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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, DC 20549

Form 10-K

(Mark One)ý

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended January 1, 2011Oro

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period
from                 to


Commission File Number 1-32266

Polypore International, Inc.(Exact Name of Registrant as Specified in Its Charter)

Delaware(State or Other Jurisdiction of
Incorporation or Organization)

43-2049334(IRS Employer
Identification No.)11430 North Community House Road, Suite 350Charlotte, North Carolina

28277(Address of Principal Executive Offices)

(Zip Code)


Registrant's
Telephone Number, Including Area Code (704) 587-8409

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

Title of each class:

Name of each exchange on which registered:Common stock, par value $0.01 per share

New York Stock Exchange


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

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

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

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. ý Yes    o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, 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). o Yes    o No

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

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 the definitions of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer o

Accelerated filer ý

Non-accelerated filer o (Do not check if a
smaller reporting company)

Smaller reporting company o


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

The aggregate market value of the voting common stock of the registrant held by non-affiliates at July 2, 2010 was $535,999,000, as computed by
reference to the closing price of such stock on such date. For purposes of this calculation, executive officers, directors and 5% shareholders are deemed to be affiliates of the registrant.

There
were 45,666,557 shares of the registrant's common stock outstanding as of February 21, 2011.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's definitive proxy statement for the 2011 Annual Meeting of Stockholders, which will be filed within 120 days of
January 1, 2011, are incorporated by reference into Part III.



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Polypore International, Inc.  Index to Annual Report on Form 10-K  For the Fiscal Year Ended January 1, 2011



PagePart IItem 1.

Business

5Item 1A.

Risk Factors

16Item 1B.

Unresolved Staff Comments

23Item 2.

Properties

23Item 3.

Legal Proceedings

23Part IIItem 5.

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

25Item 6.

Selected Financial Data

27Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations

28Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

42Item 8.

Financial Statements and Supplementary Data

43Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

83Item 9A.

Controls and Procedures

83Item 9B.

Other Information

83Part IIIItem 10.

Directors, Executive Officers and Corporate Governance

84Item 11.

Executive Compensation

84Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

84Item 13.

Certain Relationships and Related Transactions, and Director Independence

84Item 14.

Principal Accountant Fees and Services

84Part IVItem 15.

Exhibits and Financial Statement Schedules

84Signatures

89


In
this Annual Report on Form 10-K, the words "Polypore International," "Company," "we," "us" and "our" refer to Polypore International, Inc. together with its
subsidiaries, unless the context indicates otherwise. References to "fiscal year" mean the 52 or 53 week period ending on the Saturday that is closest to December 31. The fiscal years
ended January 1, 2011, or "fiscal 2010," and January 2, 2010, or "fiscal 2009," included 52 weeks. The fiscal year ended January 3, 2009, or "fiscal 2008," included
53 weeks.

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Forward-looking Statements

This Annual Report on Form 10-K includes "forward-looking statements" within the meaning of Section 27A of
the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the Private Securities Litigation
Reform Act of 1995. All statements other than statements of historical facts included in this Annual Report on Form 10-K that address activities, events or developments that we
expect, believe or anticipate will or may occur in the future are forward-looking statements, including, in particular, the statements about Polypore International's plans, objectives, strategies and
prospects regarding, among other things, the financial condition, results of operations and business of Polypore International and its subsidiaries. We have identified some of these forward-looking
statements with words like "believe," "may," "will," "should," "expect," "intend," "plan," "predict," "anticipate," "estimate" or "continue" and other words and terms of similar meaning. These
forward-looking statements may be contained under the captions entitled "Business," "Properties," "Controls and Procedures," "Management's Discussion and Analysis of Financial Condition and Results of
Operations" or "Risk Factors," the Company's financial statements or the notes thereto or elsewhere in this Annual Report on Form 10-K.

These
forward-looking statements are based on current expectations about future events affecting us and are subject to uncertainties and factors relating to our operations and business
environment, all of
which are difficult to predict and many of which are beyond our control. Many factors mentioned in our discussion in this Annual Report on Form 10-K, including the risks outlined
under the caption below entitled "Item 1A. Risk Factors," will be important in determining future results. Although we believe that the expectations reflected in our forward-looking statements
are reasonable, we do not know whether our expectations will prove correct. They can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties, including with
respect to Polypore International, the following, among other things:



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Because
our actual results, performance or achievements could differ materially from those expressed in, or implied by, the forward-looking statements, we cannot give any assurance that
any of the events anticipated by the forward-looking statements will occur or, if any of them do, what impact they will have on Polypore International's results of operations and financial condition.
You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K. We do not undertake any
obligation to update these forward-looking statements or the factors set forth in the caption below entitled "Item 1A. Risk Factors" to reflect new information, future events or otherwise,
except as may be required under federal securities laws.

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Item 1.    Business

General

Overview

Polypore International, Inc., a Delaware corporation, is a leading global high technology filtration company that develops,
manufactures and markets specialized microporous membranes used in separation and filtration processes. The microporous membranes we produce are highly engineered polymeric structures that contain
millions of pores per square inch, enabling the management of ions, gases and particles that range in size from the cellular to the nano or molecular level.

Our
products and technologies are used in two primary segments: energy storage and separations media. The energy storage segment accounted for approximately 72% of our fiscal 2010 net
sales. Primary applications for our membranes in this segment are lithium batteries and lead-acid batteries. Lithium batteries are the power source in a wide variety of electronics
applications ranging from notebook computers, tablets, mobile phones to cordless power tools, and are emerging in applications such as electric drive vehicles ("EDV's") and electricity grid storage or
energy storage systems ("ESS"). Lead-acid batteries are used in transportation and industrial applications. The separations media segment accounted for approximately 28% of our fiscal 2010
net sales. Primary applications for our membranes and membrane modules in this segment are hemodialysis, blood oxygenation, plasmapheresis and various high-performance microfiltration,
ultrafiltration and gasification/degasification applications.

Information
concerning segments and geographic information appears under "Note 22Segment Information" in the Notes to Consolidated Financial Statements for the year
ended January 1, 2011 included in Item 8 of this Report which is incorporated herein by reference.

Competitive strengths



We produce a variety of separation and filtration products for end markets with attractive growth characteristics, which in many cases
are supported by a growing recurring revenue base.



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We believe that we are well positioned in each of the markets in which we compete. For example, in terms of market share (based on
revenue and volume):



We
believe, based on the information above and other company estimates, that we are among the top three in terms of market share (based on revenue and volume) in products comprising a
total of
approximately 80% of our fiscal 2010 net sales. These products include lead-acid battery separators, lithium battery separators, blood oxygenation membranes and membrane contactors for
gasification/degasification of liquids.



We have established our leading market positions through our ability to utilize core technical expertise and broad product and process
capabilities to develop customized solutions that meet demanding requirements in specific applications. Over time, we have demonstrated a commitment to innovation, developing technical expertise and a
high level of customer service. As of January 1, 2011, our research and development effort is supported by approximately 100 engineers, scientists, PhDs and other personnel, who work directly
with our manufacturing and marketing groups to commercialize innovative products that address market needs. We also maintain technical centers strategically located in Asia, Europe and North America.

We
have leveraged our established filtration and separation technology and membrane expertise to supply a broad portfolio of membranes based on flat sheet, hollow fiber, and tubular
technology. We are able to draw upon our experiences across multiple end markets and various membrane technologies to create innovative solutions in new niche applications in addition to our existing
markets. For example, our Liqui-Cel® Membrane Contactor product line, which combines our blood oxygenation membrane technology with patented module design features, provides
superior performance to conventional gasification/degasification methods in multiple sectors such as semiconductor and flat panel display manufacturing, pharmaceutical processing and power and boiler
feedwater applications. We believe that our capabilities in product innovation, which combine multiple technologies, a global technical infrastructure and extensive experience in microporous membrane
development and manufacturing, are difficult to replicate.



We have cultivated strong, collaborative relationships with a diverse base of customers worldwide who are among the leaders in their
respective industries. Our research and development, technical service and application development teams are closely involved with our customers. We often enter into joint agreements in which we
partner with our customers on product development and end-use testing.

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As
a result, many of our products have been customized to our customers' exacting manufacturing and end-use specifications. In addition, we are often selected as a customer's exclusive
supplier for our microporous membrane products.



As of January 1, 2011, we manufacture, market and service our products through 14 manufacturing sites and 13 sales and service
locations throughout the Americas, Europe and Asia, with sales relatively balanced across these regions. In the energy storage segment, we remain focused on growth in the Asia Pacific region and on
driving worldwide improvements in production efficiency. For example, to better serve our growing lithium battery customers in Asia, we moved some lithium battery separator finishing capacity from our
Charlotte, North Carolina plant to our Shanghai, China plant in 2005, and in 2008 we acquired a South Korean lithium battery membrane separator manufacturer. In early 2010, we initiated a
$30.0 million capacity expansion at our Korean facility. Our lead-acid battery membrane separator business has also focused on growth in the Asia Pacific region by increasing
capacity at our Prachinburi, Thailand facility in 2006 and 2008; acquiring battery separator manufacturing assets and subsequently expanding our operations in Bangalore, India; acquiring a
lead-acid battery membrane separator production facility in Tianjin, China in December 2009; and establishing an Asian Technical center in Thailand. In 2010, we reached an agreement to
enter into a joint venture with a customer, Camel Group Co., Ltd. ("Camel"), a leading battery manufacturer in China, to produce lead-acid battery separators primarily for
Camel's use. The joint venture will be located at Camel's facility in Xiangfan, China. In February 2011, we approved an additional expansion at our Prachinburi, Thailand facility to be
completed by mid-2012.

By
strategically positioning our manufacturing, sales and marketing, and technical service personnel near our customers, we can respond to their needs more effectively, provide a higher
level of service, reduce shipping costs and improve delivery and response times. In addition, our global presence enables us to participate in faster growth markets in developing regions of the world.



We believe we have state-of-the-art manufacturing facilities and capabilities. Our equipment,
manufacturing techniques and process technologies have been developed over many years with significant intellectual property, know-how and capital investments. Our wide range of
manufacturing processes enables us to produce specialized products that are difficult and costly to replicate in the market. We continually evaluate projects that will improve or enhance our global
manufacturing capabilities.



Our senior management team has significant experience leading high technology companies, driving growth through development of new
applications and technologies and cultivating strong relationships with existing customers. Management has also demonstrated a track record of successfully leading companies larger in size and scope
than ours. The team has an average of more than 20 years of management experience.

Business strategy

We intend to:



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Products and markets

Our business segments are energy storage and separations media. The following table describes our key products and end markets served:

Segment

Applications

Major brands

End marketsEnergy storage

Lead-acid batteries

Daramic®
DARAK®
FLEX-SIL®
CellForce®
ACE-SIL®

Transportation and industrial batteriesRechargeable and disposable lithium batteries

CELGARD®

Portable consumer electronics devices such as mobile phones, audio/video players, notebook computers, tablets and cameras. Also cordless power tools and EDV's, such as bikes, scooters, cars, trucks, buses and
industrial utility vehicles. Emerging use in electricity grid storageSeparations media

Hemodialysis

PUREMA®
DIAPES®

Hemodialysis dialyzers which replicate function of healthy kidneysBlood oxygenation

CELGARD®
HEXPET®
OXYPHAN®
OXYPLUS®

Heart-lung machine oxygenation unit for open-heart surgical procedures and intensive care artificial lung applicationsPlasmapheresis

MicroPES®
PLASMAPHAN®
SYNCLEAR®
FractioPES®

Blood cell and plasma separation equipmentIndustrial and specialty filtration applications

Liqui-Cel®

Liquid gasification/degasification for beverage, pharmaceutical, semiconductor and flat panel display manufacturing, and power and boiler feedwater applicationsMicroPES®
DuraPES®

Specialty filtration applications including ultrapure water, cold sterile filtration of beverages, ultrapure chemicals for the electronics industry and pharmaceutical processingSuperPhobic®

Solvent/ink deaeration for ink jet printers, paper coating processes and semiconductor manufacturingMicroModule®
MiniModule®

Liquid degasification in laboratory, biotechnology and analytical testing equipment and ink degasification for ink jet printersAccurel®

Specialty filtration applications including ultrapure chemicals for the electronics industry, vent and process air cleaning, industrial wastewater treatment and pharmaceutical processingLiqui-Flux®

Water and beverage filtration, process water treatment and prefiltration for reverse osmosisP.E.T.®

Potable water treatment, beverage filtration, prefiltration for reverse osmosis and medical applications


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In the energy storage segment, our membrane separators are a critical performance component in lithium and lead-acid
batteries, performing the core function of regulating ion exchange and thus allowing the charge and discharge process to occur between a battery's positive and negative electrodes. These membrane
separators require specialized technical engineering and must be manufactured to extremely demanding requirements and specifications including thickness, porosity, mechanical strength and chemical and
electrical resistance. For example, membrane pores must be large enough to allow ions to pass through, but small enough to prevent contamination from conductive particles that cause short circuits.
Our energy storage businesses accounted for 72%, 71% and 74% of our net sales in fiscal 2010, fiscal 2009 and fiscal 2008, respectively.

