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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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|x | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ---------------------------------------------------------------------------------------



for the Quarterly Period Ended March 31, 2005



or



| ̈ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ----------------------------------------------------------------------------------------



for the Transition Period from  to



Commission File Number 001-32498



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Xerium Technologies, Inc.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|DELAWARE                                                       |  | 42-1558674                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)



One Technology Drive

Westborough Technology Park

Westborough, Massachusetts 01581

(Address of principal executive offices)



(508) 616-9468

Registrants telephone number (including area code)



Not Applicable

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



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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 ̈No  x



Applicable Only to Corporate Issuers



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



The number of shares of the registrants common stock, $0.01 par value,
outstanding as of June 17, 2005 was 43,725,093.



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##### Table of Contents

TABLE OF CONTENTS



|                              |  |                                                                                       |  |        
|----------------------------- |  | ------------------------------------------------------------------------------------- |  | -------
|                              |  |                                                                                       |  | Page   
|Part I. Financial Information |  |                                                                                      
|                              |  |                                                                                      
|Item 1.                       |  | Financial Statements                                                                  |  | 3 - 15 
|                              |  |                                                                                      
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results Of Operations |  | 16 - 28
|                              |  |                                                                                      
|Item 3.                       |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 29     
|                              |  |                                                                                      
|Item 4.                       |  | Controls and Procedures                                                               |  | 30     
|                              | 
|Part II. Other Information    |  |                                                                                      
|                              |  |                                                                                      
|Item 1.                       |  | Legal Proceedings                                                                     |  | 31     
|                              |  |                                                                                      
|Item 2.                       |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 31 - 33
|                              |  |                                                                                      
|Item 3.                       |  | Defaults Upon Senior Securities                                                       |  | 33     
|                              |  |                                                                                      
|Item 4.                       |  | Submission of Matters to a Vote of Security Holders                                   |  | 33     
|                              |  |                                                                                      
|Item 5.                       |  | Other Information                                                                     |  | 33     
|                              |  |                                                                                      
|Item 6.                       |  | Exhibits                                                                              |  | 33     



2



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##### Table of Contents

PART I. FINANCIAL INFORMATION



ITEM 1. FINANCIAL STATEMENTS



Xerium Technologies, Inc.

Consolidated Balance Sheets(Unaudited)

(dollars in thousands)



|                                                                                                                                      |  |                |           |   |                   |   |           |  
|------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | --------- | - | ----------------- | - | --------- | -
|                                                                                                                                      |  | (Unaudited)    |          
|                                                                                                                                      |  | March 31, 2005 |           |   | December 31, 2004 |  
|ASSETS                                                                                                                                |  |                |           |   |                   |   |           |  
|Current assets:                                                                                                                       |  |                |           |   |                   |   |           |  
|Cash and cash equivalents                                                                                                             |  | $              | 39,771    |   |                   | $ | 24,002    |  
|Accounts receivable (net of allowance for doubtful accounts of $1,721 at March 31, 2005 and $2,034 at December 31, 2004)              |  |                | 112,074   |   |                   |   | 113,283   |  
|Inventories                                                                                                                           |  |                | 108,755   |   |                   |   | 110,931   |  
|Prepaid expenses                                                                                                                      |  |                | 7,925     |   |                   |   | 4,131     |  
|Other current assets                                                                                                                  |  |                | 6,106     |   |                   |   | 9,717     |  
|                                                                                                                                      |  |                |           |   |                   |   |           |  
|Total current assets                                                                                                                  |  |                | 274,631   |   |                   |   | 262,064   |  
|Property and equipment, net                                                                                                           |  |                | 378,997   |   |                   |   | 393,621   |  
|Goodwill                                                                                                                              |  |                | 311,984   |   |                   |   | 320,297   |  
|Intangible assets and deferred financing costs, net                                                                                   |  |                | 29,344    |   |                   |   | 30,804    |  
|Other assets                                                                                                                          |  |                | 15,219    |   |                   |   | 11,166    |  
|                                                                                                                                      |  |                |           |   |                   |   |           |  
|Total assets                                                                                                                          |  | $              | 1,010,175 |   |                   | $ | 1,017,952 |  
|                                                                                                                                      |  |                |           |   |                   |   |           |  
|LIABILITIES AND STOCKHOLDERS DEFICIT                                                                                                 |  |                |           |   |                   |   |           |  
|Current liabilities:                                                                                                                  |  |                |           |   |                   |   |           |  
|Notes payable                                                                                                                         |  | $              | 15,589    |   |                   | $ | 11,014    |  
|Accounts payable                                                                                                                      |  |                | 35,563    |   |                   |   | 39,217    |  
|Accrued expenses                                                                                                                      |  |                | 77,773    |   |                   |   | 72,720    |  
|Current maturities of long-term debt                                                                                                  |  |                | 43,675    |   |                   |   | 45,703    |  
|                                                                                                                                      |  |                |           |   |                   |   |           |  
|Total current liabilities                                                                                                             |  |                | 172,600   |   |                   |   | 168,654   |  
|Long-term debt, net of current maturities                                                                                             |  |                | 752,825   |   |                   |   | 771,132   |  
|Deferred taxes                                                                                                                        |  |                | 44,439    |   |                   |   | 42,050    |  
|Pension, other postretirement and postemployment obligations                                                                          |  |                | 90,567    |   |                   |   | 90,601    |  
|Other liabilities                                                                                                                     |  |                | 612       |   |                   |   | 611       |  
|Commitments and contingencies                                                                                                         |  |                |          |   |                   |   |          |  
|Stockholders deficit                                                                                                                 |  |                |           |   |                   |   |           |  
|Common stock, $.01 par value, 150,000,000 shares authorized; 31,013,482 shares outstanding as of March 31, 2005 and December 31,
2004 |  |                | 310       |   |                   |   | 310       |  
|Paid-in capital                                                                                                                       |  |                | 7,270     |   |                   |   | 6,687     |  
|Accumulated deficit                                                                                                                   |  |                | (38,763   | ) |                   |   | (47,030   | )
|Accumulated other comprehensive loss                                                                                                  |  |                | (19,685   | ) |                   |   | (15,063   | )
|                                                                                                                                      |  |                |           |   |                   |   |           |  
|Total stockholders deficit                                                                                                           |  |                | (50,868   | ) |                   |   | (55,096   | )
|                                                                                                                                      |  |                |           |   |                   |   |           |  
|Total liabilities and stockholders deficit                                                                                           |  | $              | 1,010,175 |   |                   | $ | 1,017,952 |  
|                                                                                                                                      |  |                |           |   |                   |   |           |  



See accompanying notes.



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Xerium Technologies, Inc.

Consolidated Statements of Income  (Unaudited)

(dollars in thousands,
except per share data)



|                                               |  |                              |            |   |      |   |            |  
|---------------------------------------------- |  | ---------------------------- | ---------- | - | ---- | - | ---------- | -
|                                               |  | Three Months Ended March 31, |           
|                                               |  | 2005                         |            |   | 2004 |  
|Net sales                                      |  | $                            | 153,034    |   |      | $ | 146,802    |  
|Costs and expenses:                            |  |                              |            |   |      |   |            |  
|Cost of products sold                          |  |                              | 81,686     |   |      |   | 74,890     |  
|Selling                                        |  |                              | 18,861     |   |      |   | 18,337     |  
|General and administrative                     |  |                              | 18,980     |   |      |   | 20,693     |  
|Restructuring                                  |  |                              | 5,176      |   |      |   | 1,082      |  
|Research and development                       |  |                              | 2,327      |   |      |   | 2,185      |  
|                                               |  |                              |            |   |      |   |            |  
|                                               |  |                              | 127,030    |   |      |   | 117,187    |  
|                                               |  |                              |            |   |      |   |            |  
|Income from operations                         |  |                              | 26,004     |   |      |   | 29,615     |  
|Interest expense                               |  |                              | (15,611    | ) |      |   | (16,600    | )
|Interest income                                |  |                              | 151        |   |      |   | 103        |  
|Foreign exchange gain                          |  |                              | 3,378      |   |      |   | 1,700      |  
|                                               |  |                              |            |   |      |   |            |  
|Income before provision for income taxes       |  |                              | 13,922     |   |      |   | 14,818     |  
|Provision for income taxes                     |  |                              | 5,655      |   |      |   | 6,426      |  
|                                               |  |                              |            |   |      |   |            |  
|Net income                                     |  | $                            | 8,267      |   |      | $ | 8,392      |  
|                                               |  |                              |            |   |      |   |            |  
|Net income per share:                          |  |                              |            |   |      |   |            |  
|Basic                                          |  | $                            | .27        |   |      | $ | .27        |  
|                                               |  |                              |            |   |      |   |            |  
|Diluted                                        |  | $                            | .27        |   |      | $ | .27        |  
|                                               |  |                              |            |   |      |   |            |  
|Shares used in computing net income per share: |  |                              |            |   |      |   |            |  
|Basic                                          |  |                              | 31,013,482 |   |      |   | 31,013,482 |  
|                                               |  |                              |            |   |      |   |            |  
|Diluted                                        |  |                              | 31,013,482 |   |      |   | 31,013,482 |  
|                                               |  |                              |            |   |      |   |            |  



See accompanying notes.



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Xerium Technologies, Inc.

Consolidated Statements of Cash Flows - (Unaudited)

(dollars in thousands)



|                                                                                                  |  |                             |        |   |      |   |        |  
|------------------------------------------------------------------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------ | -
|                                                                                                  |  | Three Months EndedMarch 31, |       
|                                                                                                  |  | 2005                        |        |   | 2004 |  
|Operating activities                                                                              |  |                             |        |   |      |   |        |  
|Net income                                                                                        |  | $                           | 8,267  |   |      | $ | 8,392  |  
|Adjustments to reconcile net income to net cash provided by operating activities:                 |  |                             |        |   |      |   |        |  
|Depreciation                                                                                      |  |                             | 10,713 |   |      |   | 11,091 |  
|Amortization of intangibles                                                                       |  |                             | 1,043  |   |      |   | 1,043  |  
|Deferred financing cost amortization                                                              |  |                             | 246    |   |      |   | 245    |  
|Unrealized foreign exchange gain on revaluation of debt                                           |  |                             | (3,771 | ) |      |   | (1,998 | )
|Deferred taxes                                                                                    |  |                             | 999    |   |      |   | 3,608  |  
|Deferred interest                                                                                 |  |                             | 528    |   |      |   | 455    |  
|Change in assets and liabilities net of effect of acquired businesses which provided (used) cash: |  |                             |        |   |      |   |        |  
|Accounts receivable                                                                               |  |                             | (1,403 | ) |      |   | (3,665 | )
|Inventories                                                                                       |  |                             | (527   | ) |      |   | (3,193 | )
|Prepaid expenses                                                                                  |  |                             | (3,941 | ) |      |   | (4,714 | )
|Other current assets                                                                              |  |                             | 5      |   |      |   | 200    |  
|Accounts payable and accrued expenses                                                             |  |                             | 3,835  |   |      |   | 725    |  
|Deferred and other long term liabilities                                                          |  |                             | 1,787  |   |      |   | 674    |  
|Other                                                                                             |  |                             | 10     |   |      |   | (53    | )
|                                                                                                  |  |                             |        |   |      |   |        |  
|Net cash provided by operating activities                                                         |  |                             | 17,791 |   |      |   | 12,810 |  
|                                                                                                  |  |                            
|Investing activities                                                                              |  |                             |        |   |      |   |        |  
|Capital expenditures, gross                                                                       |  |                             | (6,825 | ) |      |   | (9,661 | )
|Proceeds from disposals of property and equipment                                                 |  |                             | 4,900  |   |      |   | 352    |  
|Other                                                                                             |  |                             | (8     | ) |      |   | (9     | )
|                                                                                                  |  |                             |        |   |      |   |        |  
|Net cash used in investing activities                                                             |  |                             | (1,933 | ) |      |   | (9,318 | )
|                                                                                                  |  |                            
|Financing activities                                                                              |  |                             |        |   |      |   |        |  
|Net increase in borrowings (maturities of 90 days or less)                                        |  |                             | 5,035  |   |      |   | 3,766  |  
|Principal payments on debt                                                                        |  |                             | (2,236 | ) |      |   | (2,265 | )
|Other                                                                                             |  |                             | (2,428 | ) |      |   | (1,940 | )
|                                                                                                  |  |                             |        |   |      |   |        |  
|Net cash provided by (used in) financing activities                                               |  |                             | 371    |   |      |   | (439   | )
|Effect of exchange rate changes on cash flows                                                     |  |                             | (460   | ) |      |   | (97    | )
|                                                                                                  |  |                             |        |   |      |   |        |  
|Net increase in cash                                                                              |  |                             | 15,769 |   |      |   | 2,956  |  
|Cash and cash equivalents at beginning of period                                                  |  |                             | 24,002 |   |      |   | 22,294 |  
|                                                                                                  |  |                             |        |   |      |   |        |  
|Cash and cash equivalents at end of period                                                        |  | $                           | 39,771 |   |      | $ | 25,250 |  
|                                                                                                  |  |                             |        |   |      |   |        |  



See accompanying notes.



