed more than one year subsequent to the Employee’s last day of employment it shall be precluded by this provision, regardless of whether or not the claim has accrued at that time.

8.10 Right to Injunctive and Equitable Relief. The Employee’s obligations under Section 9.4 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 Employee breaches such obligations. Therefore, the Employee expressly agrees that the Company shall be entitled to injunctive and other equitable relief without bond

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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 Employee and the rights and remedies of the Company under Section 8.4 and this Section 8.13 are cumulative and in addition to, and not in lieu of, any obligations, rights, or remedies as created by applicable law. The Employee agrees that the terms of this Section 8.13 shall survive the term of this Agreement and the termination of the Employee’s employment.

8.11 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.

8.12 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.

8.13 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.

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

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LYDALL, INC.
By:	/s/ David Freeman	1/29/07
	David Freeman	Date
	President and Chief Executive Officer
	/s/ Peter Ferris	1/29/07
	Peter Ferris	Date
	President, Charter Medical, Ltd

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EXHIBIT A

CONFIDENTIALITY AGREEMENT

Charter Medical, Ltd.

Also referred to as the “Company”)

Confidentiality, Invention and Non-Compete Agreement

(For Domestic Employees Only)

In consideration of my employment by the Company, 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,

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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.

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,

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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 publicly 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

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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.

Employee Name:	/s/ Peter V. Ferris
Name printed:	Peter V. Ferris
Date:	11/29/06
Charter Medical, Ltd.
By:	David Freeman
Name Printed:	David Freeman
Title:	President and CEO

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EXHIBIT B

TERMINATION, VOLUNTARY RELEASE AND WAIVER OF RIGHTS AGREEMENT

I, Peter Ferris, unqualifiedly accept and agree to the relinquishment of my title, responsibilities and obligations as an employee of Lydall, 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                  , 2006 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

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any other laws, ordinances, Employee 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.

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

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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, Employees, 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.)

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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.

AFFIRMATION OF RELEASOR

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

I, Peter Ferris, 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, Peter Ferris, 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.

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Executed this      day of             , 2006, at                                          .

NAME

STATE OF	)
	)	SS:
COUNTY OF	)

Subscribed and sworn to before me, a Notary Public in and for said County and State, this      day of             , 2006, under the pains and penalties of perjury.

, Notary Public

My Commission Expires:

County of Residence:

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EX-10.22

Exhibit 10.22

EMPLOYMENT AGREEMENT

THIS AGREEMENT is made and entered by and between LYDALL, INC., a Delaware corporation (the “Company”), and John F. Tattersall (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.

1.3 Immediately upon the commencement of the Executive’s employment pursuant to the terms of this Agreement, that certain Agreement by and between the Executive and the Company dated as of August 1, 2005 shall terminate and shall be of no further force or effect.

2. Duties. It is the intention of the Parties that during the term of the Executive’s employment under this Agreement, the Executive will serve as President, Lydall Transport, Ltd. 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 Forty Thousand Dollars ($240, 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 Bonuses.

(a) 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.

(b) Performance Bonus. If the Executive is employed by the Company on October 26, 2006, the Company will pay to the Executive a performance bonus equal to three (3) months’ base pay on the six-month anniversary of such date (the “Anniversary Date”), provided that (i) the Company does not terminate the Executive’s employment for Cause, the Executive does not terminate his employment with the Company (other than for Good Reason) or the Executive’s employment is not terminated due to his death or Disability prior to the Anniversary Date and (ii) the Executive maintains a satisfactory level of performance through the Anniversary Date as determined by the Compensation Committee in its sole discretion after receiving input from the CEO.

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, Inc. Executive Medical Plan), short-term and long-term disability.

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

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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 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

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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 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).

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(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

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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”).

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.

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(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

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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 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.

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(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, 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, Inc. P.O. Box 151 One Colonial Road Manchester, CT 06045-0151 Attn: Chief Executive Officer
To the Executive:	Mr. John F. Tattersall XXXXX XXXXX

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.

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

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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

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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. 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.

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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.

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.

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LYDALL, INC.
By:	/s/ David Freeman	1/10/07
	David Freeman	Date
	President and Chief
	Executive Officer
	/s/ John F. Tattersall	1/10/07
	John F. Tattersall	Date

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EXHIBIT A

CONFIDENTIALITY AGREEMENT

LYDALL EMPLOYEE AGREEMENT

In consideration of my employment by any subsidiary or affiliated company of Lydall, Inc., (“Lydall”) and of the compensation and other benefits to be received by me from Lydall, I, John Finley Tattersall agree that:

1. The term “Confidential Information” as used in this Agreement includes all business information and records which relate to Lydall 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 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 or otherwise, which relates to any activity or business in which Lydall is engaged or any process, equipment, material, product or method (including computer software) in which Lydall has any direct or indirect interest.

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

3. I grant to Lydall without further compensation, all my right, title and interest in and to any such Invention for the sole use and benefit of Lydall, 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 Lydall, I will at any time do what Lydall reasonably believes to be necessary to assist Lydall to vest full right and title to each such Invention in Lydall, Inc.; enable Lydall 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 Lydall may be involved concerning any such Invention. This will include preparing, executing and delivering any written document, drawings, flowcharts, or computer printouts. The provision of this paragraph will continue after I stop working for Lydall and shall be binding on my executors, administrators and assigns, unless waived in writing by Lydall.