Electronics applications.We develop, manufacture and market a broad line of patented polypropylene and polyethylene monolayer and
multilayer
membrane separators for lithium batteries that are used in numerous applications such as portable electronic devices, cordless power tools and outdoor power equipment, EDV's and electricity grid
storage systems. According to the Institute of Information Technology, unit sales of lithium batteries are expected to experience average annual growth of at least 10% through 2015. Lithium batteries
provide critical performance advantages relative to alternative
battery technologies, such as faster charging rates, improved battery life and higher power density, which results in more compact, lightweight batteries. These advantages create the potential for
expansion by lithium batteries into additional devices. Because many new applications are incorporating large-format lithium batteries that require much greater membrane separator volume per battery,
we believe that membrane separator growth will exceed battery unit sales growth.

We
believe, based on independent industry research, that we are among the top three lithium battery separator providers, serving the entire breadth of lithium battery applications, and
have been among the top three since the market's first development in the early 1990s. We believe the top three providers supply approximately 70% of the membrane separator requirements for the global
lithium battery market. Major lithium battery manufacturers include A123 Systems, AESC, Amperex Technology Limited, BYD Company Limited, China BAK Battery, Inc., Energizer
Holdings, Inc., Hitachi Maxell Limited, Hitachi Vehicle Energy, LG Chem Ltd., Panasonic CorporationEnergy Company, Saft Groupe SA, Samsung SDI Co. Ltd.,
Sanyo Electric Company Limited (acquired by Panasonic Corporation in 2010), Sony Corporation, Tianjin Lishen Battery Joint Stock Co., Ltd. and Ultralife Batteries, Inc.

Transportation and industrial applications.We develop, manufacture and market a complete line of high-performance polymer-based
membrane
separators for lead-acid batteries. Approximately 80% of our lead-acid battery separators are used in batteries for automobiles and other motor vehicles. The remaining
approximately 20% are used in industrial battery applications such as forklifts, submarines and uninterruptible power supply systems. We believe that over 80% of lead-acid battery unit
sales for motor vehicles are aftermarket batteries. Aftermarket sales are primarily driven by the size of the worldwide vehicle fleet rather than by new motor vehicle sales. According to
WardsAuto.com, the worldwide fleet of motor vehicles has averaged 3% annual growth for over 25 years, providing us with a growing recurring revenue base. We believe another factor contributing
to market growth is the worldwide conversion from alternative separator materials to the higher performance polyethylene-based membrane separators such as those we produce. Lead-acid
battery separator growth is strongest in the Asia Pacific region due, we believe, to increasing penetration of automobile ownership, growth in industrial and manufacturing sectors, export incentives
and ongoing conversion to polyethylene-based membrane separators.

We
believe we are the global market leader in the lead-acid battery separator market. We supply most of the world's major lead-acid battery manufacturers
including East Penn Manufacturing Co., Inc., EnerSys, Exide Technologies, Camel and Trojan Battery Company.

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In the separations media segment, our filtration membranes and modules are used in healthcare and high-performance
filtration and specialty applications. These membranes perform the critical function of removing sub-micron particulates from fluids and introducing or removing gases
(gasification/degasification) within liquids. Both healthcare and specialty filtration applications require membranes with precisely controlled pore size, structure, distribution and uniformity. Our
supply relationships with customers in healthcare and certain filtration applications such as pharmaceutical manufacturing are reinforced by the rigorous testing, clinical studies and/or regulatory
approval that our membranes undergo prior to end-product commercialization. In some cases, several years of development and qualification are required. Our separations media business
accounted for 28%, 29% and 26% of our net sales in fiscal 2010, fiscal 2009 and fiscal 2008, respectively.

Healthcare Applications.We develop, manufacture and market a complete line of patented polyethersulfone membranes for the hemodialysis
market.
Hemodialysis is the artificial process that performs the function of a healthy kidney for patients with permanent kidney failure, a condition known as End Stage Renal Disease ("ESRD"). In a healthy
person, the kidney carries out certain excretory and endocrine functions, including filtering toxins from the blood and controlling blood pressure. For an ESRD patient on dialysis, the dialyzer
membrane performs these critical filtering functions. The membranes consist of thousands of fibers that resemble hollow straws slightly larger than a human hair. These fibers have nanopores in their
walls at a density of millions of pores per square inch. The size and distribution of these nanopores are designed to separate harmful toxins from the healthy blood passing through the dialyzer.
Growth in demand for dialyzers and dialyzer membranes is driven by several factors, including the aging population in developed countries, longer life-expectancy of treated ESRD patients,
improving access to treatment in developing countries and the trend in the United States towards single-use rather than multiple-use dialyzers. According to the European Renal
AssociationEuropean Dialysis and Transplant Association, the number of worldwide ESRD patients has historically grown by approximately 6% per year. We estimate that continued patient
population growth combined with conversion to single-use dialyzers and increasing treatment frequency will result in overall annual dialyzer market growth in excess of 6%.

Our
synthetic membrane, PUREMA®, is superior in performance compared to other synthetic membranes on the market. Dialyzers containing PUREMA® have been classified
in the highest level (category 5) of Japan's dialyzer reimbursement rate system, reflecting the efficacy of our PUREMA® membrane. We believe an example of the increasing customer
acceptance of PUREMA® is our entry into several long-term supply agreements with customers in the United States, Japan and Europe. We are currently marketing
PUREMA®'s performance advantages, such as by co-branding our customers' dialyzers with the PUREMA® logo.

We
believe, based on independent industry research, that we are uniquely positioned as the leading independent supplier of synthetic hemodialysis membranes (i.e., not a supplier
of dialyzers). Major dialyzer manufacturers include Asahi Kasei Kuraray Medical Co., Ltd., Bellco S.r.l., Fresenius Medical Care AG, Gambro AB and Nipro Corp.

We
develop, manufacture and market polypropylene and polymethylpentene membranes for the blood oxygenation market. As a component of heart-lung machines, blood oxygenators
temporarily replace the functions of the lungs during on-pump open-heart surgery. The oxygenator contains highly specialized membranes which remove carbon dioxide from the
blood while oxygen is diffused into the blood. We estimate that growth in the blood oxygenation market is modest as a result of the use of less-invasive alternative heart treatments.
However, we believe that the market could grow as the number of patients receiving on-pump open heart surgery increases due to the saturation of alternative heart treatments. Because blood
oxygenators are designed to utilize a specific membrane technology and require regulatory approval, an oxygenator manufacturer's relationship with its membrane supplier

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is
vital and switching costs can be substantial. We believe, based on independent industry research, that we are the world's leading supplier of membranes for blood oxygenation. Major blood oxygenator
producers include Maquet Cardiopulmonary AG, Medtronic, Inc., Sorin Group S.r.l. and Terumo Medical Corp. The polymethylpentene membranes are increasingly used in intensive care
applications to serve as an artificial lung for patients with severe lung trauma or lung failure following sepsis, in multi-organ failure, or infectious diseases. Major producers of such artificial
lungs are Sorin Group S.r.l., Maquet Cardiopulomnary AG, Terumo Medical Corp. and Medtronic, Inc.

We
develop, manufacture and market polypropylene and polyethersulfone membranes for the plasmapheresis market. In plasmapheresis, plasma is separated from the blood and either retained
for the production of therapeutic proteins or filtered and returned to the blood as a treatment for various autoimmune disorders. We believe that the plasmapheresis market is growing and that new
treatment methodologies based on blood filtration may lead to additional growth. We believe we are a leading supplier of extracorporeal therapeutic plasmapheresis membranes. Major manufacturers of
plasmapheresis equipment include Asahi Kasei Kuraray Medical Co., Ltd., Fresenius Medical Care AG, Gambro AB and B. Braun AG.

Industrial and specialty filtration applications.We produce a wide range of membranes and membrane-based elements for microfiltration
and
ultrafiltration as well as gasification/degasification of liquids, covering a broad range of applications in the filtration market. According to independent industry research, the U.S. microfiltration
and ultrafiltration membrane element market is approximately $1.7 billion and growing in excess of 8% annually. Market growth is being driven by several factors, including
end-market growth in various water treatment applications. Displacement of conventional filtration media by membrane filtration due to membranes' superior cost and performance attributes
and increasing purity requirements in industrial and other applications are
also important to the end-market growth. We currently serve a variety of filtration end markets, including water treatment, food and beverage processing and pharmaceutical, semiconductor
and flat panel display manufacturing, and we are working closely with current and potential customers to develop innovative new products based on our technology and capabilities.

The
following are descriptions of certain of our industrial and specialty filtration products:



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We
believe, based on internal company estimates, that we are the world leader in membrane gasification/degasification for liquids, and, based on internal company estimates, that we are
uniquely positioned as the leading independent supplier of polyethersulfone flat sheet membranes.

New product development

We have focused our research and development efforts on developing products for new markets based on existing technologies and
developing new process technologies to enhance existing businesses and allow entry into new businesses. We spent $14.8 million (2% of our net sales), $16.8 million (3% of our net sales)
and $18.2 million (3% of our net sales) in fiscal 2010, fiscal 2009 and fiscal 2008, respectively, on research and development.

Our
energy storage research and development is performed at technical centers at our facilities in Owensboro, Kentucky; Prachinburi, Thailand; Selestat, France; Charlotte, North Carolina
and Ochang, South Korea. Our separations media research and development is performed at technical centers at our facilities in Wuppertal, Germany and Charlotte, North Carolina. All of the products
that we develop are subject to multiple levels of extensive and rigorous testing. The qualification of membrane separators for use in transportation and industrial applications, for instance, may
require one or more years of testing by our staff and battery manufacturers.

Sales and marketing

We sell our products and services to customers in both the domestic and international marketplace. We sell primarily to manufacturers
and converters that incorporate our products into their finished goods. We employ a direct worldwide sales force and utilize approximately 90 people with extensive experience who manage major customer
relationships. Many of our sales representatives are engineers or similarly trained technical personnel who have advanced knowledge of our products and the applications for which they are used. Our
sales representatives are active in new product development efforts and are strategically located in the major geographic regions in which our products are sold. In certain geographic areas, we use
distributors or other agents. We typically seek to enter into supply contracts with our major customers. These contracts typically describe the volume and selling price. In addition, these contracts
reflect our close collaborative relationships with our customers, which are driven by our customers' need to develop new separators and membranes directly with us. In fiscal 2010, sales to our top
five customers represented approximately 22% of our total net sales.