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Xerium Technologies, Inc.



Notes to Unaudited Consolidated Financial Statements

(dollars in thousands, except per share data)



1. Company History



Xerium Technologies, Inc. (the Company), is a leading global manufacturer and supplier of two types of consumable products used primarily in the production
of paper  clothing and roll covers. Operations are strategically located in the major paper-making regions of the world, including the United States (US), Canada, the United Kingdom, Continental Europe, Asia-Pacific and South America.



As discussed in Note 13, the Company was reorganized in connection with its
initial public offering which was completed on May 19, 2005. Prior to the offering, Xerium Technologies, Inc. was an indirect, wholly owned subsidiary of Xerium S.A.; subsequent to the offering the Company directly or indirectly holds all of the
operating subsidiaries and related holding companies of the former corporate group of Xerium S.A., excluding the former parent, Xerium S.A., and two holding company subsidiaries of Xerium S.A., Xerium 2 S.A. and Xerium 3 S.A. The accompanying
unaudited consolidated financial statements for all periods presented reflect only those operations of the Company after the effect of this reorganization.



2. Interim Financial Statements



The accompanying unaudited consolidated interim financial statements at March 31, 2005 and for the three months ended March 31, 2005 and 2004 include the accounts of the
Company and its wholly-owned subsidiaries and have been prepared in conformity with accounting principles generally accepted in the United States (GAAP) for interim financial reporting and pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, such financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. GAAP requires the Companys management to make estimates and
assumptions that affect the amounts reported in the financial statements. Actual results could differ from those estimates. The interim results presented herein are not necessarily indicative of the results to be expected for the entire year. In
managements opinion, these unaudited consolidated interim financial statements contain all adjustments of a normal recurring nature necessary for a fair presentation of the financial statements for the interim periods presented. These
unaudited consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements of Xerium S.A. for the year ended December 31, 2004 included in the Prospectus dated May 16, 2005 relating to the
Companys initial public offering.



3. Accounting Policies



Derivatives and Hedging



The Company has entered into several types of derivatives instruments. Certain of these
derivatives are treated as hedges under Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities,as amended, and include interest rate swaps and caps that qualify as cash flow
hedges, and foreign currency forward contracts that qualify as either cash flow or fair value hedges. The Company has also entered into swaptions, which do not qualify for hedge accounting treatment under SFAS No. 133. These swaptions expired in
2004.



(a) Cash Flow and Fair Value Hedges



The Company utilizes interest rate swaps to reduce interest rate risks and
utilizes foreign currency forward contracts to manage risk exposure to movements in foreign exchange rates.



The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk management objectives and strategies
for undertaking various hedge transactions. The Company links all hedges that are designated as fair value hedges to specific assets or liabilities on the consolidated balance sheets or to the specific firm commitments. The Company links all
hedges that are designated as cash flow hedges to forecasted transactions or to floating-rate liabilities on the consolidated balance sheets.



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Xerium Technologies, Inc.



Notes to Unaudited Consolidated Financial Statements

(dollars in thousands, except per share data)



3. Accounting Policies - (continued)



Derivatives and Hedging - (continued)



(a) Cash Flow and Fair Value Hedges  (continued)



The Company also assesses, both at inception of the hedge and on an ongoing basis, whether the derivatives used in hedging
transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. Should it be determined that a derivative is not highly effective as a hedge, the Company will discontinue hedge accounting prospectively. The
Companys derivative activities are as follows:



(i) Cash Flow Hedges



The Companys
interest rate swap agreements effectively convert a portion of its floating-rate debt to a fixed-rate basis, thus reducing the impact of interest-rate changes on future interest expense. The fair value of the interest rate derivative contracts is
approximately $(821) and $(1,225) at March 31, 2005 and December 31, 2004, respectively, and is included in accrued expenses. All changes in the fair value of these contracts are recorded in accumulated other comprehensive loss.



The Company, from time to time, enters into forward exchange contracts to
fix currencies at specified rates based on expected future cash flows to protect against the fluctuations in cash flows resulting from sales denominated in foreign currency over the next year. The value of these contracts is recognized at fair value
based on market exchange forward rates. The fair value of these contracts represented an asset and amounted to $817 and $1,585 at March 31, 2005 and December 31, 2004, respectively. The change in fair value of these contracts is included in
accumulated other comprehensive loss.



(ii) Fair Value
Hedges



The Company is subject to exposure from
fluctuations in foreign currencies. To manage this exposure, the Company uses foreign exchange forward contracts. The value of these contracts is recognized at fair value based on forward market exchange rates and the change in the fair value of
these contracts is included in general and administrative expense. The amount was not material to the Companys consolidated statements of income for the three months ended March 31, 2005 and 2004.



(b) Other Derivatives



In 2004, the Company had interest rate swaption agreements outstanding which allowed the counterparties the option to enter
into interest rate swaps through 2004. If exercised, the effect of these instruments was to negate cash flows from certain of the currently outstanding interest rate swaps. These swaptions were written options. The value of these contracts was
recognized at fair value based on market valuations and was included in general and administrative expense. There were no exercises under interest rate swaption contracts during the year ended December 31, 2004 and such swaptions expired at the end
of 2004.



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Xerium Technologies, Inc.



Notes to Unaudited Consolidated Financial Statements

(dollars in thousands, except per share data)



3. Accounting Policies - (continued)



Goodwill



The Company accounts for goodwill and other intangible assets in accordance with SFAS No. 142, Accounting for Goodwill and Other Intangible Assets. SFAS No. 142
requires that goodwill and intangible assets that have indefinite lives not be amortized but, instead, must be tested at least annually for impairment or whenever events or business conditions warrant. The Company performs the test for goodwill
impairment as of December 31st each year. The results of the test for December 2004 indicated that there was no impairment of goodwill.



Net Income Per Common Share



Net income per common share has been computed and presented pursuant to the provisions of SFAS No. 128, Earnings per Share(SFAS No. 128). Net income
per share is based on the weighted-average number of shares outstanding during the period. As discussed in Note 13, the Company was reorganized in connection with its initial public offering. Prior to the offering, Xerium Technologies, Inc. was an
indirect, wholly owned subsidiary of Xerium S.A.; subsequent to the offering the Company directly or indirectly holds all of the operating subsidiaries and related holding companies of the former corporate group of Xerium S.A., excluding the former
parent, Xerium S.A. and two holding company subsidiaries of Xerium S.A., Xerium 2 S.A. and Xerium 3 S.A.



Prior to and in connection with the offering, the Company effected a 31,013,482-for-1 stock split of the Companys common stock. All share and per share amounts related to common stock included in the following
table below have been restated to reflect the transactions above:



|                                                   |  |            |  |           
|-------------------------------------------------- |  | ---------- |  | ----------
|Three Months Ended March 31,                       |  | 2005       |  | 2004      
|Weighted-average Common Shares OutstandingBasic   |  | 31,013,482 |  | 31,013,482
|Dilutive Effect of Options Outstanding             |  |           |  |          
|                                                   |  |            |  |           
|Weighted-average Common Shares OutstandingDiluted |  | 31,013,482 |  | 31,013,482
|                                                   |  |            |  |           



Reclassifications



Certain prior year balances have been reclassified to conform with
the current year presentation.



New Accounting Standards



In May 2004, the Financial Accounting Standards Board
(FASB) issued Staff Position No. 106-2 (FSP 106-2), Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) which supersedes FSP
106-1, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003, which was issued in December 2003. The Company elected the one-time deferral allowed under FSP

106-1 and as a result any measures of the accumulated postretirement benefit obligation or net periodic postretirement benefit cost in the previous financial statements
or accompanying notes do not reflect the effects of the Act on postretirement health care benefit plans. FSP 106-2 provides authoritative guidance on the accounting for the federal subsidy and specifies the disclosure requirements for employers who
have adopted FSP 106-2. The Company adopted FSP 106-2 during its third quarter of 2004. Based on a preliminary analysis of the Act, the Company has formed a preliminary conclusion that its retiree medical plans provide benefits that are at least
actuarially equivalent to Medicare Part D.



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Xerium Technologies, Inc.



Notes to Unaudited Consolidated Financial Statements

(dollars in thousands, except per share data)



3. Accounting Policies - (continued)



New Accounting Standards(continued)



The Company believes that the Act will reduce, based on a September 30, 2004 transition measurement date, its accrued post-retirement
benefit obligation by approximately $3,000 and reduce its annual net periodic benefit cost by approximately $500. However, detailed final regulations necessary to implement the Act have not been issued, including those that would specify the manner
in which actuarial equivalency must be determined, the evidence required to demonstrate actuarial equivalency, and the documentation requirements necessary to be entitled to the subsidy. Since final regulations have not been issued, the
Companys preliminary conclusion is subject to change.



In November 2004,
the FASB issued SFAS No. 151, Inventory Costsan Amendment of ARB No. 43, Chapter 4. This statement clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs and spoilage, requiring these items be
recognized as current-period charges. In addition, this statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The provisions of this statement are
effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The adoption of this accounting principle is not expected to have a significant impact on the Companys financial position or results of operations.



In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment
(Revised 2004) (SFAS No. 123R). This statement addresses the accounting for share-based payment transactions in which a company receives employee services in exchange for the companys equity instruments or liabilities that are
based on the fair value of the Companys equity securities or may be settled by the issuance of these securities. SFAS No. 123R discontinues the accounting for share-based compensation using Accounting Principles Board (APB) Opinion
No. 25 and generally requires that such transactions be accounted for using a fair value method. On April 14, 2005 the U.S. Securities and Exchange Commission (the SEC) announced a deferral of the effective date of SFAS 123(R) for
calendar year companies until the beginning of 2006. With respect to stock options and restricted stock outstanding on March 31, 2005, the adoption of this accounting principle is not expected to have a significant impact on the Companys
financial position or results of operations because vesting of such stock options and restricted stock occurs only upon a change of control; therefore, there is no difference in compensation expense charged to the consolidated statements of
operations with respect to stock options and restricted stock outstanding as of March 31, 2005 under the two methods and the proforma net income under SFAS No. 123 and the reported net income are identical. All such options and restricted stock
vested in connection with the consummation of the Companys initial public offering on May 19, 2005 (see Note 13) at which time the Company measured and recorded compensation expense based on the then current fair value of the options and
restricted stock. The full impact that the adoption of this statement will have on the Companys financial position and results of operations will be determined by share-based payments granted in periods after March 31, 2005.



4. Inventories



The components of inventories are as follows at:



|                |  |               |         |                  |   |        
|--------------- |  | ------------- | ------- | ---------------- | - | -------
|                |  | March 31,2005 |         | December 31,2004
|Raw materials   |  | $             | 21,900  |                  | $ | 21,774 
|Work in process |  |               | 38,206  |                  |   | 37,481 
|Finished units  |  |               | 48,649  |                  |   | 51,676 
|                |  |               |         |                  |   |        
|                |  | $             | 108,755 |                  | $ | 110,931
|                |  |               |         |                  |   |        



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Xerium Technologies, Inc.



Notes to Unaudited Consolidated Financial Statements

(dollars in thousands, except per share data)



5. Income Taxes



The Company accounts for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes, which requires the recognition of deferred tax assets and
liabilities for the expected future consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets, representing future tax benefits,
are reduced by a valuation allowance when the determination can be made that it is more likely than not that all or a portion of the related tax asset will not be realized. The deferred tax provision or benefit represents the change in
deferred tax assets and liabilities, excluding any amounts accounted for as components of accumulated other comprehensive loss.



The Companys effective tax rate is 41% for the three months ended March 31, 2005 as compared with 43% for the three months ended March 31, 2004. The 41% effective
tax rate for 2005 exceeds the statutory United States tax rate of 34% primarily due to forecasted operating losses in taxing jurisdictions for which valuation allowances have been recognized due to the uncertainty surrounding the future utilization
of such net operating loss carryforwards.



6. Pensions, Other Postretirement
and Postemployment Benefits



The Company has defined benefit pension plans
covering substantially all of its US and Canadian employees, and employees of certain subsidiaries in other countries. Benefits are generally based on the employees years of service and compensation. The US and Canadian plans are funded in
conformity with the funding requirements of applicable government regulations, and most of the other plans are unfunded.



In addition to providing pension benefits, the Company sponsors various unfunded defined contribution plans that provide for retirement benefits to employees, some in
accordance with local government requirements.



