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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-Q







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

for the Quarterly Period Ended June 30, 2009

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





Xerium Technologies, Inc.

(Exact name of registrant as specified in its
charter)







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



|                                                      |  |           
|----------------------------------------------------- |  | ----------
|8537 Six Forks Road Suite 300 Raleigh, North Carolina |  | 27615     
|(Address of principal executive offices)              |  | (Zip Code)

(919) 526-1400

(Registrants telephone number, including area code)



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





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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files).    Yes   ̈    No   ̈

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of large accelerated filer,
accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):



|                        |  |                                                  |  |                           |  |  
|----------------------- |  | ------------------------------------------------ |  | ------------------------- |  | -
|Large accelerated filer |  |  ̈                                                |  | Accelerated filer         |  | x
|                        |  |                                                  | 
|Non-accelerated filer   |  |  ̈  (Do not check if a smaller reporting company) |  | Smaller reporting company |  |  ̈

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

The number of shares of the registrants common stock, $0.01 par value, outstanding as of August 3, 2009 was 48,934,820.









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##### Table of Contents

TABLE OF CONTENTS



|                              |  |                                                                                       |  |        
|----------------------------- |  | ------------------------------------------------------------------------------------- |  | -------
|                              |  |                                                                                       |  | Page   
|Part I. Financial Information |  |                                                                                      
|                              |  |                                                                                      
|Item 1.                       |  | Financial Statements                                                                  |  | 3 - 27 
|                              |  |                                                                                      
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 28 - 50
|                              |  |                                                                                      
|Item 3.                       |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 50 - 51
|                              |  |                                                                                      
|Item 4.                       |  | Controls and Procedures                                                               |  | 51 - 52
|                              | 
|Part II. Other Information    |  |                                                                                      
|                              |  |                                                                                      
|Item 1.                       |  | Legal Proceedings                                                                     |  | 52     
|                              |  |                                                                                      
|Item 1A.                      |  | Risk Factors                                                                          |  | 52 - 53
|                              |  |                                                                                      
|Item 2.                       |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 54     
|                              |  |                                                                                      
|Item 3.                       |  | Defaults Upon Senior Securities                                                       |  | 54     
|                              |  |                                                                                      
|Item 4.                       |  | Submission of Matters to a Vote of Security Holders                                   |  | 54     
|                              |  |                                                                                      
|Item 5.                       |  | Other Information                                                                     |  | 55     
|                              |  |                                                                                      
|Item 6.                       |  | Exhibits                                                                              |  | 55     



2



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PART I. FINANCIAL INFORMATION



|ITEM 1. | FINANCIAL STATEMENTS
|------- | --------------------

Xerium Technologies, Inc.

Condensed Consolidated Balance Sheets(Unaudited)

(dollars in thousands, except per share data)



|                                                                                                                                                                   |  |              |          |   |                  |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------ | -------- | - | ---------------- | - | -------- | -
|                                                                                                                                                                   |  | June 30,2009 |          |   | December 31,2008 |  
|ASSETS                                                                                                                                                             |  |              |          |   |                  |   |          |  
|Current assets:                                                                                                                                                    |  |              |          |   |                  |   |          |  
|Cash and cash equivalents                                                                                                                                          |  | $            | 20,396   |   |                  | $ | 34,733   |  
|Accounts receivable (net of allowance for doubtful accounts of $11,730 at June 30, 2009 and $14,937 at December 31,
2008)                                          |  |              | 77,331   |   |                  |   | 94,049   |  
|Inventories                                                                                                                                                        |  |              | 86,259   |   |                  |   | 85,543   |  
|Prepaid expenses                                                                                                                                                   |  |              | 6,879    |   |                  |   | 4,844    |  
|Other current assets                                                                                                                                               |  |              | 10,782   |   |                  |   | 14,938   |  
|                                                                                                                                                                   |  |              |          |   |                  |   |          |  
|Total current assets                                                                                                                                               |  |              | 201,647  |   |                  |   | 234,107  |  
|Property and equipment, net                                                                                                                                        |  |              | 383,222  |   |                  |   | 384,590  |  
|Goodwill                                                                                                                                                           |  |              | 153,604  |   |                  |   | 155,205  |  
|Intangible assets                                                                                                                                                  |  |              | 28,309   |   |                  |   | 32,129   |  
|Other assets                                                                                                                                                       |  |              | 5,061    |   |                  |   | 5,541    |  
|                                                                                                                                                                   |  |              |          |   |                  |   |          |  
|Total assets                                                                                                                                                       |  | $            | 771,843  |   |                  | $ | 811,572  |  
|                                                                                                                                                                   |  |              |          |   |                  |   |          |  
|                                                                                                                                                                   |  |             
|LIABILITIES AND STOCKHOLDERS DEFICIT                                                                                                                              |  |              |          |   |                  |   |          |  
|Current liabilities:                                                                                                                                               |  |              |          |   |                  |   |          |  
|Notes payable                                                                                                                                                      |  | $            | 28,000   |   |                  | $ |         |  
|Accounts payable                                                                                                                                                   |  |              | 30,172   |   |                  |   | 53,076   |  
|Accrued expenses                                                                                                                                                   |  |              | 65,268   |   |                  |   | 83,139   |  
|Current maturities of long-term debt                                                                                                                               |  |              | 27,444   |   |                  |   | 39,687   |  
|                                                                                                                                                                   |  |              |          |   |                  |   |          |  
|Total current liabilities                                                                                                                                          |  |              | 150,884  |   |                  |   | 175,902  |  
|Long-term debt, net of current maturities                                                                                                                          |  |              | 563,308  |   |                  |   | 577,270  |  
|Deferred and long-term taxes                                                                                                                                       |  |              | 13,028   |   |                  |   | 13,358   |  
|Pension, other postretirement and postemployment obligations                                                                                                       |  |              | 66,361   |   |                  |   | 67,029   |  
|Other long-term liabilities                                                                                                                                        |  |              | 4,625    |   |                  |   | 5,594    |  
|Commitments and contingencies                                                                                                                                      |  |              |          |   |                  |   |          |  
|Stockholders deficit                                                                                                                                              |  |              |          |   |                  |   |          |  
|Preferred stock, $0.01 par value, 1,000,000 shares authorized; no shares outstanding as of June 30, 2009 and December 31,
2008                                     |  |              |         |   |                  |   |         |  
|Common stock, $0.01 par value, 150,000,000 shares authorized; 48,934,820 and 46,257,772 shares outstanding as of June 30, 2009 and
December 31, 2008, respectively |  |              | 489      |   |                  |   | 463      |  
|Paid-in capital                                                                                                                                                    |  |              | 220,621  |   |                  |   | 220,370  |  
|Accumulated deficit                                                                                                                                                |  |              | (226,762 | ) |                  |   | (218,915 | )
|Accumulated other comprehensive loss                                                                                                                               |  |              | (20,711  | ) |                  |   | (29,499  | )
|                                                                                                                                                                   |  |              |          |   |                  |   |          |  
|Total stockholders deficit                                                                                                                                        |  |              | (26,363  | ) |                  |   | (27,581  | )
|                                                                                                                                                                   |  |              |          |   |                  |   |          |  
|Total liabilities and stockholders deficit                                                                                                                        |  | $            | 771,843  |   |                  | $ | 811,572  |  
|                                                                                                                                                                   |  |              |          |   |                  |   |          |  

See accompanying notes.



3



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Xerium Technologies, Inc.

Condensed Consolidated Statements of Operations  (Unaudited)

(dollars
in thousands, except per share data)



|                                                      |  |                            |            |   |                          |   |            |      |  |   |            |   |  |   |            |  
|----------------------------------------------------- |  | -------------------------- | ---------- | - | ------------------------ | - | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                                      |  | Three Months EndedJune 30, |            |   | Six Months EndedJune 30, |  
|                                                      |  | 2009                       |            |   | 2008                     |   |            | 2009 |  |   | 2008       |  
|Net sales                                             |  | $                          | 120,843    |   |                          | $ | 170,393    |      |  | $ | 237,346    |   |  | $ | 329,380    |  
|Costs and expenses:                                   |  |                            |            |   |                          |   |            |      |  |   |            |   |  |   |            |  
|Cost of products sold                                 |  |                            | 75,225     |   |                          |   | 101,595    |      |  |   | 147,436    |   |  |   | 197,250    |  
|Selling                                               |  |                            | 16,075     |   |                          |   | 21,847     |      |  |   | 32,583     |   |  |   | 42,312     |  
|General and administrative                            |  |                            | 6,464      |   |                          |   | 23,367     |      |  |   | 19,672     |   |  |   | 42,057     |  
|Restructuring and impairments                         |  |                            | 1,026      |   |                          |   | 2,718      |      |  |   | 1,140      |   |  |   | 3,250      |  
|Research and development                              |  |                            | 2,740      |   |                          |   | 3,196      |      |  |   | 5,460      |   |  |   | 6,199      |  
|                                                      |  |                            |            |   |                          |   |            |      |  |   |            |   |  |   |            |  
|                                                      |  |                            | 101,530    |   |                          |   | 152,723    |      |  |   | 206,291    |   |  |   | 291,068    |  
|                                                      |  |                            |            |   |                          |   |            |      |  |   |            |   |  |   |            |  
|Income from operations                                |  |                            | 19,313     |   |                          |   | 17,670     |      |  |   | 31,055     |   |  |   | 38,312     |  
|Interest expense                                      |  |                            | (15,934    | ) |                          |   | (1,135     | )    |  |   | (32,248    | ) |  |   | (26,550    | )
|Interest income                                       |  |                            | 364        |   |                          |   | 369        |      |  |   | 721        |   |  |   | 563        |  
|Foreign exchange gain (loss)                          |  |                            | 555        |   |                          |   | (875       | )    |  |   | (786       | ) |  |   | 2,634      |  
|                                                      |  |                            |            |   |                          |   |            |      |  |   |            |   |  |   |            |  
|Income (loss) before provision for income taxes       |  |                            | 4,298      |   |                          |   | 16,029     |      |  |   | (1,258     | ) |  |   | 14,959     |  
|Provision for income taxes                            |  |                            | 2,697      |   |                          |   | 1,911      |      |  |   | 6,589      |   |  |   | 5,550      |  
|                                                      |  |                            |            |   |                          |   |            |      |  |   |            |   |  |   |            |  
|Net income (loss)                                     |  | $                          | 1,601      |   |                          | $ | 14,118     |      |  | $ | (7,847     | ) |  | $ | 9,409      |  
|                                                      |  |                            |            |   |                          |   |            |      |  |   |            |   |  |   |            |  
|Net income (loss) per share:                          |  |                            |            |   |                          |   |            |      |  |   |            |   |  |   |            |  
|Basic                                                 |  | $                          | 0.03       |   |                          | $ | 0.31       |      |  | $ | (0.16      | ) |  | $ | 0.20       |  
|                                                      |  |                            |            |   |                          |   |            |      |  |   |            |   |  |   |            |  
|Diluted                                               |  | $                          | 0.03       |   |                          | $ | 0.31       |      |  | $ | (0.16      | ) |  | $ | 0.20       |  
|                                                      |  |                            |            |   |                          |   |            |      |  |   |            |   |  |   |            |  
|Shares used in computing net income (loss) per share: |  |                            |            |   |                          |   |            |      |  |   |            |   |  |   |            |  
|Basic                                                 |  |                            | 48,882,979 |   |                          |   | 46,121,323 |      |  |   | 48,879,669 |   |  |   | 46,084,995 |  
|                                                      |  |                            |            |   |                          |   |            |      |  |   |            |   |  |   |            |  
|Diluted                                               |  |                            | 48,971,375 |   |                          |   | 46,211,012 |      |  |   | 48,879,669 |   |  |   | 46,189,813 |  
|                                                      |  |                            |            |   |                          |   |            |      |  |   |            |   |  |   |            |  

See accompanying notes.



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Xerium Technologies, Inc.

Condensed Consolidated Statements of Cash Flows(Unaudited)

(dollars in
thousands)



|                                                                                                   |  |                          |         |   |      |   |         |  
|-------------------------------------------------------------------------------------------------- |  | ------------------------ | ------- | - | ---- | - | ------- | -
|                                                                                                   |  | Six Months EndedJune 30, |        
|                                                                                                   |  | 2009                     |         |   | 2008 |  
|Operating activities                                                                               |  |                          |         |   |      |   |         |  
|Net income (loss)                                                                                  |  | $                        | (7,847  | ) |      | $ | 9,409   |  
|Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: |  |                          |         |   |      |   |         |  
|Stock-based compensation                                                                           |  |                          | 1,046   |   |      |   | 274     |  
|Depreciation                                                                                       |  |                          | 18,752  |   |      |   | 22,152  |  
|Amortization of intangibles                                                                        |  |                          | 1,166   |   |      |   | 1,807   |  
|Deferred financing cost amortization                                                               |  |                          | 2,694   |   |      |   | 2,344   |  
|Unrealized foreign exchange gain on revaluation of debt                                            |  |                          | (570    | ) |      |   | (1,476  | )
|Deferred taxes                                                                                     |  |                          | 1,439   |   |      |   | (3,012  | )
|Asset impairment                                                                                   |  |                          |        |   |      |   | 67      |  
|Gain on disposition of property and equipment                                                      |  |                          | (2,016  | ) |      |   | (269    | )
|Change in fair value of interest rate swaps                                                        |  |                          | 794     |   |      |   | (1,548  | )
|Provision for bad debt expense                                                                     |  |                          | (3,209  | ) |      |   | (71     | )
|Change in assets and liabilities which provided (used) cash:                                       |  |                          |         |   |      |   |         |  
|Accounts receivable                                                                                |  |                          | 21,336  |   |      |   | 7,642   |  
|Inventories                                                                                        |  |                          | 1,294   |   |      |   | 859     |  
|Prepaid expenses                                                                                   |  |                          | (1,963  | ) |      |   | (2,891  | )
|Other current assets                                                                               |  |                          | 3,841   |   |      |   | (4,722  | )
|Accounts payable and accrued expenses                                                              |  |                          | (42,607 | ) |      |   | 11,459  |  
|Deferred and other long-term liabilities                                                           |  |                          | (1,668  | ) |      |   | (1,012  | )
|                                                                                                   |  |                          |         |   |      |   |         |  
|Net cash (used in) provided by operating activities                                                |  |                          | (7,518  | ) |      |   | 41,012  |  
|                                                                                                   |  |                         
|Investing activities                                                                               |  |                          |         |   |      |   |         |  
|Capital expenditures, gross                                                                        |  |                          | (11,115 | ) |      |   | (20,886 | )
|Proceeds from disposals of property and equipment                                                  |  |                          | 4,001   |   |      |   | 1,033   |  
|Proceeds from acquisition, net of cash acquired                                                    |  |                          |        |   |      |   | 144     |  
|Other                                                                                              |  |                          | 1,100   |   |      |   |        |  
|                                                                                                   |  |                          |         |   |      |   |         |  
|Net cash used in investing activities                                                              |  |                          | (6,014  | ) |      |   | (19,709 | )
|                                                                                                   |  |                         
|Financing activities                                                                               |  |                          |         |   |      |   |         |  
|Net increase in borrowings (maturities of 90 days or less)                                         |  |                          | 28,000  |   |      |   | 168     |  
|Proceeds from borrowings (maturities longer than 90 days)                                          |  |                          |        |   |      |   | 349     |  
|Principal payments on debt                                                                         |  |                          | (29,057 | ) |      |   | (13,500 | )
|Other                                                                                              |  |                          |        |   |      |   | (8,744  | )
|                                                                                                   |  |                          |         |   |      |   |         |  
|Net cash used in financing activities                                                              |  |                          | (1,057  | ) |      |   | (21,727 | )
|                                                                                                   |  |                         
|Effect of exchange rate changes on cash flows                                                      |  |                          | 252     |   |      |   | 1,594   |  
|                                                                                                   |  |                          |         |   |      |   |         |  
|Net (decrease) increase in cash                                                                    |  |                          | (14,337 | ) |      |   | 1,170   |  
|Cash and cash equivalents at beginning of period                                                   |  |                          | 34,733  |   |      |   | 24,218  |  
|                                                                                                   |  |                          |         |   |      |   |         |  
|Cash and cash equivalents at end of period                                                         |  | $                        | 20,396  |   |      | $ | 25,388  |  
|                                                                                                   |  |                          |         |   |      |   |         |  

See accompanying notes.



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Xerium Technologies, Inc.

Notes to Unaudited Condensed 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 North America, Europe, South America and Asia-Pacific.

2. Basis of Presentation

The accompanying unaudited condensed consolidated interim financial statements at June 30, 2009 and for the three and six months ended June 30, 2009 and 2008
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 condensed 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 condensed consolidated interim financial statements should be read in conjunction with the Companys audited consolidated financial statements for the year ended December 31, 2008 as reported
on Form 10-K filed on March 12, 2009.

3. Accounting Policies

Derivatives and Hedging

On January 1, 2009, the Company adopted Statement of Financial Accounting
Standards No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133(SFAS No. 161). SFAS No. 161 amends and expands the disclosure requirements of FASB
Statement No. 133 (SFAS No. 133) with the intent to provide users of financial statements with an enhanced understanding of: (a) how and why an entity uses derivative instruments, (b) how derivative instruments and
related hedged items are accounted for under SFAS No. 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entitys financial position, financial performance, and cash flows. SFAS
No. 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about the fair value of and gains and losses on derivative instruments and disclosures about credit-risk-related contingent
features in derivative instruments.

As required by SFAS No. 133, the Company records all derivatives on the balance sheet at fair value. The
accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging
relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability or firm commitment attributable to a particular risk
are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives may also be
designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the
changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge.



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Xerium Technologies, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(dollars in thousands,
except per share data)

3. Accounting Policies(continued)

Derivatives and Hedging(continued)



The Company may enter into derivative contracts that are intended to economically hedge certain of its risks, even
though hedge accounting does not apply or the Company elects not to apply hedge accounting under SFAS No. 133.

Goodwill

The Company accounts for goodwill and other intangible assets in accordance with SFAS No. 142, Goodwill and Other Intangible Assets(SFAS No. 142). 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. As a result of the tests as of December 31, 2008, the Company determined that no goodwill impairment existed. As of June 30, 2009, the Company evaluated events and circumstances which may have indicated an impairment of
goodwill and other intangible assets and determined that no impairment exists.

Net Income (Loss) Per Common Share

Net income (loss) per common share has been computed and presented pursuant to the provisions of SFAS No. 128, Earnings per Share(SFAS
No. 128). Net income (loss) per share is based on the weighted-average number of shares outstanding during the period. As of June 30, 2009 and 2008, the Company had outstanding restricted stock units (RSUs) (see Note 14).

For the three months ended June 30, 2008, the diluted average shares outstanding were computed using the average market price for time-based
RSUs granted in 2005 and certain time-based RSUs granted in 2008 and the actual grant date market price for non-employee director RSUs. The calculation of earnings per share for the three and six months ended June 30, 2008 also excludes
time-based and performance-based RSUs that were approved on January 3, 2008 as these awards were made contingent upon the approval by the Companys stockholders at or before the Companys 2008 annual meeting of stockholders of an
amendment to the Companys 2005 Plan to increase the aggregate number of shares of common stock that may be delivered under or in satisfaction of awards under such plan from 2,500,000 to 5,000,000. On August 6, 2008, at the Companys
2008 annual meeting of stockholders, the stockholders approved an amendment to the Companys 2005 Plan to increase the aggregate number of shares of common stock that may be delivered under or in satisfaction of awards under such plan from
2,500,000 to 7,500,000. The calculation of diluted earnings per share for 2008 also excludes the Companys performance-based RSUs granted in 2005 and 2007 that are based on shareholder return targets because the performance criteria have not
been contingently achieved and therefore the RSUs are not contingently issuable.

For the three months ended June 30, 2009, the diluted average shares
outstanding were computed using the average market price for time-based RSUs granted in 2008 and 2009 and the actual grant date market price for non-employee director RSUs. The calculation of diluted earnings per share for the three and six
months ended June 30, 2009 excludes the Companys performance-based RSUs granted in 2005, 2007, 2008 and 2009 that are based on shareholder return targets because the performance criteria have not been contingently achieved and therefore
the RSUs are not contingently issuable. For the six months ended June 30, 2009, the Company excluded the dilutive impact of potential future issuances of common stock underlying the Companys RSUs from the calculation of diluted average
shares outstanding because their effect would have been antidilutive as the Company had a net loss for this period.



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##### Table of Contents

Xerium Technologies, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(dollars in thousands,
except per share data)

3. Accounting Policies(continued)

Net Income (Loss) Per Common Share(continued)



The following table sets forth the computation of basic and diluted earnings weighted average shares:



|                                                               |  |                                |  |                                |  |                              |  |                             
|-------------------------------------------------------------- |  | ------------------------------ |  | ------------------------------ |  | ---------------------------- |  | ----------------------------
|                                                               |  | Three MonthsEndedJune 30, 2009 |  | Three MonthsEndedJune 30, 2008 |  | Six MonthsEndedJune 30, 2009 |  | Six MonthsEndedJune 30, 2008
|Weighted-average common shares outstandingbasic               |  | 48,882,979                     |  | 46,121,323                     |  | 48,879,669                   |  | 46,084,995                  
|Dilutive effect of stock-based compensation awards outstanding |  | 88,396                         |  | 89,689                         |  |                             |  | 104,818                     
|                                                               |  |                                |  |                                |  |                              |  |                             
|Weighted-average common shares outstandingdiluted             |  | 48,971,375                     |  | 46,211,012                     |  | 48,879,669                   |  | 46,189,813                  
|                                                               |  |                                |  |                                |  |                              |  |                             

Reclassifications

Certain prior period amounts have been reclassified to conform to the current period presentation.

New Accounting
Standards

In June 2009, the Financial Accounting Standards Board (FASB) issued SFAS No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162(SFAS No. 168). SFAS No. 168 is effective for interim periods ending after
September 15, 2009 and identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally
accepted accounting principles in the United States. The objective of this statement is to replace SFAS No. 162 and to establish the FASB Accounting Standards Codification (Codification) as the source of authoritative
accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. Rules and interpretive releases of the Securities and Exchange Commission (SEC) under
authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. The Company believes that the adoption of SFAS No. 168 will have no material impact on its results of operations, financial position or cash
flows.