Manufacturing and operations



We have manufacturing facilities in the major geographic markets of North America, Europe and Asia. We manufacture our
lead-acid battery membrane separators at our facilities in Owensboro,

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Kentucky;
Corydon, Indiana; Piney Flats, Tennessee; Selestat, France; Norderstedt, Germany; Feistritz, Austria; Prachinburi, Thailand; and Tianjin, China. We also have a finishing operation at our
facility in Bangalore, India. We manufacture our lithium battery membrane separators at our facilities in Charlotte, North Carolina and Ochang, South Korea and have a finishing operation at our
facility in Shanghai, China. We manufacture our healthcare membranes and industrial and specialty filtration membranes and membrane modules at facilities in Wuppertal and Obernburg, Germany and
Charlotte, North Carolina.

In
fiscal 2010, fiscal 2009 and fiscal 2008, we generated net sales from customers outside the United States of approximately 80%, 77% and 77%, respectively. We typically sell our
products in the currency of the country in which the products are manufactured rather than the local currency of our customers.

Our
manufacturing facilities in North America accounted for 34% of total sales for fiscal 2010, with facilities in Europe and Asia accounting for 41% and 25%, respectively. Our foreign
operations are subject to certain risks that could materially affect our sales, profits, cash flows and financial position. These risks include fluctuations in foreign currency exchange rates,
inflation, economic or political instability, shipping delays, changes in applicable laws and regulatory policies and various trade restrictions, all of which could have a significant impact on our
ability to deliver products on a competitive and timely basis. The future imposition of, or significant increases in the level of, customs duties, import quotas or other trade restrictions could also
have a material adverse effect on our business, financial condition and results of operations.



All of our membrane manufacturing processes involve an extrusion process. To produce our flat sheet and hollow fiber membranes, we use
one of three basic membrane processes that begin with an extrusion step. These include phase separation (thermally-induced, solvent-induced, or reaction-induced), "dry stretch", and
extrusion/extraction processes. Each process, and its resulting product properties, is well suited to the various membrane requirements for our target markets. To produce
Liqui-Cel® Membrane Contactors and Liqui-Flux® membrane modules, hollow fibers are bonded together into a cartridge form by extruding either a
polyolefin resin or using an epoxy or polyurethane adhesive before final assembly into a finished module.

Membrane separators for batteries.We manufacture Daramic®, our principal lead-acid battery separator used in industrial and
automotive applications, using a composite extrusion/extraction process. The process stages are fully automated, although the process requires some handling as material is transferred from stage to
stage. Initially, an ultra-high molecular weight polyethylene is mixed with porous silica and oil, which are heated and extruded into a film. The film is passed through an extraction bath
to remove the excess oil from the silica pores to create the proper microporosity and film stiffness prior to drying. We manufacture our DARAK® industrial separator using a patented
manufacturing process that begins by saturating a polyester fleece with a modified phenolic resin, which is then cross-linked, washed, dried, cured and cut into single pieces in a continuous
one-step process. The reaction step produces the final microporous structure.

We
manufacture our lithium battery separators using two processes, both of which begin with an extrusion step. Membrane porosity is created either during a thermal stretching process or
during a chemical extrusion process. Some special coated and non-woven laminate products are also manufactured for specialty battery and other applications.

Hemodialysis, blood oxygenation, plasmapheresis and filtration membranes.Membranes for hemodialysis, blood oxygenation, plasmapheresis,
 and
filtration are produced using phase separation processes. For these phase separation processes, the polymer spinning solution is prepared by dissolving the polymer in a solvent prior to extrusion. A
porous membrane is formed by separating the solvent

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and
polymer phases using temperature (thermally-induced), or a "non-solvent" (solvent-induced), and then the solvent phase is extracted and the porous polymer membrane is dried.
For the blood oxygenation market and certain filtration markets, hollow fiber and flat sheet membranes are also produced using our "dry stretch" process. We rely on the molecular behavior of
semi-crystalline polymers (polyolefins) to create the microporous structure. By controlling the extrusion process under which the film or fiber is formed, we create a crystalline structure
that allows the formation of microvoids in a subsequent stretching step. After extrusion, our products can be stored or immediately processed on annealing and stretching lines that create the final
porous form.

Competition

Our markets are highly competitive. Within our energy storage segment, we face competition throughout the world and our primary
competitors in the market for membrane separators used in lead-acid batteries for transportation and industrial applications are Entek International LLC ("Entek") in North America
and Europe and Nippon Sheet Glass Co., Ltd. in Japan. In addition, we have a number of smaller competitors in South Korea, Indonesia, China and Taiwan. We also compete with Asahi Kasei
Chemicals Corporation, Toray Tonen Specialty Separator Godo Kaisha (a joint venture of TonenGeneral Sekiyu and Toray Industries), Ube Industries Limited and SK Energy (a subsidiary of SK Group) as
well as a number of smaller competitors in the market for membrane separators used in lithium batteries.

Within
our separations media segment, we compete primarily with Asahi Kasei Kuraray Medical Co., Ltd., Fresenius Medical Care, Gambro AB and Toyobo Co. Ltd.
for membranes used in dialysis. In addition, we compete primarily with Terumo Medical Corp. in the blood oxygenation market and Asahi Kasei Kuraray Medical Co., Ltd. and Fresenius
Medical Care in the plasmapheresis market. Our industrial and specialty filtration business competes across multiple markets and applications. Principal competitors include Dainippon Ink and
Chemicals, Inc., Koch Membrane Systems (a division of Koch Industries), Norit B.V., Millipore Corporation and Pall Corporation. Product innovation and performance, quality, service,
utility and cost are the primary competitive factors, with technical support being highly valued by our customers. We believe that we are well positioned in our end markets for the reasons set forth
under "Competitive strengths" above.

Raw materials

We employ a global purchasing strategy to achieve pricing leverage on our purchases of major raw materials. The major polyethylene and
polypropylene resins we use are specialized petroleum-based products that are less affected by commodity pricing cycles than other petroleum-based products. In the event of future price increases for
these major raw materials, we believe that we will generally be able to pass these increases on to our customers. The primary raw materials we use to manufacture most of our products are polyethylene
and polypropylene resins, silica and oil. Our major supplier of polyethylene resins is Ticona LLC and our major suppliers of
polypropylene resins are Total Petrochemicals USA, Inc., Performance Polymers, Inc. and Bamberger Polymers, Inc. Our major suppliers of silica are PPG Industries, Inc. and
Evonik Degussa GmbH, while our major suppliers of oil are Calumet Lubricants, Shell Chemical LP and Shell Company of Thailand (subsidiaries of Royal Dutch/Shell).

We
believe that the loss of any one or more of our suppliers would not have a long-term material adverse effect on us because other suppliers with whom we conduct business or
have conducted business in the past would be able to fulfill our requirements. However, the loss of one of our key suppliers could, in the short term, adversely affect our business until we secure
alternative supply arrangements. In addition, we cannot assure you that any new supply arrangements we enter into will have terms as favorable as those contained in current supply arrangements. We
have never experienced any significant disruptions in supply as a result of shortages in raw materials.

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At January 1, 2011, we had approximately 2,200 employees worldwide. Employees at six of our 14 facilities are unionized and
account for approximately 35% of our total employees. The following summarizes those employees represented by unions as of January 1, 2011:

Location

Number of
unionized
employees

% of
total
employees

Date of contract
renegotiationNorderstedt, Germany


46


81

AnnualObernburg, Germany


23


82

AnnualWuppertal, Germany


347


85

AnnualOwensboro, Kentucky


118


70

April 2012Corydon, Indiana


96


77

August 2013Selestat, France


130


63

June 2014Total


760


Environmental matters

We are subject to a broad range of federal, state, local and foreign environmental laws and regulations which govern, among other
things, air emissions, wastewater discharges and the handling, storage disposal and release of wastes and hazardous substances. It is our policy to comply with applicable environmental requirements at
all of our facilities. We are also subject to laws, such as the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), that may impose liability retroactively and without
fault for releases or threatened releases of hazardous substances at on-site or off-site locations. From time to time, we have identified environmental compliance issues at our
facilities.

We
have conducted some cleanup of on-site releases at some facilities and we will be conducting additional cleanups of on-site contamination at other facilities
under regulatory supervision or voluntarily. Costs for such work and related measures (such as eliminating sources of contamination) could be substantial, particularly at our Wuppertal, Germany
facility. We have established reserves for environmental liabilities of $15.6 million as of January 1, 2011. We do not anticipate that the remediation activities will disrupt operations
at our facilities or have a material adverse effect on our business, financial condition or results of operations. In addition, we have asserted claims under an indemnity from Akzo Nobel N.V.,
the prior owners of Membrana GmbH ("Membrana"). The indemnity is expected to provide indemnification of a substantial percentage of anticipated environmental costs at Wuppertal. The amount
receivable under the indemnification agreement at January 1, 2011 was $12.5 million. To date we have not had any significant disagreement with Akzo Nobel N.V. over its
environmental indemnity obligations to us.

Intellectual property rights

We consider our patents and trademarks, in the aggregate, to be important to our business and seek to protect our tradenames,
trademarks, brandnames, proprietary technology and know-how in part through United States and foreign patents and trademark registrations and applications. However, no individual patent is
material to our business, and the expiration or invalidation of any one patent would not have a material impact on our business. We own approximately 130 active unique patents and patent applications
relating to our separator, membrane and module technologies. In general, the term of each of our U.S. patents depends on when the patent was filed. A U.S. utility patent will expire either
20 years from the date the application was filed, or 17 years from the date of issuance, whichever is longer, if it was filed prior to June 8, 1995; or 20 years from the
earliest date the application was filed if it was filed on or after June 8, 1995.

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In
general, trademarks are valid as long as they are in use and/or their registrations are properly maintained, and trademark registrations can generally be renewed indefinitely so long
as the marks are in use. Some of our registered marks include CELGARD®, Liqui-Cel®, Daramic® and PUREMA®.

In
addition, we maintain certain trade secrets for which, in order to maintain the confidentiality of such trade secrets, we have not sought patent protection. Our policies require our
employees to assign their intellectual property rights to us and to treat all proprietary technology as our confidential information.

We
have granted security interests or liens on some of our patents to financial institutions, including to lenders under our senior secured credit agreement.

If
we fail to adequately protect and enforce our intellectual property rights, competitors may manufacture and market products similar to ours. The loss of protection for or enforcement
of our intellectual property rights could reduce the market value of our products, reduce product sales, lower our profits or impair our financial condition. See "Item 1A. Risk Factors." If we
are unable to adequately protect, police or enforce our intellectual property, we could lose a significant competitive advantage.

Available Information

You may obtain free copies of our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K and amendments to those reports, as filed with or furnished to the Securities and Exchange Commission ("SEC"), as soon as reasonably practicable after
such material is filed with or furnished to the SEC on our website at www.polypore.net.

Item 1A.    Risk Factors

Our business faces many risks. As such, prospective investors and shareholders should carefully consider and evaluate all of the risk
factors described below. These risk factors may change from time to time and may be amended, supplemented, or superseded by updates to the risk factors contained in periodic reports on
Form 10-Q and Form 10-K that we file with the SEC in the future. These risks include the following:

Because the specialized markets in which we sell our products are highly competitive, we may have difficulty growing our business.

The markets in which we sell our products are highly competitive. Many of these markets require highly specialized products that are
time and cost intensive to design and develop. In addition, innovative products, quality, service, utility, cost and technical support are the primary competitive factors in the separation and
filtration membrane industry. Some of our competitors are much larger companies that have greater financial, technological, manufacturing and marketing resources than we do. Many of these competitors
are also better established as suppliers to the markets that we serve. As a result, a reduction in overall demand or increased costs to design and produce our products within these markets could cause
us to reduce our prices, which could lower our profit margins and impair our ability to grow our business.

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We must continue to invest significant resources in developing innovative products in order to maintain a competitive edge in the highly specialized markets in which we
operate.

Our continued success depends, in part, upon our ability to maintain our technological capabilities and to continue to identify,
develop and commercialize innovative products for the separation and filtration membrane industry. For example, products for some consumer electronics applications have a short lifecycle and require
constant development. If we fail to continue to develop products for those markets or keep pace with technological developments by our competitors generally, we may lose market share which could
result in reduced sales and impair our financial condition.