Also, the Company sponsors an
unfunded plan that offers the opportunity to obtain health care benefits to substantially all retired US employees and their covered dependents and beneficiaries. A portion of this plan is contributory, with retiree contributions adjusted
periodically, as well as other cost-sharing features, such as deductibles and coinsurance. Eligibility varies according to date of hire, age and length of service. Certain retirees also have a life insurance benefit provided at no cost.



As required by FASB Statement No. 132, the following tables summarize the
components of net periodic benefit cost:



|                                   |  |                    |       |   |                |   |       |  
|---------------------------------- |  | ------------------ | ----- | - | -------------- | - | ----- | -
|                                   |  | Three Months Ended |      
|Defined Benefit Plans              |  | March 31, 2005     |       |   | March 31, 2004 |  
|Service cost                       |  | $                  | 1,236 |   |                | $ | 1,217 |  
|Interest cost                      |  |                    | 1,364 |   |                |   | 1,262 |  
|Expected return on plan assets     |  |                    | (768  | ) |                |   | (710  | )
|Amortization of prior service cost |  |                    | 2     |   |                |   | 7     |  
|Amortization of net loss           |  |                    | 139   |   |                |   | 125   |  
|                                   |  |                    |       |   |                |   |       |  
|Net periodic benefit cost          |  | $                  | 1,973 |   |                | $ | 1,901 |  
|                                   |  |                    |       |   |                |   |       |  



10



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##### Table of Contents

Xerium Technologies, Inc.



Notes to Unaudited Consolidated Financial Statements  (Continued)

(dollars in thousands, except per share information)



6. Pensions, Other Postretirement and Postemployment Benefits(continued)



|                                   |  |                    |       |   |                |   |      
|---------------------------------- |  | ------------------ | ----- | - | -------------- | - | -----
|                                   |  | Three Months Ended
|Other Postretirement Benefit Plans |  | March 31, 2005     |       |   | March 31, 2004
|Service cost                       |  | $                  | 127   |   |                | $ | 113  
|Interest cost                      |  |                    | 715   |   |                |   | 713  
|Amortization of prior service cost |  |                    | (116  | ) |                |   |     
|Amortization of net loss           |  |                    | 352   |   |                |   | 187  
|                                   |  |                    |       |   |                |   |      
|Net periodic benefit cost          |  | $                  | 1,078 |   |                | $ | 1,013
|                                   |  |                    |       |   |                |   |      



7. Accumulated Other Comprehensive
Loss



The components of accumulated other comprehensive loss were as
follows:



|                             |  |                                        |         |   |                         |   |        |                                        |  |   |                                   |   |  |   |         |  
|---------------------------- |  | -------------------------------------- | ------- | - | ----------------------- | - | ------ | -------------------------------------- |  | - | --------------------------------- | - |  | - | ------- | -
|                             |  | ForeignCurrency Translation Adjustment |         |   | MinimumPensionLiability |   |        | Change inValue ofDerivativeInstruments |  |   | AccumulatedOtherComprehensiveLoss |  
|Balance at December 31, 2004 |  | $                                      | (9,633  | ) |                         | $ | (5,567 | )                                      |  | $ | 137                               |   |  | $ | (15,063 | )
|Current period change        |  |                                        | (4,456  | ) |                         |   |       |                                        |  |   | (166                              | ) |  |   | (4,622  | )
|                             |  |                                        |         |   |                         |   |        |                                        |  |   |                                   |   |  |   |         |  
|Balance at March 31, 2005    |  | $                                      | (14,089 | ) |                         | $ | (5,567 | )                                      |  | $ | (29                               | ) |  | $ | (19,685 | )
|                             |  |                                        |         |   |                         |   |        |                                        |  |   |                                   |   |  |   |         |  



8. Warranties



The Company sells a number of products and offers warranties on certain products. The
specific terms and conditions of these warranties vary depending on the product sold and country in which the product is sold. The Company estimates the costs that may be incurred under its warranties and records a liability for such costs. Factors
that affect the Companys warranty liability include the number of units sold, historical and anticipated rates of warranty claims, cost per claim and new product introduction. The Company periodically assesses the adequacy of its recorded
warranty claims and adjusts the amounts as necessary. Changes in the Companys combined short-term and long-term warranty liabilities during the three months ended March 31, 2005 are as follows:



|                                                      |  |   |       |  
|----------------------------------------------------- |  | - | ----- | -
|Balance at December 31, 2004                          |  | $ | 3,105 |  
|Warranties provided during period                     |  |   | 778   |  
|Settlements made during period                        |  |   | (724  | )
|Changes in liability estimates, including expirations |  |   | (222  | )
|                                                      |  |   |       |  
|Balance at March 31, 2005                             |  | $ | 2,937 |  
|                                                      |  |   |       |  



9. Stock Options and Restricted
Stock



In 2003, the Companys former parent adopted the Senior
Management Share Purchase Program and the 2003 Management Share Option Plan. In accordance with APB Opinion No. 25, shares issued under these plans are recorded and measured under variable accounting; however the Company will not recognize an
expense until a change in control occurs (See Note 13).



11



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##### Table of Contents

Xerium Technologies, Inc.



Notes to Unaudited Consolidated Financial Statements

(dollars in thousands, except per share data)



10. Restructuring Charges



Restructuring charges included in the statement of income are the result of the Companys long-term strategy to reduce production costs
and improve long-term competitiveness. Restructuring charges consist principally of severance costs related to reductions in work force and of facility costs and impairments of assets related to closing facilities and/or shifting production from one
facility to another. Facility costs are principally comprised of costs to relocate assets to the Companys other facilities, operating lease termination costs, legal and consulting expenses and other associated costs.



On March 1, 2005, the Company announced that it will be closing its manufacturing facility in
Wigan, United Kingdom in the second quarter of 2005. The Company incurred $200 of restructuring expenses related to this effort in the first quarter of 2005 and expects to incur additional restructuring expenses of $300 in the second quarter of
2005.



The table below sets forth the significant components and
activity under restructuring programs for the three months ended March 31, 2005:



|                         |  |                            |       |         |   |            |  |              |   |  |                         |        |   |  |   |      
|------------------------ |  | -------------------------- | ----- | ------- | - | ---------- |  | ------------ | - |  | ----------------------- | ------ | - |  | - | -----
|                         |  | Balance atDecember 31,2004 |       | Charges |   | Write-offs |  | CashPayments |   |  | Balance atMarch 31,2005
|Severance                |  | $                          | 1,870 |         | $ | 3,546      |  | $            |  |  | $                       | (1,311 | ) |  | $ | 4,105
|Facility costs and other |  |                            | 78    |         |   | 1,630      |  |              |  |  |                         | (1,332 | ) |  |   | 376  
|                         |  |                            |       |         |   |            |  |              |   |  |                         |        |   |  |   |      
|Total                    |  | $                          | 1,948 |         | $ | 5,176      |  | $            |  |  | $                       | (2,643 | ) |  | $ | 4,481
|                         |  |                            |       |         |   |            |  |              |   |  |                         |        |   |  |   |      



Restructuring charges by segment are
as follows:



|            |  |                            |       |                |   |      
|----------- |  | -------------------------- | ----- | -------------- | - | -----
|            |  | For the Three Months Ended
|            |  | March 31,2005              |       | March 31, 2004
|Clothing    |  | $                          | 3,982 |                | $ | 744  
|Roll Covers |  |                            | 1,194 |                |   | 338  
|            |  |                            |       |                |   |      
|Total       |  | $                          | 5,176 |                | $ | 1,082
|            |  |                            |       |                |   |      



11. Business Segment Information



The Company is a global manufacturer and supplier of products primarily
used in the production of paper, and which is organized into two reportable segments: Clothing and Roll Covers. The Clothing segment represents the manufacture and sale of synthetic textile belts used to transport paper along the length of
papermaking machines. The Roll Covers segment primarily represents the manufacture and refurbishment of covers used on the steel rolls of a papermaking machine. The Company manages each of these operating segments separately.



Management evaluates segment performance based on earnings before interest, taxes,
depreciation and amortization before allocation of corporate charges. Such measure is then adjusted to exclude items that are of an unusual nature and are not used in measuring segment performance or are not segment specific (Segment Earnings
(Loss)). The accounting policies of these segments are the same as those for the Company as a whole. Inter-segment net sales and inter-segment eliminations are not material for any of the periods presented.



12



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##### Table of Contents

Xerium Technologies, Inc.



Notes to Unaudited Consolidated Financial Statements

(dollars in thousands, except per share data)





11. Business Segment
Information(continued)



Summarized financial information for the
Companys reportable segments is presented in the tables that follow for the three months ended March 31, 2005 and 2004.



|                                   |  |          |         |            |   |           |  |   |        |   |  |   |        
|---------------------------------- |  | -------- | ------- | ---------- | - | --------- |  | - | ------ | - |  | - | -------
|                                   |  | Clothing |         | RollCovers |   | Corporate |  |   | Total 
|Three Months Ended March 31, 2005: |  |          |         |            |   |           |  |   |        |   |  |   |        
|Net sales                          |  | $        | 100,172 |            | $ | 52,862    |  | $ |       |   |  | $ | 153,034
|Segment Earnings (Loss)            |  |          | 29,804  |            |   | 16,225    |  |   | (3,486 | ) |  |   |       
|                                   |  |          |         |           
|Three Months Ended March 31, 2004: |  |          |         |            |   |           |  |   |        |   |  |   |        
|Net sales                          |  | $        | 91,700  |            | $ | 55,102    |  | $ |       |   |  | $ | 146,802
|Segment Earnings (Loss)            |  |          | 26,105  |            |   | 18,599    |  |   | (2,171 | ) |  |   |       



Provided below is a reconciliation of
Segment Earnings (Loss) to income before provision for income taxes for the three months ended March 31, 2005 and 2004, respectively.



|                                                        |  |                             |         |   |      |   |         |  
|------------------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------- | -
|                                                        |  | Three Months EndedMarch 31, |        
|                                                        |  | 2005                        |         |   | 2004 |  
|Segment Earnings (Loss):                                |  |                             |         |   |      |   |         |  
|Clothing                                                |  | $                           | 29,804  |   |      | $ | 26,105  |  
|Roll Covers                                             |  |                             | 16,225  |   |      |   | 18,599  |  
|Corporate                                               |  |                             | (3,486  | ) |      |   | (2,171  | )
|Net interest expense                                    |  |                             | (15,460 | ) |      |   | (16,497 | )
|Depreciation and amortization                           |  |                             | (11,756 | ) |      |   | (12,134 | )
|Restructuring charges                                   |  |                             | (5,176  | ) |      |   | (1,082  | )
|Unrealized foreign exchange gain on revaluation of debt |  |                             | 3,771   |   |      |   | 1,998   |  
|                                                        |  |                             |         |   |      |   |         |  
|Income before provision for income taxes                |  | $                           | 13,922  |   |      | $ | 14,818  |  
|                                                        |  |                             |         |   |      |   |         |  



12. Environmental Matters



In connection with the contemplated closure of certain manufacturing
facilities under its restructuring programs, the Company conducted environmental site assessments which have indicated potential contamination at two sites. The estimated range of costs of remediation at these facilities is $2,500 to $4,600. The
Company had recorded a charge for remediation costs of $3,800 during the year ended December 31, 2004, which represents managements best estimates of the probable and reasonably estimable costs relating to this environmental remediation. This
charge includes an additional $1,000, which represents costs management intends to incur in order to implement and accelerate the remediation beyond that which is required by the state. These costs are classified in general and administrative
expenses and accrued expenses. As of March 31, 2005, the Company has incurred approximately $200 of environmental costs. Actual costs incurred may vary from these estimates due to the inherent uncertainties involved. The Company believes that any
additional liability in excess of amounts provided which may result from the resolution of such matters will not have a material adverse effect on the financial conditions, liquidity or cash flow of the Company.



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##### Table of Contents

Xerium Technologies, Inc.



Notes to Unaudited Consolidated Financial Statements

(dollars in thousands, except per share data)



13. Subsequent Event



On May 19, 2005 the Company completed its initial public offering and a reorganization. Prior to the offering, Xerium Technologies, Inc. was an indirect, wholly owned
subsidiary of Xerium S.A.; subsequent to the offering the Company directly or indirectly holds all of the operating subsidiaries and related holding companies of the former corporate group of Xerium S.A., excluding the former parent, Xerium S.A.,
and two holding company subsidiaries of Xerium S.A., Xerium 2 S.A. and Xerium 3 S.A.



Prior to the offering, the Company had outstanding one share of $.01 par value common stock that was held by Xerium 3 S.A. In connection with the offering, the Company effected a 31,013,482-for-1 stock split of this common stock and
accordingly, all share and per share amounts related to common stock included in the accompanying consolidated financial statements and notes thereto have been restated.