4. I have not disclosed and will not disclose to Lydall, and I will not use, in the discharge of my duties as an employee of Lydall, 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 paragraph 4 shall not apply to matters which (a) are or become public knowledge, (b) were previously known to Lydall, (c) are subsequently received by Lydall from a third party, or (d) are independently derived by Lydall.

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

6. When I leave Lydall’s employ, or at any other time upon request by Lydall, I will promptly deliver to Lydall 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 Lydall, 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.

7. I acknowledge and agree that Lydall’s business competes upon a nationwide and worldwide basis, and that the degree of competition in that business is high; I recognize that Lydall may assign me responsibilities in geographic regions of Lydall’s selection. Accordingly, I agree that, unless I first obtain Lydall’s written consent, I will not during my employment with Lydall and for a period of two (2) years following the termination of my employment with Lydall (provided, however, that if I am employed by Lydall for less than two (2) years, the post-employment period to which this paragraph 7 applies shall be the greater of six (s) months or a period of time equal to the duration of my employment by Lydall in any capacity,¹) directly or indirectly:

(i) own, manage, operate, join, control or participate in the ownership, management, operation or control of, or work for (as an employee, consultant or independent contractor) or have any material financial

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interest in, any business competitive with Lydall in (a) any market in which the Division(s) of Lydall 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 such termination or (b) if Lydall has assigned me a specific geographic area for responsibility, within two hundred fifty (250) miles of any geographic location in which Lydall has assigned me responsibilities in the two (2) years preceding such termination;

(ii) induce or attempt to induce any person who is an employee of Lydall to terminate his or her employment with Lydall; or

(iii) induce or attempt to induce any person, business or entity which, as of the date of the termination of my employment, is a supplier of, a purchaser from , or a contracting party with Lydall to terminate any written or oral agreement, order or understanding with Lydall.

8. I further understand and agree that the remedy at law for any breach or threatened breach of my agreement not to compete contained in paragraph 7 would be inadequate and that any breach or attempted breach would result in irreparable damage to Lydall, 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 contained in paragraph 7, in addition to any and all other legal or equitable remedies which may be available, Lydall may obtain preliminary injunctive relief to remedy damage caused by such breach or threatened breach, and that Lydall shall be entitled to recover from me its costs and expenses including reasonable attorney fees incurred in remedying such breach or threatened breach.

9. Should any claim or dispute relating to this agreement arise, I agree that the claim will be settled by arbitration in the state of the Division of Lydall for which I was last working, in accordance with the Commercial Arbitration Rules of the American Arbitration Association, and judgment will be binding and may be entered in any court with jurisdiction.

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

11. In consideration of my employment, I agree to conform to the policies of Lydall. 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 Lydall or me, and will remain so unless a written agreement for a specific term is entered into and executed by me and Lydall’s CEO. No other representations or agreements have been made regarding the term or termination of my employment. I understand that no employee of Lydall other than its CEO has the authority to enter into any agreement, commitment or guarantees binding on Lydall regarding my employment and then only by a signed, written document.

12. This Agreement, which is ancillary to any other agreement I may have with Lydall, (a) is intended as the complete and exclusive statement of my agreement with Lydall with respect to its subject matter; (b) shall be binding upon my heirs, executors and administrators; (c) shall not be modified unless in writing and signed by me and Lydall; and (d) shall be governed by and construed in accordance with the law of the State of Connecticut, Lydall’s home office state.

13. Should any part of this Employee Agreement be found invalid by any court, the remainder shall be valid and enforceable in law and equity.

¹ individually; or as a member, employee or agent of any partnership; or as an officer, agent, employee, director, or investor of any other corporation or entity; or as a stockholder (except of not more than two percent (2%) of the outstanding stock of any company listed on a national securities exchange or actively traded in the over-the-counter securities market) or investor of any other corporation or entity;

Signed at                 Clifton Park, NY	on             3/24/1998
(City/State)	(Date)
Employee’s Name:             John Finley Tattersall	Lydall         Manning                 Division
(Print or Type)

By:	/s/ John Finley Tattersall	By	/s/ William J. Rankin
	(Employee Signature)		(Division President)

S.S.#                 ###-##-####                                      Witness:         /s/ Lucy Gendron

Acknowledgement of Receipt

I acknowledge receipt of a copy of this document on

                            3/27/1998

(date)

Employee’s Signature         /s/ John Finley Tattersall

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EXHIBIT B

TERMINATION, VOLUNTARY RELEASE AND WAIVER OF RIGHTS AGREEMENT

I,                     , unqualifiedly accept and agree to the relinquishment of my title, responsibilities and obligations as an employee of Lydall, 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                  , 2006 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

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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.

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

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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.)

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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.

AFFIRMATION OF RELEASOR

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

I,                     , 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,                     , 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.

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Executed this      day of             , 2006 at                     .

		NAME
STATE OF	)
	)	SS:
COUNTY OF	)

Subscribed and sworn to before me, a Notary Public in and for said County and State, this      day of             , 2006 under the pains and penalties of perjury.

, Notary Public

My Commission Expires:

County of Residence:

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EX-10.29

Exhibit 10.29

2006 INCENTIVE STOCK OPTION AGREEMENT

(Under the Lydall 2003 Stock Incentive Compensation Plan)

THIS AGREEMENT is made and entered into as of                     , by and between LYDALL, INC., a Delaware corporation, with its principal office in Manchester, Connecticut (hereinafter called the “Company”), and Optionee (hereinafter called the “Optionee”), under the provisions of the Lydall 2003 Stock Incentive Compensation Plan (hereinafter called the “Plan”).