In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R) (SFAS No. 167),
which amends the consolidation guidance applicable to variable interest entities. The amendments will significantly affect the overall consolidation analysis under FASB Interpretation No. 46(R). SFAS No. 167 is effective as of the
beginning of the first fiscal year that begins after November 15, 2009 and the Company believes that the adoption of SFAS No. 167 will have no material impact on its results of operations, financial position or cash flows.

In June 2009, the FASB issued FASB Statement No. 166, Accounting for Transfers of Financial Assetsan amendment of FASB Statement No. 140(SFAS No. 166). SFAS No. 166 is intended to improve the relevance, representational faithfulness and comparability of the information that a reporting entity provides in its financial statements about a transfer of
financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferors continuing involvement, if any, in transferred financial assets. SFAS No. 166 must be applied as of the
beginning of each reporting entitys first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. Earlier
application is prohibited. The Company believes that the adoption of SFAS No. 166 will have no material impact on its results of operations, financial position or cash flows.



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##### Table of Contents

Xerium Technologies, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(dollars in thousands,
except per share data)

3. Accounting Policies(continued)

New Accounting Standards(continued)



In May 2009, the FASB issued SFAS No. 165, Subsequent Events (SFAS
No. 165). SFAS 165 is intended to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. It
requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that datethat is, whether that date represents the date the financial statements were issued or were available to be
issued. This disclosure should alert all users of financial statements that an entity has not evaluated subsequent events after that date in the set of financial statements being presented. SFAS No. 165 is effective for interim and
annual periods ending after June 15, 2009. The adoption of SFAS No. 165 had no material impact on its results of operations, financial position or cash flows. The Company has evaluated subsequent events through August 6, 2009,
which represents the date the Companys Form 10-Q for the quarter ended June 30, 2009 was filed with the Securities and Exchange Commission.

In
April 2009, the FASB issued Staff Position SFAS No. 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments(FSP FAS 107-1). FSP 107-1 requires disclosure about fair value of financial
instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. FSP 107-1 is effective for interim reporting periods ending after June 15, 2009. The adoption of FSP 107-1 had no material
impact on the Companys results of operations, financial position or cash flows. See Note 6 for further discussion.

Effective January 1, 2009,
the Company adopted SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activitiesan amendment of FASB Statement No. 133(SFAS No. 161). See Derivatives and Hedging above. The Company's
adoption of SFAS No. 161 did not have a material effect on its financial position or results of operations.

Effective January 1, 2008, the
Company partially adopted SFAS No. 157, Fair Value Measurements (SFAS No. 157), for measuring its derivative assets and liabilities. See further discussion at Note 4 Derivatives and Hedging. FASB Staff
Position SFAS No. 157-2, Effective Date of FASB Statement No. 157, permits the Company to defer the recognition and measurement of its nonfinancial assets and nonfinancial liabilities until January 1, 2009. At January 1,
2009, the Company did not have any nonfinancial assets or nonfinancial liabilities that are recognized or disclosed at fair value.

In December 2007, the
FASB issued SFAS No. 141(R), Business Combinations (SFAS No. 141R). SFAS No. 141R requires that upon initially obtaining control, an acquirer will recognize 100% of the fair values of acquired assets, including
goodwill, and assumed liabilities, with only limited exceptions, even if the acquirer has not acquired 100% of its target. SFAS No. 141R amends SFAS No. 109, Accounting for Income Taxes, to require the acquirer to recognize changes
in the amount of its deferred tax benefits that are recognizable because of a business combination, either in income from continuing operations in the period of the combination or directly in contributed capital, depending on the circumstances. On
January 1, 2009, the Company adopted SFAS No. 141R, which is effective for fiscal years beginning after December 15, 2008. The adoption of SFAS No. 141R had no impact on the Companys financial statements.



9



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##### Table of Contents

Xerium Technologies, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(dollars in thousands,
except per share data)

3. Accounting Policies(continued)

New Accounting Standards(continued)



In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial
Statements (SFAS No. 160), an amendment of Accounting Research Bulletin (ARB) No. 51 (ARB No. 51). SFAS No. 160 clarifies the classification of noncontrolling interests in consolidated
statements of financial position and the accounting for, and reporting of, transactions between the reporting entity and holders of such noncontrolling interests. On January 1, 2009, the Company adopted SFAS No. 160, which is effective for
the first annual reporting period beginning on or after December 15, 2008. SFAS No. 160 is required to be adopted prospectively, except for reclassifying noncontrolling interests to equity, separate from the parents
shareholders equity, in the consolidated statement of financial position and recasting consolidated net income (loss) to include net income (loss) attributable to both the controlling and noncontrolling interests, both of which are required to
be adopted retrospectively. Since essentially all of the Companys subsidiaries are 100% owned, the adoption of SFAS No. 160 did not have a significant impact to its financial statements.

4. Derivatives and Hedging

Risk Management Objective of Using
Derivatives

The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally
manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company enters into derivative financial instruments to manage exposures that arise from business activities that
result in the receipt or payment of future known cash amounts, the value of which are determined by interest rates or foreign exchange rates. Specifically, the Company has entered into interest rate swaps to hedge variable interest related to its
senior debt and foreign exchange contracts to protect the value of certain assets and obligations.

Cash Flow Hedges of Interest Rate Risk

The Companys objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate
movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a
counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.

The
effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income (loss) and is subsequently reclassified into earnings in the period that the hedged
forecasted transaction affects earnings. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings.

Based
on interest rates as of June 30, 2009, amounts reported in accumulated other comprehensive income (loss) related to derivatives will be reclassified to interest expense as interest payments are made on the Companys variable-rate debt.
During the twelve months ended June 30, 2010, the Company estimates, based on interest rates as of June 30, 2009, that $13,595 will be reclassified as a charge to interest expense. As of June 30, 2009, the Company effectively fixed
the variable interest rate on approximately 84% of the term loan portion of the Companys senior credit facility at 9.74%.



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##### Table of Contents

Xerium Technologies, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(dollars in thousands,
except per share data)

4. Derivatives and Hedging(continued)

Cash Flow Hedges of Interest Rate Risk(continued)



As of June 30, 2009, the Company had the following outstanding interest rate derivatives that were designated as
cash flow hedges of interest rate risk:



|                                                  |  |                       |  |          |        
|------------------------------------------------- |  | --------------------- |  | -------- | -------
|Interest Rate Derivative                          |  | Number of Instruments |  | Notional
|Interest Rate Swaps  Canadian dollar instruments |  | 2                     |  | $        | 53,479 
|Interest Rate Swaps  Euro instruments            |  | 2                     |  | $        | 173,994
|Interest Rate Swaps  U.S. dollar instruments     |  | 2                     |  | $        | 261,152

Non-designated Hedges of Foreign Exchange Risk

Derivatives not designated as hedges are not speculative and are used to manage the Companys exposure to foreign exchange rates but do not meet the strict hedge
accounting requirements of SFAS No. 133. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in earnings.

The Company, from time to time, enters into foreign exchange forward 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 (cash flow hedges). Additionally, to manage its exposure to fluctuations in foreign currency on intercompany balances and certain purchase commitments, the Company uses foreign exchange forward contracts (fair value hedges).

As of June 30, 2009, the Company had the following outstanding derivatives that were not designated as hedges in qualifying hedging relationships.
The value of these contracts is recognized at fair value based on market exchange forward rates. The change in fair value of these contracts is included in foreign exchange gain/(loss).



|                            |  |               |         |   |                    |   |       
|--------------------------- |  | ------------- | ------- | - | ------------------ | - | ------
|Foreign Currency Derivative |  | Notional Sold |         |   | Notional Purchased
|Cash flow hedges            |  | $             |        |   |                    | $ | 1,540 
|Fair value hedges           |  | $             | (13,831 | ) |                    | $ | 13,635

Credit-risk-related Contingent Features

The Company has agreements with each of its derivative counterparties that contain a provision where if the Company either defaults or is capable of being declared in
default on any of its indebtedness, then the Company could also be declared in default on its derivative obligations.

As of June 30, 2009, the fair
value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $21,388. Included in this amount are certain derivative liabilities of $8,071 that
are related to counterparties that are also lenders under the Companys senior credit facility. Liabilities to these counterparties for derivatives and borrowings made under the senior credit facility are secured by substantially all of the
Companys assets. The Company has not posted any collateral related to other derivative agreements.

Due to reduced credit limits at some of its
banks, the Company has been entering into fewer foreign currency hedging arrangements and may not be able to enter into as many hedging arrangements in the future. As a result, the Company could be more exposed to the effects of currency
fluctuations, both favorable and unfavorable, which could have a material impact on its results of operations.



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##### Table of Contents

Xerium Technologies, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(dollars in thousands,
except per share data)

4. Derivatives and Hedging(continued)



The table below presents the fair value of the Companys derivative financial instruments as well as their classification on the consolidated balance
sheet as of June 30, 2009.

Tabular Disclosure of Fair Values of Derivative Instruments



|                                                                       |  |                                      |  |                                           |     |                       |                  |            |   |       
|---------------------------------------------------------------------- |  | ------------------------------------ |  | ----------------------------------------- | --- | --------------------- | ---------------- | ---------- | - | ------
|                                                                       |  | Asset
DerivativesAs of June 30, 2009 |  | Liability Derivatives As of June 30, 2009
|                                                                       |  | Balance SheetLocation                |  | Fair Value                                |     | Balance SheetLocation |                  | Fair Value
|Derivatives designated as hedging instruments under SFAS 133           |  |                                      |  |                                           |     |                       |                  |            |   |       
|Interest Rate Swaps                                                    |  | Other current assets                 |  | $                                         |    |                       | Accrued expenses |            | $ | 16,792
|                                                                       |  |                                      |  |                                           |     |                       |                  |            |   |       
|Total derivatives designated as hedging instruments under SFAS 133     |  |                                      |  | $                                         |    |                       |                  |            | $ | 16,792
|                                                                       |  |                                      |  |                                           |     |                       |                  |            |   |       
|Derivatives not designated as hedging instruments under SFAS 133       |  |                                      |  |                                           |     |                       |                  |            |   |       
|Foreign Currency Hedges                                                |  | Other current assets                 |  | $                                         | 281 |                       | Accrued expenses |            | $ | 1,141 
|                                                                       |  |                                      |  |                                           |     |                       |                  |            |   |       
|Total derivatives not designated as hedging instruments under SFAS 133 |  |                                      |  | $                                         | 281 |                       |                  |            | $ | 1,141 
|                                                                       |  |                                      |  |                                           |     |                       |                  |            |   |       

The tables below present the effect of the Companys derivative financial instruments on the consolidated
statements of operations for the three months ended June 30, 2009.

Tabular Disclosure of the Effect of Derivative Instruments on
the Consolidated Statements of Operations for the Three Months Ended June 30, 2009



|                                                           |  |                                                                                  |        |   |                                                                                          |                  |                                                                                                 |   |        |                                                                                                                          |  |                                                                                                                      |  |   |      |  
|---------------------------------------------------------- |  | -------------------------------------------------------------------------------- | ------ | - | ---------------------------------------------------------------------------------------- | ---------------- | ----------------------------------------------------------------------------------------------- | - | ------ | ------------------------------------------------------------------------------------------------------------------------ |  | -------------------------------------------------------------------------------------------------------------------- |  | - | ---- | -
|Derivatives in SFAS No. 133 Cash Flow HedgingRelationships |  | Amount ofGain or(Loss)Recognizedin OCI onDerivative(EffectivePortion), netof
tax |        |   | Location of Gain or (Loss)Reclassified fromAccumulated OCIinto Income(Effective Portion) |                  | Amount of Gainor
(Loss)Reclassified fromAccumulatedOCI into Income(EffectivePortion), net oftax |   |        | Location of Gainor (Loss)Recognized inIncome
onDerivative(IneffectivePortion andAmountExcluded fromEffectivenessTesting) |  | Amount ofGain or(Loss)Recognizedin Income onDerivative(IneffectivePortion
andAmountExcludedfromEffectivenessTesting) | 
|Interest Rate Swaps                                        |  | $                                                                                | (3,211 | ) |                                                                                          | Interest expense |                                                                                                 | $ | (3,699 | )                                                                                                                        |  | Interest expense                                                                                                     |  | $ | (397 | )



|                                                                     |  |                                                             |  |                                                         |      
|-------------------------------------------------------------------- |  | ----------------------------------------------------------- |  | ------------------------------------------------------- | -----
|Derivatives Not Designated as Hedging Instruments Under SFAS No. 133 |  | Location of Gain or (Loss)Recognized in Income
onDerivative |  | Amount of Gainor (Loss)Recognized inIncome onDerivative
|Foreign Currency Hedges                                              |  | Foreign exchange gain                                       |  | $                                                       | 1,505
|                                                                     |  |                                                             |  |                                                         |      
|                                                                     |  |                                                             |  | $                                                       | 1,505
|                                                                     |  |                                                             |  |                                                         |      



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##### Table of Contents

Xerium Technologies, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(dollars in thousands,
except per share data)

4. Derivatives and Hedging(continued)



Fair Value of Derivatives Under SFAS No. 157

Effective January 1, 2008, the Company adopted SFAS No. 157 for measuring its derivative assets and liabilities. SFAS No. 157 emphasizes that fair value is a market-based measurement, not an entity-specific measurement.
Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, SFAS
No. 157 establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of
the hierarchy) and the reporting entitys own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).

Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 inputs are inputs other than quoted prices included in Level
1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other
than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, which are typically based on an entitys
own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy
within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Companys assessment of the significance of a particular input to the fair value
measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

To comply with the provisions of SFAS
No. 157, the Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterpartys nonperformance risk in the fair value measurements. Although the Company has
determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit
spreads to evaluate the likelihood of default by itself and its counterparties. However, as of June 30, 2009, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative
positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Company has determined that its derivative valuations in their entirety are classified in Level 2 of
the fair value hierarchy. The Company does not have any fair value measurements using significant unobservable inputs (Level 3) as of June 30, 2009.

The table below presents the Companys assets and liabilities measured at fair value on a recurring basis as of June 30, 2009, aggregated by the level in the fair value hierarchy within which those measurements fall.



|            |  |       |         |   |                                                             |   |                                             |  |   |                                        |   |  |   |  
|----------- |  | ----- | ------- | - | ----------------------------------------------------------- | - | ------------------------------------------- |  | - | -------------------------------------- | - |  | - | -
|Assets      |  | Total |         |   | Quoted Prices inActive Markets forIdentical Assets(Level 1) |   | Significant OtherObservablesInputs(Level
2) |  |   | SignificantUnobservableInputs(Level 3)
|Derivatives |  | $     | 281     |   |                                                             | $ |                                            |  | $ | 281                                    |   |  | $ | 
|            |  |       |         |   |                                                             |   |                                             |  |   |                                        |   |  |   |  
|Total       |  | $     | 281     |   |                                                             | $ |                                            |  | $ | 281                                    |   |  | $ | 
|            |  |       |         |   |                                                             |   |                                             |  |   |                                        |   |  |   |  
|            |  |       |         |  
|Liabilities |  |       |         |   |                                                             |   |                                             |  |   |                                       
|Derivatives |  | $     | (17,933 | ) |                                                             | $ |                                            |  | $ | (17,933                                | ) |  | $ | 
|            |  |       |         |   |                                                             |   |                                             |  |   |                                        |   |  |   |  
|Total       |  | $     | (17,933 | ) |                                                             | $ |                                            |  | $ | (17,933                                | ) |  | $ | 
|            |  |       |         |   |                                                             |   |                                             |  |   |                                        |   |  |   |  



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##### Table of Contents

Xerium Technologies, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(dollars in thousands,
except per share data)



5. Inventories

The components of inventories are as follows at:



|                |  |              |        |                  |   |       
|--------------- |  | ------------ | ------ | ---------------- | - | ------
|                |  | June 30,2009 |        | December 31,2008
|Raw materials   |  | $            | 18,305 |                  | $ | 17,357
|Work in process |  |              | 29,611 |                  |   | 29,385
|Finished units  |  |              | 38,343 |                  |   | 38,801
|                |  |              |        |                  |   |       
|                |  | $            | 86,259 |                  | $ | 85,543
|                |  |              |        |                  |   |       

6. Debt

The
Company was in compliance with the covenants under its senior credit facility at June 30, 2009. Based on information available as of the date of this report, the Company anticipates it will not be in compliance with certain financial covenants
for the period ending September 30, 2009. Failing to satisfy financial covenants under the senior credit facility would constitute an event of default, upon which the lenders could terminate the revolving credit facility and accelerate the
payment of all of the outstanding debt under the senior credit facility, causing it to immediately become due and payable. The Company intends to seek an amendment to its senior credit facility agreement with the lenders thereunder prior to the date
upon which an event of default would occur due to its failure to demonstrate compliance with certain financial covenants for the period ending September 30, 2009. No assurances can be given that the Company will successfully obtain the
lenders consent to amend the credit facility on this timetable, or at all, or amend covenants in a manner sufficient to adequately reduce the risk of default. In connection with any such amendments, the lenders are likely to condition their
consent on increases in the fees and interest rate payable under the credit facility, among other things, and no assurance can be given that such fees and increased interest will be sustainable by the Company. Additionally, if the Company does not
successfully amend the senior credit facility or if the lenders accelerate the debt under the senior credit facility so that it is payable prior to the expiration of the underlying interest rate swaps, hedge accounting under SFAS No. 133 would
no longer be applicable for these interest rate swaps. Accordingly, the cumulative mark to market changes in their fair value that have been recorded in accumulated other comprehensive income (loss) through September 30, 2009 in addition to the
credit valuation adjustments recorded under SFAS No. 157 would be charged to the statement of operations during the third quarter of 2009. As of June 30, 2009 this amount was $18,079. Additionally, mark to market changes subsequent to
September 30, 2009 would be recorded as charges or credits to interest expense prospectively.

Previously, the Company was not in compliance with
certain financial covenants for the period ended March 31, 2008 under its then existing credit facility and on April 8, 2008 and May 30, 2008, the Company amended its then existing senior credit facility agreement with the lenders
thereunder. Under the amended senior credit facility agreement dated May 30, 2008, borrowings under the revolving credit facility and the term loans bear interest at the sum of, as applicable, LIBOR, the Euribor rate or CDOR plus, in each case,
the applicable margin. The applicable margin increased from 2.75% to 5.50% through December 31, 2008 with three identified step downs (i.e., to 4.25%, 3.75% and 2.75%) that are contingent upon future improvements in the Companys credit
rating levels beginning January 1, 2009. Based on the 90-day LIBOR, as of June 30, 2009, approximately 84% of the Companys long-term debt under its senior credit facility was effectively fixed by interest rate swap contracts at
9.74%, and the weighted average interest rate on the portion of the term loan facility not effectively fixed was 6.32%.

FSP 107-1 requires disclosure
about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. Accordingly, the carrying value of the debt under the senior credit facility of $581,402 exceeds its fair
value of approximately $385,000 as of June 30, 2009.



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##### Table of Contents

Xerium Technologies, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(dollars in thousands,
except per share data)

6. Debt(continued)



During the first quarters of 2009 and 2008, the Company made mandatory debt repayments of approximately $16,100 and $9,400, respectively, based on the difference between
its pre-dividend free cash flow, as defined in its credit facility agreement, and cash dividends paid in the prior year, multiplied by the applicable percentage. The Company also made mandatory payments of $2,600 during the second
quarter of 2009. Beginning in 2009, the sum of voluntary and scheduled debt payments made in the previous year is subtracted from this result to determine the mandatory debt repayment. The Company also made scheduled quarterly debt payments of its
senior debt of approximately $4,700 and $1,800 during the first quarters of 2009 and 2008, respectively and $4,700 and $2,000 during the second quarters of 2009 and 2008, respectively. During the first quarter of 2009, the Company made borrowings
under its revolver of $28,000.

7. Income Taxes

The
Company utilizes the asset and liability method for accounting for income taxes in accordance with SFAS No. 109. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax
bases of assets and liabilities. Deferred tax assets and liabilities are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company reduces the deferred tax assets by a valuation
allowance if, based upon the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Information evaluated includes the Companys financial position and results of
operations for the current and preceding years as well as an evaluation of currently available information about future years.

Because of the
Companys accumulated loss position and the uncertainty around the future profitability in certain tax jurisdictions, on June 30, 2009, the Company has valuation allowances for deferred tax assets primarily related to net operating loss
carry forwards in the United States, the United Kingdom, Canada, Germany, Sweden and Australia.

For the three months ended June 30, 2009 and 2008,
the provision for income taxes was $2,697 and $1,911, respectively. The effective tax rate was higher than the statutory rate in all periods presented due to the impact of losses incurred in certain of the Companys U.S. and foreign
subsidiaries with previously established valuation allowances in relation to the level of profitability in tax-paying subsidiaries. In addition, the effective tax rate increased for the second quarter of 2009 as compared with the second quarter of
2008 principally due to the minimal tax provision being recognized on the increase in income before income taxes in 2008 resulting from the $13,704 increase in the fair value of the Companys interest rate swaps which occurred principally in
subsidiaries with valuation allowances. For the six months ended June 30, 2009 and 2008, the provision for income taxes was $6,589 and $5,550, respectively. The increase in tax for the six months ended June 30, 2009 was primarily due to
the establishment of a valuation allowance in Canada of approximately $2,850 in the first quarter of 2009.

The Company adopted FASB Interpretation
No. 48, Accounting for Uncertainty in Income Taxes(FIN 48) on January 1, 2007. As of December 31, 2008, the Company had a gross unrecognized tax benefit of $4,831. During the six months ended June 30, 2009,
the Companys unrecognized tax benefit decreased by approximately $688 based principally on the outcome of a foreign tax audit.

The Companys
policy is to recognize interest and penalties related to income tax matters as income tax expense, which were immaterial for the six months ended June 30, 2009 and 2008, respectively. The tax years 2000 through 2008 remain open to examination
by the major taxing jurisdictions to which the Company and its subsidiaries are subject.



15



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##### Table of Contents

Xerium Technologies, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(dollars in thousands,
except per share data)



8. Pensions, Other Postretirement and Postemployment
Benefits

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

The Company also sponsors various unfunded defined contribution plans that provide for retirement benefits to employees, some in accordance with local government
requirements.

Also, through December 31, 2008, the Company sponsored an unfunded plan that offered the opportunity to obtain health care benefits to
a majority of all retired U.S. employees and their covered dependents and beneficiaries. A portion of this plan was contributory, with retiree contributions adjusted periodically. Eligibility varied according to date of hire, age and length of
service. As of December 31, 2008, the Company no longer sponsors or funds its U.S. retiree health insurance program. Certain retirees also have a life insurance benefit provided at no cost.