In connection with the offering, Xerium Technologies, Inc. issued 13,399,233 shares of common stock at a public offering price of $12.00 per
share and entered into a $750,000 credit facility agreement, under which $650,000 was borrowed in connection with the offering and which has a 7 year maturity. In connection with the offering, the Company repaid $752,500 of principal and interest on
the senior bank debt, mezzanine bank debt and certain noninterest-bearing shareholder notes, as well as $1,354 of contractual payments under various rate swap agreements which were used to hedge the floating rate senior and mezzanine debt. The
Company wrote off $4,920 of deferred financing costs related to the repayment of this debt as of May 19, 2005.



Costs related to the reorganization, debt recapitalization and the offering that will be recorded as of May 19, 2005 include the following:



| |  |  | $39,528 of fees and expenses including (i) $10,049 to underwriters (charged against paid-in capital), (ii) $13,125 to arrangers and lenders (capitalized as deferred financing costs)
and (iii) $16,354 of other fees and expenses (including approximately $10,000 related to the offering and charged against paid-in capital; approximately $5,000 related to the debt recapitalization and capitalized as deferred financing costs and
$1,354 charged against accumulated deficit related to contractual payments under various rate swap agreements which were used to hedge the floating rate senior and mezzanine debt);
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | $15,572 of compensation expense related to the vesting of stock options and restricted stock in connection with the offering to be charged to general and administrative expense;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | $2,681 in compensation expense for cash transaction bonuses that are to be paid to members of our management team in connection with the offering to be charged to general and
administrative expense;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In addition, Xerium Technologies, Inc.
distributed $7,359 to Xerium 3 S.A. to reimburse Xerium 3 S.A. for certain pre-closing liabilities and $1,154 to Xerium 3 S.A. to fund certain expenses which are expected to be incurred by Xerium 3 S.A. following the offering.



Prior to the offering, the Company had outstanding $39,646 of non-interest bearing loans and
upon closing of the offering, repaid with cash $1,153 of these loans; the remaining amount of $38,493 was repaid by Xerium S.A. with an obligation to deliver shares of Xerium Technologies, Inc. This repayment with shares is considered to be a
capital contribution to Xerium Technologies, Inc.



In connection with the
offering, directors and members of the Companys senior management who owned common stock of Xerium S.A. or held options to purchase common stock of Xerium S.A. transferred their equity interests in Xerium S.A. to Xerium Technologies, Inc. in
exchange for 1,842,546 shares of common stock of Xerium Technologies, Inc. The Company used the shares received in this exchange to redeem 1,842,546 shares of its common stock from Xerium 3 S.A.



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##### Table of Contents

Xerium Technologies, Inc.



Notes to Unaudited Consolidated Financial Statements

(dollars in thousands, except per share data)



13. Subsequent Event  (continued)



Additionally, Xerium Technologies, Inc. received 283,117 shares of its common stock from Xerium S.A. in exchange for Xerium S.A. shares held
by a subsidiary of Xerium Technologies, Inc. that were not allocated to the issuance of shares related to stock options that were exercised in connection with the offering. These shares were subsequently retired. In addition, $4,551 of the offering
proceeds were used to redeem 404,505 shares of common stock from certain directors and members of senior management. All such shares were retired by the Company in connection with the offering.



Upon completion of the offering, the total amount of the Companys authorized capital
stock consists of 150,000,000 shares of $.01 par value common stock and 1,000,000 shares of $.01 par value preferred stock, of which 43,725,093 shares of common stock were outstanding and no shares of preferred stock were outstanding.



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##### Table of Contents

ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



Forward Looking Statements



The following discussion of our financial condition and results of operations should be read together with our unaudited condensed consolidated interim financial
statements and the related notes thereto contained elsewhere in this quarterly report on Form 10-Q. The discussion included in this section, as well as other sections of this quarterly report on Form 10-Q contains forward-looking statements. These
statements relate to future events or to our future financial performance and involve known and unknown risks, uncertainties, and other factors that may cause our actual results, levels of activity, performance, or achievements to be materially
different from any future results, levels of activity, performance, or achievements expressed or implied by these forward-looking statements. In some cases, you can identify forward-looking statements by the use of words such as may,
could, expect, intend, plan, seek, anticipate, believe, estimate, predict, potential, or continue or the negative of
these terms or other comparable terminology. You should not place undue reliance on forward-looking statements because they involve known and unknown risks, uncertainties, and other factors that are, in some cases, beyond our control and that could
materially affect actual results, levels of activity, performance, or achievements. Factors that could materially affect our actual results, levels of activity, performance or achievements include the following items:



| |  |  | our revenues and profitability could be adversely affected by fluctuations in currency exchange rates;
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | our profitability would be reduced by a decline in the prices of our products;
| | - |  | ------------------------------------------------------------------------------



| |  |  | we may not be able to develop and market new products successfully or we may not be successful in competing against new technologies developed by competitors;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | we are not required to make dividend payments on our common stock at any particular level or at all;
| | - |  | ----------------------------------------------------------------------------------------------------



| |  |  | we are limited by our new credit facility as to the amount of dividends we are permitted to pay;
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | we may have insufficient cash to fund growth and unexpected cash needs after satisfying our debt service obligations and paying dividends due to our high degree of leverage and
significant debt service obligations;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | we are subject to the risk of weaker economic conditions in the locations around the world where we conduct business;
| | - |  | ---------------------------------------------------------------------------------------------------------------------



| |  |  | we may be required to incur significant costs to reorganize our operations in response to market changes in the paper industry;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------



| |  |  | we are subject to the risk of terrorist attacks or an outbreak or escalation of any insurrection or armed conflict involving the United States or any other country in which we
conduct business, or any other national or international calamity;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | we are subject to any future changes in government regulation; and
| | - |  | ------------------------------------------------------------------



| |  |  | we are subject to any changes in U.S. or foreign government policies, laws and practices regarding the repatriation of funds or taxes.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------



Other factors that could materially affect actual results, levels of activity, performance,
or achievements can be found in our Prospectus dated May 16, 2005 and filed with Securities and Exchange Commission on May 17, 2005. If any of these risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual
results may vary significantly from what we projected. Any forward-looking statement you read in this quarterly report on Form 10-Q reflects our current views with respect to future events and is subject to these and other risks, uncertainties, and
assumptions relating to our operations, results of operations, growth strategy, and liquidity. We assume no obligation to publicly update or revise these forward-looking statements for any reason, whether as a result of new information, future
events, or otherwise.



16



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##### Table of Contents

Overview



We are a leading global manufacturer and supplier of two categories of consumable products used primarily in the production of paperclothing and roll covers. Our
operations are strategically located in the major paper-producing regions of North America, Europe, South America and Asia-Pacific.



Our products play key roles in the formation and processing of paper along the length of a paper-making machine. Paper producers rely on our products and services to help
improve the quality of their paper, differentiate their paper products, operate their paper-making machines more efficiently and reduce production costs. Our products and services typically represent only a small fraction of a paper producers
overall production costs, yet they reduce costs by permitting the use of lower-cost raw materials and reducing energy consumption. Paper producers must replace clothing and refurbish or replace roll covers regularly as these products wear down
during the paper production process. Our products are designed to withstand extreme temperature, chemical and pressure conditions, and are the result of a substantial investment in research and development and highly sophisticated manufacturing
processes.



We operate in two principal business segments: clothing and roll
covers. In our clothing segment, we manufacture and sell highly engineered synthetic textile belts that transport paper as it is processed on a paper-making machine. Clothing plays a significant role in the forming, pressing and drying stages of
paper production. Because paper-making processes and machine specifications vary widely, the clothing size, form, material and function is selected to fit each individual paper-making machine and process. For the three months ended March 31, 2005,
our clothing segment represented 65% of our net sales.



Our roll cover products
provide a surface with the mechanical properties necessary to process the paper sheet in a cost-effective manner that delivers the sheet qualities desired by the paper producer. Roll covers are tailored to each individual paper-making machine and
process, using different materials, treatments and finishings. In addition to manufacturing and selling new roll covers, we also provide refurbishment services for previously installed roll covers and manufacture spreader rolls. For the three months
ended March 31, 2005, our roll cover segment represented 35% of our net sales.



In both our clothing and roll cover segments, a portion of our products are sold for use in other industrial applications, such as steel, plastics and textiles. For the three months ended March 31, 2005 sales for such industrial
applications accounted for 10% of the net sales in our clothing segment and 9% of the net sales in our roll covers segment.



Industry Trends and Outlook



Demand for our products and services is driven primarily by the volume of global paper production, which according to the Food and Agriculture Organization of the United
Nations, increased at a compound annual growth rate of 2.9% from 1980 to 2003. Over such period, only in 1982 and 2001 did global production decline from the prior year, and in both 1983 and 2002 production recovered to levels higher than the
previous peak. Although global paper production has demonstrated stable growth over time, the paper products industry has experienced cycles in profitability that are primarily driven by imbalances in supply and demand. During the down period of
these cycles, prices for paper products declined, leading to decreased profitability for paper producers. These cycles have been caused in part by the structure of the paper industry, which has been highly fragmented and has exhibited poor
discipline in supply management. Producers have generally focused on maximizing production, to reduce fixed costs per ton, rather than producing to meet demand. This practice resulted in producers building inventories of paper when supply exceeded
demand and in-turn led to higher volatility in paper prices as they reduced these inventories.



The most recent cyclical downturn in the paper products industry started in 2001. In anticipation of this downturn, paper producers began in 2000 to take actions that seek to structurally improve the balance between
the supply of and demand for paper. As part of these efforts, they have shut down many older and less efficient paper-making machines. As a result, we estimate that there were approximately 350 fewer paper-making machines in operation throughout the
world at the end of 2004 than at the end of 1999, a decline of approximately 4%. We believe that significant consolidation in the paper production industry over the last few years will improve the ability of producers to better balance supply and
demand and that this consolidation will give fewer paper producers a larger portion of overall capacity, leading to a more rational approach by industry leaders to the management of supply. We believe that, in the long term, the combination of these
trends in the paper production industry, global economic growth and expected increases in per capita paper consumption in less developed regions of the world should drive increased paper production levels and consequently higher spending on
consumable products used in the paper-making process.



17



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##### Table of Contents

Sales and Expenses



Sales in both our clothing and roll covers segments are primarily driven by the following factors:



| |  |  | The volume of worldwide paper production;
| | - |  | -----------------------------------------



| |  |  | Advances in the technology of our products, which can provide value to our customers by improving the efficiency of paper-making machines; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our ability to provide products and services which reduce paper-making machine downtime, while at the same time allowing the manufacture of high quality paper products.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In addition, sales in our roll covers segment have benefited
from the expansion of our mechanical services business. We have expanded this business in response to demand from paper producers that we perform work on the internal mechanisms of a roll while we refurbish or replace a roll cover. In our clothing
segment, we continue to benefit from our investment in and introduction of advanced technology which provides performance characteristics in the paper producers machine that enhances paper production quality and cost. A small portion of our
business has been conducted pursuant to consignment arrangements under which we do not recognize a sale of a product until the customer placed the product into use. Recently, we have been reducing the number of consignment arrangements with
conversion to standard terms of sale upon product shipment and we expect this trend to continue.



Key factors affecting our costs include:



| |  |  | Our total sales volume (which directly impacts the level of our cost of products sold and production capacity utilization);
| | - |  | ---------------------------------------------------------------------------------------------------------------------------



| |  |  | The amount of our property and equipment depreciation; and
| | - |  | ----------------------------------------------------------



| |  |  | The level of our research and development spending.
| | - |  | ---------------------------------------------------



The level of our cost of products sold is primarily attributable to labor costs, raw material costs, product shipping costs, plant utilization and depreciation, with
labor costs constituting the largest component. We believe that our cost structure provides us with significant operating leverage and flexibility as we can expand production in support of sales increases without proportional increases in our costs.



The amount of depreciation on our property and equipment reflects the level of
our capital expenditures. We invest in facilities and equipment that enable innovative product development and improve production efficiency and costs. Recent examples of capital spending for such purposes include faster weaving looms and seaming
machines with accurate electronic controls, automated compound mixing equipment and computer-controlled lathes and mills.



The level of research and development spending is driven by market demand for technology enhancements, including both specific customer needs and general market
requirements, as well as by our own analysis of applied technology opportunities. With the exception of purchases of equipment and similar capital items used in our research and development activities, all research and development is expensed as
incurred. Research and development expenses were $2.3 million and $2.2 million, respectively for the three months ended March 31, 2005 and 2004, respectively. We expect that research and development expenses will be at approximately this same level
for the next several quarters.



Foreign Exchange



We have a geographically diverse customer base. For the three months ended March 31, 2005,
approximately 40% of our sales were in North America, 39% were in Europe, 9% were in South America and 11% were in Asia-Pacific.