1. GRANT OF INCENTIVE STOCK OPTION. Subject to the terms and conditions set forth herein, the Company grants to the Optionee, effective the day and year first above written (hereinafter called the “date of grant”), the following incentive stock option, exercisable during the period commencing one year from the date of grant and ending ten (10) years after the date of grant the right and incentive stock option (hereinafter called the “option”) to purchase from the Company from time to time, up to but not exceeding in the aggregate number of shares of the Common Stock of the Company to be issued upon the exercise hereof, fully paid and nonassessable, as listed in an award letter dated                      from Lydall’s President and Chief Executive Officer. The option is subject to the restriction that it be exercised as set forth in Section 4 of this Agreement, and to other terms and conditions as set forth in Section 5 of this Agreement.

2. TYPE OF OPTION. The option is an “Incentive Stock Option” meeting the requirements of such options as defined in Section 422A of the Internal Revenue Code of 1986, as amended.

3. OPTION PRICE. The purchase price of each share subject to the option shall be $            , being 100 percent of the fair market value of the shares subject to the option on the date of grant.

4. MANNER OF EXERCISE OF OPTION. The Bank of New York (“BNY”) is the administrator and executing broker of Lydall, Inc.’s Stock Incentive Compensation Plans. BNY must be used to exercise any vested stock options, including cashless and sell-to-cover transactions. BNY will provide you with a confirmation of each exercise made. BNY will collect funds for option costs and taxes related to an exercise, or issue the net proceeds in the case of a cashless exercise. To exercise an option or to ask questions, contact the BNY Customer Service Center toll-free at 1-888-805-6278. As a participant, you have unlimited Internet access to your account at https://www.bnymystock.com/lydall.

Section 16 Officers and Directors are required to pre-clear option transactions with Lydall’s General Counsel. All employees must comply with Lydall’s Policies regarding securities trades by company personnel when making trades.

5. ADDITIONAL TERMS AND CONDITIONS.

(a) Acceptance of Option. The Optionee must go to their account at www.bnymystock.com/lydall and click the “Accept Grant” button to complete the grant process. Your on-line acceptance of your granted option is deemed to be your acknowledgement and acceptance of the terms and conditions both this agreement and the 2003 Stock Incentive Compensation Plan, as posted at www.bnymystock.com/lydall. These agreements can be printed or downloaded for further review or retention as per personal choice. Please access the Bank of New York website, read the applicable agreements and accept your option grant no later than                     .

(b) Period of Option. The option shall have a term of ten (10) years from the date on which it is granted; provided that the option, or the unexercised portions thereof, shall terminate at the close of business on the ninetieth (90^th) day following the date on which the Optionee ceases to be an employee of the Company except as provided under subsection (e) of this section in the event of the death or disability of the Optionee. Notwithstanding the foregoing, the option may not be exercised after termination of Optionee’s employment if the Committee, as defined in the Plan, determines that the termination of his or her employment resulted for cause or from his or her willful acts, or failure to act, deemed detrimental to the Company.

(c) Exercise of Option and Limitations Thereon. The option shall be exercised in the manner set forth in Section 4 of this Agreement.

The option shall be exercisable subject to the following limitations:

(i) no shares may be purchased prior to 12/7/2007, until after one (1) year of continued service as an employee from the above date;

(ii) on or after 12/7/2007, 25 percent of said aggregate number of shares may be purchased;

(iii) on or after 12/7/2008, 50 percent of said aggregate number of shares may be purchased;

(iv) on or after 12/7/2009, 75 percent of said aggregate number of shares may be purchased;

(v) on or after 12/7/2010, 100 percent of said aggregate number of shares may be purchased;

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(vi) no shares may be purchased pursuant to such option after 12/6/2016.

Any obligation of the Company to issue the shares as to which the option is being exercised shall be conditioned upon the Company’s ability at nominal expense to issue such shares in compliance with all applicable statutes, rules or regulations of any governmental authority. The Company may secure from the Optionee any assurances or agreements which the Committee, in its sole discretion, shall deem necessary or advisable in order that the issuance of such shares shall comply with any such statutes, rules or regulations.

The Company shall not be required to deliver any certificate upon the exercise of the option until the Company has been furnished with such representation or opinion or other document as it may reasonably deem necessary to insure compliance with any rule or regulation of the New York Stock Exchange, or the Securities and Exchange Commission, or any law, rule, or regulation of any other governmental authority having jurisdiction over the Company or the shares to be issued under the Plan.

If at any time the Company’s Board of Directors shall determine, in its discretion, that the listing, registration or qualification of the shares subject to the option upon any securities exchange or under any state or federal law, or that the consent or approval of any government regulatory body, is necessary or desirable as a condition of, or in connection with, the granting of such option or the issue or purchase of shares thereunder, such option may not be exercisable in whole or in part unless such listing, registration, qualification, consent, or approval shall have been effected or obtained free of any conditions not acceptable to the Board of Directors.

(d) Nontransferability. The option shall not be transferable by the Optionee otherwise than by will or by the laws of descent and distribution, and the option shall be exercisable, during his or her lifetime, only by him or her.