Effective December 31, 2008, the Company froze benefit pension accruals under its Pension Plan for U.S. Salaried and Non-Union Hourly Employees (the Pension
Plan) so that service beyond December 31, 2008 is not credited under the Pension Plan. Employees who were vested as of December 31, 2008 will be entitled to their benefit earned as of December 31, 2008. Current employees who
were not vested as of December 31, 2008 will be entitled to their benefit earned as of December 31, 2008 upon five years of continuous employment from date of hire.

Additionally, during the first quarter of 2009 the Company suspended its 401(k) plan match in the United States until further notice.

As required by SFAS No. 132 (revised 2003), Employers Disclosures about Pensions and Other Postretirement Benefits  an amendment of FASB Statements No. 87, 88, and 106, the following
tables summarize the components of net periodic benefit cost:

Defined Benefit Plans



|                                   |  |                    |       |   |                  |   |        |              |  |   |              |   |  |   |        |  
|---------------------------------- |  | ------------------ | ----- | - | ---------------- | - | ------ | ------------ |  | - | ------------ | - |  | - | ------ | -
|                                   |  | Three Months Ended |       |   | Six Months Ended |  
|                                   |  | June 30,2009       |       |   | June 30,2008     |   |        | June 30,2009 |  |   | June 30,2008 |  
|Service cost                       |  | $                  | 689   |   |                  | $ | 1,505  |              |  | $ | 1,397        |   |  | $ | 3,026  |  
|Interest cost                      |  |                    | 1,500 |   |                  |   | 1,665  |              |  |   | 2,979        |   |  |   | 3,355  |  
|Expected return on plan assets     |  |                    | (788  | ) |                  |   | (1,200 | )            |  |   | (1,547       | ) |  |   | (2,402 | )
|Amortization of prior service cost |  |                    | 22    |   |                  |   | 30     |              |  |   | 43           |   |  |   | 59     |  
|Amortization of net loss           |  |                    | 275   |   |                  |   | 125    |              |  |   | 519          |   |  |   | 258    |  
|                                   |  |                    |       |   |                  |   |        |              |  |   |              |   |  |   |        |  
|Net periodic benefit cost          |  | $                  | 1,698 |   |                  | $ | 2,125  |              |  | $ | 3,391        |   |  | $ | 4,296  |  
|                                   |  |                    |       |   |                  |   |        |              |  |   |              |   |  |   |        |  

Other Postretirement Benefit Plans



|                                   |  |                    |    |   |                  |   |      |              |  |   |              |   |  |   |      |  
|---------------------------------- |  | ------------------ | -- | - | ---------------- | - | ---- | ------------ |  | - | ------------ | - |  | - | ---- | -
|                                   |  | Three Months Ended |    |   | Six Months Ended |  
|                                   |  | June 30,2009       |    |   | June 30,2008     |   |      | June 30,2009 |  |   | June 30,2008 |  
|Service cost                       |  | $                  |   |   |                  | $ | 132  |              |  | $ |             |   |  | $ | 264  |  
|Interest cost                      |  |                    | 9  |   |                  |   | 453  |              |  |   | 18           |   |  |   | 906  |  
|Amortization of prior service cost |  |                    |   |   |                  |   | (140 | )            |  |   |             |   |  |   | (279 | )
|Amortization of net gain           |  |                    | (1 | ) |                  |   | (17  | )            |  |   | (2           | ) |  |   | (35  | )
|                                   |  |                    |    |   |                  |   |      |              |  |   |              |   |  |   |      |  
|Net periodic benefit cost          |  | $                  | 8  |   |                  | $ | 428  |              |  | $ | 16           |   |  | $ | 856  |  
|                                   |  |                    |    |   |                  |   |      |              |  |   |              |   |  |   |      |  



16



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##### Table of Contents

Xerium Technologies, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(dollars in thousands,
except per share data)



9. Comprehensive Income and Accumulated Other
Comprehensive Income (Loss)

Comprehensive income for the periods ended June 30, 2009 and 2008 is as follows:



|                                                 |  |                    |        |   |                  |   |        |              |  |   |              |   |  |   |        |  
|------------------------------------------------ |  | ------------------ | ------ | - | ---------------- | - | ------ | ------------ |  | - | ------------ | - |  | - | ------ | -
|                                                 |  | Three Months Ended |        |   | Six Months Ended |  
|                                                 |  | June 30,2009       |        |   | June 30,2008     |   |        | June 30,2009 |  |   | June 30,2008 |  
|Net income (loss)                                |  | $                  | 1,601  |   |                  | $ | 14,118 |              |  | $ | (7,847       | ) |  | $ | 9,409  |  
|Foreign currency translation adjustments         |  |                    | 12,132 |   |                  |   | 6,649  |              |  |   | 9,681        |   |  |   | 12,353 |  
|Minimum pension liability/SFAS No. 158 Liability |  |                    | (973   | ) |                  |   | (158   | )            |  |   | (904         | ) |  |   | (65    | )
|Change in value of derivative instruments        |  |                    | 60     |   |                  |   |       |              |  |   | 11           |   |  |   |       |  
|                                                 |  |                    |        |   |                  |   |        |              |  |   |              |   |  |   |        |  
|Comprehensive income                             |  | $                  | 12,820 |   |                  | $ | 20,609 |              |  | $ | 941          |   |  | $ | 21,697 |  
|                                                 |  |                    |        |   |                  |   |        |              |  |   |              |   |  |   |        |  

The components of accumulated other comprehensive income (loss) are as follows:



|                                  |  |                                      |        |                                               |   |         |                               |  |   |                                            |   |  |   |         |  
|--------------------------------- |  | ------------------------------------ | ------ | --------------------------------------------- | - | ------- | ----------------------------- |  | - | ------------------------------------------ | - |  | - | ------- | -
|                                  |  | ForeignCurrencyTranslationAdjustment |        | MinimumPensionLiability/SFASNo. 158 Liability |   |         | Value ofDerivativeInstruments |  |   | AccumulatedOtherComprehensiveIncome (Loss) |  
|Balance at December 31, 2008      |  | $                                    | 5,891  |                                               | $ | (21,531 | )                             |  | $ | (13,859                                    | ) |  | $ | (29,499 | )
|Current period change, net of tax |  |                                      | 9,681  |                                               |   | (904    | )                             |  |   | 11                                         |   |  |   | 8,788   |  
|                                  |  |                                      |        |                                               |   |         |                               |  |   |                                            |   |  |   |         |  
|Balance at June 30, 2009          |  | $                                    | 15,572 |                                               | $ | (22,435 | )                             |  | $ | (13,848                                    | ) |  | $ | (20,711 | )
|                                  |  |                                      |        |                                               |   |         |                               |  |   |                                            |   |  |   |         |  



|10. | Warranties
|--- | ----------

The Company offers warranties on certain products that
it sells. The specific terms and conditions of these warranties vary depending on the product sold, the country in which the product is sold and arrangements with the customer. 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 six months ended June 30, 2009 are
as follows:



|                                                                           |  |   |        |  
|-------------------------------------------------------------------------- |  | - | ------ | -
|Balance at December 31, 2008                                               |  | $ | 2,424  |  
|Warranties provided during period                                          |  |   | 1,183  |  
|Settlements made during period                                             |  |   | (1,061 | )
|Changes in liability estimates, including expirations and currency effects |  |   | (274   | )
|                                                                           |  |   |        |  
|Balance at June 30, 2009                                                   |  | $ | 2,272  |  
|                                                                           |  |   |        |  



17



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##### Table of Contents

Xerium Technologies, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements  (Continued)

(dollars in thousands, except per share information)



|11. | Restructuring and Impairments Expense
|--- | -------------------------------------

Restructuring and
impairments expense included in the Companys statements of operations are the result of its long-term strategy to reduce production costs and improve long-term competitiveness. Restructuring and impairments expense consists principally of
severance costs related to reductions in work force and of facility costs and impairments of assets principally 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 and other associated costs.

During the first quarter of 2009,
the Company continued its program of streamlining its operating structure and recorded restructuring expenses of approximately $700 in connection therewith. Additionally during the first quarter of 2009, the Company sold its rolls manufacturing
facility in Sweden at a gain of approximately $1,200, which was partially offset by approximately $600 of costs incurred to continue with actions related to the closure of manufacturing facilities previously announced prior to the first quarter of
2009.

During the second quarter of 2009, essentially all of the Companys restructuring expenses of approximately $1,000 were related to the
streamlining of its operating structure. The Company expects to incur restructuring expenses of approximately $3,000 during the remainder of 2009, primarily related to a continuation of streamlining its operating structure.

The table below sets forth for the six months ended June 30, 2009, the significant components and activity under restructuring programs and asset impairments:



|                         |  |                            |       |         |   |       |                 |  |              |    |  |                         |        |   |  |   |      
|------------------------ |  | -------------------------- | ----- | ------- | - | ----- | --------------- |  | ------------ | -- |  | ----------------------- | ------ | - |  | - | -----
|                         |  | Balance atDecember 31,2008 |       | Charges |   |       | CurrencyEffects |  | CashPayments |    |  | Balance atJune 30, 2009
|Severance                |  | $                          | 5,422 |         | $ | 2,136 |                 |  | $            | 15 |  | $                       | (6,326 | ) |  | $ | 1,247
|Facility costs and other |  |                            | 2,455 |         |   | (996  | )               |  |              | 66 |  |                         | 419    |   |  |   | 1,944
|                         |  |                            |       |         |   |       |                 |  |              |    |  |                         |        |   |  |   |      
|Total                    |  | $                          | 7,877 |         | $ | 1,140 |                 |  | $            | 81 |  | $                       | (5,907 | ) |  | $ | 3,191
|                         |  |                            |       |         |   |       |                 |  |              |    |  |                         |        |   |  |   |      

Restructuring and impairments expense by segment, which is not included in Segment Earnings (Loss) in Note 11, is
as follows:



|            |  |                            |       |                          |              |   |              |  |   |              |   |  |   |      
|----------- |  | -------------------------- | ----- | ------------------------ | ------------ | - | ------------ |  | - | ------------ | - |  | - | -----
|            |  | For the Three Months Ended |       | For the Six Months Ended
|            |  | June 30,2009               |       |                          | June 30,2008 |   | June 30,2009 |  |   | June 30,2008
|Clothing    |  | $                          | (198  | )                        |              | $ | 115          |  | $ | (130         | ) |  | $ | 115  
|Roll Covers |  |                            | 673   |                          |              |   | 1,287        |  |   | 44           |   |  |   | 1,721
|Corporate   |  |                            | 551   |                          |              |   | 1,316        |  |   | 1,226        |   |  |   | 1,414
|            |  |                            |       |                          |              |   |              |  |   |              |   |  |   |      
|Total       |  | $                          | 1,026 |                          |              | $ | 2,718        |  | $ | 1,140        |   |  | $ | 3,250
|            |  |                            |       |                          |              |   |              |  |   |              |   |  |   |      



18



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##### Table of Contents

Xerium Technologies, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(dollars in thousands,
except per share data)



12. Business Segment Information

The Company is a global manufacturer and supplier of consumable products used primarily in the production of paper and 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 papermaking machines. The Company manages each of these operating segments separately.

Management evaluates segment
performance based on earnings before interest, taxes, depreciation and amortization and 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.

Summarized financial information for the Companys reportable segments is presented in the tables that follow for the
three and six months ended June 30, 2009 and 2008, respectively.



|                                  |  |          |         |            |   |           |  |   |        |   |  |   |        
|--------------------------------- |  | -------- | ------- | ---------- | - | --------- |  | - | ------ | - |  | - | -------
|                                  |  | Clothing |         | RollCovers |   | Corporate |  |   | Total 
|Three Months Ended June 30, 2009: |  |          |         |            |   |           |  |   |        |   |  |   |        
|Net sales                         |  | $        | 80,033  |            | $ | 40,810    |  | $ |       |   |  | $ | 120,843
|Segment Earnings (Loss)           |  |          | 25,955  |            |   | 8,421     |  |   | (2,467 | ) |  |   |        
|                                  |  |          |         |           
|Three Months Ended June 30, 2008: |  |          |         |            |   |           |  |   |        |   |  |   |        
|Net sales                         |  | $        | 109,275 |            | $ | 61,118    |  | $ |       |   |  | $ | 170,393
|Segment Earnings (Loss)           |  |          | 27,901  |            |   | 15,522    |  |   | (6,953 | ) |  |   |        



|                                |  |          |         |            |   |           |  |   |        |   |  |   |        
|------------------------------- |  | -------- | ------- | ---------- | - | --------- |  | - | ------ | - |  | - | -------
|                                |  | Clothing |         | RollCovers |   | Corporate |  |   | Total 
|Six Months Ended June 30, 2009: |  |          |         |            |   |           |  |   |        |   |  |   |        
|Net sales                       |  | $        | 157,848 |            | $ | 79,498    |  | $ |       |   |  | $ | 237,346
|Segment Earnings (Loss)         |  |          | 42,831  |            |   | 16,319    |  |   | (6,777 | ) |  |   |        
|                                |  |          |         |           
|Six Months Ended June 30, 2008: |  |          |         |            |   |           |  |   |        |   |  |   |        
|Net sales                       |  | $        | 212,854 |            | $ | 116,526   |  | $ |       |   |  | $ | 329,380
|Segment Earnings (Loss)         |  |          | 51,957  |            |   | 29,669    |  |   | (9,984 | ) |  |   |        

Segment Earnings (Loss) above excludes restructuring and impairments expense.



19



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##### Table of Contents

Xerium Technologies, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(dollars in thousands,
except per share data)

12. Business Segment Information(continued)



Provided below is a reconciliation of Segment Earnings (Loss) to income before provision for income taxes for the three and six months ended
June 30, 2009 and 2008, respectively.



|                                           |  |                             |         |   |      |   |         |  
|------------------------------------------ |  | --------------------------- | ------- | - | ---- | - | ------- | -
|                                           |  | Three Months Ended June 30, |        
|                                           |  | 2009                        |         |   | 2008 |  
|Segment Earnings (Loss):                   |  |                             |         |   |      |   |         |  
|Clothing                                   |  | $                           | 25,955  |   |      | $ | 27,901  |  
|Roll Covers                                |  |                             | 8,421   |   |      |   | 15,522  |  
|Corporate                                  |  |                             | (2,467  | ) |      |   | (6,953  | )
|Non-cash compensation and related expenses |  |                             | (885    | ) |      |   | 197     |  
|Net interest expense                       |  |                             | (15,570 | ) |      |   | (766    | )
|Depreciation and amortization              |  |                             | (10,130 | ) |      |   | (11,956 | )
|Restructuring and impairments expense      |  |                             | (1,026  | ) |      |   | (2,718  | )
|Expenses related to debt financing         |  |                             |        |   |      |   | (5,198  | )
|                                           |  |                             |         |   |      |   |         |  
|Income before provision for income taxes   |  | $                           | 4,298   |   |      | $ | 16,029  |  
|                                           |  |                             |         |   |      |   |         |  



|                                                        |  |                           |         |   |      |   |         |  
|------------------------------------------------------- |  | ------------------------- | ------- | - | ---- | - | ------- | -
|                                                        |  | Six Months Ended June 30, |        
|                                                        |  | 2009                      |         |   | 2008 |  
|Segment Earnings (Loss):                                |  |                           |         |   |      |   |         |  
|Clothing                                                |  | $                         | 42,831  |   |      | $ | 51,957  |  
|Roll Covers                                             |  |                           | 16,319  |   |      |   | 29,669  |  
|Corporate                                               |  |                           | (6,777  | ) |      |   | (9,984  | )
|Non-cash compensation and related expenses              |  |                           | (1,046  | ) |      |   | (274    | )
|Net interest expense                                    |  |                           | (31,527 | ) |      |   | (25,987 | )
|Depreciation and amortization                           |  |                           | (19,918 | ) |      |   | (23,959 | )
|Restructuring charges                                   |  |                           | (1,140  | ) |      |   | (3,250  | )
|Unrealized foreign exchange gain on revaluation of debt |  |                           |        |   |      |   | 1,985   |  
|Expenses related to debt financing                      |  |                           |        |   |      |   | (5,198  | )
|                                                        |  |                           |         |   |      |   |         |  
|Income (loss) before provision for income taxes         |  | $                         | (1,258  | ) |      | $ | 14,959  |  
|                                                        |  |                           |         |   |      |   |         |  

13. Commitments and Contingencies

The Company is involved in various legal matters, which have arisen in the ordinary course of business. The Company does not believe that the ultimate resolution of these matters will have a material adverse effect on
its financial position, results of operations or cash flow.

Environmental Matters

During the third quarter of 2008, the Company, while evaluating its facility in Australia, discovered the possibility of contamination at that facility. Subsequently, the Company had a preliminary evaluation
performed, which confirmed the existence of contamination and estimated preliminary costs to remediate this facility. Based upon this evaluation, the Company accrued $4,100 in 2008 as its best estimate of the remediation costs it expected to incur.
A Phase II assessment of the groundwater contamination performed for the Company during the second quarter of 2009 indicated the costs to remediate the contamination would be significantly less than originally estimated and accordingly, the Company
reduced the accrual by $3,400 during the second quarter of 2009 based on this assessment.

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 condition, liquidity or cash flow of the Company.



20



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##### Table of Contents

Xerium Technologies, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(dollars in thousands,
except per share data)



14. Stock-Based Compensation

Effective May 19, 2005, the Company adopted the 2005 Equity Incentive Plan (the 2005 Plan), under which the Board of Directors authorized 2,500,000
shares for grant (subsequently increased to 7,500,000 at the Companys Annual Meeting of Stockholders on August 6, 2008).

The Company recorded
stock-based compensation expense (income) during the three and six months ended June 30, 2009 and 2008, respectively, with respect to the following programs:



|                                   |  |                            |     |              |                          |      |              |  |              |       |  |   |    
|---------------------------------- |  | -------------------------- | --- | ------------ | ------------------------ | ---- | ------------ |  | ------------ | ----- |  | - | ---
|                                   |  | For the Three Months Ended |     |              | For the Six Months Ended
|                                   |  | June 30,2009               |     | June 30,2008 |                          |      | June 30,2009 |  | June 30,2008
|RSU Awards (1)                     |  | $                          | 733 |              | $                        | (193 | )            |  | $            | 776   |  | $ | 274
|2009 Performance Award Program (2) |  |                            | 152 |              |                          |     |              |  |              | 270   |  |   |   
|Stock Awards (3)                   |  |                            | 94  |              |                          |     |              |  |              | 94    |  |   |   
|                                   |  |                            |     |              |                          |      |              |  |              |       |  |   |    
|Total                              |  | $                          | 979 |              | $                        | (193 | )            |  | $            | 1,140 |  | $ | 274
|                                   |  |                            |     |              |                          |      |              |  |              |       |  |   |    

| | 
| | 

| | (1) | Related to restricted stock units awarded in and prior to 2009. See further discussion below.
| | --- | ---------------------------------------------------------------------------------------------

| | (2) | Related to the value of expected awards for the year ending December 31, 2009 under the Companys Performance Award Program, which was approved by the Companys Board
of Directors on March 10, 2009.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | Represents the value of 60,000 shares of the Companys common stock awarded to Mr. Maffucci on June 8, 2009 in connection with his appointment as the Companys
Executive Vice President and Chief Financial Officer.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As a result of adopting SFAS No. 123R on January 1, 2006, the Company has
used the straight-line attribution method to recognize expense for time-based RSUs granted after December 31, 2005. The Company used the graded attribution method to recognize expense for all RSUs granted prior to the adoption of SFAS
No. 123R.

During 2005, 424,683 time-based RSUs and 801,843 performance-based RSUs were granted to officers and employees of the Company. Non-employee
directors were also granted 12,500 RSUs during 2005. Each RSU represents one share of common stock.

To earn common stock under time-based RSUs granted in
2005, generally the grantee must be employed by the Company through the applicable vesting date, which occurred annually on May 19, 2006, 2007 and 2008. The final tranche of these RSUs vested on May 19, 2008.

To earn common stock under performance-based RSUs granted in 2005, generally defined shareholder return targets must be met over the four years following the completion
of the Companys initial public offering on May 19, 2005 and the grantee must be employed by the Company through May 19, 2009. On May 19, 2009, all of the remaining 269,171of these RSUs were forfeited because the defined
shareholder return targets had not been achieved.

On May 16, 2007, the Company granted 742,885 performance-based RSUs to certain officers and
employees of the Company. Generally, to earn common stock under these performance-based RSUs, defined shareholder return targets must be met over the four years following the grant date and the grantee must be employed by the Company through
May 16, 2011.



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##### Table of Contents

Xerium Technologies, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(dollars in thousands,
except per share data)

14. Stock-Based Compensation(continued)



Awards to non-employee directors vest immediately under the 2005 Plan and the underlying shares will be issued to the director upon termination of service
as a member of the Board or a change in control, as defined in the 2005 Plan. Annually during 2005, 2006 and 2007, the non-employee directors were granted 12,500 RSUs in the aggregate. In July 2008, they also were granted 48,820 RSUs in the
aggregate. On November 30, 2008, three members of the Board retired, which resulted in an aggregate issuance of 81,351 shares of common stock to them underlying their vested RSUs. On June 9, 2009 the non-employee directors were granted
224,715 RSUs in the aggregate.

On January 3, 2008, the Compensation Committee of the Companys Board of Directors approved 433,000
performance-based RSU awards (based on shareholder return targets) and 433,000 time-based RSU awards for certain of the Companys officers under the 2005 Plan, which were made contingent upon the approval by the Companys stockholders at
or before the Companys 2008 annual meeting of stockholders of an amendment to the Companys 2005 Plan to increase the aggregate number of shares of common stock that may be delivered under or in satisfaction of awards under such plan from
2,500,000 to 5,000,000. On August 6, 2008, at the Companys 2008 annual meeting of stockholders, the stockholders approved an amendment to the Companys 2005 Plan to increase the aggregate number of shares of common stock that may be
delivered under or in satisfaction of awards under such plan from 2,500,000 to 7,500,000. The shareholder return based awards will generally only vest if the share price of the Companys common stock plus dividends paid on the common stock from
January 3, 2008 satisfies annual targets that the Compensation Committee has established in respect of the three years following January 3, 2008 and the named officer continues to be employed with the Company through January 3, 2011.
The shareholder return based restricted stock units may also vest, in whole or in part, if a change of control (as defined in the awards) occurs and shareholder return based requirements have previously been satisfied or are satisfied based on the
transaction price. The time-based restricted stock unit awards are scheduled to vest completely, in nearly equal installments on the first, second, and third anniversaries of January 3, 2008, provided that the named officer continues to be
employed by the Company on such dates. Dividends, if any, on such time based restricted stock units will be paid at the same rate as dividends on the Companys common stock, but only in the form of additional restricted stock units. The time
based restricted stock units may also vest, in whole or in part, in connection with a change of control (as defined in the awards) and/or termination of employment under the circumstances set forth in the restricted stock unit awards.