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A substantial portion of our sales is denominated in Euros or other currencies. As a result, changes in the relative
values of US Dollars, Euros and other currencies affect our reported levels of revenues and profitability as the results are translated into US Dollars for reporting purposes. In particular, if the value of the US Dollar increases relative to the
value of the Euro and these other currencies, our levels of revenue and profitability will decline since the translation of a certain number of Euros or units of such other currencies into US Dollars for financial reporting purposes will represent
fewer US Dollars.



For certain transactions, our sales are denominated in US
Dollars or Euros but all or a substantial portion of the associated costs are denominated in a different currency. As a result, changes in the relative values of US Dollars, Euros and other currencies can affect the level of the profitability of
these transactions. The largest proportion of such transactions consist of transactions in which the sales are denominated in US Dollars and all or a substantial portion of the associated costs are denominated in Euros or other currencies.



Currency fluctuations have a greater proportionate effect on the level of our
net sales than on the level our income from operations. For example, for the three months ended March 31, 2005, the decline in the value of the US Dollar as compared to the three months ended March 31, 2004 resulted in increases in net sales and
income from operations of $5.7 million and $0.6 million, respectively. While our income from operations as a percentage of net sales was 17.0% for the three months ended March 31, 2005, the $0.6 million increase in income from operations
attributable to currency fluctuations represents only 10.5% of the $5.7 million increase in net sales attributable to currency fluctuations. Although the results for the three months ended March 31, 2005 reflect a period in which the value of the US
Dollar declined as compared to the three months ended March 31, 2004, we would expect a similar but opposite effect in a period in which the value of the US Dollar increases. In such a period, the increase in the value of the US Dollar would
adversely affect both the level of our net sales and the level of our income from operations, but we would expect our income from operations to be affected less proportionately than our net sales.



During the three months ended March 31, 2005, we conducted business in nine foreign
currencies. The following table provides the average exchange rate for the three months ended March 31, 2005 and the three months ended March 31, 2004 of the US Dollar against each of the five foreign currencies in which we conduct the largest
portion of our operations, and indicates the percentage of our net sales for the three months ended March 31, 2005 denominated in such foreign currency.



|                  |  |                                                                                  |  |                                                                                  |  |                                                                                            |  
|----------------- |  | -------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------ | -
|Currency          |  | Average exchange rate of the US Dollar for
the three months ended March 31, 2005 |  | Average exchange rate of the US Dollar for
the three months ended March 31, 2004 |  | Percentage of net salesfor the three monthsended March 31, 2005denominated in suchcurrency |  
|Euro              |  | $1.31 = 1 Euro                                                                   |  | $1.24 = 1 Euro                                                                   |  | 43.1                                                                                       | %
|Canadian Dollar   |  | $0.82 = 1 Canadian Dollar                                                        |  | $0.75 = 1 Canadian Dollar                                                        |  | 9.3                                                                                        |  
|Brazilian Real    |  | $0.38 = 1 Brazilian Real                                                         |  | $0.34 = 1 Brazilian Real                                                         |  | 7.0                                                                                        |  
|Australian Dollar |  | $0.78 = 1 Australian Dollar                                                      |  | $0.76 = 1 Australian Dollar                                                      |  | 3.6                                                                                        |  
|British Pound     |  | $1.89 = 1 British Pound                                                          |  | $1.84 = 1 British Pound                                                          |  | 3.3                                                                                        |  



To mitigate the risk of transactions
in which a sale is made in one currency and associated costs are denominated in a different currency, we utilize forward currency contracts in certain circumstances, other than in South America, to lock in exchange rates with the objective that the
gain or loss on the forward contracts will approximate the loss or gain that results from the transaction or transactions being hedged. We determine whether to enter into hedging arrangements based upon the size of the underlying transaction or
transactions, an assessment of the risk of adverse movements in the applicable currencies and the availability of a cost effective hedge strategy. To the extent we do not engage in hedging or such hedging is not effective, changes in the relative
value of currencies can affect our profitability. We do not hedge our US Dollar exposure in South America as it would generally not be cost effective due to the relatively inefficient foreign exchange markets for local currencies in that region.



Any dividends on our common stock will be paid in US Dollars. We do not expect
to generate sufficient cash flows denominated in US Dollars to make our anticipated dividend payments and will therefore rely, in part, on the conversion to US Dollars of cash flows generated in other currencies. The amount of US Dollars received
from the conversion of cash flows generated in other currencies will depend on the then-current exchange rates. If the value of the US Dollar increases relative to the value of these other



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currencies, the cash flows will represent fewer US Dollars. As a result, even if our results of operations meet our expectations in local currencies and we
are permitted to pay dividends under our new credit facility, we may not have sufficient cash to pay such dividends.



Cost Reduction Programs



An important part of our strategy is to seek to reduce our overall costs and improve our competitiveness. As a part of this effort, we initiated cost reduction programs in each of the years ended December 31, 2002,
2003 and 2004, most of which were designed to improve the cost structure of our North American operations in response to changing market conditions. These cost reduction programs include plant closures that have rationalized production among our
facilities to better enable us to meet customer demands. They also include headcount reductions throughout the world. All costs associated with these programs are accounted for as restructuring expenses. We are still implementing portions of these
programs.



In the second quarter of 2005, we completed the closing of our
clothing manufacturing facility in Farmville, Virginia, which we began in 2004. In addition, during the year ended December 31, 2004, we began transferring certain production from our facility in Sherbrooke, Quebec to our other North American
facilities and completed this transfer in the first quarter of 2005.



During
the three months ended March 31, 2005, we incurred $1.1 million of restructuring expenses relating to closures commenced during the years ended December 31, 2002, 2003 and 2004 ($0.8 million for costs related to facility shutdowns and $0.3 million
severance and benefit costs) and expect to record approximately $2.2 million in additional restructuring expenses for the remainder of 2005 related to such closings.



In addition, we expect to close in the second quarter of 2005 the clothing portion of our manufacturing facility in the United Kingdom. We
believe that the clothing market in the United Kingdom no longer justifies our continued operation of manufacturing at this facility. We intend to support the demands of our existing clothing customers currently served out of the United Kingdom
facility through our other European facilities. Also, we will be closing in the second quarter of 2005 a small roll covers manufacturing facility in Wigan, United Kingdom. In respect of these closings, we recorded a $3.4 million asset impairment in
the year ended December 31, 2004 and $3.0 million of restructuring expenses during the three months ended March 31, 2005, including $2.2 million for severance and benefit costs and $0.8 million for facility shutdowns and other related costs. For the
remainder of 2005, we expect to incur approximately $4.4 million in additional restructuring expenses relating to these closures.



In addition to the facilities closures, we initiated head count reductions of our non-hourly employees in the fourth quarter of 2004 and the first quarter of 2005 that,
when fully completed by June 30, 2005, is expected to eliminate 100 positions in our worldwide workforce. These actions are being taken to improve our cost structure and reduce over-capacity in certain areas. Approximately 75% of the reductions are
in our clothing segment, with most of the reductions in North America and Europe. In the first quarter of 2005, we incurred approximately $0.9 million of severance costs in connection with these headcount reductions. We expect to incur additional
severance costs related to these headcount reductions of approximately $1.0 million during the remainder of 2005.



We believe that our cost reduction efforts since 2002 eliminated approximately $2 million in cash costs that we would have otherwise incurred during the three months
ended March 31, 2005 as compared with the companys cost structure in the first quarter of 2004. There can be no assurance that our cost reduction programs will be successful. While our cost reduction programs are designed to help mitigate the
effect of increases in our operating costs, we may experience sales or cost changes from period to period which have a greater effect on the level of our profitability than savings derived from our cost reduction programs.



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##### Table of Contents

Results of Operations



The tables that follow set forth for the periods presented certain consolidated operating results and the percentage of net sales they represent:



|                                         |  |                             |       |   |      |   |       |  
|---------------------------------------- |  | --------------------------- | ----- | - | ---- | - | ----- | -
|                                         |  | Three Months EndedMarch 31, |      
|(in millions)                            |  | 2005                        |       |   | 2004 |  
|Net sales                                |  | $                           | 153.0 |   |      | $ | 146.8 |  
|Cost of products sold                    |  |                             | 81.7  |   |      |   | 74.9  |  
|Selling expenses                         |  |                             | 18.9  |   |      |   | 18.3  |  
|General and administrative expenses      |  |                             | 19.0  |   |      |   | 20.7  |  
|Restructuring expenses                   |  |                             | 5.1   |   |      |   | 1.1   |  
|Research and development expenses        |  |                             | 2.3   |   |      |   | 2.2   |  
|                                         |  |                             |       |   |      |   |       |  
|Income from operations                   |  |                             | 26.0  |   |      |   | 29.6  |  
|Interest expense, net                    |  |                             | (15.5 | ) |      |   | (16.5 | )
|Foreign exchange gain                    |  |                             | 3.4   |   |      |   | 1.7   |  
|                                         |  |                             |       |   |      |   |       |  
|Income before provision for income taxes |  |                             | 13.9  |   |      |   | 14.8  |  
|Provision for income taxes               |  |                             | 5.6   |   |      |   | 6.4   |  
|                                         |  |                             |       |   |      |   |       |  
|Net income                               |  | $                           | 8.3   |   |      | $ | 8.4   |  
|                                         |  |                             |       |   |      |   |       |  



|                                         |  |                             |   |  |       |  
|---------------------------------------- |  | --------------------------- | - |  | ----- | -
|                                         |  | Percentage of Sales         |  
|                                         |  | Three Months EndedMarch 31, |  
|                                         |  | 2005                        |   |  | 2004  |  
|Net sales                                |  | 100.0                       | % |  | 100.0 | %
|Cost of products sold                    |  | 53.4                        |   |  | 51.0  |  
|Selling expenses                         |  | 12.4                        |   |  | 12.5  |  
|General and administrative expenses      |  | 12.4                        |   |  | 14.1  |  
|Restructuring expenses                   |  | 3.3                         |   |  | 0.7   |  
|Research and development expenses        |  | 1.5                         |   |  | 1.5   |  
|                                         |  |                             |   |  |       |  
|Income from operations                   |  | 17.0                        |   |  | 20.2  |  
|Interest expense, net                    |  | (10.1                       | ) |  | (11.2 | )
|Foreign exchange gain                    |  | 2.2                         |   |  | 1.1   |  
|                                         |  |                             |   |  |       |  
|Income before provision for income taxes |  | 9.1                         |   |  | 10.1  |  
|Provision for income taxes               |  | 3.7                         |   |  | 4.4   |  
|                                         |  |                             |   |  |       |  
|Net income                               |  | 5.4                         | % |  | 5.7   | %
|                                         |  |                             |   |  |       |  



Three Months Ended March 31,
2005 Compared to the Three Months Ended March 31, 2004.



Net
Sales. Net sales for the three months ended March 31, 2005 increased by $6.2 million, or 4.2%, to $153.0 million from $146.8 million for the three months ended March 31, 2004. For the three months ended March 31, 2005, 65% of our net sales were
in our clothing segment and 35% were in our roll covers segment.



In our
clothing segment, net sales for the three months ended March 31, 2005 increased by $8.5 million, or 9.3%, to $100.2 million from $91.7 million for the three months ended March 31, 2004. This improvement resulted primarily from an increase in
equipment product sales of $1.2 million and increased volume sales of forming fabrics and press felts of $3.3 million, of which $2.4 million is due to efforts to convert its consignment inventory into sales and changing customers from a consignment
sales model to sales recognition at the time of product shipment on a going forward basis. The remaining $4.0 million increase in sales is attributable to the translation of sales made in currencies other than the US Dollar to US Dollars for
financial reporting purposes.



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In our roll covers segment, net sales for the three months ended March 31, 2005 decreased by $2.3 million, or 4.2%, to
$52.8 million from $55.1 million for the three months ended March 31, 2004. We believe that the decrease in sales worldwide primarily relates to the consolidation of paper-making facilities, principally in North America, which led to a reduction in
the number of paper making machines in operation and therefore reduced the demand for our products. The roll covers market has contracted due to these mill closures and paper machine shutdowns which started to significantly impact our business in
the second half of 2004, and this impact has been amplified by the fact that the machines that have been taken out of service utilized some of our more profitable roll cover products. Another factor contributing to the sales decrease is the paper
industry labor force unrest in Finland that resulted in lower operating rates at our customers paper mills in Finland. Partially offsetting the decrease in sales are currency gains of $1.7 million related to the translation of sales made in
currencies other than the US Dollar to US Dollars for financial reporting purposes.



Cost of Products Sold.Cost of products sold for the three months ended March 31, 2005 increased by $6.8 million, or 9.1%, to $81.7 million from $74.9 million for the three months ended March 31, 2004.