(e) Death or Disability of Optionee. In the event the Optionee dies while in the employ of the Company or a subsidiary, his or her option may be exercised within the period of one (1) year succeeding his or her death, but in no event later than ten (10) years from the date the option was granted, by the person or persons designated in the Optionee’s will for that purpose to the extent that the Optionee would have been entitled to exercise his or her option at the time of his or her death. If no such person or persons are so designated or if the Optionee dies intestate, then his or her option may be exercised within said period to the same extent by the legal representative or representatives of the Optionee’s estate.

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Similarly, in the event that the Optionee is disabled while in the employ of the Company or a subsidiary, his or her option may be exercised within the period of one (1) year succeeding such disability either by the Optionee or by his or her representative, as the case may be, to the extent that the Optionee would have been entitled to exercise his or her option at the time of such disability.

(f) Stockholder Rights. The Optionee shall not be entitled to any rights as a stockholder with respect to any shares subject to the option prior to the date of issuance to him or her of a stock certificate representing such shares. The Company shall not be required to deliver any certificate upon the exercise of the option until the Company has been furnished with such representation or opinion or other document as it may reasonably deem necessary to insure compliance with any rule or regulation of the New York Stock Exchange, or the Securities and Exchange Commission, or any law, rule, or regulation of any other governmental authority having jurisdiction over the Company or the shares to be issued under the Plan.

(g) Notification of Disqualifying Disposition. The Optionee shall promptly notify the Company in the event of a disqualifying disposition (within the meaning of the Internal Revenue Code) of any shares acquired pursuant to the option, and provide the Company with all relevant information related thereto, including without limitation the date of the disqualifying disposition, the number of shares disposed of, and the value of the consideration received.

6. TERMINATION OF OPTION. If the Optionee shall no longer be a full-time salaried employee of the Company or a subsidiary, his or her employment being terminated for any reason whatsoever other than death or disability, any unexercised portions of the option shall terminate at the close of business on the ninetieth (90th) day following the date on which the Optionee ceases to be employed by the Company or a subsidiary, or upon the expiration of the term of the option, whichever shall first occur. In no event may the Optionee exercise an option after his or her termination of employment by the Company or a subsidiary except to the extent the Optionee would have been entitled to exercise his or her option at the time of the Optionee’s termination of employment, provided, however, that if Optionee’s termination of employment results for cause or from willful acts, or failure to act, deemed detrimental to the Company, the option shall terminate upon termination of employment.

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7. COMPLIANCE WITH LAWS. Notwithstanding any of the provisions hereof, the Optionee agrees for him or herself and his or her legal representatives, legatees and distributees that the option shall not be exercisable by him or her or them, and that the Company shall not be obligated to issue any shares hereunder, if the exercise of said option or the issuance of such shares shall constitute a violation by the option holder or the Company of any provision of any law or regulation or any governmental authority.

8. NOTICES. Every notice or other communication relating to this Agreement shall be in writing, and shall be mailed or delivered to the party for whom it is intended at such address as may from time to time be designated by such party in a notice mailed or delivered to the other party as herein provided; provided, that, unless and until some other address be so designated, all notices or communications to the Company shall be mailed to or delivered to its Vice President, General Counsel and Secretary at One Colonial Road, P. O. Box 151, Manchester, Connecticut, 06045-0151, and all notices by the Company to the Optionee may be given to the Optionee personally or may be mailed to him or her at the last address designated for the Optionee on the employment records of the Company.

9. ADMINISTRATION AND INTERPRETATION. The administration of this Agreement shall be subject to such rules and regulations as the Committee, as defined in the Plan, deems necessary or advisable for the administration of the Plan. The determination or the interpretation and construction of any provision of this Agreement by the Committee shall be final and conclusive upon all concerned, unless otherwise determined by the Board of Directors of the Company. The Agreement shall at all times be interpreted and applied in a manner consistent with the provisions of the Plan, and in the event of any inconsistency between the terms of this Agreement and the terms of the Plan, the terms of the Plan shall control, the terms of the Plan being incorporated herein by reference.

10. EFFECT OF OTHER AGREEMENTS. Notwithstanding any of the provisions hereof, this option shall be subject to the terms of any agreement or instrument contractually binding upon the Company and affecting the terms of this option which is entered into before the date of grant.

IN WITNESS WHEREOF, LYDALL, INC. has caused these presents to be executed in its corporate name and its corporate seal to be hereunto affixed, and the Optionee has signed on his or her own behalf as of the day and year first above written.

LYDALL, INC.
By:	David Freeman
	President & Chief Executive officer

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EX-10.30

Exhibit 10.30

2006 RESTRICTED STOCK AGREEMENT

(Under the Lydall 2003 Stock Incentive Compensation Plan)

THIS AGREEMENT, made and entered into as of the 7^th day of December, 2006, by and between Lydall, Inc., a Delaware corporation, with its principal office in Manchester, Connecticut (the "Corporation"), and Participant;

WITNESSETH:

WHEREAS, it has been determined that the Participant is an Eligible Person under the Corporation's 2003 Stock Incentive Compensation Plan (the "Plan"); and

WHEREAS, effective December 7, 2006, the Corporation desires to grant a Restricted Stock Award to the Participant pursuant to the Plan and subject to the terms and conditions set forth in this Agreement;

NOW THEREFORE, in consideration of the foregoing and of the mutual covenants and agreements herein contained, the parties agree as follows:

1. Restricted Stock Award.

(a) Subject to the terms and conditions of this Agreement, the number of shares of the Common Stock of the Corporation (the "Restricted Shares") listed in the Award Letter from the President and Chief Executive Officer to the Participant shall be transferred to the Participant’s custodial account as additional compensation for services rendered to the Corporation or one of its Subsidiaries. The Restricted Shares are subject to forfeiture during a specified time period, as more particularly described in Sections 2 and 4 of this Agreement.