The Company also granted time-based restricted stock unit awards to its new chief executive officer with respect to 75,000 shares on February 26, 2008 and 37,500
shares on June 13, 2008. These awards are scheduled to vest completely, in nearly equal installments on the first, second, and third anniversaries of January 3, 2008 and June 13, 2008, respectively, provided that the Companys
chief executive officer continues to be employed by the Company on such dates. Additionally, on June 13, 2008, the Company granted a time-based restricted stock unit award to certain of its executive officers with respect to an aggregate 60,000
shares, which are scheduled to vest on the third anniversary of June 13, 2008, provided that the named officers continue to be employed by the Company on that date. During 2008, the Company granted to certain employees 55,175 time-based
restricted stock units that vest equally in annual installments from the grant date over a period of three to four years.

During the first quarter of
2009, 54,299 shares of common stock underlying 87,000 time-based RSUs were issued; the remaining 32,701 shares underlying the RSUs were withheld from issuance in connection with minimum tax withholding requirements related to the issuance of such
shares to the recipients. During the second quarter of 2009, 21,828 shares of common stock underlying 32,377 time-based RSUs were issued; the remaining 10,549 shares underlying the RSUs werewithheld from issuance in connection with minimum tax
withholding requirements related to the issuance of such shares to the recipients.



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##### Table of Contents

Xerium Technologies, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(dollars in thousands,
except per share data)

14. Stock-Based Compensation(continued)



On March 10 2009, the Company granted to certain employees 39,000 time-based restricted stock units and 39,000 performance-based restricted stock
units. The time-based restricted stock unit awards are scheduled to vest completely, in nearly equal installments on the first and second anniversaries of January 3, 2009, provided that the employee continues to be employed by the Company on
such dates. Dividends, if any, on such time based restricted stock units will be paid at the same rate as dividends on the Companys common stock, but only in the form of additional restricted stock units. The time based restricted stock units
may also vest, in whole or in part, in connection with a change of control (as defined in the awards) and/or termination of employment under the circumstances set forth in the restricted stock unit awards. The shareholder return based awards will
generally only vest if the share price of the Companys common stock plus dividends paid on the common stock from January 3, 2009 satisfies annual targets that the Compensation Committee has established in respect of the two years
following January 3, 2009 and the named employee continues to be employed with the Company through January 3, 2011. The shareholder return based restricted stock units may also vest, in whole or in part, if a change of control (as defined
in the awards) occurs and shareholder return based requirements have previously been satisfied or are satisfied based on the transaction price.

On
March 10, 2009, in accordance with the employment agreement between the Company and Mr. Stephen Light, the Companys Chairman, President and Chief Executive Officer, the Compensation Committee of the Company's Board of
Directors approved RSU grants to Mr. Light as follows: (i) 341,761 time-based RSUs; (ii) 605,209 time-based RSUs that were contingent on shareholder approval of an increase in the maximum number of shares that
may be granted as stock awards to any one person in any calendar year under the 2005 Plan; and (iii) 946,969 performance-based RSUs that were contingent on shareholder approval of the same increase. Mr. Lights
employment agreement provides that he was to have been granted RSUs having a fair market value of $1,250 on January 1, 2009, or 1,893,939 RSUs, and that half of these are to vest based on his service over time while the
other half vest based on the Company's performance. The 2005 Plan imposes a limit on the maximum number of shares that may be granted as stock awards to any one person in any calendar year. Those of the RSUs granted to
Mr. Light that were in excess of that limit were granted contingent on shareholder approval of an amendment to the 2005 Plan to increase the limit to enable these grants. The contingent awards were not considered outstanding until approved by
the shareholders. The shareholders approved the amendment on June 9, 2009.

On June 8, 2009, in connection with the appointment of
Mr. David G. Maffucci as Executive Vice President and Chief Financial Officer, the Company granted to Mr. Maffucci 112,500 time-based RSUs and 37,500 performance-based RSUs. With respect to 75,000 of the time-based RSUs, the awards
will vest in nearly equal installments on the first, second, and third anniversaries of the date of grant. With respect to 37,500 of the time-based RSUs, 12,500 will vest on January 3, 2010 and the remaining 25,000 will vest on January 3,
2011. Mr. Maffuccis time-based restricted stock unit awards will vest as long as he continues to be employed by the Company on the applicable vesting dates. The time based restricted stock units may also vest, in whole or in part, in
connection with a change of control (as defined in the RSU agreement) and/or termination of employment under the circumstances set forth in the restricted stock unit awards. The shareholder return based awards will generally only vest if the share
price of the Companys common stock plus dividends paid on the common stock satisfies annual targets that the Compensation Committee has established in respect of January 3, 2010 and 2011 and Mr. Maffucci continues to be employed with
the Company through January 3, 2011. The shareholder return based restricted stock units may also vest, in whole or in part, if a change of control (as defined in the RSU agreement) occurs and shareholder return based requirements have
previously been satisfied or are satisfied based on the transaction price.

Certain time-based RSUs and all non-employee director RSUs automatically adjust
to reflect awards of additional RSUs upon payment of dividends by the Company. During the year ended December 31 2008 and the first six months of 2009, no RSUs were awarded in connection with the payment of dividends as no dividends were
declared by the Company during any of those periods.



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Xerium Technologies, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(dollars in thousands,
except per share data)

14. Stock-Based Compensation(continued)



A summary of RSUs outstanding as of June 30, 2009 and their vesting dates is as follows:



|                                                                                                                              |  |                                                                                                                                                                                                 |  |              
|----------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------
|                                                                                                                              |  | Vesting Dates                                                                                                                                                                                   |  | Number ofRSUs
|Time-based RSUs granted February 26, 2008                                                                                     |  | Annually in equal installments on January 3, 2009, January 3, 2010 and January 3, 2011                                                                                                          |  | 50,000       
|                                                                                                                              |  |                                                                                                                                                                                                
|Time-based RSUs granted June 13, 2008                                                                                         |  | With respect to 37,500 RSUs  annually in equal installments on June 13, 2009,                                                                                                                  |  |              
|                                                                                                                              |  |                                                                                                                                                                                                
|                                                                                                                              |  | June 13, 2010 and June 13, 2011; with respect to 60,000 RSUsJune 13, 2011                                                                                                                      |  | 85,000       
|                                                                                                                              |  |                                                                                                                                                                                                
|Time-based RSUs granted August 6, 2008 (contingently awarded on January 3, 2008)                                              |  | Annually in equal installments on January 3, 2009, January 3, 2010 and January 3, 2011                                                                                                          |  | 91,334       
|                                                                                                                              |  |                                                                                                                                                                                                
|Time-based RSUs granted at various dates during 2008                                                                          |  | Annually in equal installments over three years                                                                                                                                                 |  | 32,334       
|                                                                                                                              |  |                                                                                                                                                                                                
|Time-based RSUs granted at various dates during 2009                                                                          |  | With respect to 1,023,470 RSUsannually in equal installments on January 1, 2010 and January 1, 2011; with respect to 75,000 RSUsannually in equal installments on June 8, 2010, 2011
and 2012 |  | 1,098,470    
|                                                                                                                              |  |                                                                                                                                                                                                
|Performance-based RSUs granted May 19, 2005 (based on shareholder return targets)                                             |  | Forfeited on May 19, 2009 because shareholder return targets were not achieved.                                                                                                                 |  |             
|                                                                                                                              |  |                                                                                                                                                                                                
|Performance-based RSUs granted May 16, 2007 (based on shareholder return targets)                                             |  | May 16, 2011, assuming performance criteria are achieved                                                                                                                                        |  | 376,200      
|                                                                                                                              |  |                                                                                                                                                                                                
|Performance-based RSUs granted August 6, 2008 (based on shareholder return targets) (contingently awarded on January 3,
2008) |  | January 3, 2011, assuming performance criteria are achieved                                                                                                                                     |  | 137,000      
|                                                                                                                              |  |                                                                                                                                                                                                
|Performance-based RSUs granted at various dates during 2009 (based on shareholder return targets)                             |  | January 3, 2011, assuming performance criteria are achieved                                                                                                                                     |  | 1,023,469    
|                                                                                                                              |  |                                                                                                                                                                                                
|Non-employee directors RSUs                                                                                                  |  | Date of grant                                                                                                                                                                                   |  | 261,254      
|                                                                                                                              |  |                                                                                                                                                                                                 |  |              
|Total RSUs outstanding                                                                                                        |  |                                                                                                                                                                                                 |  | 3,155,061    
|                                                                                                                              |  |                                                                                                                                                                                                 |  |              



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Xerium Technologies, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(dollars in thousands,
except per share data)

14. Stock-Based Compensation(continued)



RSU activity during the six months ended June 30, 2009 is presented below.



|                                                |  |               |   |  |                                                   |              |                                                    |   |     
|----------------------------------------------- |  | ------------- | - |  | ------------------------------------------------- | ------------ | -------------------------------------------------- | - | ----
|                                                |  | Number ofRSUs |   |  | Price Range of Grant-DateFair Value Price Per RSU |              | WeightedAverage Grant-Date FairValue Price Per RSU
|Outstanding, December 31, 2008                  |  | 1,358,585     |   |  | $                                                 | 3.77 - 12.01 |                                                    | $ | 7.50
|Granted                                         |  | 2,346,654     |   |  |                                                   | 0.54 - 1.57  |                                                    |   | 1.30
|Forfeited                                       |  | (430,802      | ) |  |                                                   | 5.12 -11.66  |                                                    |   | 9.80
|Issued or withheld for tax withholding purposes |  | (119,376      | ) |  |                                                   | 3.89 - 5.40  |                                                    |   | 5.22
|                                                |  |               |   |  |                                                   |              |                                                    |   |     
|Outstanding, June 30, 2009                      |  | 3,155,061     |   |  | $                                                 | 0.54 -12.01  |                                                    | $ | 2.66
|                                                |  |               |   |  |                                                   |              |                                                    |   |     
|Vested, June 30, 2009 (1)                       |  | 261,254       |   |  | $                                                 | 1.43 -12.01  |                                                    | $ | 2.13
|                                                |  |               |   |  |                                                   |              |                                                    |   |     



|(1) | Vested RSUs at June 30, 2009 consist entirely of non-employee director RSUs. The common stock underlying these RSUs will be issued to the directors upon termination of their
service as members of the Board and/or a change in control, as defined in the 2005 Plan. The total grant-date fair value of such non-employee directors RSUs that vested during the six months ended June 30, 2009 was $200.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Assumptions

Under SFAS No. 123R,
the Company uses the following assumptions in determining compensation expense:

Grant-Date Fair Value

The Company calculates the grant-date fair value of time-based RSUs and non-employee directors RSUs based on the closing price of the Companys common stock on
the date of grant.

For the performance-based RSUs granted in 2008, 2007 and 2005 (none granted in 2006), the Company calculated the grant-date fair value
of performance-based RSUs by using a Monte Carlo pricing model and the following assumptions:



|                             |  |                                                               |  |                                                                                       |  |                                                |  |                                               
|---------------------------- |  | ------------------------------------------------------------- |  | ------------------------------------------------------------------------------------- |  | ---------------------------------------------- |  | ----------------------------------------------
|                             |  | For Performance-Based RSUs Grantedat
various datesduring 2009 |  | For Performance-Based RSUs GrantedAugust 6, 2008(contingently awardedJanuary 3, 2008) |  | For Performance-Based RSUs GrantedMay 16, 2007 |  | For Performance-Based RSUs GrantedMay 19, 2005
|Expected term (i)            |  | 1 1/2to 2 years                                               |  | 3 years                                                                               |  | 4 years                                        |  | 4 years                                       
|Expected volatility (ii)     |  | 116% and 119%                                                 |  | 44%                                                                                   |  | 39%                                            |  | 37%                                           
|Expected dividends (iii)     |  | None                                                          |  | None                                                                                  |  | $0.45 per year ($0.1125 per quarter)           |  | $0.90 per year ($0.225 per quarter)           
|Risk-free interest rate (iv) |  | 0.99% to 1.17%                                                |  | 2.64%                                                                                 |  | 4.32%                                          |  | 3.73%                                         



|(i) | Expected term. Performance-based RSUs expire three years after the grant date for the 2008 awards and four years after the grant date for the 2007 and 2005
awards. For 2009 awards, the RSUs expire after approximately 1 1/2to 2 years.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

Xerium Technologies, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(dollars in thousands,
except per share data)

14. Stock-Based Compensation(continued)

Assumptions(continued)



|(ii) | Expected volatility. The Company is responsible for estimating the volatility of the price of its common stock and has considered a number of factors, including third party
estimates, to determine its expected volatility. For the 2008, 2007 and 2005 awards, the Company performed a peer group analysis of historical and implied volatility measures rather than using its own historical volatility because it had been a
public company for a relatively short period of time (i.e., since its initial public offering on May 19, 2005). Based upon the peer group analysis, the Company determined to use a 44%, 39% and 37% volatility assumption for performance-based
RSUs granted in 2008, 2007 and 2005, respectively, which is the midpoint of the range developed by looking at the peer group. For the 2009 awards, after being a public company for four years, the Company determined to use its own historical
volatility rather than a peer group analysis. The volatility for the 2009 awards was 116% and 119%.
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(iii) | Expected dividends. Based on the Companys dividend policy in place at the time of the performance-based RSU grants on May 19, 2005, an assumed continuation of
quarterly dividends at the rate of $0.225 per share of common stock was used for the purposes of the application of the Monte Carlo pricing model. On May 2, 2007, the Company modified its credit agreement to limit the amount of any quarterly
dividends payable on its common stock to not more than $0.1125 per share. Accordingly, for the performance-based RSUs that were granted on May 16, 2007, the Company assumed continuation of quarterly dividends at the rate of $0.1125 per share of
common stock for the purposes of the application of the Monte Carlo pricing model. On May 30, 2008, the Company amended its credit facility. No dividends are permitted to be paid on the Companys common stock through May 2012, the maturity
date of the term loans under the amended senior credit facility. Accordingly no dividends were assumed for the 2008 or 2009 awards for purposes of the application of the Monte Carlo pricing model.
|----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(iv) | Risk-free interest rate. The yield on zero-coupon U.S. Treasury securities for the period that is commensurate with the expected term assumptions.
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

Xerium Technologies, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(dollars in thousands,
except per share data)

14. Stock-Based Compensation(continued)

Assumptions(continued)



Forfeitures

As
the time-based and performance-based RSUs require continued employment up to the time of vesting, the amount of stock-based compensation recognized during a period is required to include an estimate of forfeitures. SFAS No. 123R requires
forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The term forfeitures is related to employee attrition and based on a historical analysis
of its employee turnover. This analysis is re-evaluated quarterly and the forfeiture rate will be adjusted as necessary. Ultimately, the actual expense recognized over the vesting period will be only for those shares that meet the requirements of
continued employment up to the time of vesting. The Company estimated its forfeiture rates as of June 30, 2009 to be as follows:



|                                                                                                                                               |  |                                                            
|---------------------------------------------------------------------------------------------------------------------------------------------- |  | -----------------------------------------------------------
|Description of Award                                                                                                                           |  | Forfeiture Rates                                           
|Time-based RSUs granted on various dates in 2008 and in 2009 (and contingently granted on January 1, 2009), other than those on
August 6, 2008 |  | 10%                                                        
|                                                                                                                                               | 
|Time-based RSUs granted on August 6, 2008                                                                                                      |  | 55%                                                        
|                                                                                                                                               | 
|Performance-based RSUs granted May 19, 2005 (based on shareholder return targets)                                                              |  | 74%                                                        
|                                                                                                                                               | 
|Performance-based RSUs granted May 19, 2007 (based on shareholder return targets)                                                              |  | 65%                                                        
|                                                                                                                                               | 
|Performance-based RSUs granted August 6, 2008 (based on shareholder return targets)                                                            |  | 70%                                                        
|                                                                                                                                               | 
|Performance-based RSUs granted in 2009 (and contingently granted on January 1, 2009 (based on shareholder return targets)                      |  | 10%                                                        
|                                                                                                                                               | 
|Non-employee directors RSUs                                                                                                                   |  | Vest immediately upon grant so no forfeiture rate required.

As of June 30, 2009, there was approximately $2,800 of total unrecognized compensation expense related to
unvested share-based awards which is expected to be recognized over a weighted average period of 1.7 years.



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|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. Undue reliance should not be placed 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:



| |  |  | based on information available as of the date of this report, we anticipate we will not be in compliance with certain financial covenants in our senior credit
facility for the period ending September 30, 2009. We intend to seek an amendment to our senior credit facility agreement with the lenders thereunder prior to the date upon which an event of default would occur due to our failure to demonstrate
compliance with certain financial covenants for the period ending September 30, 2009, although no assurances can be given that we will successfully obtain the lenders consent to amend the credit facility on this timetable, or at all, or
amend covenants in a manner sufficient to adequately reduce the risk of default;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | in the event that we are not in compliance with certain financial covenants in our senior credit facility for the period ending September 30, 2009, our lenders
could terminate our revolving credit facility and accelerate the repayment of all of the outstanding debt under our senior credit facility, causing it to immediately become due and payable and counterparties may have the right to terminate our
existing interest rate swaps if we are not able to reach agreement on amendment of our financial covenants or otherwise refinance our credit facility;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | in the event that we are not in compliance with certain financial covenants in our senior credit facility for the period ending September 30, 2009 and if we
are able to reach agreement on amendment of our financial covenants or otherwise refinance our credit facility, we may be required to pay substantial fees and our borrowing costs are likely to increase, and we may not have sufficient cash to pay
such increased fees and costs;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | absent an amendment to our senior credit facility agreement as discussed above, based on our current internal forecasts, we anticipate we will not be in compliance
with certain financial covenants for the period ending September 30, 2009. Our ability to generate cash sufficient to service our debt also depends on our ability to achieve our financial forecasts. Our forecasts are based on certain
assumptions that may or may not materialize as we expect regarding (i) demand for paper products, (ii) the level of paper production and inventories, (iii) the number of mills producing paper, (iv) the financial health of our
customers, (v) the stability of product prices, (vi) the strength of market acceptance of new products, (vii) the absence of dramatic increases in commodity prices, (viii) our ability to maintain hedge accounting for our interest
rate swaps, (ix) the beginning of an economic recovery in the global paper market in 2009, with the effect of increasing our revenues and profits, (x) the value of the Euro relative to the U.S. dollar from its current level and
(xi) our ability to implement and continue planned cost reductions;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | we may not have sufficient cash to fund our operations should the current conditions in the global paper market continue;
| | - |  | -------------------------------------------------------------------------------------------------------------------------



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| |  |  | we have entered into fewer hedging arrangements due to reduced credit limits at some of our banks and may not be able to enter into as many hedging arrangements in
the future. As a result, we could be more exposed to the effects of currency fluctuations, both favorable and unfavorable, which could have a material impact on our results of operations;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | we are subject to the risk of weaker economic conditions in the locations around the world where we conduct business, including without limitation the current
turmoil in the global paper markets and the impact of the current global economic crisis on the paper industry and our customers;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our strategies and plans, including, but not limited to, those relating to the decrease in our financial leverage, developing new products, enhancing our
operational efficiencies and reducing costs may not result in the anticipated benefits;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | we may not achieve compliance with the NYSE continued listing standards;
| | - |  | ------------------------------------------------------------------------



| |  |  | our profitability could be adversely affected by fluctuations in interest rates;
| | - |  | --------------------------------------------------------------------------------



| |  |  | we may not be able to develop and market new products successfully;
| | - |  | -------------------------------------------------------------------



| |  |  | we may not be successful in developing new technologies or in competing against new technologies developed by competitors;
| | - |  | --------------------------------------------------------------------------------------------------------------------------



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



| |  |  | there can be no assurance that in future periods we will be able to assert that our hedge transactions are probable of occurring, and thus there can be no assurance
that the interest rate swaps will continue to qualify for hedge accounting;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------

Many of these risks are discussed elsewhere in this Form 10-Q, including in the sections below: Recent Developments, Overview, Industry
Trends and Outlook, Liquidity and Capital Resources and Credit Facility. Other factors that could materially affect actual results, levels of activity, performance, or achievements can be found in Part I, Item 1A
in our Annual Report on Form 10-K for the year ended December 31, 2008 filed with the Securities and Exchange Commission on March 12, 2009. 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 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.

Recent Developments

Senior Credit Facility

Our senior credit facility requires that we satisfy certain operating requirements and financial covenant
ratios in order to avoid a default or event of default under the facility. See Credit Facility below. As of June 30, 2009, the Company was in compliance with all of the covenants under its senior credit facility. Absent a
significant recovery in revenue resulting from an economic revival in the paper industry, we anticipate that we will not be in compliance with certain financial covenants for the period ending September 30, 2009 and intend to seek an amendment
to our senior credit facility agreement with the lenders prior to the date when an event of default would occur due to our failure to demonstrate compliance with certain financial covenants for the period ending September 30, 2009. We have
begun work toward this amendment, initiating contact with our lenders, although no assurances can be



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given that we will successfully obtain the lenders consent to amend the credit facility on this timetable, or at all, or amend covenants in a manner
sufficient to adequately reduce the risk of default. We have created a steering committee of our Board of Directors to lead this activity and have retained AlixPartners, LLC as our financial advisor to assist in this process. Failing to satisfy
financial covenants under the senior credit facility would constitute an event of default, upon which the lenders could terminate the revolving credit facility and accelerate the repayment of all of the outstanding debt under the senior credit
facility, causing it to immediately become due and payable. Any such acceleration of our obligations would likely cause other lenders and contractual counterparties, including counterparties to our interest rate swap agreements and other hedge
agreements to terminate and/or to accelerate our obligations under other financing and credit instruments and agreements. Should the lenders and/or other counterparties demand immediate repayment of all of our obligations, we expect that we would be
unable to pay such obligations.