In our clothing segment, cost of products sold increased by $6.1 million, or 12.2%, to $56.1
million for the three months ended March 31, 2005 from $50.0 million for the three months ended March 31, 2004. Approximately $3.4 million of this increase was attributable to higher costs resulting primarily from increased sales in the segment. In
addition, currency translation effects increased cost of products sold by $2.7 million. As a result of our cost reduction programs, we realized additional savings in our clothing segment cost of products sold of approximately $0.3 million in the
three months ended March 31, 2005 as compared to the three months ended March 31, 2004. These savings were offset by other cost increases related to normal inflationary impact of wages and raw material.



In our roll covers segment, cost of products sold increased by $0.7 million, or 2.8%, to
$25.6 million for the three months ended March 31, 2005 from $24.9 million for the three months ended March 31, 2004. This increase was primarily attributable to unfavorable currency translation effects of $1.0 million and an unfavorable shift in
the mix of our product sales to lower margin products. The unfavorable product mix shift occurred globally, but is primarily driven by a shift from our more profitable rubber covers to other types of covers and increased sales in mechanical services
and spreader rolls in North America, which carry lower margins. This mix effect was partially offset by lower costs driven by the impact of our cost reduction programs pursuant to which we realized savings in our rolls segment cost of products sold
of approximately $1.0 million in the three months ended March 31, 2005 as compared to the three months ended March 31, 2004.



Selling Expenses. For the three months ended March 31, 2005, selling expenses increased by $0.6 million, or 3.3%, to $18.9 million from $18.3 million for the three
months ended March 31, 2004. This increase was primarily due to unfavorable currency translation effects of $0.8 million partially offset by increased savings of $0.3 million as a result of our cost reduction programs as compared to the three months
ended March 31, 2004.



General and Administrative Expenses. For the
three months ended March 31, 2005, general and administrative expenses decreased by $1.7 million, or 8.2%, to $19.0 million from $20.7 million for the three months ended March 31, 2004. The decrease was primarily due to increased royalty income of
$1.5 million, lower management incentive compensation of $1.6 million and savings of $0.4 million as a result of our cost reduction programs as compared to the three months ended March 31, 2004. The increase in royalty income is attributable to the
buyout of future royalties by a licensee. The decrease in general and administrative expenses was partially offset by unfavorable currency effects of $0.6 million and $1.3 million of increases in costs to support the requirements of being a public
company including costs related to preparing to comply with the Sarbanes-Oxley Act and the regulations promulgated thereunder.



Restructuring Expenses.For the three months ended March 31, 2005, restructuring expenses increased by $4.0 million, to $5.1 million from $1.1 million for the
three months ended March 31, 2004 as a result of our long-term strategy to reduce production costs and improve long-term competitiveness as described above under Cost Reduction Programs by closing and/or transferring production
from certain of its manufacturing facilities. The $4.0 million increase during the three months ended March 31, 2005 consists of increased severance and facility costs of $2.7 million and $1.3 million, respectively.



Research and Development Expenses. For the three months ended March 31, 2005, research
and development expenses remained relatively constant ($2.3 million and $2.2 million for the three months ended March 31, 2005 and 2004, respectively).



Interest Expense, Net. Net interest expense for the three months ended March 31, 2005 decreased by $1.0 million, or 6.1%, to $15.5 million from $16.5 million for
the three months ended March 31, 2004. The decrease in net interest expense was primarily attributable to a decrease in interest related to hedge contracts that expired in 2004, partially offset by unfavorable currency translation effects of $0.6
million.



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Foreign Exchange Gain. For the three months ended March 31, 2005, we had an unrealized foreign exchange gain of
$3.4 million compared to $1.7 million for the three months ended March 31, 2004. The $1.7 million difference was primarily attributable to the manner in which swings in the value of the US Dollar as compared to the Euro affect the reported amount of
our indebtedness. Certain of our subsidiaries whose functional currency is US Dollars had debt denominated in Euros. Similarly, certain of our subsidiaries whose functional currency is Euros had debt denominated in US Dollars. As a result, the
stated amount of indebtedness of such subsidiaries changes based on movements in the exchange rate between US Dollars and Euros. To the extent that exchange rate movements cause an increase in the stated amount of such indebtedness, we record a
foreign exchange loss, and to the extent that exchange rate movements cause a decrease in the stated amount of such indebtedness, we record a foreign exchange gain.



Provision for Income Taxes.The provision for income taxes for the three months ended March 31, 2005 decreased as compared to the
three months ended March 31, 2004, due to decreased taxable income and a lower effective tax rate. Our effective tax rate was 41% for the three months ended March 31, 2005 as compared with 43% for the three months ended March 31, 2004. The 41%
effective tax rate for the three months ended March 31, 2005 is based upon our expected annual effective tax rate and exceeds the statutory tax rate of 34% primarily due to forecasted operating losses in taxing jurisdictions for which valuation
allowances have been recognized due to the uncertainty surrounding the future utilization of such net operating loss carryforwards.



DIVIDEND POLICY



Effective upon completion the initial public offering or our common stock in May 2005 our board of directors adopted a dividend policy that reflects our judgment that our stockholders would be better served if we
distributed to them a substantial portion of the excess cash generated by our business rather than reinvesting it in our business. Under this policy, we intend to distribute a substantial portion of the cash generated by our business in excess of
operating needs, reserves for contingencies, interest and principal payments on indebtedness, capital expenditures, restructuring expenses and tax payments as regular quarterly dividends to the holders of our common stock, up to the intended
dividend rate set forth below, rather than retaining such cash for other purposes such as significant acquisitions or to pursue growth opportunities requiring capital expenditures or other investments significantly beyond our current expectations.
As more fully described in the Prospectus dated May 16, 2005 relating to the initial public offering and filed with the Securities and Exchange Commission on May 17, 2005, shareholders may not receive any dividends as a result of the following
factors:



| |  |  | we are not obligated to pay dividends;
| | - |  | --------------------------------------



| |  |  | our new credit facility limits the amount of dividends we are permitted to pay;
| | - |  | -------------------------------------------------------------------------------



| |  |  | our new credit facility contains restrictive covenants that will require us to improve our performance over time to remain in compliance therewith;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | even if our dividend policy is not modified or revoked, our board of directors could decide to reduce dividends or not to pay dividends at all, at any time and for any reason;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the amount of dividends distributed is subject to state law restrictions;
| | - |  | -------------------------------------------------------------------------



| |  |  | our stockholders have no contractual or other legal right to dividends;
| | - |  | -----------------------------------------------------------------------



| |  |  | we may not have enough cash to pay dividends due to changes to our operating earnings, working capital requirements and anticipated cash needs; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our foreign subsidiaries may be subject to legal restrictions that prevent them from distributing cash to us to enable the payment of dividends.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------



For a description on the restrictions imposed on our ability to pay dividends by our new
credit facility, see Part II, Item 2 of this Quarterly Report on Form 10-Q.



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In accordance with our initial dividend policy, we currently intend to pay aggregate dividends on our common stock at an
annual rate of approximately $39.4 million in respect of the period following the initial public offering through March 31, 2006, which based upon the 43,725,093 shares of common stock outstanding immediately following the consummation of our
initial public offering and assuming that no additional shares of common stock are issued, equals an annual rate of $0.90 per share.



We believe that our dividend policy will limit, but not preclude, our ability to pursue growth. If we pay dividends at the level currently anticipated under our dividend
policy, we expect that we would need additional financing to fund significant acquisitions or to pursue growth opportunities requiring capital expenditures or other investments significantly beyond our current expectations. However, we intend to
allocate sufficient cash to pursue growth opportunities that do not require material investment beyond our current expectations.



LIQUIDITY AND CAPITAL RESOURCES



Our principal liquidity requirements are for working capital, capital expenditures, debt service and to pay dividends. We will fund our liquidity needs primarily with
cash generated from operations and, to the extent necessary, through borrowings under our new credit facility.



Net cash provided by operating activities was $17.8 million for the three months ended March 31, 2005 and $12.8 million for the three months ended March 31, 2004. The increase is primarily due to positive changes in
working capital items.



Net cash used in investing activities was $1.9 million
for the three months ended March 31, 2005 and $9.3 million for the three months ended March 31, 2004 primarily due to decreased spending of $2.8 million on capital equipment in the three months ended March 31, 2005 as compared with the three months
ended March 31, 2004 and to an increase in proceeds from the disposal of assets of $4.6 million in the first quarter of 2005 as a result of the sale of our Wake Forest facility.



Net cash provided by financing activities was $0.4 million for the three months ended March 31, 2005 and net cash used in operating
activities was $0.4 million for the three months ended March 31, 2004.



As of
March 31, 2005, there was a $589.6 million balance of term loans outstanding under our senior credit facility, and a $162.5 million balance outstanding under our mezzanine credit facility. In addition, we had $70.9 million available for borrowing
under our revolving lines of credit, including the revolving credit facility under our senior credit facility and lines of credit in various foreign countries that are used to facilitate local short-term operating needs, of which an aggregate of
$15.6 million was outstanding as of March 31, 2005.



We had $39.8 million of
cash and cash equivalents at March 31, 2005 compared to $24.0 million at December 31, 2004. After giving effect to this offering, we believe that our cash on hand, the cash flows we expect to generate from operations, and borrowing available under
our new credit facility, will be sufficient to meet our liquidity requirements and to pay dividends.



CAPITAL EXPENDITURES



For the three
months ended March 31, 2005, we had capital expenditures of $6.8 million consisting of growth capital expenditures of $4.5 million and maintenance capital expenditures of $2.3 million. Growth capital expenditures consist of items that are intended
to increase the manufacturing, production and/or distribution capacity or efficiencies of our operations in conjunction with the execution of our business strategies. Maintenance capital expenditures are designed to sustain the current capacity or
efficiency of our operations and include items relating to the renovation of existing manufacturing or service facilities, the purchase of machinery and equipment for existing manufacturing or service facilities and safety and environmental needs.
For the three months ended March 31, 2004 capital expenditures were $9.7 million, consisting of growth capital expenditures of $4.6 million and maintenance capital expenditures of $5.1 million. Our growth capital expenditures for the three months
ended March 31, 2004 included $2.5 million related to the completion of specific cost reduction programs. The lower amount of capital expenditures for the three months ended March 31, 2005 was primarily attributable to the timing of certain capital
expenditures, which are expected to occur later in 2005.



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NEW CREDIT FACILITY



Upon completion of the initial public of offering of our common stock, in May 2005 we and certain of our subsidiaries entered into a new $750 million senior secured
credit facility. Our new credit facility provides for a $100 million senior secured revolving credit facility (to be reduced to $50 million upon the earlier of the completion of a legal reorganization of a portion of our international operations and
the date that is 364 days from the closing date of the initial public offering) and a term loan in a total principal amount of $650 million. The new credit facility is secured by substantially all of our assets and the assets of most of our
subsidiaries that are guarantors under the existing facility in all cases subject to legal and tax considerations and requirements. Borrowings under the revolving credit facility and term loan facility bear interest, at our option, at either (a)
LIBOR plus the applicable margin or (b) the Euribor rate plus the applicable margin, in each case in addition to certain other mandatory costs associated with syndication in the European markets. The applicable margin for US Dollar LIBOR term loans
will be 2.00% and the applicable margin for LIBOR revolving loans, Euribor loans and CDOR loans will be 2.25%, provided that the applicable margin with respect to revolving loans may be reduced to 2.00% or 1.75% based on a leverage test set forth in
the new credit agreement. We entered into interest rate swap agreements that effectively fixed the interest rate on approximately 85% of the term loan credit facility for three years at a weighted average rate of 5.52%. The revolving credit facility
has a 6.5 year maturity and the term loan facility has a 7 year maturity.



The
new credit facility provides for scheduled principal payments of the term loan of $6.5 million each year, payable in quarterly installments beginning September 30, 2005, with the remaining $606.1 million due at maturity in May 2012. The new credit
facility will also require us to prepay outstanding loans under the term loan facility under the following circumstances:



| |  |  | with 100% of the net cash proceeds received by us from any sale, transfer or other disposition of any assets, subject to certain customary reinvestment rights and with an exemption
for sales of up to $100,000 for any transaction or series of related transactions, exemption of the first $10,000,000 of cumulative net proceeds and exemption of up to an additional $10,000,000 of net proceeds from the sale of four identified
manufacturing facilities;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | with 100% of the net cash proceeds received by us from any insurance recovery or condemnation events, subject to certain exceptions and reinvestment rights and with an exemption for
the first $2,000,000 of cumulative net insurance or condemnation proceeds;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | with 100% of the net cash proceeds from the incurrence of any indebtedness by us, subject to customary exceptions; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------



| |  |  | with 50% of the amount equal to our pre-dividend free cash flow minus our actual dividend payments, except that in the event our dividend payments exceed 65% of our pre-dividend
free cash flow, we will be required to make prepayments in the amount of 75% of the amount equal to our pre-dividend free cash flow minus our actual dividend payments.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Our new credit facility requires that we meet certain financial covenants in order to avoid a default or event of default under the
facility. Our ability to comply in future periods with the financial covenants in our new credit facility will depend on our ongoing financial and operating performance, which in turn will be subject to general economic conditions and to financial,
business and other factors, many of which are beyond our control (including currency exchange rates), and will be substantially dependent on the level of demand for our products, our ability to compete effectively and our ability to otherwise
successfully implement our overall business strategies, including our ability to realize the benefits of our cost reduction programs.