(b) In order for the transfer of Restricted Shares to occur, the Participant must go to www.bnymystock.com/lydall and click the “Accept Grant” button (in accordance with Section 4(e) hereof). Promptly thereafter, the Restricted Shares shall be issued to and held in book entry form for the Participant by the Bank of New York (the "Custodian") until the end of the applicable Restriction Period described in Section 2. The shares issued under this Section 2, the ownership of the Restricted Shares (and any Retained Distributions), and the enjoyment of all rights of a shareholder appurtenant thereto, are subject to the restrictions, terms and conditions provided in the Plan and in this Agreement.

(c) Effective upon the later of the date of signifying acceptance by clicking the “Accept Grant” button or of delivery to the Custodian via a certificate or book entry form the Restricted Shares registered in the Participant's name, the Participant will be a holder of record of the Restricted Shares and will have, subject to the terms and conditions of this Agreement, all rights of a shareholder with respect to such shares including the right to vote such shares at any meeting of shareholders of the Corporation at which such shares are entitled to vote and the right to receive all distributions (including regular cash dividends and other cash equivalent distributions) of any kind made or declared with respect to such shares. As provided under the Plan, the Corporation will retain custody of all such distributions as “Retained Distributions” until the Restriction Period shall have expired under Section 2 hereof. If any such Retained Distributions are paid in the form of Common Stock, any such shares will be delivered to and held by the Custodian and will also be considered "Restricted Shares".

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2. Lapse of Restrictions.

(a) All restrictions set forth in section 4 below will lapse in their entirety with respect to twenty-five percent (25%) of the Restricted Shares on each of the following dates:

December 7, 2007, December 7, 2008, December 7, 2009 and December 7, 2010

The period during which the Restricted Shares are subject to the restrictions set forth in Section 4 is sometimes hereinafter referred to as the “Restriction Period.”

(b) As soon as reasonably practicable after the end of the Restriction Period, the Custodian will deliver to the Participant either the certificate, or electronically via book entry transferred to a personal account, Restricted Shares free of further restrictions; provided, however, that the Custodian shall not issue such shares to the Participant until the Participant has either (i) paid, or (ii) made provisions satisfactory to the Committee for the payment of, all applicable tax withholding obligations.

(c) The Bank of New York (“BNY”) is the administrator and executing broker of Lydall, Inc.’s Stock Incentive Compensation Plans. BNY must be used by the participant to receive the shares after all restrictions have lapsed. BNY will collect funds for the payment of all applicable costs and taxes related to a transfer. To effect a transfer or to ask questions, contact the BNY Customer Service Center toll-free at 1-888-805-6278. As a participant, you have unlimited internet access to your account at https:www.bnymystock.com/Lydall.

(d) If the Participant's employment with the Corporation or a Subsidiary terminates during the Restriction Period because of Death or Disability, effective on the date of that event all restrictions set forth in Section 4 will lapse in their entirety with respect to all of the then Restricted Shares and a certificate for the Restricted Shares will be delivered in accordance with section 2(b).

3. Taxation

(a) The Participant recognizes and agrees that there may be certain tax issues that impact Participant arising from this Restricted Stock Award and Participant is solely responsible for payment of said taxes. The Corporation expressly provides no tax advice to the Participant and recommends Participant seek personal tax advice.

(b) In general, the Participant will have taxable income in each year during which a portion of the award becomes unrestricted. The amount of the taxable income for each year will equal the numbers of shares for which a restriction lapses multiplied by the closing price of Lydall’s Common Stock on the applicable dates set forth in Section 2 (a). This amount will be included in Participants taxable income shown on Form W-2 for that year and the applicable taxes associated with this restriction lapsing must be paid to the Company prior to the transfer of the shares to the Participant and generally no later than the payroll immediately subsequent to the lapsing of the restriction.

(c) Section 83(b) of the Internal Revenue Code permits Participants to recognize income in the year in which the Restricted Shares are granted, rather than in the subsequent years in which they vest. This election generally must be filed with the Internal Revenue Service within 30 days of the date of this agreement. You should discuss this option with your tax advisor.

(d) Upon lapse of the restriction for each portion of the award, the shares for which the restriction has lapsed will become yours and will be taxable income to you as outlined above. As a result, you must pay withholding taxes to the Corporation at the time each restriction lapses. There are options available to you regarding payment of the taxes to the Corporation. Unless the Participant notifies the Corporation in writing to the contrary, the default option for payment of taxes will be

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(e) outlined below, except for Section 16 Officers. The options available are as outlined in (e) through (h) below.

(e) Participant’s tax liability can be satisfied through the delivery to the Corporation by The Bank of New York of shares of Lydall stock in an amount equal to the tax liability outlined in (b). The number of shares to be delivered to the Corporation will be rounded up to the nearest whole share and in no case shall partial shares be transferred. The shares delivered to the Corporation for satisfaction of Participant tax liability will result in a reduction in the number of shares provided to the Participant as a result of the lapsing of restrictions subsequent to the payment of applicable taxes. (This option may not be available to Section 16 Officers or to those with inside information at the time of sale).