New York Stock Exchange (NYSE)

On December 29, 2008, we were notified by the NYSE that we were not in compliance with two NYSE standards for continued listing of our common stock on the exchange because the average closing price of our common
stock was less than $1.00 per share over a consecutive 30 trading day period, and our average total market capitalization was less than $75 million over the same period and our most recently reported stockholders equity was less than $75
million.

On March 27, 2009, we were notified by the NYSE that it has accepted our plan for continued listing on the NYSE. As a result, our common
stock will continue to be listed on the NYSE during the compliance period, subject to quarterly reviews by the NYSE to monitor our progress against the approved plan for continued listing.

With respect to the $1.00 minimum price standard, we initially had six months from the date of receipt of the notification from the NYSE to bring our share price and
average share price over $1.00. However, the NYSE suspended the $1.00 minimum price requirement through June 30, 2009. On July 8, 2009, we announced that we were notified by the NYSE that because our closing price and average share price
for the 30 days ended June 29, 2009 was above $1.00, we are no longer considered to be below the $1.00 continued listing criterion. However, the Companys stock price has since varied above and below $1.00 and, should we fall out of
compliance again, we would have six months to regain compliance.

The Company has 18 months from the original non-compliance notification date on
December 29, 2008 in which to regain compliance with the NYSEs revised $50 million market capitalization and $50 million stockholders equity requirement. Failure to make progress consistent with the plan or to regain compliance with
the continued listing standards could result in our common stock being delisted from the NYSE.

Global Economic Environment

Our business is highly dependent upon the paper production industry and the degree to which the paper industry is affected by global economic conditions and the
availability of credit. Demand for our products, could continue to decline if paper manufacturers are unable to obtain required financing or if the economic crisis causes additional mill closures or extends current capacity curtailments.

During 2008, especially the latter part of the year, the global paper industry experienced a sharp reduction in production levels, caused by the general slowdown in
economic activity and the related paper consumption decline during the same period. The slowdown of production was across all grades of paper production, but most notably in the packaging grades and newsprint. For packaging grades, demand is
directly related to broad manufacturing and transportation activity reduction, while newsprint demand has been increasingly declining over a number of years due to the greater prevalence of electronic media, exacerbated in recent months by a
reduction in print advertising. One of the results of the recent reduction in demand for paper products is that the inventory of paper at the paper-makers has increased significantly and production slowdowns, curtailments and idling of paper-making
machines have been occurring at a sharply increasing rate since October 2008 and have continued into 2009. Regionally, North America and Europe have seen the most significant production declines. Paper production in those regions decreased in 2008
and is expected to decrease further in 2009. While we were successful in reducing the rate of price decrease in 2008 for the products we sell to the paper-makers and prices have remained relatively stable in the first half of 2009, there continues
to be price pressure due to our competitors pursuing market growth at this time of lower overall demand in our market.



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In the quarters ended September 30, 2008 and December 31, 2008, due to the global economic crisis and the lack
of credit availability that may affect our customers demand for products and their ability to pay their debts, we assessed the impact of this crisis on our customers and our industry, and changed our estimates of net realizable value of
receivables and inventories. For example, two of our major customers, who collectively represent approximately 5% of 2008 revenues, have experienced financial difficulties and filed for bankruptcy protection in 2009. As of March 31, 2009, we
had fully reserved for all amounts due from these customers. As of June 30, 2009, the Company determined it does not need to reserve for the post-bankruptcy receivables, due to the improved financial situation for these customers. The Company
continues to reserve for pre-bankruptcy receivables. Decreases in orders from these customers or future payment problems from these or other customers could have a material adverse effect on our sales and profitability, which in turn could impact
our ability to satisfy the covenant requirements in our credit facility.

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 can 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 June 30, 2009, our clothing segment represented 66% 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 June 30, 2009, our roll
covers segment represented 34% of our net sales.

Industry Trends and Outlook

Historically, demand for our products has been driven primarily by the volume of paper produced on a worldwide basis. According to the Food and Agriculture Organization of the United Nations, the volume of paper
production between 1980 and 2007 increased at a compound annual growth rate of approximately 3.07%. There can be no assurance that the industry will continue to grow at a similar rate and it is possible that paper production may decline in any
specific period compared to prior periods, as production declined globally for the latter half of 2008 and the first half of 2009. Generally, and over time, we expect growth in paper production to be greater in Asia, South America and Eastern Europe
than in the more mature North American and Western European regions where demand may potentially decline.

The profitability of paper producers has
historically been highly cyclical due to wide swings in the price of paper, driven to a high degree by the oversupply of paper during periods when paper producers have more aggregate capacity than the market requires. A



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sustained downturn in the paper industry, either globally or in a particular region, can cause paper manufacturers to reduce production or cease operations,
which could adversely affect our revenues and profitability. Since 2000, paper producers have taken actions that seek to structurally improve the balance between the supply of and demand for paper. As part of these efforts, they have permanently
shut down many paper-making machines. Between 2001 and 2004 the bulk of these closures occurred in North America. Announcements by paper producers concerning temporary and permanent shutdowns of paper-making machines in both North America and Europe
have continued. During 2005 through the first half of 2009, the sales and profitability of our North American and European operations were adversely affected by these shutdowns. Papermakers continue to experience low levels of profitability, and we
believe that further consolidation among papermakers, reducing the number of paper producers, and shutdowns of paper-making machines will occur in Europe and North America, until there is a better balance between supply and demand for paper and the
profit levels of paper producers improve. This rebalancing will be accelerated during the current global economic recession. Over a number of years, consumption growth of paper is expected to drive an increase in the global production rates required
to maintain balance between supply and demand although it is highly likely that a consumption slow-down and related effect on global paper production will continue in the near term, exacerbated by the global economic crisis. Also affecting machine
curtailments are structural productivity gains from improved products that we and our competitors supply.

Global paper production growth that does occur
would be moderated by the level of industry consolidation and paper-machine shutdown activity that is a continuing underlying trend in North America and Western Europe. We also believe that, in addition to industry consolidation and paper machine
shutdown activity in North America and Western Europe, the trend towards new paper machine designs which have fewer rolls and market recognition of extended life of our roll cover products has been and will continue to negatively impact demand for
these products and that the volume potential for the roll covers business will slowly diminish. Additionally, we are seeing a trend that paper producers are placing an increasing emphasis on maintenance cost reduction and, as a result, are extending
the life of roll covers through additional maintenance cycles before replacing them.

We anticipate that pricing pressure for our products will continue
with the consolidation among paper producers and as the shift of paper production growth in Asia develops. In response to this pricing pressure, we expect to increase our expenditure levels on research and development expenses and continue to
develop our value added selling approach as part of our strategy to differentiate our products, while at the same time remaining focused on cost reduction and efficiency programs.

The negative paper industry trends described above are likely to continue. We believe that in the current economic environment, the paper industry will experience reduced demand, increased emphasis on cost reduction,
and sustained paper-machine shutdown activity than would have been the case in the absence of the economic crisis.

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;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Impact of currency fluctuations.
| | - |  | --------------------------------

Sales in our roll
covers segment include 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, a portion of our business has been conducted pursuant to consignment arrangements under which we do not recognize a sale of a product to a customer until the customer places the product into use, which typically occurs some period after the
product is shipped to the customer or to a warehouse location near the customers facility. We are striving to reduce the number of consignment arrangements and increase the use of standard terms of sale under which we recognize a sale upon
product shipment. We made progress with this initiative in 2008 and expect this effort to be successful over several years.



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Our operating costs are driven primarily by our total sales volume, the impact of inflation and currency and the level
and impact of cost reduction programs.

The level of our cost of products sold is primarily attributable to labor costs, raw material costs, shipping
costs, plant utilization and depreciation, with labor costs constituting the largest component. 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 $2.7 million and $3.2 million for the three months ended June 30, 2009 and 2008, respectively.

Foreign Exchange

We have a geographically diverse customer base. For the three months ended June 30, 2009, approximately 36% of our
sales was in Europe, 36% was in North America, 17% was in Asia-Pacific, 9% was in South America and 2% was in the rest of the world.

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

For certain
transactions, our sales are denominated in U.S. 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 U.S. 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 or indexed to U.S. Dollars and all or a substantial portion of the
associated costs are denominated in Euros, Reals or other currencies.

Currency fluctuations have a greater effect on the level of our net sales than on
the level of our income from operations. For example, for the three months ended June 30, 2009 as compared with the three months ended June 30, 2008, the change in the value of the U.S. Dollar against the currencies we conduct our
business in resulted in currency translation decreases in net sales and income from operations of $17.0 million and $2.0 million, respectively. Although the results for the three months ended June 30, 2009 reflect a period in which the value of
the U.S. Dollar increased against the currencies in which we conduct the majority of our non-U.S. Dollar denominated business as compared to the three months ended June 30, 2008, we would expect a similar but opposite effect in a
period in which the value of the U.S. Dollar decreases. For any period in which the value of the U.S. Dollar changes relative to other currencies, we would expect our income from operations to be proportionately affected less than our net
sales.

During the three and six months ended June 30, 2009, we conducted business in 11 foreign currencies. The following table provides the average
exchange rate for the three and six months ended June 30, 2009 and 2008, respectively, of the U.S. Dollar against each of the four foreign currencies in which we conduct the largest portion of our operations, and indicates the percentage
of our net sales for the three and six months ended June 30, 2009 denominated in such foreign currency.



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|                  |  |                                                                                   |  |                                                                                   |  |                                                                                           |  
|----------------- |  | --------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------- | -
|Currency          |  | Average exchange rate of the U.S. Dollar for the three months
ended June 30, 2009 |  | Average exchange rate of the U.S. Dollar for the three months ended June 30, 2008 |  | Percentage of net salesfor the three monthsended June 30, 2009denominated in
suchcurrency |  
|Euro              |  | $1.36 = 1 Euro                                                                    |  | $1.56 = 1 Euro                                                                    |  | 41.9                                                                                      | %
|Canadian Dollar   |  | $0.86 = 1 Canadian Dollar                                                         |  | $0.99 = 1 Canadian Dollar                                                         |  | 6.7                                                                                       | %
|Brazilian Real    |  | $0.48 = 1 Brazilian Real                                                          |  | $0.60 = 1 Brazilian Real                                                          |  | 7.6                                                                                       | %
|Australian Dollar |  | $0.76 = 1 Australian Dollar                                                       |  | $0.94 = 1 Australian Dollar                                                       |  | 7.2                                                                                       | %
|                  |  |                                                                                   | 
|Currency          |  | Average exchange rate of the U.S. Dollar for the six months ended
June 30, 2009   |  | Average exchange rate of the U.S. Dollar for the six months ended
June 30, 2008   |  | Percentage of net salesfor the six monthsended June 30, 2009denominated in suchcurrency   |  
|Euro              |  | $1.33 = 1 Euro                                                                    |  | $1.53 = 1 Euro                                                                    |  | 41.9                                                                                      | %
|Canadian Dollar   |  | $0.83 = 1 Canadian Dollar                                                         |  | $0.99 = 1 Canadian Dollar                                                         |  | 6.4                                                                                       | %
|Brazilian Real    |  | $0.46 = 1 Brazilian Real                                                          |  | $0.59 = 1 Brazilian Real                                                          |  | 8.9                                                                                       | %
|Australian Dollar |  | $0.71 = 1 Australian Dollar                                                       |  | $0.92 = 1 Australian Dollar                                                       |  | 6.7                                                                                       | %

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 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.

Due to reduced credit limits at some of our banks, we have been entering into fewer foreign currency hedging arrangements and may not be able to enter into as many hedging arrangements in the future. As a result, we
could be more exposed to the effects of currency fluctuations, both favorable and unfavorable, which could have a material impact on our results of operations.

Cost Reduction Programs

An important part of our long-term operating strategy is to seek to reduce our overall costs and improve our
competitiveness. As a part of this effort, we have engaged in a series of cost reduction programs, which were designed to improve the cost structure of our global operations in response to changing market conditions. These cost reduction programs
include headcount reductions throughout the world as well as plant closures that have rationalized production among our facilities to better enable us to meet customer demands.

During the first quarter of 2009, we continued our program of streamlining our operating structure and recorded restructuring expenses of approximately $0.7 million in connection therewith. Additionally, during 2009
we sold our rolls manufacturing facility in Sweden at a gain of approximately $1.2 million, which was partially offset by approximately $0.6 million of costs incurred to continue with actions related to the closure of manufacturing facilities
announced prior to the first quarter of 2009. During the second quarter of 2009, essentially all of the $1.0 million of restructuring expenses we recorded were related to streamlining our operating structure. We expect to incur restructuring
expenses of approximately $3 million during the remainder of 2009, primarily related to continuing our program of streamlining our operating structure.

During the first quarter of 2009, we also froze one of our U.S. employee pension plans, terminated our retiree medical plan, suspended contributions to our U.S. 401(k) program, froze salaries, delayed union contract wage increases,
curtailed travel and halted work on our Vietnam project.



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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 EndedJune 30, |       |   | Six Months EndedJune 30, |  
|(in millions)                                   |  | 2009                       |       |   | 2008                     |   |       | 2009 |  |   | 2008  |  
|Net sales                                       |  | $                          | 120.8 |   |                          | $ | 170.4 |      |  | $ | 237.3 |   |  | $ | 329.4 |  
|Cost of products sold                           |  |                            | 75.2  |   |                          |   | 101.6 |      |  |   | 147.4 |   |  |   | 197.3 |  
|Selling expenses                                |  |                            | 16.1  |   |                          |   | 21.8  |      |  |   | 32.6  |   |  |   | 42.3  |  
|General and administrative expenses             |  |                            | 6.5   |   |                          |   | 23.4  |      |  |   | 19.7  |   |  |   | 42.1  |  
|Restructuring and impairments expenses          |  |                            | 1.0   |   |                          |   | 2.7   |      |  |   | 1.1   |   |  |   | 3.2   |  
|Research and development expenses               |  |                            | 2.7   |   |                          |   | 3.2   |      |  |   | 5.4   |   |  |   | 6.2   |  
|                                                |  |                            |       |   |                          |   |       |      |  |   |       |   |  |   |       |  
|Income from operations                          |  |                            | 19.3  |   |                          |   | 17.7  |      |  |   | 31.1  |   |  |   | 38.3  |  
|Interest expense, net                           |  |                            | (15.6 | ) |                          |   | (0.8  | )    |  |   | (31.5 | ) |  |   | (25.9 | )
|Foreign exchange gain (loss)                    |  |                            | 0.6   |   |                          |   | (0.9  | )    |  |   | (0.8  | ) |  |   | 2.6   |  
|                                                |  |                            |       |   |                          |   |       |      |  |   |       |   |  |   |       |  
|Income (loss) before provision for income taxes |  |                            | 4.3   |   |                          |   | 16.0  |      |  |   | (1.2  | ) |  |   | 15.0  |  
|Provision for income taxes                      |  |                            | 2.7   |   |                          |   | 1.9   |      |  |   | 6.6   |   |  |   | 5.6   |  
|                                                |  |                            |       |   |                          |   |       |      |  |   |       |   |  |   |       |  
|Net income (loss)                               |  | $                          | 1.6   |   |                          | $ | 14.1  |      |  | $ | (7.8  | ) |  | $ | 9.4   |  
|                                                |  |                            |       |   |                          |   |       |      |  |   |       |   |  |   |       |  

Percentage of Sales



|                                                |  |                            |   |  |                          |   |  |       |    |  |       |  
|----------------------------------------------- |  | -------------------------- | - |  | ------------------------ | - |  | ----- | -- |  | ----- | -
|                                                |  | Three Months EndedJune 30, |   |  | Six Months EndedJune 30, |  
|                                                |  | 2009                       |   |  | 2008                     |   |  | 2009  |    |  | 2008  |  
|Net sales                                       |  | 100.0                      | % |  | 100.0                    | % |  | 100.0 | %  |  | 100.0 | %
|Cost of products sold                           |  | 62.3                       |   |  | 59.6                     |   |  | 62.1  |    |  | 59.9  |  
|Selling expenses                                |  | 13.3                       |   |  | 12.8                     |   |  | 13.7  |    |  | 12.8  |  
|General and administrative expenses             |  | 5.4                        |   |  | 13.7                     |   |  | 8.3   |    |  | 12.8  |  
|Restructuring and impairments expenses          |  | 0.8                        |   |  | 1.6                      |   |  | 0.5   |    |  | 1.0   |  
|Research and development expenses               |  | 2.3                        |   |  | 1.9                      |   |  | 2.3   |    |  | 1.9   |  
|                                                |  |                            |   |  |                          |   |  |       |    |  |       |  
|Income from operations                          |  | 15.9                       |   |  | 10.4                     |   |  | 13.1  |    |  | 11.6  |  
|Interest expense, net                           |  | (12.9                      | ) |  | (0.5                     | ) |  | (13.3 | )  |  | (7.9  | )
|Foreign exchange gain (loss)                    |  | 0.5                        |   |  | (0.5                     | ) |  | (0.3  | )  |  | 0.8   |  
|                                                |  |                            |   |  |                          |   |  |       |    |  |       |  
|Income (loss) before provision for income taxes |  | 3.5                        |   |  | 9.4                      |   |  | (0.5  | )  |  | 4.5   |  
|Provision for income taxes                      |  | 2.2                        |   |  | 1.1                      |   |  | 2.8   |    |  | 1.7   |  
|                                                |  |                            |   |  |                          |   |  |       |    |  |       |  
|Net income (loss)                               |  | 1.3                        | % |  | 8.3                      | % |  | (3.3  | )% |  | 2.8   | %
|                                                |  |                            |   |  |                          |   |  |       |    |  |       |  

Three Months Ended June 30, 2009 Compared to the Three Months Ended June 30, 2008.

Net Sales. Net sales for the three months ended June 30, 2009 decreased by $49.6 million, or 29.1%, to $120.8 million from $170.4
million for the three months ended June 30, 2008. For the three months ended June 30, 2009, 66% of our net sales were in our clothing segment and 34% were in our roll covers segment.

In our clothing segment, net sales for the three months ended June 30, 2009 decreased by $29.3 million, or 26.8%, to $80.0 million from $109.3 million for the three
months ended June 30, 2008 primarily due to (i) decreased worldwide sales volume and (ii) unfavorable currency effects on net sales of $12.4 million related to the translation of sales made in currencies other than the
U.S. Dollar to U.S. Dollars for financial reporting purposes. The decrease was partially offset by favorable currency effects on pricing related to sales prices indexed in U.S. Dollars by certain non-U.S. operations of $1.5 million. Overall
pricing levels in our clothing segment increased slightly less than 1% during the three months ended June 30, 2009 as compared with the three months ended June 30, 2008.

In our roll covers segment, net sales for the three months ended June 30, 2009 decreased by $20.3 million or 33.2%, to $40.8 million from $61.1 million for the three months ended June 30, 2008. The decrease
was primarily due to (i) decreased worldwide sales volumes and (ii) unfavorable currency effects on net sales of $4.6 million related to the translation of sales made in currencies other than the U.S. Dollar to U.S. Dollars for
financial reporting purposes. Overall pricing levels in our roll covers segment increased by approximately 1% during the three months ended June 30, 2009 as compared with the three months ended June 30, 2008.



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Cost of Products Sold.Cost of products sold for the three months ended June 30, 2009 decreased by $26.4
million, or 26.0%, to $75.2 million from $101.6 million for the three months ended June 30, 2008.

In our clothing segment, cost of products sold
decreased by $16.0 million, or 25.0%, to $48.1 million for the three months ended June 30, 2009 from $64.1 million for the three months ended June 30, 2008 primarily due to (i) lower sales volumes during the three months ended
June 30, 2009 as compared with the three months ended June 30, 2008, (ii) favorable currency effects of $7.3 million related to the translation of expenses made in currencies other than the U.S. Dollar to U.S. Dollars for
financial reporting purposes and (iii) the $1.1 million impact of a lower cost structure, resulting from our cost reduction programs, during the three months ended June 30, 2009 as compared with the three months ended June 30, 2008.

In our roll covers segment, cost of products sold decreased by $10.4 million, or 27.7%, to $27.1 million for the three months ended June 30, 2009
from $37.5 million for the three months ended June 30, 2008 primarily due to (i) lower sales volumes during the three months ended June 30, 2009 as compared with the three months ended June 30, 2008, (ii) favorable currency
effects of $3.0 million related to the translation of expenses made in currencies other than the U.S. Dollar to U.S. Dollars for financial reporting purposes and (iii) the $1.2 million impact of a lower cost structure, resulting from our
cost reduction programs, during the three months ended June 30, 2009 as compared with the three months ended June 30, 2008.

Selling
Expenses. For the three months ended June 30, 2009, selling expenses decreased by $5.7 million, or 26.1%, to $16.1 million from $21.8 million for the three months ended June 30, 2008. The decrease was primarily due to the impact
of (i) a reduction in salaried sales positions, commissions and travel expenses, (ii) favorable currency effects of $2.3 million related to the translation of expenses made in currencies other than the U.S. Dollar to U.S. Dollars for
financial reporting purposes during the three months ended June 30, 2009 as compared with the three months ended June 30, 2008 and (iii) the $0.7 million impact of a lower cost structure, resulting from our cost reduction programs,
during the three months ended June 30, 2009 as compared with the three months ended June 30, 2008.

General and Administrative Expenses.
For the three months ended June 30, 2009, general and administrative expenses decreased by $16.9 million, or 72.2%, to $6.5 million from $23.4 million for the three months ended June 30, 2008. The decrease was primarily due to (i) a
decrease in consulting, legal and bank fees of $5.2 million for the three months ended June 30, 2009 as compared with the three months ended June 30, 2008, relating to the amendment of our senior credit facility on May 30, 2008,
(ii) a decrease in environmental expense of $3.4 million as a result of a Phase II assessment during the second quarter of 2009 that indicated that remediation costs in Australia would be significantly less than originally estimated,
(iii) a decrease in litigation accruals of $2.3 million for Brazilian labor matters and other legal matters, (iv) favorable currency translation effects of $1.9 million, (v) decreased provisions for bad debts of approximately $1.4
million and (vi) decreased salaries, travel and other costs as a result of cost reduction efforts during the three months ended June 30, 2009 as compared with the three months ended June 30, 2008.

Restructuring and Impairments Expenses.For the three months ended June 30, 2009, restructuring and impairments expenses decreased by $1.7 million, or 63.0%,
to $1.0 million from $2.7 million for the three months ended June 30, 2008. Restructuring expenses result from 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 our manufacturing facilities and through headcount reductions. For the three months ended June 30, 2009, restructuring expenses consisted almost entirely of severance
costs.