The loss of large volume customers could impact our sales and our profits.

Our products are often sold to a relatively small number of large volume customers. The loss of large volume customers could impact our
sales and our profits. In fiscal 2010, sales to our top five customers represented approximately 22% of our total net sales.

Vertical integration by our customers of the production of our products into their own manufacturing processes could reduce our sales and our profits.

Our future sales and profits will depend to a significant extent upon whether our customers choose in the future to manufacture the
separation and filtration membranes used in their products instead of purchasing these components from us. If any of our existing customers choose to vertically integrate the production of our
products in such a manner, the loss of sales to these customers could reduce our sales and our profits.

Increases in prices for raw materials or the loss of key supplier contracts could reduce our profit margins.

The primary raw materials we use in the manufacture of most of our products are polyethylene and polypropylene resins, silica and oil.
In fiscal 2010, raw materials accounted for approximately 35% of our cost of sales. Although our major customer contracts generally allow us to pass increased costs on to our customers, we may not be
able to pass on all raw material price increases to our customers in each case or without delay. The loss of any of our key suppliers could disrupt our business until we secure alternative supply
arrangements. Furthermore, any new supply agreement we enter into may not have terms as favorable as those contained in our current supply arrangements.

Our substantial indebtedness could harm our ability to react to changes in our business or to market developments and prevent us from fulfilling our obligations under our
indebtedness.

We have incurred a significant amount of indebtedness. As of January 1, 2011, our consolidated indebtedness is
$715.3 million. Our cash interest requirements for the next twelve months are estimated to be $35.3 million.

Our
substantial level of indebtedness, as well as any additional borrowings we may make under the unused portions of the senior secured credit agreement, increases the possibility that
we may be unable to generate cash sufficient to pay, when due, the principal of, interest on or other amounts due in respect of our indebtedness. Our substantial debt could increase our vulnerability
to general economic downturns and adverse competitive and industry conditions by limiting our flexibility to plan for, or to react to, changes in our business and in the industry in which we operate.
This limitation could place us at a competitive disadvantage compared to competitors that have less debt and more cash to insulate their operations from market downturns and to finance new business
opportunities.

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Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly.

At January 1, 2011, we had variable rate debt of $350.3 million. An interest rate increase would result in an increase in
interest expense. Our earnings may not be sufficient to allow us to meet any such increases in interest rate expense and to pay principal and interest on our debt and meet our other obligations. If we
do not have sufficient earnings, we may be required to refinance all or part of our existing debt, sell assets, borrow more money or sell more securities, none of which we can guarantee we will be
able to do based on terms favorable to the Company or at all.

To service our indebtedness, we will require a significant amount of cash. Our ability to generate cash depends on many factors beyond our control.

Our ability to make payments on and to refinance our indebtedness and to fund our operations will depend on our ability to generate
cash in the future. However, our business may not generate sufficient cash flow from operations for a variety of reasons, including those mentioned elsewhere in this "Risk Factors" section. Without
sufficient cash flow, future borrowings may not be available to us under the senior secured credit agreement in amounts sufficient to enable us to service our indebtedness or to fund our other
liquidity or capital needs. If we cannot generate sufficient cash to service our debt, we will have to take such actions as reducing or delaying capital investments, selling assets, restructuring or
refinancing our debt or seeking additional equity capital. Any of these actions may not be effected on commercially reasonable terms, or at all. In addition, the indenture for the 7.5% senior notes
and the senior secured credit agreement may restrict us from adopting any of these alternatives.

The terms of the senior secured credit agreement and the indenture related to the 7.5% senior notes may restrict our current and future operations, particularly our ability
to respond to market changes or to take certain actions.

The senior secured credit agreement and the indenture related to the 7.5% senior notes contain a number of restrictive covenants that
impose significant operating and financial restrictions on us and may limit our ability to engage in acts that may be in our long-term best interests. For example, the senior secured
credit agreement includes covenants restricting, among other things, our ability to incur, assume or permit to exist additional indebtedness or guarantees; engage in mergers, acquisitions and other
business combinations; or amend or otherwise alter terms of our indebtedness, including the 7.5% senior notes, and other material agreements. The senior secured credit agreement also includes
financial covenants requiring that we maintain a maximum senior leverage ratio at all times when loans or letters of credit are outstanding under the revolving credit facility.

The
indenture related to the 7.5% senior notes also contains numerous negative covenants including, among other things, restrictions on our ability to: incur or guarantee additional
debt; issue preferred stock of restricted subsidiaries; pay dividends or make other equity distributions; or purchase or redeem capital stock.

A
breach of any of these covenants or the inability to comply with financial covenants could result in a default under the senior secured credit agreement or the indenture governing the
7.5% senior notes. If any such default occurs, the lenders and the holders of the 7.5% senior notes may elect to declare all outstanding borrowings, together with accrued interest and other amounts
payable thereunder, to be immediately due and payable. The lenders under the credit agreement also have the right in these circumstances to terminate any commitments they have to provide further
borrowings and to proceed against all collateral granted to them to secure the debt. If collateral (such as available cash) is repossessed by the lenders or holders of the 7.5% senior notes, we will
be unable to access the

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capital
and other resources necessary to operate our business, and we could incur immediate and significant losses.

Some of our employees are represented under collective bargaining agreements. Any employee slowdowns, strikes or failure to renew our collective bargaining agreements could
disrupt our business.

Approximately 35% of our employees are represented under collective bargaining agreements. A majority of those employees are located in
France and Germany and are
represented under industry-wide agreements that are subject to national and local government regulations. Many of these collective bargaining agreements must be renewed annually. Labor
unions also represent our employees in Owensboro, Kentucky and Corydon, Indiana.

Labor
organizing activities could result in additional employees becoming unionized. We may not be able to maintain constructive relationships with these labor unions or successfully
negotiate new collective bargaining agreements in the future. The loss of a substantial number of these employees or a prolonged labor dispute could disrupt our business. Any such disruption could in
turn reduce our sales, increase our costs to bring products to market and result in significant losses.

We generate most of our sales from manufacturing products that are used in a wide variety of industries and the potential for product liability exposure for our products
could be significant.

We manufacture a wide variety of products that are used in healthcare and consumer applications. Several of these products are used in
medical devices that some consumers require in order to sustain their lives. As a result, we may face exposure to product liability claims in the event that the failure of our products results, or is
alleged to result, in bodily injury and/or death. In addition, if any of our products are, or are alleged to be, defective, we may be required to make warranty payments or to participate in a recall
involving those products.

Consequently,
end users of our products may look to us for contribution when faced with product recalls, product liability or warranty claims. The future costs associated with defending
product liability claims or providing product warranties could be material and we may experience material losses in the future as a result. A successful product liability claim brought against us in
excess of available insurance coverage or a requirement to participate in any product recall could substantially reduce our available cash from operations. Reduced cash could in turn reduce our
profits or impair our financial condition.

Our operations outside the United States pose risks to our business that are not present with our domestic business, including compliance with applicable anti-corruption
laws.

Our manufacturing facilities in the United States accounted for 34% of total net sales for fiscal 2010, with facilities in Europe and
Asia accounting for 41% and 25%, respectively. Typically, we sell our products in the currency of the country where the manufacturing facility that produced the products is located. In addition, as
part of our growth and acquisition strategy, we may expand our operations in these or other foreign countries. Our foreign operations are, and any future foreign operations will be, subject to certain
risks that are unique to doing business in foreign countries. These risks include fluctuations in foreign currency exchange rates, inflation, economic or political instability, shipping delays,
changes in applicable laws and regulatory policies and inconsistent enforcement of such laws and policies and various trade restrictions. All of these risks could have a negative impact on our ability
to deliver products to customers on a competitive and
timely basis. This could reduce or impair our sales, profits, cash flows and financial position. The future imposition of, or significant increases in the level of, customs duties, import quotas or
other trade restrictions could also increase our costs and reduce our profits.

Countries
around the world are increasingly enacting anti-corruption laws, many of which are patterned after the United States' Foreign Corrupt Practices Act ("FCPA"). The
FCPA generally

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prohibits
companies and their intermediaries from giving, or offering to give, anything of value to foreign officials with the intent of obtaining an improper business advantage. The FCPA's foreign
counterparts contain similar prohibitions, although varying in both scope and jurisdiction. Our internal policies prohibit corruption in all forms and expressly mandate compliance with the FCPA in
particular. Despite such policies and the FCPA training we provide to our employees, we cannot guarantee that our employees' or intermediaries' conduct will not periodically violate the
anti-corruption laws of a particular nation. Our continued overseas expansion, especially in the aforementioned emerging markets, naturally increases the risk of such violations and
consequently could cause a material adverse effect on our operations or financial condition.

We could incur substantial costs to comply with environmental laws, and violations of such laws may increase our costs or require us to change certain business practices.

We use and generate a variety of chemicals and other hazardous by-products in our manufacturing operations. As a result, we
are subject to a broad range of federal, state, local and foreign environmental laws and regulations. These environmental laws govern, among other things, air emissions, wastewater discharges and the
handling, storage and release of wastes and hazardous substances. Such laws and regulations can be complex and change often. We regularly incur costs to comply with environmental requirements, and
such costs could increase significantly with changes in legal requirements or their interpretation or enforcement. Some of our manufacturing facilities have been the subject of actions to enforce
environmental requirements. We could incur substantial costs, including clean-up costs, fines and sanctions and third-party property damage or personal injury claims, as a result of
violations of environmental laws. Failure to comply with environmental requirements could also result in enforcement actions that materially limit or otherwise affect the operations of the facilities
involved.

Under
certain environmental laws, a current or previous owner or operator of an environmentally contaminated site may be held liable for the entire cost of investigation, removal or
remediation of hazardous materials at such property. This liability could result whether or not the owner or operator knew of, or was responsible for, the presence of any hazardous materials.

Contaminants
have been detected at some of our present facilities, principally in connection with historical operations. Investigations and/or clean-ups of these contaminants
have been undertaken by us or by former owners of the sites. The costs of investigating and remediating environmental conditions at some of our facilities may be substantial. Although we believe we
are entitled to contractual indemnification for a portion of these costs, if we do not receive expected indemnification payments, or if our remediation costs are higher than expected, our exposure to
these costs would increase. This exposure could reduce our cash available for operations, consume valuable management time and reduce our profits or impair our financial condition.

We
anticipate additional investigations and clean-ups of on-site contamination under regulatory supervision or voluntarily at some of our sites. In addition, the
imposition of more stringent clean-up requirements, the discovery of additional contaminants or the discovery of off-site contamination at or from one or more of our facilities
could result in significant additional costs to us.

If we are unable to adequately protect our intellectual property, we could lose a significant competitive advantage.

Our success with our products depends, in part, on our ability to protect our unique technologies and products against competitive
pressure and to defend our intellectual property rights. If we fail to adequately protect our intellectual property rights, competitors may manufacture and market products similar to ours.

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Even
though we have filed patent applications, we may not be granted patents for those applications. Our failure to secure these patents may limit our ability to protect the intellectual
property rights that these applications were intended to cover. Moreover, even if we are granted a patent, that does not prove conclusively that the patent is valid and enforceable. Our existing or
future patents that we receive or license may not provide competitive advantages for our products. Our competitors may invalidate, narrow or avoid the scope of any existing or future patents,
trademarks, or other intellectual property rights that we receive or license. In addition, patent rights may not prevent our competitors from developing, using or selling products that are similar or
functionally equivalent to our products. Patent rights are territorial; thus, the patent protection we do have will only extend to those countries in which we have issued patents. Even so, the laws of
certain countries do not protect our intellectual property rights to the same extent as do the laws of the United States and various European countries. The loss of protection for our intellectual
property could reduce the market value of our products, reduce product sales, and lower our profits or impair our financial condition.