(f) Participant tax liability can be satisfied by Participant remitting payment to the Corporation via an authorized ACH debit to Participant’s bank account on the date of the lapsing of restriction. This option must be chosen through the Bank of New York website by December 1 of each year that a restriction lapsing occurs as outlined in Section 2 (a). If this option is chosen, but sufficient funds are not available on the date due, the Corporation will withhold taxes due from the Participant’s next paycheck and any tax liability not covered by the paycheck will result in restricted shares sufficient to cover the shortfall in liability being forfeited by the Participant to the Corporation.

(g) Participant tax liability can be satisfied by Participant electing to withhold taxes due from the Participant’s first paycheck subsequent to a restriction lapsing. This option must be communicated in writing to the Corporation by December 1 of each year that a restriction lapsing occurs as outlined in Section 2 (a). If this option is chosen, but sufficient funds are not available from the Participant’s paycheck, any tax liability not covered by the paycheck will result in restricted shares sufficient to cover the shortfall in liability being forfeited by the Participant to the Corporation.

(h) Participants of a natural citizenship other than the United States of America will be subject to and have their tax liability calculated in accordance with the applicable statutory laws of their country which may result in treatment other than what is outlined in (b) through (g) above.

(i) In each event, the Custodian will take action promptly after each date as outlined in Section 2 (a). Section 16 Officers and those with inside information are subject to restrictions which may preclude them from satisfying their tax liability under (e) above. The determination of the applicability of these restrictions and alternative mechanisms for the satisfaction of tax liability of officers of the Corporation, as well as the impact of any future interpretations of Section 16 Officer restrictions and tax payment mechanisms will be the sole responsibility of the General Counsel of the Corporation.

4. Restrictions.

(a) Except as provided in Section 2(d) and 4(b), if the Participant's employment with the Corporation or a Subsidiary terminates during the Restriction Period for any other reason, then effective upon the date of termination all then Restricted Shares shall automatically be forfeited to the Corporation. Employment will not be deemed to have terminated for this purpose by reason of a leave of absence approved by the Committee.

(b) If the Participant retires from active service with the Corporation or a Subsidiary under the terms of the Lydall, Inc. Defined Benefit Pension Plan during the Restriction Period, effective upon retirement the then Restricted Shares will automatically be forfeited to the Corporation; except that, the Committee may, in its sole discretion, allow all restrictions set forth in this Section 4 to lapse in their entirety with respect to the then Restricted Shares. If the restrictions are allowed to lapse, the Restricted Shares will be delivered to the Participant in accordance with section 2(b).

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(c) None of the Restricted Shares, nor the Participant's interest in any of the Restricted Shares, may be encumbered, sold, assigned, transferred, pledged or otherwise disposed of at any time during the Restriction Period. In the event of any such action, all then Restricted Shares (and all Retained Distributions with respect thereto) shall automatically be forfeited to the Corporation effective upon the date of such event.

(d) If the Participant at any time forfeits Restricted Shares pursuant to this Agreement, the Restricted Shares will be delivered by the Custodian to the Corporation. All of the Participant's rights to and interest in the Restricted Shares shall terminate upon forfeiture without payment of consideration.

(e) If Restricted Shares are forfeited under this Agreement, the Corporation shall direct the Transfer Agent and Registrar of the Corporation's Common Stock to make appropriate entries upon their records showing the cancellation of said Restricted Shares and to return the shares represented thereby to the Corporation. Your acceptance of this Award conveys to the Custodian the authority to take any action necessary to effect the transfer of shares to the Corporation and the Participant.

(f) The Committee shall make all determinations in connection with this Agreement, including determinations as to whether an event has occurred resulting in the forfeiture of or lapse of restrictions on Restricted Shares and all such determinations of the Committee shall be final and conclusive.

5. Appointment Of Agent. By acceptance of this Agreement, the Participant irrevocably nominates, constitutes and appoints the Custodian as his or her agent and attorney-in-fact for purposes of surrendering or transferring the Restricted Shares to the Corporation upon any forfeiture required or authorized by this Agreement. This power is intended as a power coupled with an interest and shall survive the Participant's death. In addition, it is intended as a durable power and shall survive the Participant's Disability.

6. No Employment Rights. No provision of this Agreement shall:

(a) confer or be deemed to confer upon the Participant any right to continue in the employ of the Corporation or any Subsidiary or shall in any way affect the right of the Corporation or any Subsidiary to dismiss or otherwise terminate the Participant's employment at any time for any reason with or without cause, or

(b) be construed to impose upon the Corporation or any Subsidiary any liability for any forfeiture of Restricted Shares which may result under this Agreement if the Participant's employment is so terminated, or

(c) affect the Corporation's right to terminate or modify any contractual relationship with a Participant who is not an employee of the Corporation or a Subsidiary.

7. No Liability For Business Acts Or Omissions. The Participant recognizes and agrees that the Board of Directors or the officers, agents or employees of the Corporation, including the Custodian, in their conduct of the business and affairs of the Corporation, may cause the Corporation to act, or to omit to act, in a manner that may, directly or indirectly, prevent the Restricted Shares from vesting under this Agreement. No provision of this Agreement shall be interpreted or construed to impose any liability upon the Corporation, the Board of Directors or any officer, agent or employee of the Corporation, including the Custodian, for any forfeiture of Restricted Shares that may result, directly or indirectly, from any such action or omission.