For a description on the restrictions imposed on our ability to pay dividends by our new credit facility, see Part II, Item 2 of this Quarterly Report on Form 10-Q. For a
further description of our new credit facility, see the Prospectus dated May 16, 2005 relating to the initial public offering and filed with the Securities and Exchange Commission on May 17, 2005.



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SUBSEQUENT EVENT



On May 19, 2005 the Company completed its initial public offering and a reorganization. Prior to the offering, Xerium Technologies, Inc. was an indirect, wholly owned
subsidiary of Xerium S.A.; subsequent to the offering the Company directly or indirectly holds all of the operating subsidiaries and related holding companies of the former corporate group of Xerium S.A., excluding the former parent, Xerium S.A.,
and two holding company subsidiaries of Xerium S.A., Xerium 2 S.A. and Xerium 3 S.A.



Prior to the offering, the Company had outstanding one share of $.01 par value common stock that was held by Xerium 3 S.A. In connection with the offering, the Company effected a 31,013,482-for-1 stock split of this common stock and
accordingly, all share and per share amounts related to common stock included in the accompanying consolidated financial statements and notes thereto have been restated.



In connection with the offering, Xerium Technologies, Inc. issued 13,399,233 shares of common stock at a public offering price of $12.00 per
share and entered into a $750 million credit facility agreement, under which $650 million was borrowed in connection with the offering and which has a 7 year maturity. In connection with the offering, the Company repaid $752.5 million of principal
and interest on the senior bank debt, mezzanine bank debt and certain noninterest-bearing shareholder notes, as well as $1.4 million of contractual payments under various rate swap agreements which were used to hedge the floating rate senior and
mezzanine debt. The Company wrote off $4.9 million of deferred financing cost related to the repayment of this debt as of May 19, 2005.



Costs related to our reorganization, debt recapitalization and the offering that will be recorded as of May 19, 2005 include the following:



| |  |  | $39.5 million of fees and expenses including (i) $10.0 million to underwriters (charged against paid-in capital), (ii) $13.1 million to arrangers and lenders (capitalized as
deferred financing costs) and (iii) $16.4 million of other fees and expenses (including approximately $10.0 million related to the offering and charged against paid-in capital; approximately $5.0 million related to the debt recapitalization and
capitalized as deferred financing costs and $1.4 million charged against accumulated deficit related to contractual payments under various rate swap agreements which were used to hedge the floating rate senior and mezzanine debt);
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | $15.6 million of compensation expense related to the vesting of stock options and restricted stock in connection with the offering to be charged to general and administrative
expense;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | $2.7 million in compensation expense for the portion of cash transaction bonuses that are to be paid to members of our management team in connection with the offering to be charged
to general and administrative expense;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In addition, Xerium
Technologies, Inc. distributed $7.4 million to Xerium 3 S.A. to reimburse Xerium 3 S.A. for certain pre-closing liabilities and $1.2 million to Xerium 3 S.A. to fund certain expenses which are expected to be incurred by Xerium 3 S.A. following the
offering.



Prior to the offering, the Company had outstanding $39.6 million of
non-interest bearing loans and upon closing of the offering, repaid with cash $1.2 million of these loans; the remaining amount of $38.5 million was repaid by Xerium S.A. with an obligation to deliver shares of Xerium Technologies, Inc. This
repayment with shares is considered to be a capital contribution to Xerium Technologies, Inc.



In connection with the offering, directors and members of the Companys senior management who owned common stock of Xerium S.A. or held options to purchase common stock of Xerium S.A. transferred their equity
interests in Xerium S.A. to Xerium Technolgies, Inc. in exchange for 1,842,546 shares of common stock of Xerium Technologies, Inc. The Company used the shares received in this exchange to redeem 1,842,546 shares of its common stock from Xerium 3
S.A.



Additionally, Xerium Technologies, Inc. received 283,117 shares of its
common stock from Xerium S.A., which represent Xerium S.A. shares held by a subsidiaries of Xerium Technologies, Inc. that were not allocated to the issuance of shares related to stock options that were exercised in connection with the offering.
These shares were subsequently retired. In addition, $4.6 million of the offering proceeds were used to purchase 404,505 shares of common stock from certain directors and members of senior management. All such shares were retired by the Company in
connection with the offering.



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Upon completion of the offering, the total amount of our authorized capital stock consists of 150,000,000 shares of $.01
par value common stock and 1,000,000 shares of $.01 par value preferred stock, of which 43,725,093 shares of common stock were outstanding and no shares of preferred stock were outstanding.



Following the completion of our initial public offering, we expect to incur additional annual
administrative costs of approximately $5.0 million associated with being a public company. We expect that such costs will primarily include approximately $1.5 million for Sarbanes-Oxley Act compliance and an increase in liability insurance premiums
for directors and officers of approximately $1.0 million. Approximately $1.3 million of these costs were incurred in the first quarter of 2005. In addition, our cash management incentive plans in effect prior to this offering had been terminated. In
connection with this offering and the adoption of new management incentive compensation plans and in consideration of the fact that members of our senior management will no longer participate in the previously existing plans, we made special
one-time payments in the aggregate amount of $4.2 million to certain members of senior management in the second quarter of 2005 in connection with the adoption of our new incentive plans.



NON-GAAP LIQUIDITY MEASURES



We use EBITDA and Adjusted EBITDA as supplementary non-GAAP liquidity measures to assist us in evaluating our liquidity and financial performance, specifically our
ability to service indebtedness and to fund ongoing capital expenditures and dividends. Our new credit facility will include covenants based on Adjusted EBITDA. Additionally, if our Adjusted EBITDA declines below certain levels, we could go into
default under the new credit facility or be required to prepay the new credit facility or we could be prohibited from paying dividends. Neither EBITDA or Adjusted EBITDA should be considered in isolation or as a substitute for net cash provided by
operating activities (as determined in accordance with GAAP) or income from operations (as determined in accordance with GAAP).



EBITDA is defined as net income before interest expense, income tax provision and depreciation and amortization. Adjusted EBITDA is defined in the credit facility of
Xerium Technologies, Inc. and is EBITDA plus (i) expenses or losses incurred on or prior to the completion of our initial public offering in connection with proposed or completed debt or equity financing transactions, including expenses or losses
related to the early retirement or extinguishment of debt and any bonuses paid in connection with such financing transactions, (ii) unrealized foreign exchange (gain) loss on indebtedness, net, (iii) restructuring or impairment expenses (not to
exceed $11 million in 2005, $4 million in 2006, $3.5 million in 2007 and $1.5 million in each year thereafter), (iv) reserves for inventory in connection with plant closings, (v) stock-based and other non-cash compensation charges, charges from
forgiveness of loans made to employees in connection with the purchase of equity and any tax gross-up payments made in respect of such loan forgiveness in connection with or prior to the completion of our initial public offering, (vi) certain
transaction costs, including costs incurred in connection with this offering and the related debt financing, (vii) costs associated with payments to management prior to the completion of our initial public offering in connection with the termination
of incentive plans, (viii) non-cash charges resulting from the application of purchase accounting, (ix) any fees, expenses or charges deducted in computing net income which have been determined by management, which determination is reasonably
acceptable to the administrative agent under our credit facility, to be non-recurring by virtue of changes in our method of operations pursuant to our cost reduction programs, (x) non-cash losses (net of non-cash gains) resulting from
marking-to-market hedging obligations, (xi) non-cash expenses resulting from the granting of stock options, restricted stock or restricted stock unit awards under equity compensation programs solely with respect to our common stock and (xii)
expenses not exceeding $5 million per year incurred as a result of the repurchase, redemption or retention of common stock earned under equity compensation programs solely in order to make withholding tax payments. Adjusted EBITDA, as defined in the
credit facility and calculated below, may not be comparable to similarly titled measurements used by other companies. The following table provides a reconciliation from net cash provided by operating activities, which is the most directly comparable
GAAP financial measure, to EBITDA and Adjusted EBITDA:



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|                                                      |  |                             |        |   |      |   |        |  
|----------------------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------ | -
|                                                      |  | Three Months EndedMarch 31, |       
|(in thousands)                                        |  | 2005                        |        |   | 2004 |  
|Net cash provided by operating activities             |  | $                           | 17,791 |   |      | $ | 12,810 |  
|Interest expense, net                                 |  |                             | 15,460 |   |      |   | 16,497 |  
|Net change in operating assets and liabilities        |  |                             | 234    |   |      |   | 10,026 |  
|Income tax provision                                  |  |                             | 5,655  |   |      |   | 6,426  |  
|Deferred financing cost amortization                  |  |                             | (246   | ) |      |   | (245   | )
|Deferred taxes                                        |  |                             | (999   | ) |      |   | (3,608 | )
|Deferred interest                                     |  |                             | (528   | ) |      |   | (455   | )
|Unrealized foreign exchange gain on indebtedness, net |  |                             | 3,771  |   |      |   | 1,998  |  
|                                                      |  |                             |        |   |      |   |        |  
|EBITDA                                                |  |                             | 41,138 |   |      |   | 43,449 |  
|Unrealized foreign exchange gain on indebtedness, net |  |                             | (3,771 | ) |      |   | (1,998 | )
|Restructuring expenses                                |  |                             | 5,176  |   |      |   | 1,082  |  
|                                                      |  |                             |        |   |      |   |        |  
|Adjusted EBITDA                                       |  | $                           | 42,543 |   |      | $ | 42,533 |  
|                                                      |  |                             |        |   |      |   |        |  



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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



We have foreign currency cash flow and earnings exposure with respect to specific sale transactions denominated in currencies other than the functional currency of the unit incurring the costs associated with such
transactions. To mitigate the risks related to this exposure, we utilize forward currency contracts in certain circumstances, other than in South America, to lock in exchange rates with the objective that the gain or loss on the forward contracts
will approximate the loss or gain on the transaction or transactions being hedged. We determine whether to enter into hedging arrangements based upon the size of the underlying transaction or transactions, an assessment of the risk of adverse
movements in the applicable currencies and the availability of a cost-effective hedging strategy. To the extent we do not engage in hedging or such hedging is not effective, changes in the relative value of currencies can affect our profitability.



In South America, substantially all of our sales are denominated in US
Dollars, but the associated costs are recorded in the local currencies of the operating units. We do not hedge this US Dollar exposure as it would generally not be cost effective due to the relatively inefficient foreign exchange markets for local
currencies in that region.



As of March 31, 2005, we had open foreign currency
exchange contracts maturing through April 2006 with net notional amounts of approximately 28 million. At March 31, 2005, we prepared an analysis to determine the sensitivity of our forward exchange contracts to changes in exchange rates. A
hypothetical adverse exchange rate movement of 10% against our forward exchange contracts would have resulted in a potential net loss in fair value of these contracts of approximately $2.8 million. All such losses on these forward foreign exchange
contracts would be substantially offset by gains on the underlying transactions that we had hedged.



In connection with our existing senior debt as of March 31, 2005, we had non-hedged currency exposure on certain indebtedness related to (i) indebtedness denominated in Euros at our U.S. subsidiaries, whose functional
currency is the US dollar, and (ii) indebtedness denominated in U.S. dollars at our foreign subsidiaries, whose functional currency is the Euro.



Additionally our senior credit facility as of March 31, 2005 required us to hedge the variable interest rate on a portion of the outstanding senior debt to effectively
convert such debt to fixed-rate debt.



At March 31, 2005, we also had interest
rate swaps that provide for us to pay fixed rates on Eurodollar, US Dollar and Canadian Dollar notional amounts while receiving the applicable floating LIBOR rates from the counter-parties. In addition to these interest rate swaps, interest on the
US Dollar-denominated portion of the mezzanine debt had a fixed rate. With respect to our floating rate debt, interest rate changes generally do not affect the market value, but, if the floating rates have not been effectively converted to fixed
rates through interest rate swaps, they do impact the amount of our interest payments and, therefore, our future earnings and cash flows, assuming other factors are held constant.



We used the proceeds from our initial public offering, together with borrowings under the new credit facility, to repay all outstanding
borrowings under our existing senior and mezzanine credit facilities and our interest rate swap and swaption contracts were terminated. We entered into interest rate swap contracts that effectively fixed the interest rate on 85% of the term loan
credit facility for three years at a weighted average rate of 5.52%. The weighted average interest rate on the revolving credit facility and the portion of the term loan facility not effectively fixed by interest rate swap contracts, based on the
90-day LIBOR, was 5.00% based on current market rates.