We
intend to enforce our intellectual property rights vigorously, and from time to time we may initiate claims against third parties that we believe are infringing our intellectual
property rights if we are unable to resolve matters satisfactorily through negotiation or we may be required to participate in other administrative proceedings. Lawsuits brought to protect and enforce
our intellectual property rights could be expensive, time-consuming and distracting to management and could result in the impairment or loss of portions of our intellectual property. Our
failure to secure, protect and enforce our intellectual property rights could seriously harm our business.

Security
interests or liens have been granted to financial institutions on some of our patents. If we fail to satisfy our obligations, the financial institutions have rights to those
patents.

Due to the unique products that we produce and the particular industry in which we operate, the loss of our senior management could disrupt our business.

Our senior management is important to the success of our business. There is significant competition for executive personnel with unique
experience in the separation and filtration membrane industry. As a result of this unique need and the competition for a limited pool of industry-based executive experience, we may not be able to
retain our existing senior management. In addition, we may not be able to fill new positions or vacancies created by expansion or turnover or attract additional senior management personnel. All of our
executive officers are free to pursue other business opportunities (other than our chief executive officer, who is bound by a non-compete provision of his employment agreement), including
those that may compete with us. The loss of any member of our senior management without retaining a suitable replacement (either from inside or outside our existing management team) could disrupt our
business.

We may pursue future acquisitions. If we incur contingent liabilities and expenses or additional debt in connection with future acquisitions or if we cannot effectively
integrate newly acquired operations, our business could be disrupted.

Acquisitions involve risks that the businesses acquired will not perform in accordance with expectations or that business judgments
concerning the value, strengths and weaknesses of businesses acquired will prove incorrect. Future acquisitions would likely result in the incurrence of debt and contingent liabilities. Such
acquisitions could also increase our interest and amortization expenses as well as periodic impairment charges related to goodwill and other intangible assets. Acquisitions could also result in
significant charges relating to integration costs. We may not be able to integrate successfully any business we acquire into our existing business. Any acquired businesses may not be profitable or as
profitable as we had expected. The successful integration of new businesses depends on our ability to manage these new businesses and cut excess costs. The successful integration of future
acquisitions may also require substantial attention from our senior management and the management

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of
the acquired business. This could decrease the time that they have to service and attract customers and develop new products and services. In addition, because we may actively pursue a number of
opportunities simultaneously, we may encounter unforeseen expenses, complications and delays. Such expenses and delays could include difficulties in employing sufficient staff and maintaining
operational and management oversight. Our inability to complete the integration of new businesses in a timely and orderly manner could increase costs, reduce our profits and ultimately disrupt our
business.

We have recorded a significant amount of intangible assets, which may never generate the returns we expect.

Our net identifiable intangible assets at January 1, 2011 were approximately 11% of our total assets. Such assets include
trademarks and trade names, license agreements and technology acquired in acquisitions. Goodwill, which relates to the excess of cost over the fair value of the net assets of the businesses acquired,
was approximately 35% of our total assets at January 1, 2011. Goodwill and identifiable intangible assets are recorded at fair value on the date of acquisition and are reviewed at least
annually for impairment. Impairment may result from, among other things, deterioration in the performance of the acquired business, adverse market conditions, and adverse changes in applicable laws or
regulations. We may never realize the full value of our intangible assets. Any future determination requiring the write-off of a significant portion of intangible assets would reduce our
profits for the fiscal period in which the write-off occurs. In fiscal 2009, we recorded a non-cash impairment charge to goodwill of $131.5 million.

Legal proceedings could have an adverse impact on our financial condition.

From time to time, we are party to legal proceedings including matters involving personnel and employment issues, personal injury,
intellectual property, acquisitions and other proceedings arising in the ordinary course of business.

On
September 9, 2008, the United States Federal Trade Commission ("FTC") issued an administrative complaint against us alleging that our actions and the acquisition of Microporous
Holding Corporation, the parent company of Microporous Products L.P. ("Microporous") have substantially lessened competition in North American markets for lead-acid battery
separators. We filed an answer to the complaint on October 15, 2008 denying the material allegations of the complaint. The matter was presented before an Administrative Law Judge ("ALJ") of the
FTC and the hearing concluded on June 12, 2009. In October 2009, the ALJ granted our request to re-open the record to take additional evidence. On February 22, 2010, the
FTC's ALJ issued an initial decision in which he recommended to the FTC that it order us to divest substantially all of the acquired Microporous assets, which include the manufacturing facilities
located in Piney Flats, Tennessee and Feistritz, Austria and restore the competitive environment to that which existed prior to the acquisition, while ruling in our favor on other portions of the
complaint. On March 15, 2010, we filed a Notice of Appeal with the FTC. On November 5, 2010, we were notified that the FTC commissioners affirmed the relief initially granted by the
FTC's ALJ issued on February 22, 2010. The Commissioners ordered that we proceed with the ALJ's recommendations to divest substantially all of the Microporous assets acquired in February 2008.

On
January 28, 2011, we filed a petition with the U.S. Court of Appeals for the 11th Circuit to review the FTC's November 5, 2010 order and opinion. It
is not possible to predict with certainty whether we will be successful in the appellate process or the timing of a final decision. If the appellate court affirms the FTC's decision, and we choose not
to seek Supreme Court review or the Supreme Court denies our petition seeking review of the case, then we will be required to divest substantially all of the assets acquired in the Microporous
acquisition, and we will be subject to some prospective restrictions on our future conduct.

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Our operations are vulnerable to interruption or loss due to natural disasters, epidemics, terrorist acts and other events beyond our control, which could adversely affect
our business.

Our operations may be subject to significant interruption if any of our facilities are damaged or destroyed. For example, certain of
our products are manufactured at a single facility location for which we do not maintain a backup manufacturing facility. A natural or other disaster, such as a fire or flood, could significantly
disrupt our operations, delay or prevent product manufacture and shipment for the time required to repair, rebuild or replace our manufacturing facilities, which could be lengthy, and result in large
expenses to repair or replace the facilities. In addition, concerns about terrorism or an outbreak of epidemic diseases, especially in our major markets of North America, Europe and Asia could have a
negative effect on travel and our business operations, and result in adverse consequences on our sales and financial performance.

Item 1B.    Unresolved Staff Comments

None.

Item 2.    Properties

Our manufacturing facilities are strategically located to serve our customers globally. We believe our facilities are suitable and
adequate for our present purposes.

Location

Floor area
(sq. ft.)

Business segment

CertificationOwensboro, Kentucky(1)


277,000

Energy Storage

ISO 14001, ISO 9001Prachinburi, Thailand


166,000

Energy Storage

ISO 14001, ISO 9001Corydon, Indiana(1)


161,000

Energy Storage

ISO 14001, ISO 9001Selestat, France


153,000

Energy Storage

ISO 14001, ISO 9001Norderstedt, Germany


124,000

Energy Storage

ISO 14001, ISO 9001Piney Flats, Tennessee(1)


121,000

Energy Storage

ISO 9001Ochang, South Korea


105,000

Energy Storage

ISO 9001Feistritz, Austria


52,000

Energy Storage

ISO 14001, ISO 9001Tianjin, China


47,000

Energy Storage

ISO 14001, ISO 9001Shanghai, China(2)


46,000

Energy Storage

ISO 9001Bangalore, India(2)


65,000

Energy Storage

ISO 14001, ISO 9001,
OSHA 18001Charlotte, North Carolina(1)


350,000

Energy Storage and Separations Media

ISO 14001, ISO 9001Wuppertal, Germany


1,503,000

Separations Media

ISO 14001, ISO 9001Obernburg, Germany(2)


23,000

Separations Media

ISO 9001


(1)These
domestic facilities serve as collateral under the senior secured credit agreement.(2)Polypore
owns the equipment and leases the facility.


Our corporate headquarters are located in leased office space in Charlotte, North Carolina and we have leased sales offices in Shenzhen, China;
Tokyo, Japan; and Sao Paulo, Brazil. We are constructing a new lithium battery separator facility for our Energy Storage segment in Concord, North Carolina that is expected to begin production in
mid-2012.

Item 3.    Legal Proceedings

On March 20, 2008, we received a letter from the United States Federal Trade Commission (the "FTC" or the "Commission")
requesting that we voluntarily provide certain documents and information to the FTC regarding our acquisition of Microporous Holding Corporation, the parent company of Microporous Products L.P.
("Microporous"), which was completed on February 29, 2008. The letter stated that the FTC was conducting an investigation to determine whether the Microporous

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acquisition
will substantially lessen competition in any relevant market and thereby violate federal antitrust laws. We voluntarily responded to the letter in writing and through supplemental
telephone conversations and meetings.

On
April 7, 2008, we and our wholly-owned subsidiary, Daramic LLC, each received from the FTC a subpoena and interrogatories requesting substantially similar documents and
information as requested in the FTC's initial letter, as well as additional documents and information. We responded fully to this request and met on several occasions with various members of the FTC
staff and Commissioners in an effort to answer their questions and resolve the investigation.

On
September 9, 2008, the FTC issued an administrative complaint against us alleging that our actions and the acquisition of Microporous have substantially lessened competition in
North American markets for lead-acid battery separators. We filed an answer to the complaint on October 15, 2008 denying the material allegations of the complaint. The matter was
presented before an ALJ of the FTC and the hearing concluded on June 12, 2009. In October 2009, the ALJ granted our request to re-open the record to take additional evidence. On
February 22, 2010, the FTC's ALJ issued an initial decision in which he recommended to the FTC that it order us to divest substantially all of the acquired Microporous assets, which include the
manufacturing facilities located in Piney Flats, Tennessee and Feistritz, Austria and restore the competitive environment to that which existed prior to the acquisition, while ruling in our favor on
other portions of the complaint. On March 15, 2010, we
filed a Notice of Appeal with the FTC. On November 5, 2010, we were notified that the FTC commissioners affirmed the relief initially granted by the FTC's ALJ issued on February 22,
2010. The Commissioners ordered that we proceed with the ALJ's recommendations to divest substantially all of the Microporous assets acquired in February 2008.

We
believe that this decision is inconsistent with the law and the facts presented at the hearing and that the Microporous acquisition is and will continue to be beneficial to our
customers and the industry. On January 28, 2011, we filed a petition with the U.S. Court of Appeals for the 11th Circuit to review the FTC's November 5, 2010 order
and opinion. It is not possible to predict with certainty whether we will be successful in the appellate process or the timing of a final decision. If the appellate court affirms the FTC's decision,
and we choose not to seek Supreme Court review or the Supreme Court denies our petition seeking review of the case, then we will be required to divest substantially all of the assets acquired in the
Microporous acquisition, and we will be subject to some prospective restrictions on our future conduct.

We
believe that a final judicial resolution to the challenge by the FTC to the Microporous acquisition could take one or more years. We believe that the final resolution of this matter
will not have a material adverse impact on our business, financial condition or results of operations

24

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Table of Contents

Part II

Item 5.    Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock is listed on the New York Stock Exchange ("NYSE") under the symbol "PPO" and has been traded on the NYSE since our
initial public offering on June 28, 2007. Warburg Pincus, directly or indirectly, owns 32.0% of our common stock. As of February 18, 2011,
there were approximately 18,650 holders of our common stock, representing primarily persons whose stock is held in nominee or "street name" accounts through brokers.

We
did not declare or pay any dividends on our common stock in fiscal 2010 or 2009, and we do not expect to pay any such dividends in fiscal 2011. The indenture relating to our
$365.0 million aggregate principal amount of 7.5% senior notes due 2017 and our senior secured credit agreement restrict or limit our ability to, among other things, declare dividends and make
payments on or redeem or repurchase capital stock.

The
low and high sales prices for the Company's common stock for each full quarterly period within the two most recent fiscal years were as follows:

Fiscal 2010

Fiscal 2009First Quarter

$11.50 - $18.79

$2.38 - $10.08Second Quarter

$16.70 - $25.10

$4.93 - $11.98Third Quarter

$22.39 - $31.04

$9.16 - $13.69Fourth Quarter

$29.33 - $45.88

$10.17 - $14.10


The
following table summarizes information about the options under our equity compensation plans as of January 1, 2011.