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8. Changes in Capitalization.

(a) This Agreement and the issuance of the Restricted Shares shall not affect in any way the right or power of the Corporation or its shareholders to make or authorize any or all adjustments, recapitalizations, reorganizations or other changes in the Corporation's capital structure or its business, or any merger or consolidation of the Corporation, or any issue of bonds, debentures, preferred or prior preference stocks ahead of or affecting the Common Stock or the rights thereof, or the dissolution or liquidation of the Corporation, or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceedings, whether of a similar character or otherwise.

(b) In the event of recapitalization, stock split, stock dividend, divisive reorganization or other change in capitalization affecting the Corporation's shares of Common Stock, an appropriate adjustment will be made in respect of the Restricted Shares. Any new or additional or different shares or securities issued as the result of such an adjustment will be delivered to and held by the Custodian and will be deemed included within the term "Restricted Shares".

9. Capitalized Terms. All capitalized terms not defined herein shall have the meaning ascribed to them in the Plan.

10. Interpretation. This Agreement shall at all times be interpreted, administered and applied in a manner consistent with the provisions of the Plan. In the event of any inconsistency between the terms of this Agreement and the terms of the Plan, the terms of the Plan shall control and the Plan is incorporated herein by reference.

11. Amendment; Modification; Waiver. No provision of this Agreement may be amended, modified or waived unless such amendment, modification or waiver shall be authorized by the Committee and shall be agreed to in writing by the Participant.

12. Complete Agreement. This Agreement contains the entire Agreement of the parties relating to the subject matter of this Agreement and supersedes any prior agreements or understandings with respect thereto.

13. Agreement Binding. This Agreement shall be binding upon and inure to the benefit of the Corporation, its successors and assigns and the Participant, his or her heirs, devisees and legal representatives.

14. Legal Representative. In the event of the Participant's death or a judicial determination of his or her incompetence, reference in this Agreement to the Participant shall be deemed to refer to his or her legal representative, heirs or devisees, as the case may be.

15. Business Day. If any event provided for in this Agreement is scheduled to take place on a day on which the Corporation's corporate offices are not open for business, such event shall take place on the next succeeding day on which the Corporation's corporate offices are open for business.

16. Titles. The titles to sections or paragraphs of this Agreement are intended solely for convenience and no provision of this Agreement is to be construed by reference to the title of any section or paragraph.

17. Notices.

(a) Any notice to the Corporation pursuant to any provision of this Agreement will be deemed to have been delivered when delivered in person to the Custodian or when deposited in the United States mail, addressed to the Custodian at the Corporation's corporate offices, or such other address as the Corporation may from time to time designate in writing.

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(b) Any notice to the Participant pursuant to any provision of this Agreement will be deemed to have been delivered when delivered to the Participant in person or when deposited in the United States mail, addressed to the Participant at his or her address on the shareholder records of the Corporation or such other address as he or she may from time to time designate in writing.

IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as of the date first written above.

Lydall, Inc.
By:
	David Freeman
	President and Chief Executive Officer

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EX-10.31

Exhibit 10.31

2007 PERFORMANCE BONUS PROGRAM

This document sets forth the 2007 Performance Bonus Program applicable to domestic Salaried Employees and certain foreign employees (“Employee”) of Lydall, Inc. and its subsidiaries as approved by the CEO of Lydall and the Compensation Committee of Lydall’s Board of Directors (BOD), and is subject to audit by the Finance Department. Lydall’s Board of Directors will establish the Lydall Consolidated Earnings per Share (EPS) threshold on an annual basis.

1. Bonus Percentage is the percentage of your Base Salary as determined on January 1^st of each Program Year or date of hire for new entrants. Changes made to a Bonus Compensation Percentage will only be effective on January 1^st of a Program Year.

2. Bonus Allocation of your Bonus Percentage is as follows:

Plan Factors	Bonus Allocation Percentage for those with Milestones		Bonus Allocation Percentage for those without Milestones
Lydall Consolidated	30	%	30	%
Business Unit	45	%	70	%
Individual Milestones	25	%
Total	100	%	100	%

3. For CHQ employees, Lydall Consolidated is the Business Unit.

4. Milestones are required to be set as part of this program by managers who directly report to the Presidents. Managers hired before July 1 of the current plan year must set milestones for the balance of the year.

5. Base Salary is your regular, overtime, and double time pay earned as an eligible participant in 2007, as indicated on your final paycheck in the current Program Year, plus any separately recorded holiday and vacation pay. Pay earned as an hourly employee will not be included as part of this Program. Base Salary will be reduced by earnings attributed to any leave of absence.

6. Bonus Program Qualifier Only when the company achieves the Lydall Consolidated Earnings per Share (EPS) threshold will program participants be qualified for any bonus. Once the company achieves the Lydall Consolidated Earnings per Share (EPS) threshold, participants earn a bonus equal to 30% of their Bonus Compensation Percentage providing the Business Unit has also achieved its individual Threshold (their 2007 Business Plan Operating Income). Business Units that have not achieved their Business Unit Threshold will not earn the 30% bonus. However, such Business Units may be eligible for a discretionary bonus as discussed in Section 7. Amounts forfeited will be added to the bonus pool described in Section 7.