Research and Development Expenses. For the three months ended June 30, 2009, research and development expenses decreased by $0.5
million, or 15.6%, to $2.7 million from $3.2 million for the three months ended June 30, 2008 primarily due to lower salary and supply costs and to favorable currency effects during the three months ended June 30, 2009 as compared with the
three months ended June 30, 2008.



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Interest Expense, Net. Net interest expense for the three months ended June 30, 2009 increased by $14.8
million to $15.6 million from $0.8 million for the three months ended June 30, 2008. The increase is primarily attributable to (i) the $13.7 million credit to interest expense in 2008 in connection with the change in the fair value of our
interest rate swaps due to the loss of hedge accounting for the first six months of 2008 and (ii) increased interest rates during the three months ended June 30, 2009 as compared with the three months ended June 30, 2008 resulting
from the amendment of our senior credit facility on May 30, 2008.

Foreign Exchange Gain (Loss). For the three months ended June 30,
2009 and 2008, we had a foreign exchange gain of $0.6 million and a foreign exchange loss of $0.9 million, respectively. Foreign exchange gains and losses were primarily the result of hedging and intercompany activities.

Provision for Income Taxes.For the three months ended June 30, 2009 and 2008, the provision for income taxes was $2.7 million and $1.9 million,
respectively. The effective tax rate increased for the second quarter of 2009 as compared with the second quarter of 2008 principally due to (i) minimal tax provision being recognized on the increase in income before income taxes in 2008
resulting from the $13.7 million increase in the fair value of the Companys interest rate swaps in 2008 which occurred principally in subsidiaries with valuation allowances and (ii) to the impact of losses incurred in certain of the
Companys U.S. and foreign subsidiaries with previously established valuation allowances in relation to the level of profitability in tax-paying subsidiaries.

Six Months Ended June 30, 2009 Compared to the Six Months Ended June 30, 2008.

Net Sales. Net sales for the
six months ended June 30, 2009 decreased by $92.1 million, or 28.0%, to $237.3 million from $329.4 million for the six months ended June 30, 2008. For the six months ended June 30, 2009, 66% of our net sales were in our clothing
segment and 34% were in our roll covers segment.

In our clothing segment, net sales for the six months ended June 30, 2009 decreased by $55.1
million, or 25.9%, to $157.8 million from $212.9 million for the six months ended June 30, 2008 primarily due to (i) decreased sales volume, primarily in Europe and North America and (ii) unfavorable currency effects on net sales of
$26.0 million related to the translation of sales made in currencies other than the U.S. Dollar to U.S. Dollars for financial reporting purposes. The decrease was partially offset by favorable currency effects on pricing related to sales prices
indexed in U.S. Dollars by certain non-U.S. operations of $6.3 million. Overall pricing levels in our clothing segment remained unchanged during the six months ended June 30, 2009 as compared with the six months ended June 30, 2008.

In our roll covers segment, net sales for the six months ended June 30, 2009 decreased by $37.0 million, or 31.8%, to $79.5 million from $116.5
million for the six months ended June 30, 2008. The decrease was primarily due to (i) decreased worldwide sales volumes and (ii) unfavorable currency effects on net sales of $9.3 million related to the translation of sales made in
currencies other than the U.S. Dollar to U.S. Dollars for financial reporting purposes. Overall pricing levels in our roll covers segment increased by approximately 1% during the six months ended June 30, 2009 as compared with the six
months ended June 30, 2008.

Cost of Products Sold.Cost of products sold for the six months ended June 30, 2009 decreased by $49.9
million, or 25.3%, to $147.4 million from $197.3 million for the six months ended June 30, 2008.

In our clothing segment, cost of products sold
decreased by $31.6 million, or 25.0%, to $94.9 million for the six months ended June 30, 2009 from $126.5 million for the six months ended June 30, 2008 primarily due to (i) lower sales volumes during the six months ended
June 30, 2009 as compared with the six months ended June 30, 2008, (ii) favorable currency effects of $15.5 million related to the translation of expenses made in currencies other than the U.S. Dollar to U.S. Dollars for
financial reporting purposes during the six months ended June 30, 2009 as compared with the six months ended June 30, 2008 and (iii) the $1.2 million impact of a lower cost structure, resulting from our cost reduction programs, during
the six months ended June 30, 2009 as compared with the six months ended June 30, 2008.

In our roll covers segment, cost of products sold
decreased by $18.3 million, or 25.8%, to $52.5 million for the six months ended June 30, 2009 from $70.8 million for the six months ended June 30, 2008. The decrease in cost of products sold was primarily due to (i) lower worldwide
sales volumes during the six months ended June 30, 2009, (ii) favorable currency effects of $5.8 million related to the translation of expenses made in currencies other than the U.S. Dollar to U.S. Dollars for financial reporting
purposes during



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the six months ended June 30, 2009 as compared with the six months ended June 30, 2008 and (iii) the $1.2 million impact of a lower cost
structure, resulting from our cost reduction programs, during the six months ended June 30, 2009 as compared with the six months ended June 30, 2008.

Selling Expenses. For the six months ended June 30, 2009, selling expenses decreased by $9.7 million, or 22.9%, to $32.6 million from $42.3 million for the six months ended June 30, 2008. The decrease was primarily due
to (i) the impact of a reduction in salaried sales positions, commissions and travel expenses, (ii) favorable currency effects of $4.8 million during the six months ended June 30, 2009 as compared with the six months ended
June 30, 2008 and (iii) the $0.7 million impact of a lower cost structure, resulting from our cost reduction programs, during the three months ended June 30, 2009 as compared with the three months ended June 30, 2008.

General and Administrative Expenses. For the six months ended June 30, 2009, general and administrative expenses decreased by $22.4 million, or 53.2%, to
$19.7 million from $42.1 million for the six months ended June 30, 2008. The decrease was primarily due to (i) a decrease in consulting, legal and bank fees of $5.2 million for the six months ended June 30, 2009 as compared with the
six months ended June 30, 2008, which include fees relating to the amendment of our senior credit facility on May 30, 2008, (ii) a decrease in environmental expense of $3.4 million as a result of a Phase II assessment during the
second quarter of 2009 that indicated that remediation costs in Australia would be significantly less than originally estimated, (iii) a decrease in litigation accruals of $2.3 million for Brazilian labor matters and other legal matters,
(iv) a decrease in management incentive bonus and stock-based compensation expense of $1.1 million, (v) favorable currency translation effects of $3.9 million, (vi) decreased provisions for bad debts of approximately $3.1 million and
(vii) decreased salaries, travel and other costs as a result of cost reduction efforts during the six months ended June 30, 2009 as compared with the six months ended June 30, 2008.

Restructuring Expenses.For the six months ended June 30, 2009, restructuring expenses decreased by $2.1 million, or 65.6%, to $1.1 million from $3.2 million
for the six months ended June 30, 2008. Restructuring expenses result from our long-term strategy to reduce costs and improve long-term competitiveness as described above under Cost Reduction Programs by closing and/or transferring
production from certain of our manufacturing facilities and through headcount reductions. For the six months ended June 30, 2009, restructuring expenses consisted of severance costs and facility costs of $2.1 million and $0.2 million,
respectively. These costs were offset by the $1.2 million gain on the sale of our Swedish roll covers facility on March 31, 2009.

Research and
Development Expenses. For the six months ended June 30, 2009, research and development expenses decreased by $0.8 million, or 12.9%, to $5.4 million from $6.2 million for the six months ended June 30, 2008 primarily to lower
material and supply costs and to favorable currency effects during the six months ended June 30, 2009 as compared with the six months ended June 30, 2008.

Interest Expense, Net. Net interest expense for the six months ended June 30, 2009 increased by $5.6 million, or 21.6%, to $31.5 million from $25.9 million for the six months ended June 30, 2008.
The increase is primarily attributable to increased interest rates during the six months ended June 30, 2009 as compared with the six months ended June 30, 2008 resulting from the amendment of our senior credit facility on May 30,
2008. The increase was partially offset by (i) the $1.5 million credit to interest expense in 2008 in connection with the change in the fair value of our interest rate swaps due to the loss of hedge accounting for the first six months of 2008
and (ii) favorable currency effects of $1.9 million.

Foreign Exchange Gain (Loss). For the six months ended June 30, 2009, we had an
unrealized foreign exchange loss of $0.8 million compared to a gain of $2.6 million for the six months ended June 30, 2008. The gain in 2008 was primarily attributable to mark-to-market gains on fair value hedges, including gains on hedges for
which the underlying foreign exchange exposure on certain intercompany debt no longer existed in the first quarter of 2008, and gains on hedges on future purchases of equipment. Foreign exchange gains and losses during the first half of 2009 were
primarily the result of hedging and intercompany activities.

Provision for Income Taxes.For the six months ended June 30, 2009 and 2008, the
provision for income taxes was $6.6 million and $5.6 million, respectively. The increase in tax was primarily due to the establishment of a valuation allowance in Canada of $2.9 million in the first quarter of 2009 and to the impact of losses
incurred in certain of our U.S. and foreign subsidiaries with previously established valuation allowances in relation to the level of profitability in tax-paying subsidiaries.



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LIQUIDITY AND CAPITAL RESOURCES

Our operations are highly dependent upon the paper production industry and the degree to which the paper industry is affected by global economic conditions and the availability of credit. Demand for our products could
continue to decline if paper manufacturers are unable to obtain required financing or if the economic slowdown causes additional mill closures or continued inventory build-up. In addition, the global economic crisis and the ensuing lack of credit
availability may affect our customers ability to pay their debts which could have a negative impact on our Company. These factors would impact our liquidity and our ability to satisfy the covenant requirements of our credit facility.

As of June 30, 2009, the Company was in compliance with all of the covenants under its senior credit facility. Our ability to satisfy the covenants
required by our credit facility is contingent on our ability to achieve our financial forecasts. These forecasts are based on certain assumptions regarding demand for paper products, the level of paper production and inventories, the number of mills
producing paper and the financial health and access to capital of the paper producers. Absent a significant recovery in revenue resulting from an economic revival in the paper industry, we anticipate that we will not be in compliance with certain
financial covenants for the period ending September 30, 2009 and intend to seek an amendment to our senior credit facility agreement with the lenders prior to the date when an event of default would occur due to our failure to demonstrate
compliance with certain financial covenants for the period ending September 30, 2009. We have begun work toward this amendment, initiating contact with our lenders, although no assurances can be given that we will successfully obtain the
lenders consent to amend the credit facility on this timetable, or at all, or amend covenants in a manner sufficient to adequately reduce the risk of default. We have created a steering committee of the Board of Directors to lead this activity
and have retained AlixPartners, LLC as our financial advisor to assist in this process. Failing to satisfy financial covenants under the senior credit facility would constitute an event of default, upon which the lenders could terminate the
revolving credit facility and accelerate the repayment of all of the outstanding debt under the senior credit facility, causing it to immediately become due and payable. Any such acceleration of our obligations would likely cause other lenders and
contractual counterparties, including counterparties to our interest rate swap agreements and other hedge agreements to terminate and/or to accelerate our obligations under other financing and credit instruments and agreements. Should the lenders
and/or other counterparties demand immediate repayment of all of our obligations, we expect that we would be unable to pay such obligations. As of June 30, 2009, the amount of cash that would be required to settle all outstanding hedging
obligations is $21.4 million. In light of this risk, and as part of our ongoing focus on enterprise risk management, we are continuing to evaluate market conditions and plan for contingencies, including, without limitation, exploring strategic
initiatives to reduce our debt, which may include, among other things, an issuance of equity or other securities to repay a portion of our outstanding debt. There can be no assurance that we will be able to complete any such strategic initiatives on
satisfactory terms, and any such strategic initiatives involving issuances of equity are likely to be highly dilutive to our existing stockholders.

Our
principal liquidity requirements are for debt service, working capital and capital expenditures. We plan to use cash generated by operations as our primary source of liquidity as well as borrowings, if necessary, under the revolving portion of the
credit facility and the utilization of certain bank overdraft facilities to meet normal operating requirements for at least the next twelve months. We may have difficulty making additional borrowings under our revolver in light of the anticipated
non-compliance with certain financial covenants in our senior credit facility for the period ending September 30, 2009. If expected revenue and profits are not realized in 2009, we may not be able to generate enough cash to meet our
obligations. In addition, should the current conditions in the global paper market continue, we may not have sufficient cash to fund our operations or meet our other liquidity requirements.

Net cash used in operating activities was $7.5 million for the six months ended June 30, 2009 and net cash provided by operating activities was $41.0 million for
the six months ended June 30, 2008. The $48.5 million decrease is principally attributable to a decrease in the volume of business as a result of the global economic crisis and an increase in working capital during the first half of 2009 as
compared with the first half of 2008 principally due to the level of payment of payables and accruals since December 31, 2008. We typically defer payments to certain vendors at the end of each quarter, which results in an increased cash
position at the



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end of the quarter and increased net cash from operating activities for the period then ended. Such deferrals were significant at December 31, 2008 and
the absence of the extent of such deferrals at the end of June 30, 2009 contributed to the increase in working capital for the six months ended June 30, 2009. In an effort to improve working capital, in the second quarter of 2009, the
Company initiated a project to accelerate accounts receivable collections and to sell excess inventories. As of June 30, 2009, the Companys efforts under this project contributed approximately $2.5 million in additional cash and increased
Adjusted EBITDA by approximately $4 million.

Net cash used in investing activities was $6.0 million for the six months ended June 30, 2009 and $19.7
million for the six months ended June 30, 2008. The decrease of $13.7 million was primarily due to (i) a decrease in capital equipment spending of $9.8 million in the six months ended June 30, 2009 as compared with the six months
ended June 30, 2008 and (ii) an increase in proceeds from disposals of property and equipment of $3.9 million in the six months ended June 30, 2009 as compared with the six months ended June 30, 2008, including $1.9 million from
the sale of our Swedish roll covers facility on March 31, 2009 and $1.1 million from the sale of the Chief Executive Officers former home in the second quarter of 2009, as provided in his employment agreement in connection with the
Executives relocation of his principal residence.

Net cash used in financing activities was $1.1 million for the six months ended June 30, 2009
and $21.7 million for the six months ended June 30, 2008. The decrease of $20.6 million was primarily the result of borrowings under our revolver of $28.0 million during the first quarter of 2009 and the decrease in other financing activities
of $8.7 million in the six months ended June 30, 2009 as compared with the six months ended June 30, 2008 which consisted principally of expenses associated with the amendment of our credit facility on May 30, 2008, partially offset
by higher debt payments of approximately $16.1 million during the six months ended June 30, 2009 as compared with the six months ended June 30, 2008. We made a mandatory principal repayment of $16.1 million in the first quarter of 2009 as
compared with $9.4 million in the first quarter of 2008. The increase in the mandatory payment was due to the loan agreement requiring us to make such excess payments based on the prior years Adjusted EBITDA, which was impacted during 2008 by
gains of approximately $52 million related to the freezing of one of our U.S. pension plans, the termination of our U.S. retiree medical plan and the mark to market changes in the fair value of our interest rate swaps, partially offset by
approximately $30 million related to increased restructuring expenses and increased noncash reserves. Because none of these events generated any cash but increased Adjusted EBITDA which increased the mandatory principal payment, the effect of these
actions reduced our available cash.

As of June 30, 2009, there was a $581.4 million balance of term loans outstanding under our senior credit
facility. During the first half of 2009, we made scheduled principal payments of $9.5 million and mandatory principal repayment of $18.7 million. In addition, as of June 30, 2009, we had an aggregate of $28.0 million outstanding under our
current 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 and an aggregate of $21.8
million available for additional borrowings under these revolving lines of credit. We may have difficulty making additional borrowings under our revolver in light of the anticipated financial covenant non-compliance for the period ending
September 30, 2009. Our liquidity is substantially affected by the covenant requirements of our credit agreement. See Credit Facility below. We had cash and cash equivalents of $20.4 million at June 30, 2009 compared to $34.7
million at December 31, 2008.

CAPITAL EXPENDITURES

For the six months ended June 30, 2009, we had capital expenditures of $11.1 million consisting of growth capital expenditures of $6.0 million and maintenance capital expenditures of $5.1 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 safety and environmental needs and information technology.
For the six months ended June 30, 2008, capital expenditures were $20.9 million, consisting of growth capital expenditures of $13.8 million and maintenance capital expenditures of $7.1 million.



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In the first quarter of 2008 we began an effort to reduce our planned capital expenditures. As part of this effort, we
determined to delay the planned capital expenditures for the Vietnam facility and cancelled or rescheduled certain other previously planned capital expenditures. These cancellations did not result in any substantial penalties for us. In December
2008, we discontinued the construction of the Vietnam facility. While construction of the Vietnam facility has been discontinued, we continue to have contractual obligations with respect to certain equipment which was previously ordered for the
facility. We are redeploying this equipment to other locations. Due to our assessment of the impact of the global economic crisis and the potential effect on our customers and our industry, we are currently evaluating additional capital expenditures
reductions and cost reduction actions to improve long-term operating efficiencies and to better match our production with demand. We analyze our planned capital expenditures based on investment opportunities available to us and our financial and
operating performance, and accordingly, actual capital expenditures may be more or less than these amounts. We target capital expenditures for 2009 to be approximately $27 million, and that capital expenditure levels in 2010 will be comparable to
those in 2009.

See Credit Facility below for a description on limitations on capital expenditures imposed by our credit facility.

CREDIT FACILITY

Upon the completion of the initial
public offering of our common stock on May 19, 2005, we and certain of our subsidiaries entered into a senior secured credit facility. The credit facility was amended four times: on February 8, 2006, December 22,
2006, May 2, 2007 and April 8, 2008. The credit facility was amended and restated on May 30, 2008.

The description of the credit
facility below describes the facility as amended and restated.

Our credit facility provides for a $50 million senior secured revolving credit facility and
for term loans that had a total principal amount of $650 million as of May 2005. Because the term loans include portions denominated in Euros and Canadian dollars, in addition to a U.S. Dollar denominated portion, the aggregate outstanding
principal on our term loans is affected by our currency exchange rates as well as principal repayments. The revolving credit facility matures on November 19, 2011, and the term loans mature on May 19, 2012. The credit facility is secured
by substantially all of our assets and the assets of most of our subsidiaries, subject to legal and tax considerations and requirements.

Borrowings under
the revolving credit facility and the term loans bear interest at the sum of, as applicable, LIBOR, the Euribor rate or CDOR plus, in each case, the applicable margin. The applicable margin was set at 5.50% through December 31, 2008. Beginning
January 1, 2009, the applicable margin depends upon our credit rating level: it will be 2.75% if our credit rating is Ba3 or higher by Moodys and BB- or higher by S&P, 3.75% if our credit rating is B1 by Moodys or B+ by S&P,
4.25% if our credit rating is B3 or higher but lower than B1 by Moodys and B- or higher but lower than B+ by S&P, and 5.50% if our credit rating is lower than B3 by Moodys or lower than B- by S&P. In order
to qualify at each level the rating must be with a stable outlook. Our current credit rating is Caa1 by Moodys and CCC+ by S&P. On September 29, 2008, Standard & Poors Ratings Services raised its ratings on
the Company, including raising the long-term corporate credit rating, from CCC+ to B- but on July 29, 2009 lowered the rating to CCC+ due to our anticipated financial covenant non-compliance for the period
ending September 30, 2009. Our current applicable margin is 5.50%.

On November 16, 2007, we entered into interest rate swap arrangements
pursuant to which we paid fixed rates on notional amounts while receiving the applicable floating LIBOR, Euribor or CDOR rates. The interest rate swap arrangements effectively fixed the interest rate on approximately 85% of the term loan portion of
our credit facility through December 31, 2010. These interest rate swaps initially qualified for hedge accounting under SFAS No. 133. As a result of the financial covenant non-compliance for the period ended March 31, 2008 as
discussed in Note 6 of the Notes to Unaudited Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report, this debt was potentially payable prior to the expiration of the underlying interest rate swaps, and accordingly,
hedge accounting under SFAS No. 133 was no longer applicable for these interest rate swaps and the mark to market decrease in their fair value of $12.2 million was recorded as a non-cash charge to interest expense in the first quarter of 2008
and a non-cash credit to interest expense of $13.7 million in the second quarter of 2008. Effective July 1, 2008, we were again able to



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assert that the hedged transactions were probable of occurring and accordingly redesignated the interest rate swaps as cash flow hedges of benchmark interest
rate risk on variable interest payments on the hedged debt as of June 30, 2008. Such mark to market changes on these interest rate swaps are principally credited or charged to accumulated other comprehensive income (loss). The ineffective
portion of these interest rate swaps of $0.8 million was charged to interest expense during the six months ended June 30, 2009. There can be no assurance that in future periods we will be able to assert that the hedge transactions are probable
of occurring, and thus there can be no assurance that the interest rate swaps will continue to qualify for hedge accounting. The new interest rate swaps effectively fix the interest rate on approximately 84% of the term loan portion of our credit
facility through December 31, 2010. As of June 30, 2009, the weighted average interest rate on the effectively fixed portion of the term loan facility was 9.74%, and the weighted average interest rate on the portion of the term loan
facility not effectively fixed by interest rate swap contracts, based on the 90-day LIBOR, was 6.32%.

The credit facility provides for scheduled quarterly
principal payments of the term loans as set out below:



|                          |  |           |  |           |  |          
|------------------------- |  | --------- |  | --------- |  | ---------
|Currency:                 |  | USD       |  | Euro      |  | CAD      
|2009                      |  | 2,458,174 |  | 1,392,040 |  | 584,489  
|2010                      |  | 3,318,535 |  | 1,879,254 |  | 789,059  
|2011                      |  | 4,055,987 |  | 2,296,865 |  | 964,406  
|2012 (first quarter only) |  | 4,916,348 |  | 2,784,080 |  | 1,168,976

The credit facility provides that for the purposes of computing debt, which is a part of the calculation of the
leverage ratio, indebtedness which is payable in Canadian Dollars or Euros shall be converted into U.S. Dollars using the average exchange rate for the period of four consecutive fiscal quarters ended March 31, 2008. Accordingly, if the value
of the U.S. Dollar increases relative to the Euro or the Canadian Dollar and our Adjusted EBITDA declines as a result of this currency effect, there would not be a corresponding decrease in the amount of our debt for purposes of the maximum
leverage ratio covenant calculation.