Plan Category

Number of
securities to be
issued upon
exercise of
outstanding
options
(a)

Weighted-
average
exercise price
of outstanding
options
(b)

Number of securities
remaining
available for future
issuance under
equity compensation
plans (excluding
securities reflected
in column (a))
(c)Equity compensation plans approved by security holders








Equity compensation plans not approved by security holders(1)


2,306,565

$
9.69


20,888


(1)Includes
options to purchase shares of our common stock under our 2006 Stock Option Plan and 2007 Stock Incentive Plan, both of which were adopted prior to
our initial public offering and were approved by our Board of Directors. A description of the equity compensation plans appears under "Note 13Stock-Based Compensation Plans" in the
Notes to Consolidated Financial Statements for the year ended January 1, 2011 included in Item 8 of this Report.


25

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Table of Contents

Performance Graph

The following graph compares the total shareholder return of our common stock for the periods indicated with the total return of the
Russell 2000 Index and the Standard & Poor's Index of Industrial Machinery Companies ("S&P Industrial Machinery Index"). The graph assumes $100 invested on June 28, 2007 (the date of our
initial public offering) in the Company, the Russell 2000 Index and the S&P Industrial Machinery Index. Total return represents stock price changes and assumes the reinvestment of dividends.

GRAPHIC

Jun-07

Dec-07

Dec-08

Dec-09

Dec-10Polypore International


100.00


97.06


41.93


66.00


225.90Russell 2000


100.00


91.12


60.33


76.73


97.33S&P Industrial Machinery Index


100.00


103.17


61.86


86.42


117.49


26

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Table of Contents

Item 6.    Selected Financial Data

The following table presents selected historical consolidated financial data of Polypore International for the fiscal years ended
January 1, 2011, January 2, 2010, January 3, 2009, December 29, 2007 and December 30, 2006. The selected historical consolidated financial data has been derived from
Polypore International's audited consolidated financial statements.

The
information presented below should be read together with "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated
financial statements and the notes thereto included in "Item 8. Financial Statements and Supplementary Data."

Statement of operations data
(in millions, except share data):

Fiscal
2010

Fiscal
2009

Fiscal
2008

Fiscal
2007

Fiscal
2006Net sales

$
616.6

$
516.9

$
610.5

$
534.7

$
478.2Gross profit


246.9


195.8


215.7


197.0


164.9Selling, general and administrative expenses


114.8


100.4


108.3


93.6


87.5Business restructuring


(0.8
)

21.3


59.9


(0.9
)

37.0Goodwill impairment





131.5








Change in accounting principle related to postemployment benefits














(2.6
)Operating income (loss)


132.9


(57.4
)

47.5


104.3


43.0Interest expense, net


46.7


57.1


60.7


81.0


92.3Gain on sale of Italian subsidiary


(3.3
)










Gain on sale of synthetic paper business








(3.8
)




Foreign currency and other


(1.4
)

(0.7
)

1.3


1.6


3.2Costs related to purchase of 8.75% senior subordinated notes


2.3











Costs related to purchase of 10.5% senior discount notes











30.1


Write-off of loan acquisition costs associated with refinancing of senior secured credit facilities











7.2


Income (loss) from continuing operations before income taxes


88.6


(113.8
)

(10.7
)

(15.6
)

(52.5
)Income taxes


25.0


3.5


6.8


(16.0
)

(22.9
)Income (loss) from continuing operations


63.6


(117.3
)

(17.5
)

0.4


(29.6
)Income (loss) from discontinued operations, net of income taxes








2.3


0.1


(0.2
)Income (loss) before the cumulative effect of a change in accounting principle


63.6


(117.3
)

(15.2
)

0.5


(29.8
)Cumulative effect of change in accounting principle, net of income taxes














0.2Net income (loss)

$
63.6

$
(117.3
)
$
(15.2
)
$
0.5

$
(29.6
)Net income (loss) per sharebasic:(1)Continuing operations

$
1.43

$
(2.64
)
$
(0.41
)
$
0.02

$
(1.17
)Discontinued operations








0.06





(0.01
)Cumulative effect of change in accounting principle, net of income taxes














0.01Net income (loss) per share

$
1.43

$
(2.64
)
$
(0.36
)
$
0.02

$
(1.17
)Net income (loss) per sharediluted:(1)Continuing operations

$
1.39

$
(2.64
)
$
(0.41
)
$
0.02

$
(1.17
)Discontinued operations








0.06





(0.01
)Cumulative effect of change in accounting principle, net of income taxes














0.01Net income (loss) per share

$
1.39

$
(2.64
)
$
(0.36
)
$
0.02

$
(1.17
)Weighted average shares outstanding:Basic(1)


44,562,421


44,385,552


42,777,531


32,942,214


25,313,130Diluted(1)


45,748,058


44,385,552


42,777,531


33,237,230


25,313,130


(1)The
weighted average shares outstanding for fiscal year 2006 has been adjusted to give effect for the stock split of 147.422-for-one
on June 25, 2007.


27

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Table of Contents

Balance sheet data
(at end of period) (in millions):

Fiscal
2010

Fiscal
2009

Fiscal
2008

Fiscal
2007

Fiscal
2006Total assets

$
1,348.5

$
1,352.6

$
1,498.9

$
1,429.0

$
1,389.9Total debt, including current portion


715.3


803.4


803.3


822.8


1,048.9Shareholders' equity


378.1


284.3


395.8


338.3


69.7




Other financial data
(in millions):

Fiscal
2010

Fiscal
2009

Fiscal
2008

Fiscal
2007

Fiscal
2006Depreciation and amortization

$
47.9

$
51.4

$
55.1

$
48.9

$
60.2Capital expenditures


68.8


16.3


48.0


29.8


24.0Net cash provided by (used in):Operating activities


127.2


53.2


93.2


69.3


50.0Investing activities


(90.3
)

(16.3
)

(129.8
)

(35.3
)

(23.9
)Financing activities


(61.3
)

(10.4
)

67.2


(40.4
)

(3.0
)


Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with our consolidated financial statements and the notes thereto included in
"Item 8. Financial Statements and Supplementary Data." Some of the information contained in this discussion and analysis or included elsewhere in this report, including information with respect
to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. Please see "Forward-looking Statements" for more information. You should review
"Risk Factors" for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained herein.

Overview

We are a leading global high technology filtration company that develops, manufactures and markets specialized microporous membranes
used in separation and filtration processes. In fiscal 2010, we generated total net sales of $616.6 million. We operate in two business segments: (i) the energy storage segment, which
accounted for approximately 72% of our fiscal 2010 net sales; and (ii) the separations media segment, which accounted for approximately 28% of our fiscal 2010 net sales. We manufacture our
products at facilities in North America, Europe and Asia. Net sales from foreign locations were $415.3 million for fiscal 2010.

We
are experiencing strong demand in both of our business segments and have significant capacity expansions underway that are scheduled to come online in early 2011 through
mid-2012. We operated at high rates of capacity utilization in 2010 and expect that to continue into early 2011, when some of the new capacity begins to ramp up. We believe
long-term demand drivers in our businesses remain positive, and we will continue to assess capacity needs and make investments to capitalize on these future growth opportunities.



In the energy storage segment, our membrane separators are a critical performance component in lithium batteries, which are primarily
used in consumer electronics and electric drive vehicle ("EDV") applications, and lead-acid batteries, which are used globally in transportation and numerous industrial applications. We
believe that the long-term growth drivers for the energy storage businessgrowth in Asia, strong demand for consumer electronics and growing demand for EDV'sare
positive.

Lithium
batteries are the power source in a wide variety of applications, including consumer electronics applications such as notebook computers, tablets, mobile phones and cordless
power tools, and emerging applications such as EDV's and electricity grid storage or energy storage systems

28

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Table of Contents

("ESS").
Growth in lithium batteries is being driven by strong demand in consumer electronic applications and accelerating demand in EDV's. In order to meet the growing demand, we have four lithium
capacity expansion projects underway, three of which are targeted at the EDV market and one for consumer electronics in Asia. In late 2009, we initiated a $102.0 million
EDV-targeted expansion that is being partially funded by a $49.3 million grant from the U.S. Department of Energy ("DOE"). The first phase of this expansion will increase capacity
at our existing Charlotte, NC facility, with production ramping up in early 2011. The second phase is the construction of a new lithium battery separator facility in Concord, NC which is expected to
start production in mid-2012. In November 2010, we announced another EDV-targeted expansion at our Charlotte, NC facility. This $32.0 million expansion is expected to
begin production toward the end of 2011. For consumer electronics, we initiated a $30.0 million capacity expansion at our Korean facility that is expected to start up in the second half of
2011.

In
the lead-acid battery market, the high proportion of aftermarket replacement sales and the steady growth of the worldwide fleet of motor vehicles provide us with a growing
recurring revenue base in lead-acid battery separators. Worldwide demand for lead-acid battery separators is expected to continue to grow at slightly more than annual
economic growth. The Asia-Pacific region is the fastest growing market for lead-acid battery separators. Growth in this region is driven by the increasing penetration of
automobile ownership, growth in industrial and manufacturing sectors, export incentives and ongoing conversion to the polyethylene-based membrane separators we produce. We have positioned ourselves to
benefit from growth in Asia by expanding capacity at our Prachinburi, Thailand facility; acquiring battery separator manufacturing assets and subsequently expanding our operations in Bangalore, India;
acquiring a production facility in Tianjin, China; and establishing an Asian Technical Center in Thailand. In 2010, we reached an agreement to enter into a joint venture with a customer, Camel
Group Co., Ltd. ("Camel"), a leading battery manufacturer in China, to produce lead-acid battery separators primarily for Camel's use. The joint venture, Daramic Xiangfan
Battery Separator Co., Ltd. ("Daramic Xiangfan"), will be located at Camel's facility in Xiangfan, China and is expected to start production in early 2012. In February 2011, we approved
an additional expansion at our Prachinburi, Thailand facility to be completed by mid-2012.



In the separations media segment, our filtration membranes and modules are used in healthcare and high-performance
filtration and specialty applications. We believe that the separations media segment will continue to benefit from continued growth in demand for higher levels of purity in a growing number of
applications.

Healthcare
applications include hemodialysis, blood oxygenation and plasmapheresis. Growth in demand for hemodialysis membranes is driven by the increasing worldwide population of
end-stage renal disease patients. We believe that conversion to single-use dialyzers and increasing treatment frequency will result in additional dialyzer market growth. In the
third quarter of 2010, we began a $25.0 million expansion of hemodialysis membrane (PUREMA®) production capacity at our Wuppertal, Germany facility and expect to start production in
the second half of 2011.

We
produce a wide range of membranes and membrane-based elements for micro-, ultra- and nanofiltration and gasification/degasification of liquids. Micro-, ultra- and nanofiltration
membrane element market growth is being driven by several factors, including end-market growth in applications such as water treatment and pharmaceutical processing, displacement of
conventional filtration media by membrane filtration due to membranes' superior cost and performance attributes and increasing purity requirements in industrial and other applications.

29

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Table of Contents

Critical accounting policies

Critical accounting policies are those accounting policies that can have a significant impact on the presentation of our financial
condition and results of operations, and that require the use of complex and subjective estimates based on past experience and management's judgment. Because of uncertainty inherent in such estimates,
actual results may differ from these estimates. Below are those policies that we believe are critical to the understanding of our operating results and financial condition. Management has discussed
the development and selection of these critical accounting policies with the Audit Committee of our Board of Directors. For additional accounting policies, see Note 2 of the consolidated
financial statements included in "Item 8. Financial Statements and Supplementary Data."