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##### Table of Contents

ITEM 4. CONTROLS AND PROCEDURES



Our management,
under the supervision and with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the Exchange Act)), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our principal executive officer and principal financial officer have
concluded that as of such date, our disclosure controls and procedures were not effective solely because of the following material weakness in internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act) with respect to accounting for income taxes: In February 2005, during the conduct of the audit of our consolidated financial statements for the year ended December 31, 2004, our independent auditors advised the audit committee of our board of
directors and our management team that deferred taxes had not properly been provided for German federal corporate tax purposes at one of our subsidiaries during the years ended December 31, 2000, 2001, 2002 and 2003, and that such error had not been
detected by our internal controls. This material weakness referred to above resulted primarily from the design of our controls related to international tax provision calculations. The design of our internal controls provided for the independent
audit of the tax calculations at our international subsidiaries prior to a review of such calculations by our corporate tax department. The deficiency in this design has been corrected and our corporate tax department will now review all tax
calculations prior to the initiation of independent audit or review of our financial statements. In addition, we provided additional tax training to all of our international controllers in May 2005. We also have planned for our corporate tax
department to conduct periodic on-site tax reviews of international tax issues with local controllers and external tax advisors, and we began conducting these reviews in May 2005. We anticipate that these measures will result in the correction of
the material weakness referred to above not later than December 31, 2005.



Other than the change in the design of internal control relating to tax calculations at our international subsidiaries described above, there was no change in our internal control over financial reporting that occurred during the period
covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. In addition, subsequent to March 31, 2005 we began taking the remedial actions
described above.



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##### Table of Contents

PART II. OTHER INFORMATION



ITEM 1. LEGAL PROCEEDINGS



We are from time to
time involved in various legal proceedings that arise in the ordinary course of our business. We believe that none of our pending litigation will, individually or in the aggregate, have a material adverse effect on our financial condition, cash
flows or results of operation.



ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.



Unregistered Sales of Equity Securities



We did not sell any unregistered equity securities during the three months ended March 31, 2005.



Use of Proceeds



The Securities and Exchange Commission declared our Registration Statement on Form S-1 (File No. 333-114703), relating to the initial public offering of shares of our common stock, $0.01 par value per share, effective
on May 16, 2005. We closed the offering on May 19, 2005. Citigroup Global Markets Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated and CIBC World Markets Corp. were representatives for the underwriters of the offering.



We sold 13,399,233 shares of common stock in the offering at a price to the public of $12.00
per share, for aggregate gross proceeds of $160.8 million. These proceeds, together with $650 million from borrowings under our new credit facility, were used as follows:



| |  |  | $752.5 million to repay existing indebtedness, including all outstanding borrowings under our existing senior and mezzanine credit facilities;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | $39.5 million to pay underwriting discounts and commissions of approximately $10.0 million, fees related to our new credit facility of approximately $13.1 million, and other fees
and expenses of $16.4 million;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | $4.6 million to redeem 404,505 shares of common stock from certain of our directors, officers and members of senior management;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------



| |  |  | $8.5 million to make a distribution to Xerium 3 S.A., our immediate parent company prior to the offering, declared prior to the offering to reimburse Xerium 3 S.A., Xerium 2 S.A.
and Xerium S.A. for certain Luxembourg tax and other pre-closing liabilities and to fund certain expenses in connection with the offering expected to be incurred by Xerium 3 S.A., Xerium 2 S.A. and Xerium S.A. following the consummation of the
offering; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | $2.7 million to pay transaction bonuses to certain officers and other members of management for completing this offering, of which $0.8 million was paid to certain of our executive
officers and $0.7 million was paid to certain other of our officers.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Restrictions on Payment of Dividends



Under Delaware law, we
can only pay dividends either out of surplus (which is defined as total assets at fair market value minus total liabilities, minus statutory capital) or out of current or the immediately preceding years earnings. We historically
have not had sufficient earnings to pay dividends at the level contemplated by our dividend policy. We anticipate that we will not have sufficient earnings to pay dividends and therefore expect that we will pay dividends out of surplus. Our board of
directors will seek periodically to assure itself that we have sufficient surplus to pay dividends before actually declaring any dividends. Further, our board of directors may seek opinions from outside valuation firms to the effect that there is
sufficient surplus to pay dividends, and such opinions may not be forthcoming. If we sought and were not able to obtain such an opinion, we likely would not be able to declare and pay dividends.



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Our credit facility restricts our ability to declare and pay dividends on our common stock as follows:



| |  |  | we will be permitted to pay dividends in an amount not to exceed $10 million in the aggregate per fiscal quarter until December 31, 2006, subject to there being no default or event
of default under our new credit facility as described below;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | beginning on December 31, 2006, we may pay dividends on each quarterly dividend payment date up to an amount that, when added to the amount of dividends paid on the three most
recent prior quarterly dividend payment dates, does not exceed 75% of our pre-dividend free cash flow (as defined in our new credit facility) for the four fiscal quarters ended immediately prior to such dividend payment date. Pre-dividend free
cash flow is defined in our new credit facility as Adjusted EBITDA minus the sum of (i) net interest expense paid in cash, (ii) net cash taxes, (iii) cash capital expenditures (reduced by the amount of any asset sale, insurance or condemnation
proceeds which we are permitted to retain in our business and any capital expenditures made with the proceeds of previously generated surplus cash), (iv) all scheduled debt repayments, (v) cash restructuring expenses and (vi) cash payments of
withholding taxes from proceeds of the repurchase, redemption or retention of our common stock relating to equity incentive awards; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | we may not pay dividends if a default or event of default under our new credit facility has occurred and is continuing or would occur as a consequence of such payment.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



Our new credit facility requires that we meet certain financial
ratios in order to avoid a default or event of default under the facility. These covenants are as follows:



| |  |  | Our interest coverage ratio as of the end of any period set forth below must exceed the ratio set forth for such period:
| | - |  | ------------------------------------------------------------------------------------------------------------------------



|                                                                 |  |       
|---------------------------------------------------------------- |  | ------
|Period                                                           |  | Ratio 
|Fiscal quarters ending September 30, 2005 through March 31, 2006 |  | 3.50:1
|Fiscal quarters ending June 30, 2006 through December 31, 2006   |  | 4.00:1
|Fiscal quarters ending March 31, 2007 and December 31, 2007      |  | 4.25:1
|Fiscal quarters ending March 31, 2008 through December 31, 2008  |  | 4.50:1
|Fiscal quarters ending March 31, 2009 through December 31, 2009  |  | 4.75:1
|Fiscal quarters ending March 31, 2010 through December 31, 2010  |  | 5.00:1
|Fiscal quarters ending March 31, 2011 and thereafter             |  | 5.25:1



| |  |  | Our leverage ratio as of the end of any period set forth below must not exceed the ratio set forth for such period:
| | - |  | -------------------------------------------------------------------------------------------------------------------



|                                                                |  |       
|--------------------------------------------------------------- |  | ------
|Period                                                          |  | Ratio 
|Fiscal quarters ending September 30, 2005 and December 31, 2005 |  | 4.50:1
|Fiscal quarter ending March 31, 2006                            |  | 4.25:1
|Fiscal quarters ending June 30, 2006 through December 31, 2006  |  | 4.00:1
|Fiscal quarters ending March 31, 2007 through December 31, 2007 |  | 3.75:1
|Fiscal quarters ending March 31, 2008 and June 30, 2008         |  | 3.50:1
|Fiscal quarters ending September 30, 2008 and December 31, 2008 |  | 3.25:1
|Fiscal quarters ending March 31, 2009 through December 31, 2009 |  | 3.00:1
|Fiscal quarters ending March 31, 2010 and June 30, 2010         |  | 2.75:1
|Fiscal quarters ending September 30, 2010 and December 31, 2010 |  | 2.50:1
|Fiscal quarters ending March 31, 2011 and June 30, 2011         |  | 2.25:1
|Fiscal quarters ending September 30, 2011 and thereafter        |  | 2.00:1



| |  |  | Our fixed charge coverage ratio as of the end of any period set forth below must exceed the ratio set forth for such period:
| | - |  | ----------------------------------------------------------------------------------------------------------------------------



|                                                                    |  |       
|------------------------------------------------------------------- |  | ------
|Period                                                              |  | Ratio 
|Fiscal quarters ending September 30, 2005 through December 31, 2006 |  | 1.75:1
|Fiscal quarters ending March 31, 2007 through December 31, 2007     |  | 1.85:1
|Fiscal quarters ending March 31, 2008 and thereafter                |  | 1.90:1



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Our new credit facility does not restrict our payment of dividends based upon the amount of our pre-dividend free cash
flow (as defined in the credit facility) until December 31, 2006. Pre-dividend free cash flow (as defined in our new credit facility) does not represent the amount we intend to distribute as dividends for any period but rather is a restriction on
the maximum level of dividend payments, if any, that we will be permitted to declare and pay under the terms of our new credit facility.



For a further description of our new credit facility, see the Prospectus dated May 16, 2005 relating to the initial public offering our common stock and filed with the
Securities and Exchange Commission on May 17, 2005.



ITEM 3. DEFAULTS UPON SENIOR SECURITIES.



Not
applicable.



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



Not applicable.



ITEM 5. OTHER INFORMATION.



Not applicable.



ITEM 6. EXHIBITS



See Exhibit Index following the
signature page of this Quarterly Report.



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SIGNATURES



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



|                    |  |                           |  |                                                     
|------------------- |  | ------------------------- |  | ----------------------------------------------------
|                    |  | XERIUM TECHNOLOGIES, INC.
|                    |  | (Registrant)             
|                    |  |                          
|Date: June 23, 2005 |  | By:                       |  | /s/ Michael P. ODonnell                            
|                    |  |                           |  | Michael P. ODonnell                                
|                    |  |                           |  | Executive Vice President and Chief Financial Officer
|                    |  |                           |  | (Principal Financial and Accounting Officer)        



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EXHIBIT INDEX



|               |  |                                                                                                                                                                                                                                                       
|-------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description of Exhibit                                                                                                                                                                                                                                
|3.1            |  | Amended and Restated Certificate of Incorporation of Xerium Technologies, Inc.                                                                                                                                                                        
|               | 
|3.2            |  | Amended and Restated By-Laws of Xerium Technologies, Inc.                                                                                                                                                                                             
|               | 
|4.1            |  | Registration Rights Agreement by and among Xerium Technologies, Inc. and certain of its investors.                                                                                                                                                    
|               | 
|4.2            |  | Form of Stock Certificate for Common Stock, incorporated by reference to Exhibit 4.2 to Xerium Technologies, Inc.s Registration Statement on Form S-1/A filed on May 3, 2005,
Registration Number 333-114703.                                        
|               | 
|10.1           |  | Credit Agreement, dated as of May 18, 2005 among Xerium Technologies, Inc. and certain financial institutions as the Lenders.                                                                                                                         
|               | 
|10.2           |  | Employment Agreement with Thomas Gutierrez.                                                                                                                                                                                                           
|               | 
|10.3           |  | Employment Agreement with Michael ODonnell.                                                                                                                                                                                                          
|               | 
|10.4           |  | Employment Agreement with Josef Mayer and supplemental Agreement.                                                                                                                                                                                     
|               | 
|10.5           |  | Employment Agreement with Miguel Quiñonez.                                                                                                                                                                                                            
|               | 
|10.6           |  | Employment Agreement with Douglas Milner.                                                                                                                                                                                                             
|               | 
|10.7           |  | 2005 Equity Incentive Plan.                                                                                                                                                                                                                           
|               | 
|10.8           |  | Senior Executive Annual Incentive Plan.                                                                                                                                                                                                               
|               | 
|10.9           |  | Form of Performance-Based Restricted Stock Units Agreement for Executive Officers, incorporated by reference to Exhibit 10.9 to Xerium Technologies, Inc.s Registration Statement on Form
S-1/A filed on May 3, 2005, Registration Number 333-114703.
|               | 
|10.10          |  | Form of Time-Based Restricted Stock Units Agreement for Executive Officers, incorporated by reference to Exhibit 10.10 to Xerium Technologies, Inc.s Registration Statement on Form S-1/A
filed on May 3, 2005, registration number 333-114703.      
|               | 
|10.11          |  | Form of Restricted Stock Units Agreement for Directors, incorporated by reference to Exhibit 10.11 to Xerium Technologies, Inc.s Registration Statement on Form S-1/A filed on May 3,
2005, Registration Number 333-114703.                          
|               | 
|31.1           |  | Certification Statement of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                         
|               | 
|31.2           |  | Certification Statement of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                         
|               | 
|32.1           |  | Certification Statement of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                         
|               | 
|32.2           |  | Certification Statement of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                         



35