The credit facility also requires us to make additional prepayments of the term loans under the following
circumstances:



| |  |  | with 100% of the net cash proceeds received by us from any sale, transfer or other disposition of any assets (excluding inventory and certain discontinued
manufacturing facilities), subject to an exemption for the reinvestment of up to $3 million of such proceeds within a year of our receipt thereof in long-term productive assets of the general type used in our business;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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
exempting the first $2 million;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | with 75% of the net cash proceeds from the issuance of any common stock, subject to customary exceptions and exempting the first $100,000;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | with 100% of the net cash proceeds from the incurrence of any indebtedness by us (excluding indebtedness permitted under the credit facility, but including any
subordinated indebtedness), subject to customary exceptions; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | with 75% of our excess cash on an annual basis; that is, our Adjusted EBITDA minus consolidated interest expense, cash income tax expense, consolidated capital
expenditures (subject to certain exceptions), consolidated restructuring costs, cash payments of withholding taxes from proceeds of the repurchase, redemption or retention of common stock and the aggregate amount of scheduled and voluntary payments
made during the past fiscal year.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Prior to the effectiveness of the amendment and restatement of our credit facility, the percentage of
our annual excess cash required to be prepaid was 40% for 2007, 27.5% for 2008 and 50% for each fiscal year thereafter. We made mandatory principal prepayments from excess cash of $18.7 million and $9.4 million in the first half of 2009 and 2008,
respectively.



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Our credit facility requires that we observe and perform numerous affirmative and negative covenants, including certain
financial covenants. The financial covenants per the amended credit facility are now as follows:



|                                                                                                                             |                                      |                                      |           |          
|---------------------------------------------------------------------------------------------------------------------------- | ------------------------------------ | ------------------------------------ | --------- | ---------
|Minimum Interest Coverage Ratio:                                                                                             |                                      | Four Fiscal Quarters Ending          |           | Ratio    
|The ratio of four quarter Adjusted EBITDA to interest expense.                                                               |                                      | March 31, 2009 to March 31, 2010     |           | 2.00:1.00
|                                                                                                                             | June 30, 2010 to March 31, 2011      |                                      | 2.25:1.00
|                                                                                                                             | June 30, 2011 to December 31, 2011   |                                      | 2.50:1.00
|                                                                                                                             | March 31, 2012                       |                                      | 2.75:1.00
|                                                                                                                             |                                      |                                     
|Minimum Fixed Charge Coverage Ratio:                                                                                         |                                      | Four Fiscal Quarters Ending          |           | Ratio    
|The ratio of four quarter Adjusted EBITDA to fixed charges (interest expense, scheduled principal payments, and cash taxes). |                                      | June 30, 2009 to March 31, 2012      |           | 1.20:1.00
|                                                                                                                             |                                      |                                     
|Maximum Leverage Ratio:                                                                                                      |                                      | Four Fiscal Quarters Ending          |           | Ratio    
|The ratio of outstanding debt to four quarter Adjusted EBITDA.                                                               |                                      | June 30, 2009 and September 30, 2009 |           | 5.25:1.00
|                                                                                                                             | December 31, 2009                    |                                      | 5.00:1.00
|                                                                                                                             | March 31, 2010 and June 30, 2010     |                                      | 4.75:1.00
|                                                                                                                             | September 30, 2010                   |                                      | 4.50:1.00
|                                                                                                                             | December 31, 2010 and March 31, 2011 |                                      | 4.25:1.00
|                                                                                                                             | June 30, 2011 to March 31, 2012      |                                      | 4.00:1.00

For the four fiscal quarters ended June 30, 2009 our interest coverage ratio was 2.24:1, our fixed charge
coverage ratio was 1.43:1 and our leverage ratio was 4.82:1.

Our credit facility defines consolidated capital expenditures for a particular fiscal year as
all expenditures required under GAAP to be included in purchase of property and equipment or similar items. The credit facility limits the amount of our consolidated capital expenditures in any given fiscal year to an amount not
exceeding $50 million for fiscal year 2008 and $35 million for each of fiscal years 2009, 2010 and 2011, exclusive of capital expenditures paid with net insurance and condemnation proceeds; provided that the maximum amount of consolidated capital
expenditures permitted in each fiscal year shall be increased by 50% of the amount below the maximum not spent in the prior fiscal year (determined without reference to any carryover amount); and provided, further, that solely for fiscal year 2008,
the maximum amount that may be carried forward to fiscal year 2009 shall equal 100% of the first $10 million of any permitted consolidated expenditures not expended in fiscal year 2008 plus 50% of any remaining expenditures not expended in fiscal
year 2008.

Our credit facility also prohibits the payment of dividends on our common stock.

As of June 30, 2009, we were in compliance with all of the covenants under our senior credit facility. Our ability to satisfy the covenants required by our credit facility is contingent on our ability to achieve
our financial forecasts. These forecasts are based on certain assumptions regarding demand for paper products, the level of paper production and inventories, the number of mills



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producing paper and the financial health and access to capital of the paper producers. Absent a significant recovery in revenue resulting from an economic
revival in the paper industry, we anticipate that we will not be in compliance with certain financial covenants for the period ending September 30, 2009 and intend to seek an amendment to our senior credit facility agreement with the lenders
prior to the date when an event of default would occur due to our failure to demonstrate compliance with certain financial covenants for the period ending September 30, 2009. We have begun work toward this amendment, initiating contact with our
lenders, although no assurances can be given that we will successfully obtain the lenders consent to amend the credit facility on this timetable, or at all, or amend covenants in a manner sufficient to adequately reduce the risk of default. We
have created a steering committee of our Board of Directors to lead this activity and have retained AlixPartners, LLC as our financial advisor to assist in this process. Failing to satisfy financial covenants under the senior credit facility would
constitute an event of default, upon which the lenders could terminate the revolving credit facility and accelerate the repayment of all of the outstanding debt under the senior credit facility, causing it to immediately become due and payable. Any
such acceleration of our obligations would likely cause other lenders and contractual counterparties, including counterparties to our interest rate swap agreements and other hedge agreements to terminate and/or to accelerate our obligations under
other financing and credit instruments and agreements. Should the lenders and/or other counterparties demand immediate repayment of all of our obligations, we expect that we would not be able to pay such obligations. As of June 30, 2009, the
amount of cash that would be required to settle all outstanding hedging obligations is $21.4 million. In light of this risk, and as part of our ongoing focus on enterprise risk management, we are continuing to evaluate market conditions and plan for
contingencies, including, without limitation, exploring strategic initiatives to reduce our debt, which may include, among other things, an issuance of equity or other securities to repay a portion of our outstanding debt. There can be no assurance
that we will be able to complete any such strategic initiatives on satisfactory terms, and any such strategic initiatives involving issuances of equity are likely to be highly dilutive to our existing stockholders.

We may have difficulty making additional borrowings under our revolver in light of the anticipated financial covenant non-compliance for the period ending
September 30, 2009.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in conformity with Generally Accepted Accounting Principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses. Actual results could differ from those estimates. We have formal accounting policies in place including those
that address critical and complex accounting areas. Note 3 to the consolidated financial statements included elsewhere in this Quarterly Report identifies the significant accounting policies used in preparation of the consolidated financial
statements. The most significant areas involving management judgments and estimates are described below.

Derivatives and Hedging.On
January 1, 2009, we adopted Statement of Financial Accounting Standards No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133(SFAS No. 161). SFAS No,
161 amends and expands the disclosure requirements of FASB Statement No. 133 (SFAS No. 133) with the intent to provide users of financial statements with an enhanced understanding of: (a) how and why an entity uses
derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entitys
financial position, financial performance, and cash flows. SFAS No. 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about the fair value of and gains and losses on derivative
instruments, and disclosures about credit-risk-related contingent features in derivative instruments.

As required by SFAS No. 133, we record all
derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether we have elected to designate a derivative in a hedging relationship and apply
hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm
commitment attributable to a particular risk are considered fair value hedges. Derivatives designated and qualifying as a hedge of the



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exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives may also be
designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the
changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. We may enter into derivative contracts that
are intended to economically hedge certain of its risk, even though hedge accounting does not apply or if we elect not to apply hedge accounting under SFAS No. 133.

There are two types of hedges into which we enter: hedges of fair value exposure and hedges of cash flow exposure. Hedges of fair value exposure are entered into in order to hedge the fair value of a recognized asset
or liability, or a firm commitment. Hedges of cash flow exposure are entered into in order to hedge a forecasted transaction or the variability of cash flows to be paid related to a recognized liability. Changes in derivative fair values are
recognized in earnings as offsets to the changes in fair value of the related hedged assets and liabilities. Changes in the derivative fair values that are designated as cash flow hedges which meet the criteria for hedge accounting are recorded in
other comprehensive income (loss). On November 16, 2007, we entered into interest rate swap arrangements pursuant to which we paid fixed rates on notional amounts while receiving the applicable floating LIBOR, Euribor or CDOR rates. The
interest rate swap arrangements effectively fixed the interest rate on approximately 85% of the term loan portion of our credit facility through December 31, 2010. These interest rate swaps initially qualified for hedge accounting under SFAS
No. 133. As a result of the financial covenant non-compliance for the period ended March 31, 2008 as discussed in Note 6 of the Notes to Unaudited Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report,
this debt was potentially payable prior to the expiration of the underlying interest rate swaps, and accordingly, hedge accounting under SFAS No. 133 was no longer applicable for these interest rate swaps and the mark to market decrease in
their fair value of $12.2 million was recorded as a non-cash charge to interest expense in the first quarter of 2008 and a non-cash credit to interest expense of $13.7 million in the second quarter of 2008. Effective July 1, 2008, we were again
able to assert that the hedged transactions were probable of occurring and accordingly redesignated the interest rate swaps as cash flow hedges of benchmark interest rate risk on variable interest payments on the hedged debt as of June 30,
2008. Such mark to market changes on these interest rate swaps are principally credited or charged to accumulated other comprehensive income (loss). The ineffective portion of these interest rate swaps of $0.8 million was charged to interest expense
during the six months ended June 30, 2009.

These interest rate swaps effectively fix the interest rate on approximately 84% of the term loan portion
of our credit facility through December 31, 2010. As of June 30, 2009, the weighted average interest rate on the effectively fixed portion of the term loan facility was 9.74%, and the weighted average interest rate on the portion of the
term loan facility not effectively fixed by interest rate swap contracts, based on the 90-day LIBOR, was 6.32%. There can be no assurance that in future periods we will be able to assert that the hedge transactions are probable of occurring, and
thus there can be no assurance that the interest rate swaps will continue to qualify for hedge accounting. Specifically, if left uncured, our anticipated financial covenant non-compliance with certain covenants in our senior credit facility for the
period ending September 30, 2009 would constitute an event of default, upon which the lenders could terminate the revolving credit facility and accelerate the repayment of all of the outstanding debt under the senior credit facility, causing it
to immediately become due and payable. If the lenders accelerate the debt under the senior credit facility so that it is payable prior to the expiration of the underlying interest rate swaps, hedge accounting under SFAS No. 133 would no longer
be applicable for these interest rate swaps. Accordingly, the cumulative mark to market changes in their fair value that will have been recorded in accumulated other comprehensive income (loss) through September 30, 2009 in addition to the
credit valuation adjustments recorded under SFAS No. 157 , Fair Value Measurements (SFAS No. 157) would be charged to interest expense during the third quarter of 2009. As of June 30, 2009 this amount was $18.1
million. Additionally, mark to market changes subsequent to September 30, 2009 would be recorded as charges or credits to interest expense prospectively.

Effective January 1, 2008, we adopted SFAS No. 157 for measuring our derivative assets and liabilities. We have classified our interest rate swaps in Level 2 of the SFAS No. 157 fair value hierarchy, as the significant inputs
to the overall valuations are based on market-observable data or information derived from or corroborated by market-observable data, including market-based inputs to models, model calibration to market-clearing transactions, broker or dealer
quotations, or alternative pricing sources with reasonable levels of price transparency. Where models are used, the selection of a particular model to value a derivative depends upon the



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contractual terms of, and specific risks inherent in, the instrument as well as the availability of pricing information in the market. We use similar models
to value similar instruments. Valuation models require a variety of inputs, including contractual terms, market prices, yield curves, credit curves, measures of volatility, and correlations of such inputs. For our derivatives, all of which trade in
liquid markets, model inputs can generally be verified and model selection does not involve significant management judgment.

To comply with the provisions
of SFAS No. 157, we incorporated credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterpartys nonperformance risk in the fair value measurements of our derivatives. The credit
valuation adjustments are calculated by determining the total expected exposure of the derivatives (which incorporates both the current and potential future exposure) and then applying each counterpartys credit spread to the applicable
exposure. For derivatives with two-way exposure, such as interest rate swaps, the counterpartys credit spread is applied to our exposure to the counterparty, and our own credit spread is applied to the counterpartys exposure to us, and
the net credit valuation adjustment is reflected in our derivative valuations. The total expected exposure of a derivative is derived using market-observable inputs, such as yield curves and volatilities. The inputs utilized for our own credit
spread are based on implied spreads from its publicly-traded debt. For counterparties with publicly available credit information, the credit spreads over LIBOR used in the calculations represent implied credit default swap spreads obtained from a
third party credit data provider. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, we have considered the impact of netting and any applicable credit enhancements, such as collateral postings,
thresholds, mutual puts, and guarantees. Additionally, we actively monitor counterparty credit ratings for any significant changes.

Although we have
determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with our derivatives utilize Level 3 inputs, such as estimates of current credit
spreads to evaluate the likelihood of default by us and our counterparties. However, as of June 30, 2009, we have assessed the net significance of the impact of the credit valuation adjustments on the overall valuation of our derivative
positions and have determined that the credit valuation adjustments reduced the settlement values of our derivative liabilities by $3.7 million. Various factors impact changes in the credit are not significant to the overall valuation adjustments
over time, including changes in the credit spreads of the parties to the contracts, as well as changes in market rates and volatilities, which affect the total expected exposure of the derivative instruments.

When appropriate, valuations are also adjusted for various factors such as liquidity and bid/offer spreads, which factors were deemed immaterial by us as of
June 30, 2009. As a result, we have determined that our derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy. We do not have any fair value measurements using significant unobservable inputs (Level 3) as
of June 30, 2009.

Effective January 1, 2008, we partially adopted SFAS No. 157. Financial Accounting Standards Board (FASB)
Staff Position SFAS No. 157-2, Effective Date of FASB Statement No. 157, permits us to defer the recognition and measurement of its nonfinancial assets and nonfinancial liabilities until January 1,
2009. At June 30, 2009, the Company did not have any nonfinancial assets or nonfinancial liabilities that are recognized or disclosed at fair value.

Goodwill. We account for acquired goodwill and intangible assets in accordance with SFAS No. 141, Business Combinations (SFAS No. 141). Purchase accounting required by SFAS
No. 141 involves judgment with respect to the valuation of the acquired assets and liabilities in order to determine the amount of goodwill. We believe that the estimates that we have used to record prior acquisitions are reasonable and in
accordance with SFAS No. 141.

Impairment of Goodwill and Indefinite-Lived Intangible Assets. We account for acquired goodwill and
goodwill impairment in accordance with SFAS No. 142, Goodwill and Other Intangible Assets (SFAS No. 142). This pronouncement requires considerable judgment in the valuation of acquired goodwill and the ongoing evaluation
of goodwill impairment. 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.



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We perform an annual test for goodwill impairment as of December 31st at the business segment level. We have two
business segments: clothing and roll covers. When our business was acquired in 1999, more than 80% of the goodwill was assigned to the roll covers segment based on relative fair values at the date of acquisition.

Goodwill impairment testing is a two-step process. Step 1 involves comparing the fair value of the Companys reporting unit to its carrying amount. If the fair
value of the reporting unit is greater than its carrying amount, there is no impairment. If the reporting unit carrying amount is greater than the fair value then the second step must be completed to measure the amount of impairment, if any. Step 2
calculates the implied fair value of goodwill by deducting the fair value of all tangible and intangible assets, excluding goodwill, of the reporting unit from the fair value of the reporting unit as determined in Step 1. The implied fair value of
goodwill determined in this step is compared to the carrying value of goodwill. If the implied fair value of goodwill is less than the carrying value of goodwill, an impairment loss is recognized equal to the difference.

For the purpose of performing the annual impairment test, we allocate all shared assets and liabilities to the business segments based upon the percentage of each
segments revenue to total revenue. Shared expenses are allocated to each segment to the extent necessary to allow them to operate as independent businesses. Fair value was determined by using a weighted combination of both a market multiple
approach and an income approach. The market multiple approach utilizes our proprietary information to determine measures that are used to value our business segments. The income approach is a present value technique used to measure the fair value of
future cash flows produced by each business segment. Determining the fair value of a business segment or an indefinite-lived purchased intangible asset is judgmental in nature and requires the use of significant estimates and assumptions, including
revenue growth rates and operating margins, discount rates and future market conditions, among others. We believe that the assumptions and rates used in our annual impairment test under SFAS No. 142 are reasonable, but inherently uncertain.

Based on these assessments performed as of December 31, 2008, we determined that no impairment of goodwill exists. The excess of the fair value over
the carrying value for our clothing and roll covers segment as of December 31, 2008, the annual test date, was approximately $134 million and $30 million, respectively. In order to evaluate the sensitivity of the analysis performed, we applied
a hypothetical 5% decrease to the fair value of these business segments, which resulted in a fair value in excess of carrying value of approximately $110 million and $13 million for the clothing segment and roll covers segment, respectively.

As of June 30, 2009, the Company evaluated events and circumstances which may have indicated an impairment of goodwill and other intangible assets
and determined that no impairment exists.

Contingencies. We are subject to various claims and contingencies associated with lawsuits,
insurance, tax, environmental and other issues arising out of the normal course of business. Our consolidated financial statements reflect the treatment of claims and contingencies based on managements view of the expected outcome. We consult
with legal counsel on those issues related to litigation with respect to matters in the ordinary course of business. If the likelihood of an adverse outcome is probable and the amount is estimable, we accrue a liability in accordance with SFAS
No. 5, Accounting for Contingencies. While we believe that the current level of reserves is adequate, the adequacy of these reserves may change in the future due to new developments in particular matters. During the third quarter of
2008, while evaluating one of our foreign facilities, we discovered the possibility of contamination at the facility. Subsequently we had a preliminary evaluation performed, which confirmed the existence of contamination and estimated preliminary
costs to clean up the facility. Based upon this evaluation, we recorded $4.1 million in 2008 as our best estimate of the remediation costs we expected to incur. A Phase II assessment of the ground water contamination performed for us during the
second quarter of 2009 indicated the costs to remediate the contamination would be significantly less than originally estimated and accordingly, we reduced the accrual by $3.4 million during the second quarter of 2009 based on this assessment.

Income Taxes.We utilize the asset and liability method for accounting for income taxes in accordance with SFAS No. 109, Accounting for
Income Taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities. Deferred tax assets and liabilities are measured using the enacted tax
rates and statutes that will be in effect when the differences are expected to reverse.



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We reduce our deferred tax assets by a valuation allowance if, based upon the weight of available evidence, it is more
likely than not that some portion or all of the deferred tax assets will not be realized. Relevant evidence, both positive and negative, is considered in determining the need for a valuation allowance. Information evaluated includes our financial
position and results of operations for the current and preceding years as well as an evaluation of currently available information about future years. In light of our accumulated loss position in certain tax jurisdictions, and the uncertainty of
profitability in future periods, we recorded valuation allowances for deferred tax assets primarily related to net operating loss carryforwards in the United States, United Kingdom, Germany, Sweden, Australia and Canada.

In addition, we operate within multiple taxing jurisdictions and could be subject to audit in these jurisdictions. These audits can involve complex issues and rely on
estimates and assumptions. These audits may require an extended period of time to resolve and may cover multiple years. Although we believe that the estimates and assumptions are reasonable, the final determination of tax audits and any related
litigation could be different than that which is reflected in historical income tax provisions and recorded assets and liabilities. There are currently no U.S. Federal or state audits or examinations underway. In May 2009, we concluded an audit
relating to our German subsidiaries for tax years 1999 through 2002. No further adjustments not previously recognized were required in the quarter ended June 30, 2009 as a result of this settlement. The Canadian Federal tax authorities
contacted us in October of 2008 and have initiated an audit of our Canadian companies. The audit is still in the initial information gathering stages and no issues or assessments have been raised. We believe that there are no other jurisdictions in
which the outcome of unresolved issues or claims is likely to be material to our results of operations, financial position or cash flows. We further believe that we have made adequate provision for all income tax uncertainties.

In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109(FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprises financial statements in accordance with FAS No. 109. FIN 48 prescribes a two-step process to determine the amount of
tax benefit to be recognized. First, the tax position must be evaluated to determine the likelihood that it will be sustained upon external examination. If the tax position is deemed more-likely-than-not to be sustained, the tax position
is then assessed to determine the amount of benefit to recognize in the financial statements. The amount of the benefit that may be recognized is the largest amount that has a greater than 50% likelihood of being realized upon ultimate settlement.

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. Our credit facility includes
covenants based on Adjusted EBITDA. If our Adjusted EBITDA declines below certain levels, we will violate the covenants resulting in a default condition under the credit facility or be required to prepay the credit facility. Neither EBITDA nor
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 (loss) from operations (as determined in accordance with GAAP).