7. Performance Exceeds Threshold If the EPS Threshold is exceeded, a portion of the excess earnings will be allocated to a bonus pool. This bonus pool will be distributed based on the discretion of the Chief Executive Officer and Chief Financial Officer. Factors considered in determining the distribution of the bonus pool may include the Business Unit’s Operating Income performance compared to Plan, accomplishment of strategic objectives, LLSS benefits derived during the year, and working capital performance.

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8. Business Units

• Corporate (CHQ)

• North American Automotive

• European Automotive

• Rochester/St. Rivalain

• Ossipee

• Green Island

• Transport

• Charter Medical

9. Thresholds are communicated by the respective Business Unit.

10. Payment Date. The bonus will be paid within 30 days following the date on which Lydall’s public auditors have completed their year-end audit.

11. Active Employment Condition. Bonus compensation is only payable to the Employee if they remain actively employed by a Lydall company through December 31^st of the applicable year-end. If the Employee is unable to carry out responsibilities through the end of the applicable year due to death or disability, a pro-rated bonus will be paid if the business has earned a bonus.

12. Termination. Any bonus earned under this program may be eliminated by Lydall, if at any time the Employee is terminated by Lydall for “cause”. “Cause” is defined as acts of dishonesty or fraud; conviction of a felony or crime involving moral turpitude; willful material breach of the employee’s duties and responsibilities; habitual neglect or insubordination; or breach of the Non-competition and Confidentiality Agreement.

13. No Guarantee. Participation in the program provides no guarantee that a bonus under the program will be paid. No bonus will be paid to the extent that it would cause the Company to violate any financial obligations it may have under any agreements.

14. Modifications, Amendments, or Termination of the Program. The Chief Executive Officer and the Chief Financial Officer, have the sole authority to modify, amend, or terminate the provisions of this Program at any time, subject to Board of Director approval.

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EX-21.1

Exhibit 21.1

LIST OF SUBSIDIARIES AS OF DECEMBER 31, 2006

I. Parent Company

Lydall, Inc.

II. First tier

Lydall Thermal/Acoustical, Inc.

Lydall Filtration/Separation, Inc.

Lydall FSC, Limited

Lydall Transport, Ltd.

Lydall Finance, Inc.

Lydall International, Inc.

Lydall France S.A.S.

Lydall Deutschland Holding GmbH

III. Second tier

Charter Medical, Ltd.

Lydall Thermal/Acoustical Sales, LLC

Lydall Industrial Thermal Solutions, Inc.

Trident II, Inc.

Lydall Distribution Services, Inc.

Lydall Express, LLC

Lydall Filtration/Separation S.A.S.

Lydall Thermique/Acoustique S.A.S.

Lydall Gerhardi GmbH & Co. KG

Lydall Gerhardi Verwaltungs GmbH

IV. Third tier

Lydall Industrial Thermal Sales/Service, LLC

V. Fourth tier

Affinity Industries Asia LLC

EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (Nos. 33-93768, 333-08886 and 333-109500) of Lydall, Inc. of our report dated March 13, 2007 relating to the financial statements, financial statement schedules, management’s assessment of the effectiveness of internal control over financial reporting and the effectiveness of internal control over financial reporting, which appears in this Form 10-K.

/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP

Hartford, Connecticut

March 13, 2007

EX-24.1

Exhibit 24.1

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned directors and officers of Lydall, Inc. (the “Corporation”), does hereby constitute and appoint David Freeman and Thomas P. Smith, and each of them singly, as his agent and attorney-in-fact to do any and all things and acts in his name and in the capacities indicated below and to execute any and all instruments for him and in his name in the capacities indicated below which said David Freeman and Thomas P. Smith, or either of them, may deem necessary or advisable to enable the Corporation to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with the preparation and filing of the Corporation’s Annual Report on Form 10-K (the “Annual Report”) respecting the fiscal year ended December 31, 2006, including specifically, but not limited to, power and authority to sign for him in his name in the capacities indicated below the Annual Report and any and all amendments thereto, and each of the undersigned does hereby ratify and confirm all that said David Freeman and Thomas P. Smith, or either of them, shall do or cause to be done by virtue hereof.

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

/S/ W. LESLIE DUFFY W. Leslie Duffy	Chairman of the Board and Director	March 6, 2007
/S/ DAVID FREEMAN David Freeman	President, Chief Executive Officer and Director	March 6, 2007
/S/ LEE A. ASSEO Lee A. Asseo	Director	March 6, 2007
/S/ KATHLEEN BURDETT Kathleen Burdett	Director	March 6, 2007
/S/ MATTHEW T. FARRELL Matthew T. Farrell	Director	March 6, 2007
/S/ WILLIAM D. GURLEY William D. Gurley	Director	March 6, 2007
/S/ SUZANNE HAMMETT Suzanne Hammett	Director	March 6, 2007
/S/ S. CARL SODERSTROM, Jr. S. Carl Soderstrom, Jr.	Director	March 6, 2007

EX-31.1

Exhibit 31.1

CERTIFICATION

I, David Freeman, certify that:

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

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

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

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

March 13, 2007	/s/ David Freeman
	David Freeman
	President and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Thomas P. Smith, certify that:

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

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

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

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

March 13, 2007	/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 Annual Report of Lydall, Inc. (the “Company”) on Form 10-K for the period ending December 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned officers of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to our knowledge:

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

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

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

March 13, 2007	/s/ David Freeman
	David Freeman
	President and Chief Executive Officer

March 13, 2007	/s/ Thomas P. Smith
	Thomas P. Smith
	Vice President, Chief Financial Officer and Treasurer