Accounts receivable are primarily composed of amounts owed to us through our operating activities and are presented net of an allowance
for doubtful accounts. We establish an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends and other information. We charge accounts
receivables off against our allowance for doubtful accounts when we deem them to be uncollectible on a specific identification basis. During 2010, $4.4 million of specifically reserved accounts
receivable were deemed not collectible and written off against the related allowance for doubtful accounts. The determination of the amount of the allowance for doubtful accounts is subject to
judgment and estimated by management. If circumstances or economic conditions deteriorate, we may need to increase the allowance for doubtful accounts.



Identified intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable. Goodwill and indefinite-lived intangible assets are not amortized, but are subject to annual impairment testing unless circumstances dictate more frequent assessments. We
perform our annual impairment assessment for goodwill and indefinite-lived intangibles as of the first day of the fourth quarter of each fiscal year and more frequently whenever events or changes in
circumstances indicate that the fair value of the asset may be less than the carrying amount. Goodwill impairment testing is a two-step process performed at the reporting unit level. Our
reporting units are at the operating segment level. Step one compares the fair value of our reporting units to their carrying amount. The fair value of the reporting unit is determined using the
income approach, corroborated by comparison to market capitalization
and key multiples of comparable companies. Under the income approach, we determine fair value based on estimated future cash flows of each reporting unit, discounted by an estimated weighted-average
cost of capital. If the fair value of the reporting unit is greater than its carrying amount, there is no impairment. If the reporting unit's carrying amount exceeds its fair value, then the second
step must be completed to measure the amount of impairment, if any. Step two calculates the implied fair value of goodwill by deducting the fair value of all tangible and intangible net assets of the
reporting unit from the fair value of the reporting unit as calculated in step one. In this step, the fair value of the reporting unit is allocated to all of the reporting unit's assets and
liabilities in a hypothetical purchase price allocation as if the reporting unit had been acquired on that date. If the carrying amount of goodwill exceeds the implied fair value of goodwill, an
impairment loss will be recognized in an amount equal to the excess.

Determining
the fair value of a reporting unit is judgmental in nature and requires the use of significant estimates and assumptions, including revenue growth rates, strategic plans and
future market conditions, among others. There can be no assurance that our estimates and assumptions made for purposes of the goodwill impairment testing will prove to be accurate predictions of the
future. If our assumptions regarding forecasted revenue or margin growth rates of certain reporting units are not achieved or changes in strategy or market conditions occur, we may be required to
record goodwill

30

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Table of Contents

impairment
charges in future periods. It is not possible at this time to determine if any such future impairment charge would result or, if it does, whether such charge would be material.

In
2010, our annual impairment test indicated that the fair value of the reporting units exceeded their respective carrying amounts. A 10% decrease in the estimated free cash flow
assumptions used in our step one test would have resulted in a reduction in fair values of approximately $155.6 million for our energy storage segment and $55.2 million for our
separations media segment. A 1% increase in the discount rate would have resulted in a reduction in fair values of $165.5 million for our energy storage segment and $59.2 million for our
separations media segment. None of these changes would have resulted in an impairment charge to goodwill or intangible assets.

In
2009, we recognized a goodwill impairment charge of $131.5 million for the lead-acid reporting unit of our energy storage segment.



Certain assumptions are used in the calculation of the actuarial valuation of our defined benefit pension plans and other
postretirement benefits. Two critical assumptions, discount rate and expected return on assets, are important elements of plan expense and/or liability
measurement and differences between actual results and these two actuarial assumptions can materially affect our projected benefit obligation or the valuation of our plan assets. Other assumptions
involve demographic factors such as retirement, expected increases in compensation, mortality and turnover. The discount rate enables us to state expected future cash flows at a present value on the
measurement date. The discount rate assumptions are based on the market rate for high quality fixed income investments, and are thus subject to change each year. At January 1, 2011, a 1%
decrease in the discount rate would increase our projected benefit obligations and the unfunded status of our pension plans by $13.2 million. The expected rates of return on our pension plans'
assets are based on the asset allocation of each plan and the long-term projected return of those assets. For 2010, if the expected rate of return on pension plan assets were reduced by
1%, the result would have increased our net periodic benefit expense for fiscal 2010 by $0.2 million. At January 1, 2011, if the actual plan assets were reduced by 1%, the unfunded
status of our pension plans would increase by $0.2 million.



Environmental obligations are accrued when such expenditures are probable and reasonably estimable. The amount of liability recorded is
based on currently available information, including the progress of remedial investigations, current status of discussions with regulatory authorities regarding the method and extent of remediation,
presently enacted laws and existing technology. Accruals for estimated losses from environmental obligations are adjusted as further information develops or circumstances change. We do not currently
anticipate any material loss in excess of the amounts accrued. Future remediation expenses may be affected by a number of uncertainties including, but not limited to, the difficulty in estimating the
extent and method of remediation, the evolving nature of environmental regulations and the availability and application of technology. If actual results are less favorable than those projected by
management, we may be required to recognize additional expense and liabilities.

In
connection with the acquisition of Membrana in 2002, we recorded a reserve for environmental obligations. The reserve provides for costs to remediate known environmental issues and
operational upgrades which are required in order for us to remain in compliance with local regulations. The initial estimate and subsequent finalization of the reserve was included in the allocation
of purchase price at the date of acquisition. At January 1, 2011, the environmental reserve for the Membrana facility was $15.2 million. We anticipate that expenditures will be made over
the next three to five years.

31

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Table of Contents

We
have indemnification agreements for certain environmental matters from Acordis and Akzo, the prior owners of Membrana. Akzo originally provided broad environmental protections to
Acordis with
the right to assign such indemnities to Acordis's successors. Akzo's indemnifications relate to conditions existing prior to December 1999, which is the date that Membrana was sold to Acordis. In
addition to the Akzo indemnification, Acordis provides separate indemnification of claims incurred from December 1999 through February 2002, the acquisition date. We will receive indemnification
payments under the indemnification agreements as expenditures are made against approved claims. At January 1, 2011 amounts receivable under the indemnification agreements were
$12.5 million.

Results of operations

The following table sets forth, for the fiscal years indicated, certain of our historical operating data in amount and as a percentage
of net sales:

Fiscal Year(in millions)

2010

2009

2008Net sales

$
616.6

$
516.9

$
610.5Gross profit


246.9


195.8


215.7Selling, general and administrative expenses


114.8


100.4


108.3Business restructuring


(0.8
)

21.3


59.9Goodwill impairment





131.5


Operating income (loss)


132.9


(57.4
)

47.5Interest expense, net


46.7


57.1


60.7Other


(2.4
)

(0.7
)

(2.5
)Income (loss) from continuing operations before income taxes


88.6


(113.8
)

(10.7
)Income taxes


25.0


3.5


6.8Income (loss) from continuing operations

$
63.6

$
(117.3
)
$
(17.5
)




Fiscal Year(percent of sales)

2010

2009

2008Net sales


100.0
%

100.0
%

100.0
%Gross profit


40.0


37.9


35.3Selling, general and administrative expenses


18.5


19.4


17.7Business restructuring


(0.1
)

4.1


9.8Goodwill impairment





25.5


Operating income (loss)


21.6


(11.1
)

7.8Interest expense, net


7.6


11.0


9.9Other


(0.4
)

(0.1
)

(0.3
)Income (loss) from continuing operations before income taxes


14.4


(22.0
)

(1.8
)Income taxes


4.1


0.7


1.1Income (loss) from continuing operations


10.3
%

(22.7
)%

(2.9
)%




Net sales.Net sales for fiscal 2010 were $616.6 million, an increase of $99.7 million, or 19.3%, from fiscal 2009. Energy
storage
sales for fiscal 2010 were $445.7 million, an increase of $78.1 million, or 21.2%. Lithium battery separator sales, while capacity constrained, increased by 52.1% due to strong demand in
consumer electronics and growing demand in EDV's. Lead-acid battery separator sales

32

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Table of Contents

increased
by 11.8%, including the impact of 2009 advance purchases of approximately $13.0 million by a North American customer. The increase was due to continued growth in Asia and global
economic improvement. Sales in Asia, which is the fastest growing market for lead-acid separators, increased 38.8% in fiscal 2010. The impact of foreign currency translation was not
significant for fiscal
2010. In the energy storage segment, we operated at high capacity utilization rates in 2010 and expect that to continue in the near term. New capacity begins to ramp up for lithium battery separators
in early 2011 and for lead-acid battery separators in early 2012.

Separations
media sales for fiscal 2010 were $170.9 million, an increase of $21.6 million, or 14.5%, from fiscal 2009, including the negative effect of foreign currency
translation of $6.4 million. Healthcare sales increased by 5.2% as demand in hemodialysis and blood oxygenation applications was somewhat offset by the effect of foreign currency translation.
Our hemodialysis production operated at high capacity utilization rates in 2010, and we expect that to continue in the near term. New capacity is expected to come online in the second half of 2011.
Filtration and specialty product sales increased by 34.5% due to economic improvement and strong demand in all key applications, somewhat offset by the effect of foreign currency translation.

Gross Profit.Gross profit as a percent of net sales was 40.0% for fiscal 2010 as compared to 37.9% for fiscal 2009. Energy storage
gross profit as a
percent of net sales was 38.3% as compared to 36.9% for fiscal 2009. The increase in gross profit margin was due to higher production volumes and production efficiencies, somewhat offset by increased
costs associated with growth investments. Separations media gross profit as a percent of net sales increased to 44.6% for fiscal 2010 from 40.3% for fiscal 2009. The increase in gross profit margin
was primarily due to product mix and production efficiencies. In the third and fourth quarters of 2009, filtration production was reduced because of lower sales related to the macro-economic
environment at that time.

Selling, general and administrative expenses.Selling, general and administrative expenses increased by $14.4 million for fiscal
2010,
primarily due to growth investments and the accrual of variable incentives under performance-based compensation plans.

Interest expense.Interest expense for fiscal 2010 decreased by $10.4 million from fiscal 2009. The decrease in interest expense
was primarily
due to $6.7 million of additional interest expense recognized in the prior year under interest rate swap agreements that expired in fiscal 2009, the capitalization of interest expense in 2010
related to capacity expansions and the effect of foreign currency fluctuations on our euro-denominated debt. In late 2010, we paid down $75.0 million of our 8.75% senior
subordinated notes and refinanced the remaining 8.75% senior subordinated notes by issuing $365.0 million of new 7.5% senior notes. The repayment and refinancing of our senior subordinated
notes will provide annual interest savings of approximately $10.0 million.

Income taxes.Income taxes as a percentage of pre-tax income from continuing operations
for fiscal 2010 were 28.2% as compared to (3.1)% for fiscal 2009. The income tax expense recorded in the financial statements fluctuates between years due to a variety of factors, including state
income taxes, the mix of income between U.S. and foreign jurisdictions taxed at varying rates, changes in estimates of permanent differences and valuation allowances and the relative size of our
consolidated income (loss) before income taxes. In fiscal 2009, the effective tax rate was also impacted by the goodwill impairment charge, which decreased pre-tax income with no material
corresponding income tax benefit.

The
mix of earnings between the tax jurisdictions has a significant impact on our effective tax rate. Each tax jurisdiction has its own set of tax laws and tax rates and income earned by
our subsidiaries is taxed independently by these various jurisdictions. Currently, the applicable statutory income tax rates in the jurisdictions in which we operate range from 0% to 39%. Therefore,
the amount of income tax expense in each jurisdiction as compared to our consolidated income (loss) before income taxes has a significant impact on our annual effective tax rate.