EBITDA is defined as net income (loss) before interest expense, income tax provision (benefit) and depreciation and amortization. Adjusted EBITDA is defined in our
credit facility and is EBITDA plus (i) restructuring or related impairment costs (not to exceed $5.0 million in the aggregate for 2008 and in each year thereafter, (ii) reserves for inventory in connection with plant closings,
(iii) 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, (iv) certain transaction costs, including costs incurred in connection with our initial public offering and the related debt financing, the legal reorganization of Brazilian
subsidiaries and the preparation and closing of the existing credit agreement, (v) consolidated amendment/termination costs, which consist of costs incurred in connection with the consummation of the fourth and fifth amendments to the senior
credit facility and the termination of the employment contract of the former Chief Executive Officer and transition to the new Chief Executive Officer, not to exceed $8.0 million in the aggregate, (vi) costs associated with payments to
management prior to the completion of our initial public offering in connection with the termination of incentive plans, (vii) non-cash charges resulting from the application of purchase accounting, (viii) non-cash expenses



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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 (ix) expenses incurred not exceeding $7 million per year as a result of the repurchase, redemption or retention of our own common stock earned under equity compensation programs solely in order to make withholding tax payments.
For certain historical periods, the amended credit agreement specified Adjusted EBITDA is $35,610, $36,514 and $38,431 for the quarters ended March 31, 2008, December 31, 2007 and September 30, 2007, respectively. For the quarter
ended March 31, 2008, the amount reflects an increase of $800 over the originally disclosed amount in the first quarter of 2008, related to the transition to the new Chief Executive Officer. 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 income (loss), which is the most directly comparable GAAP financial measure, to EBITDA and Adjusted EBITDA.



|                                                  |  |                            |        |   |      |   |        |  
|------------------------------------------------- |  | -------------------------- | ------ | - | ---- | - | ------ | -
|                                                  |  | Three Months EndedJune 30, |       
|(in thousands)                                    |  | 2009                       |        |   | 2008 |  
|Net income                                        |  | $                          | 1,601  |   |      | $ | 14,118 |  
|Income tax provision                              |  |                            | 2,697  |   |      |   | 1,911  |  
|Interest expense, net                             |  |                            | 15,570 |   |      |   | 766    |  
|Depreciation and amortization                     |  |                            | 10,130 |   |      |   | 11,956 |  
|                                                  |  |                            |        |   |      |   |        |  
|EBITDA                                            |  |                            | 29,998 |   |      |   | 28,751 |  
|Amendment/termination costs (D)                   |  |                            |       |   |      |   | 5,198  |  
|Change in fair value of interest rate swaps (C)   |  |                            | (397   | ) |      |   | 13,704 |  
|Restructuring expenses                            |  |                            | 1,026  |   |      |   | 2,651  |  
|Inventory write-offs under restructuring programs |  |                            | 142    |   |      |   |       |  
|Non-cash compensation and related expenses        |  |                            | 885    |   |      |   | (130   | )
|                                                  |  |                            |        |   |      |   |        |  
|Adjusted EBITDA                                   |  | $                          | 31,654 |   |      | $ | 50,174 |  
|                                                  |  |                            |        |   |      |   |        |  



|                                                          |  |                          |        |   |      |   |        |  
|--------------------------------------------------------- |  | ------------------------ | ------ | - | ---- | - | ------ | -
|                                                          |  | Six Months EndedJune 30, |       
|(in thousands)                                            |  | 2009                     |        |   | 2008 |  
|Net income (loss)                                         |  | $                        | (7,847 | ) |      | $ | 9,409  |  
|Income tax provision                                      |  |                          | 6,589  |   |      |   | 5,550  |  
|Interest expense, net                                     |  |                          | 31,527 |   |      |   | 25,987 |  
|Depreciation and amortization                             |  |                          | 19,918 |   |      |   | 23,959 |  
|                                                          |  |                          |        |   |      |   |        |  
|EBITDA                                                    |  |                          | 50,187 |   |      |   | 64,905 |  
|Unrealized foreign exchange gain on indebtedness, net (B) |  |                          |       |   |      |   | (1,985 | )
|Amendment/termination costs (D)                           |  |                          |       |   |      |   | 5,998  |  
|Change in fair value of interest rate swaps (C)           |  |                          | (795   | ) |      |   | 13,704 |  
|Change in fair value of other derivatives                 |  |                          |       |   |      |   | (2,126 | )
|Restructuring expenses                                    |  |                          | 1,140  |   |      |   | 3,183  |  
|Inventory write-offs under restructuring programs         |  |                          | 245    |   |      |   |       |  
|Growth program costs (A)                                  |  |                          |       |   |      |   | 1,764  |  
|Non-cash compensation and related expenses                |  |                          | 1,046  |   |      |   | 341    |  
|                                                          |  |                          |        |   |      |   |        |  
|Adjusted EBITDA                                           |  | $                        | 51,823 |   |      | $ | 85,784 |  
|                                                          |  |                          |        |   |      |   |        |  
|                                                          | 

| | (A) | In accordance with the definition of Adjusted EBITDA in our credit facility, as amended on May 30, 2008, growth program costs are not added back to Adjusted EBITDA for periods
beginning after the quarter ended March 31, 2008. Growth programs costs for the three months ended March 31, 2008 included expenses incurred for our lean manufacturing initiatives, expansion into Vietnam and other growth programs.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (B) | In accordance with the definition of Adjusted EBITDA in our credit facility, as amended on May 30, 2008, unrealized foreign exchange gains and losses on indebtedness are not
added back to Adjusted EBITDA for periods beginning after the quarter ended March 31, 2008.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | (C) | In accordance with the definition of Adjusted EBITDA in our credit facility agreement, as amended on May 30, 2008, interest expense added back to calculate Adjusted EBITDA
excludes, for periods beginning after the quarter ended March 31, 2008, the effect of any non-cash gains and losses resulting from the marking to market of hedging obligations that has been charged to interest expense. Had this amended
definition been in place for all periods presented, Adjusted EBITDA would have been $12.2 million lower for the three and six months ended June 30, 2008, respectively.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (D) | For the three and six months ended June 30, 2008, amendment/termination costs include $5,198 of costs incurred in connection with the consummation of the fourth and fifth
amendments to the credit facility; and for the six months ended June 30, 2008, these costs include an $800 increase to Adjusted EBITDA for the first quarter of 2008 in accordance with the agreement with our lenders.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|------- | ----------------------------------------------------------

Foreign Currency Hedging. We have foreign currency cash flow and earnings exposure with respect to specific sale and intercompany debt 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 these exposures, we utilize forward currency contracts in certain circumstances, 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. In South America, substantially all of our sales are indexed to U.S. Dollars, but the associated costs are recorded in the local currencies
of the operating units. Generally, we do not hedge this U.S. Dollar exposure as it would not be cost effective due to the relatively inefficient foreign exchange markets for local currencies in that region. 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. The value of these contracts is recognized at fair value based on market exchange forward rates and amounted to a net liability
position of $0.9 million at June 30, 2009. These contracts mature at various dates through June 2010.

Relative to foreign currency exposures existing
at June 30, 2009, a 10% unfavorable movement in foreign currency exchange rates would not expose us to significant losses in earnings or cash flows because we have hedged substantially all of our exposures against fluctuations in foreign
currency exchange rates. As of June 30, 2009, we had open foreign currency exchange contracts maturing through June 2010 with total net notional amounts of approximately $1.3 million. At June 30, 2009, we prepared an analysis to determine
the sensitivity of our forward foreign exchange contracts to changes in exchange rates. A hypothetical adverse exchange rate movement of 10% against our forward foreign exchange contracts would have resulted in potential net loss in fair value of
these contracts of approximately $0.1 million. The calculation assumes that each exchange rate would change in the same direction relative to the U.S. Dollar. In addition to the direct effects of changes in exchange rates, such changes
typically affect the volume of sales or the foreign currency sales price as competitors products become more or less attractive. Our sensitivity analysis of the effects of changes in foreign currency exchange rates does not factor in a
potential change in sales levels or local currency selling prices.

Due to reduced credit limits at some of our banks, we have been entering into fewer
foreign currency hedging arrangements and may not be able to enter into as many hedging arrangements in the future. As a result, we could be more exposed to the effects of currency fluctuations, both favorable and unfavorable, which could have a
material impact on our results of operations.

For additional information about the risks associated with fluctuations in currency exchange rates, see
Managements Discussion and Analysis of Financial Condition and Results of OperationsForeign Exchange.

Interest Rate
Hedging. Our senior credit facility has a variable interest rate. On November 16, 2007, we entered into interest rate swap arrangements pursuant to which we paid fixed rates on notional amounts while receiving the applicable floating LIBOR,
Euribor or CDOR rates. These interest rate swaps initially qualified for hedge accounting under SFAS No. 133. As a result of the financial covenant non-compliance for the period ended March 31, 2008 as discussed in Note 6 of the Notes to
Unaudited Condensed



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Consolidated Financial Statements included elsewhere in this Quarterly Report, this debt was potentially payable prior to the expiration of the underlying
interest rate swaps, and accordingly, hedge accounting under SFAS No. 133 was no longer applicable for these interest rate swaps and the mark to market decrease in their fair value of $12.2 million was recorded as a non-cash charge to interest
expense in the first quarter of 2008 and a non-cash credit to interest expense of $13.7 million in the second quarter of 2008. Effective July 1, 2008, we were again able to assert that the hedged transactions were probable of occurring and
accordingly redesignated the interest rate swaps as cash flow hedges of benchmark interest rate risk on variable interest payments on the hedged debt as of June 30, 2008. Such mark to market changes on these interest rate swaps are principally
credited or charged to accumulated other comprehensive income (loss). The ineffective portion of these interest rate swaps of $0.8 million was charged to interest expense during the six months ended June 30, 2009.

The interest rate swaps effectively fix the interest rate on approximately 84% of the term loan portion of our credit facility through December 31, 2010. As of
June 30, 2009, the weighted average interest rate on the effectively fixed portion of the term loan facility was 9.74%, and the weighted average interest rate on the portion of the term loan facility not effectively fixed by interest rate swap
contracts, based on the 90-day LIBOR, was 6.32%. There can be no assurance that in future periods we will be able to assert that the hedge transactions are probable of occurring, and thus there can be no assurance that the interest rate swaps will
continue to qualify for hedge accounting. Specifically, if left uncured, our anticipated non-compliance with certain financial covenants in our senior credit facility for the period ending September 30, 2009 would constitute an event of
default, upon which the lenders could terminate the revolving credit facility and accelerate the repayment of all of the outstanding debt under the senior credit facility, causing it to immediately become due and payable. If the lenders accelerate
the debt under the senior credit facility so that it is payable prior to the expiration of the underlying interest rate swaps, hedge accounting under SFAS No. 133 would no longer be applicable for these interest rate swaps. Accordingly, the
cumulative mark to market changes in their fair value that will have been recorded in accumulated other comprehensive income (loss) through September 30, 2009 in addition to the credit valuation adjustments recorded under SFAS No. 157
would be charged to interest expense during the third quarter of 2009. As of June 30, 2009 this amount was $18.1 million. Additionally, mark to market changes subsequent to September 30, 2009 would be recorded as charges or credits to
interest expense prospectively. If payment of our hedge obligations were accelerated and if we were required to pay these outstanding obligations, which as of June 30, 2009 were $21.4 million, the hedged fixed interest rate on approximately 84%
of our senior debt (9.74% at June 30, 2009) would become variable (6.32% at June 30, 2009).

As a result of the amendment of our senior credit
facility agreement on May 30, 2008, the applicable margin for LIBOR term loans, LIBOR revolving loans, Euribor loans and CDOR loans under our senior credit facility increased from 2.75% to 5.50%. We estimate that a 1% increase in the LIBOR rate
would increase our interest expense on the term debt by approximately $0.9 million on an annual basis through December 31, 2010, the period covered by the interest rate swap agreements.



|ITEM 4. | CONTROLS AND PROCEDURES
|------- | -----------------------

(a) Evaluation of Disclosure
Controls and Procedures. We have carried out an evaluation, as of June 30, 2009, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the
effectiveness of the design and operation 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 Act). Based upon that evaluation, our
principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit
under the Act is (i) recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commissions rules and forms; and (ii) accumulated and communicated to our management, including our
principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosures. No evaluation of disclosure controls and procedures can provide absolute assurance that these controls and procedures will
operate effectively under all circumstances. However, the Companys disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives, and the Companys principal executive officer and principal
financial officer have concluded that the Companys disclosure controls and procedures are effective at the reasonable assurance level as set forth above.



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(b) Changes in Internal Control over Financial Reporting.No change in our internal control over financial
reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the quarter ended June 30, 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial
reporting.

PART II. OTHER INFORMATION



|ITEM 1. | LEGAL PROCEEDINGS
|------- | -----------------

We are involved in various legal matters, which
have arisen in the ordinary course of business. We do not believe that the ultimate resolution of these matters will have a material adverse effect on our financial position, results of operations or cash flow.



|ITEM 1A. | RISK FACTORS
|-------- | ------------

Since the date that we filed our Annual Report on
Form 10-K for the fiscal year ended December 31, 2008 the majority of our served markets have deteriorated substantially from the decline in paper demand related to slowing global economic activity, which may substantially reduce our revenue,
Adjusted EBITDA and cash flows. As a result, the risks disclosed in our Form 10-K are more likely to occur. Based on information available as of the date of this report, we also anticipate that we will not be in compliance with certain financial
covenants in our senior credit facility for the period ending September 30, 2009. Accordingly, we are supplementing the risk factors disclosed in our Form 10-K for the year ended December 31, 2008 with the risk factors below.

If we do not enter into an amendment to our senior credit facility prior to the date we are required to demonstrate compliance with the financial covenants in our
senior credit facility for the period ending September 30, 2009, we expect to be in default of certain of these covenants, which could have a material adverse effect on our ability to continue operating.

Our senior credit facility requires us to satisfy certain operating requirements and financial ratios in order to avoid a default or event of default under the facility.
These financial covenants are described above under Managements Discussion and Analysis of Financial Condition and Results of OperationsCredit Facility. Absent a significant recovery in revenue resulting from an economic
revival in the paper industry, we anticipate that we will not be in compliance with certain of these financial covenants for the period ending September 30, 2009. Failing to meet financial covenants under the senior credit facility would
constitute an event of default, upon which our lenders could terminate the revolving credit facility and accelerate the repayment of all of the outstanding debt under the senior credit facility, causing it to immediately become due and payable. Any
such acceleration of our obligations would likely cause other lenders and contractual counterparties, including counterparties to our interest rate swap agreements and other hedge agreements, to terminate and/or to accelerate the obligations under
their financing and credit instruments and agreements with us. Should the lenders and/or other counterparties demand immediate repayment of all of our obligations, we expect that we would be unable to pay such obligations.

Additionally, if we are not able to successfully amend our senior credit facility or if the lenders accelerate the debt under the senior credit facility so that it is
payable prior to the expiration of the underlying interest rate swaps, hedge accounting under SFAS No. 133 would no longer be applicable for these interest rate swaps. Accordingly, the cumulative mark to market changes in their fair value that
will have been recorded in accumulated other comprehensive income (loss) through September 30, 2009 in addition to the credit valuation adjustments recorded under SFAS No. 157 would be charged to interest expense during the third quarter
of 2009. At June 30, 2009, this amount is $18.1 million. Additionally, mark to market changes subsequent to September 30, 2009 would be recorded as charges or credits to interest expense prospectively. If payment of our hedge obligations
were accelerated and if we were required to pay these outstanding obligations, which as of June 30, 2009 were $21.4 million, the hedged fixed interest rate on approximately 84% of our senior debt (9.74% at June 30, 2009) would become
variable (6.32% at June 30, 2009).

We have initiated contact with the lenders regarding the need for an amendment to our senior credit facility
agreement prior to the date when an event of default would occur due to our failure to demonstrate compliance with certain financial covenants for the



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period ending September 30, 2009. In conjunction with this effort, we are continuing to evaluate alternatives to allow us to reduce or restructure our
debt and plan for contingencies, which may include, without limitation, issuing equity. No assurances can be given that we will be able to obtain the lenders consent to amend the credit facility on this timetable, or at all, that we will be
able to amend the covenants in a manner sufficient to adequately reduce the risk of default or that we will be able to succeed in other strategies to reduce our debt. Even if we are able to obtain amendments to our credit facility, the lenders are
likely to condition agreement on substantial increases in the fees and interest rate payable under the credit facility, among other things, and no assurance can be given that we would be able to sustain such fees and increased interest.

We are subject to increased risk relating to the effects of currency fluctuations on our operations, as we are we are unable to enter into additional hedging
arrangements.

Due to reduced credit limits at some of our banks, we have been entering into fewer foreign currency hedging arrangements and we may not
be able to enter into as many hedging arrangements in the future. As a result we could be more exposed to the effects of currency fluctuations, both favorable and unfavorable, which could have a material impact on our results of operations.

In the event that we successfully negotiate an amendment to our credit facility or refinance our credit facility, our borrowing costs are likely to
increase.

As described above, we are attempting to negotiate amendments to our credit facility. In the event that we are able to negotiate
satisfactory amendments to our credit facility, and in view of current turmoil in the credit markets and our current credit ratings, the lenders are likely to require that we pay substantially higher interest and fees on our credit facility going
forward. This may result in increased costs of our operations thereby adversely affecting our results of operations, and no assurance can be given that any higher interest or fees will be sustainable by us.

Our current credit facility difficulties could have an adverse impact on our business and increase our operating costs.

The fact that we may default on our credit facility is likely to cause our customers or vendors to seek financial assurances from us before they are willing to continue
doing business with us or may instead choose to do business with our competitors. This may result in increased costs of our operations, thereby adversely affecting our results of operations.

We may explore strategic alternatives to amending our credit facility, including alternatives that involve the issuance of equity, which would dilute our existing
stockholders.

Concurrent with pursuing an amendment of our credit facility, we are considering strategic alternatives to allow us to reduce our debt,
which may include issuing equity. There can be no assurance we would be able to complete any such strategic initiative on satisfactory terms. In addition, issuance of new equity for this purpose would likely result in substantial dilution to our
existing stockholders. The new investors may, through contractual provisions and/or the percentage of voting securities purchased in such transaction or transactions, be in a position to exert strong influence over our business, policies and
affairs. We cannot be certain that the interests of these investors will align with the interests of other stockholders. In addition, any concentration of ownership or other contractual rights could have the effect of delaying or preventing a change
in control, merger or tender offer, which would deprive shareholders of an opportunity to receive a premium for their shares of common stock and may negatively affect the market price of our common stock.



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

Restrictions on Payment of Dividends

For a description on restrictions imposed by Delaware law and our credit agreement on our payment of
dividends, see Managements Discussion and Analysis of Financial Condition and Results of Operations  Credit Facility.



|ITEM 3. | DEFAULTS UPON SENIOR SECURITIES.
|------- | --------------------------------

See Managements
Discussion and Analysis of Financial Condition and Results of OperationsCredit Facility.



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

(a) The
annual meeting of shareholders of Xerium Technologies, Inc. was held on June 9, 2009.

(b) All director nominees were elected.

(c) Certain matters voted upon at the meeting and the votes cast with respect to such matters are as follows:

Management Proposals and Vote Tabulations



|                                                                                      |  |            |  |           |  |         |  |                 
|------------------------------------------------------------------------------------- |  | ---------- |  | --------- |  | ------- |  | ----------------
|                                                                                      |  | Votes Cast |  |           |  |        
|                                                                                      |  | For        |  | Against   |  | Abstain |  | Broker Non-Votes
|Approval of Amendment No. 3 to the 2005 Equity Incentive Plan                         |  | 29,756,150 |  | 6,159,391 |  | 25,067  |  | 4,900,890       
|Ratification of appointment of independent registered public accounting firm for 2009 |  | 40,734,846 |  | 87,530    |  | 19,122  |  |                

Amendment No. 3 to the 2005 Equity Incentive Plan increased the limit on the number of shares of common stock
that may be granted as stock awards in 2009 to the Companys Chief Executive Officer to 2,302,178 shares.

Election of Directors



|                  |  |                |  |               
|----------------- |  | -------------- |  | --------------
|Director          |  | Votes Received |  | Votes Withheld
|Stephen R. Light  |  | 40,134,786     |  | 706,712       
|Jay J. Gurandiano |  | 40,171,830     |  | 669,668       
|Nico Hansen       |  | 35,852,694     |  | 4,988,804     
|David G. Maffucci |  | 40,174,855     |  | 666,643       
|Edward Paquette   |  | 40,162,738     |  | 678,760       
|Michael Phillips  |  | 34,357,393     |  | 6,484,105     
|John G. Raos      |  | 40,173,355     |  | 668,143       



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|ITEM 5. | OTHER INFORMATION.
|------- | ------------------

Director Compensation

On August 4, 2009, our Board of Directors approved the following RSU awards under our 2005 Equity Incentive Plan to directors who served as non-management directors
during the year prior to the 2009 Annual Meeting of Stockholders: Jay Gurandiano, 26,176 RSUs; Nico Hansen, 42,295 RSUs; David Maffucci, 26,176 RSUs; Edward Paquette, 50,561 RSUs; Michael Phillips, 50,561 RSUs; and John Raos 26,176 RSUs. While
Mr. Maffucci is currently serving as a management director, he previously served as a non-management director for a portion of the year prior to our 2009 Annual Meeting of Stockholders. The RSUs awarded to Mr. Maffucci on August 4,
2009 relate solely to his prior service as a non-management director.

Also on August 4, 2009 our Board of Directors adopted a revised policy
regarding compensation for non-management directors. The changes to the policy provide that: (1) the equity compensation granted to non-management directors after the Annual Meeting of Stockholders will be provided in arrears for the prior year
of service, instead of in advance for the ensuing year as provided under the prior policy, (2) non-management directors who serve only a partial year of service will receive a pro-rated amount of equity compensation, and (3) for Board or
Committee meetings held after March 31, 2009, non-management directors will receive $1,500 per in person meeting and $500 for telephonic meetings that last longer than one hour.

Code of Ethics Amendment

On August 4, 2009, our Board of Directors adopted an amendment to our corporate code
of business conduct and ethics, which applies to all of our employees, officers and directors. The amendment provides additional detail regarding the import and export regulations applicable to us. Our corporate code of business conduct and ethics,
as amended, is available free of charge on our website at www.xerium.com.



|ITEM 6. | EXHIBITS
|------- | --------

See the exhibit index following the signature page to
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: August 6, 2009 |  | By:                       |  | /s/ David G. Maffucci                               
|                     |  |                           |  | David G. Maffucci                                   
|                     |  |                           |  | Executive Vice President and Chief Financial Officer
|                     |  |                           |  | (Principal Financial and Accounting Officer)        



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EXHIBIT INDEX



|              |  |                                                                                                                  
|------------- |  | -----------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Exhibits                                                                                          
|10.1(1)       |  | Amendment No. 3 to the 2005 Equity Incentive Plan.                                                               
|              | 
|10.2          |  | Xerium Technologies, Inc. Performance Award Program for 2009.                                                    
|              | 
|10.3          |  | Employment Agreement with David Maffucci.                                                                        
|              | 
|10.4          |  | Supplemental Agreement No. 1 to Management Service Contract with Peter Williamson.                               
|              | 
|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 the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|              | 
|32.2          |  | Certification Statement of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



|(1) | Filed as Exhibit 10.1 to the Registrants Current Report on Form 8-K filed on June 11, 2009, and incorporated herein by reference.
|--- | ----------------------------------------------------------------------------------------------------------------------------------



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