33

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The
effect of each of these items on our effective tax rate is quantified in the table below:

Fiscal 2010

Fiscal 2009U.S. federal statutory rate


35.0
%

35.0
%State income taxes


0.7


(0.8
)Mix of income in taxing jurisdictions


(7.7
)

(13.4
)Other permanent differences and valuation allowances


0.2


2.5Impact of goodwill impairment





(30.0
)Other





3.6Total effective tax rate


28.2
%

(3.1
)%




Net sales.Net sales for fiscal 2009 were $516.9 million, a decrease of $93.6 million, or 15.3%, from fiscal 2008. Energy
storage sales
for fiscal 2009 were $367.6 million, a decrease of $82.6 million, or 18.3%. Lithium battery separator sales decreased by 15.6% due to the impact of the weak economic environment on
consumer electronics purchases. Lead-acid battery separator sales decreased by 19.2%, including the negative effect of foreign currency translation of $5.5 million. The primary
reason for the decline in lead-acid battery separator sales in fiscal 2009 was the loss of a customer at the end of fiscal 2008. Sales to this customer in fiscal 2008 were
$52.4 million. In addition, demand for our lead-acid battery separators was negatively impacted by the economic environment, particularly in North America and Europe. Sales to our
largest customer decreased approximately $18.0 million in 2009. In the third and fourth quarters of 2009, we estimate that we shipped approximately $13.0 million of advance orders to
this customer for 2010 usage and demand. Demand in Asia, which is the fastest growing market for lead-acid separators, continues to be strong as sales in this region increased 24.1% in
fiscal 2009.

Separations
media sales for fiscal 2009 were $149.3 million, a decrease of $11.0 million, or 6.9%, from fiscal 2008, including the negative effect of foreign currency
translation of $6.5 million. Healthcare sales remained relatively consistent with fiscal 2008 as the impact of higher sales volumes of synthetic hemodialysis membranes was offset by the
negative effect of foreign currency translation. Filtration and specialty product sales decreased by 17.6% due to macro-economic conditions and the negative effect of foreign currency translation.

Gross Profit.Gross profit as a percent of net sales was 37.9% for fiscal 2009 as compared to 35.3% for fiscal 2008. Energy storage
gross profit as a
percent of net sales was 36.9% as compared to 35.1% for fiscal 2008, which included incremental costs associated with a strike at the Owensboro, Kentucky lead-acid battery separator
facility. Excluding the 2008 strike-related costs, gross profit as a percent of sales in 2009 remained relatively consistent with fiscal 2008. Separations media gross profit as a percent of net sales
increased to 40.3% for fiscal 2009 from 36.5% for fiscal 2008. The increase was due primarily to production efficiencies and decreased energy costs. In the third and fourth quarter of 2009, filtration
production was reduced because of lower sales related to the macro-economic environment.

Selling, general and administrative expenses.Selling, general and administrative expenses decreased by $7.9 million for fiscal
2009.
Excluding the effect of foreign currency translation, the decrease was $5.9 million, consisting primarily of reduced discretionary spending and cost savings from the 2008 restructuring plan,
partially offset by $2.6 million of increased costs associated with the FTC litigation.

Interest expense.Interest expense for fiscal 2009 decreased by $3.6 million from fiscal 2008. The decrease in interest expense
was primarily
due to lower interest rates under our senior credit agreement and the positive effect of foreign currency translation on our euro-denominated debt.

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Income taxes.Income taxes as a percentage of pre-tax income from continuing operations for fiscal 2009 were (3.1)% as compared to
(63.6)% for fiscal 2008. The income tax expense recorded in the financial statements fluctuates between years due to a variety of factors, including state income taxes, the mix of income between U.S.
and foreign jurisdictions taxed at varying rates, changes in estimates of permanent differences and valuation allowances and the relative size of our consolidated income (loss) before income taxes. In
fiscal 2009, the effective tax rate was also impacted by the goodwill impairment charge, which decreased pre-tax income with no material corresponding income tax benefit.

The
mix of earnings between the tax jurisdictions has a significant impact on our effective tax rate. Each tax jurisdiction has its own set of tax laws and tax rates and income earned by
our subsidiaries is taxed independently by these various jurisdictions. The applicable statutory income tax rates in the jurisdictions in which we operate range from 0% to 39%. Therefore, the amount
of income tax expense in each jurisdiction as compared to our consolidated income (loss) before income taxes has a significant impact on our annual effective tax rate.

The
effect of each of these items on our effective tax rate on continuing operations is quantified in the table below:

Fiscal 2009

Fiscal 2008U.S. federal statutory rate


35.0
%

35.0
%State income taxes


(0.8
)

0.7Mix of income in taxing jurisdictions


(13.4
)

(7.1
)Other permanent differences and valuation allowances


2.5


0.1Impact of goodwill impairment


(30.0
)

Impact of 2008 restructuring





(91.0
)Other


3.6


(1.3
)Total effective tax rate on continuing operations


(3.1
)%

(63.6
)%




Restructuring reserve activity in 2010, including the impact of the stock sale of Daramic S.r.l. on the 2008 plan, consisted of:

(in millions)

Balance at
January 2,
2010

Restructuring
Charges

Other

Cash
Payments

Foreign
Currency
Translation

Balance at
January 1,
20112009 Restructuring Plan:Severance and benefits

$
0.1

$
(0.1
)
$


$


$


$
Other





0.4





(0.4
)




0.1


0.3





(0.4
)




2008 Restructuring Plan:Severance and benefits


7.3





(6.6
)

(0.4
)

(0.3
)

Other


0.6


0.2


(0.6
)

(0.2
)




7.9


0.2


(7.2
)

(0.6
)

(0.3
)

2006 Restructuring Plan:Severance and benefits


2.7


(1.3
)




(0.3
)

(0.3
)

0.8Total

$
10.7

$
(0.8
)
$
(7.2
)
$
(1.3
)
$
(0.6
)
$
0.8


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Restructuring reserve activity in 2009 consisted of:

(in millions)

Balance at
January 3,
2009

Restructuring
Charges

Non-Cash
Charges

Cash
Payments

Foreign
Currency
Translation

Balance at
January 2,
20102009 Restructuring Plan:Severance and benefits

$


$
0.1

$


$


$


$
0.1Impairment





19.9


(19.9
)







Other





0.1





(0.1
)







20.1


(19.9
)

(0.1
)




0.12008 Restructuring Plan:Severance and benefits


9.9


(0.8
)




(1.9
)

0.1


7.3Other


0.8


2.0





(2.3
)

0.1


0.610.7


1.2





(4.2
)

0.2


7.92006 Restructuring Plan:Severance and benefits


2.9








(0.2
)




2.7Other


0.5








(0.5
)




3.4








(0.7
)




2.7Total

$
14.1

$
21.3

$
(19.9
)
$
(5.0
)
$
0.2

$
10.7


Cash
restructuring payments for the next twelve months are not expected to be significant.

2009 restructuring plan.In 2009, the North American market for lead-acid battery separators had significant excess capacity and a
highly
consolidated customer base. As a result of these factors and our estimates at that time about future demand requirements in North America, we implemented a restructuring plan in our energy storage
segment to better align lead-acid battery separator production capacity with demand in North America. The restructuring plan included idling capacity and reducing headcount at our
manufacturing facility in Owensboro, Kentucky. We recognized total costs in connection with the plan of $20.4 million, consisting of $0.5 million for severance and benefits and other
exit costs and a non-cash impairment of $19.9 million for buildings and equipment. During 2010, due to economic improvement and growing demand in Asia, worldwide demand for
lead-acid battery separators improved from previous estimates. As a result, we are utilizing the previously idled portions of the facility and do not expect additional restructuring costs
to be incurred.

2008 restructuring plan.A supply contract between our lead-acid battery separator
business and a large customer expired on December 31, 2008 and was not renewed. In response, we implemented a restructuring plan for our energy storage segment to align lead-acid
battery separator production capacity with demand, reduce costs and position ourselves to meet future growth opportunities. The plan included closing our facility in Potenza, Italy, streamlining
production at our facility in Owensboro, Kentucky and reducing selling, general and administrative resources associated with the lead-acid battery separator business. The total cost of the
restructuring plan, including $18.6 million for environmental costs recorded in the environmental reserve for the Potenza, Italy facility, was $61.4 million. The restructuring plan
included costs associated with closing the Potenza, Italy facility and the termination of production employees at Potenza, Italy and Owensboro, Kentucky and certain selling, general and administrative
employees. The restructuring charge also included a non-cash impairment charge of $28.9 million for buildings and machinery and equipment that will no longer be used in Potenza,
Italy. On March 9, 2010, we sold 100% of the stock of our Italian subsidiary, Daramic S.r.l. As a result of the stock sale, the buyer acquired all assets and liabilities of
Daramic S.r.l., including restructuring obligations associated with the Potenza, Italy facility of $7.2 million. Total cash costs for the plan, excluding the restructuring and
environmental obligations assumed by the buyer of Daramic S.r.l., were $7.4 million.

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2006 restructuring plan.In December 2006, our separations media segment exited the production of cellulosic membranes and realigned
the cost
structure at its Wuppertal, Germany facility. The total cost of the plan was $32.4 million, consisting of $9.1 million for employee layoffs, $5.8 million for other costs related
to the shutdown of portions of the Wuppertal, Germany facility and a non-cash impairment charge of $17.5 million for buildings and equipment. In 2010, we reduced the cost of
severance and benefits and related accrual by $1.3 million to reflect actual costs incurred.



At January 1, 2011, we manufacture our products at 14 strategically located facilities in North America, Europe and Asia. Net
sales from the foreign locations were $415.3 million for fiscal 2010, $351.5 million for fiscal 2009 and $388.4 million for fiscal 2008. Typically, we sell our products in the
currency of the country where the manufacturing facility that produces the product is located. Sales to foreign customers are subject to numerous additional risks, including the impact of foreign
government regulations, currency fluctuations, political uncertainties and differences in business practices. There can be no assurance that foreign governments will not adopt regulations or take
other action that would have a direct or indirect adverse impact on our business or market opportunities within such governments' countries. Furthermore, there can be no assurance that the political,
cultural and economic climate outside the United States will be favorable to our operations and growth strategy.



Operations at our European production facilities are traditionally subject to shutdowns for approximately one month during the third
quarter of each year for employee vacations. As a result, operating income during the third quarter of fiscal 2010 was, and during the third quarter of any fiscal year in the future may be, lower than
operating income in other quarters during the same fiscal year. In view of the seasonal fluctuations, we believe that comparisons of our operating results for the third quarter of any fiscal year with
those of the other quarters during the same fiscal year may be of limited relevance in predicting our future financial performance.

Liquidity and capital resources

Cash and cash equivalents decreased to $90.0 million at January 1, 2011 from $115.0 million at January 2,
2010, as we used cash on hand and cash provided by operating activities of $127.2 million to support capacity expansion projects, make certain payments associated with the sale of our Italian
subsidiary and reduce and refinance our senior subordinated notes.

Operating activities.Net cash provided by operating activities was $127.2 million in fiscal 2010, consisting of cash flows from
operations of
$111.8 million and changes in operating assets and liabilities of $15.4 million. Accounts receivable and inventory increased due to higher sales and production volumes associated with
strong demand. Days sales outstanding is consistent with the prior year, and we have not experienced significant changes in accounts receivable aging or customer payment terms and believe that we have
adequately provided for potential bad debts. Inventory is produced based on customer orders and forecasts. Inventory is generally not subject to obsolescence and does not have a shelf life, and we do
not believe there is a significant risk of inventory impairment. Accounts payable and accrued liabilities increased due to timing of payments and higher accrued variable incentive compensation under
performance-based compensation plans.

Investing activities.Capital expenditures increased in 2010 as we started significant capacity expansion projects in our energy storage
and
separations media business segments. In energy storage, we have four lithium capacity expansion projects in progress, three of which are targeted at the EDV market and one for consumer electronics.
The total cost of the lithium expansion projects is expected to be approximately $164.0 million, of which $49.3 million will be reimbursed under a grant from the

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Table of Contents

DOE.
In our separations media segment, we announced in the second quarter of 2010 a $25.0 million expansion of hemodialysis membrane (PUREMA®) production capacity at our Wuppertal,
Germany facility. Capital expenditures for these expansion projects are expected to be incurred beginning in 2010 through mid-2012. Total capital expenditures, including normal maintenance
activities, were $68.8 million (net of DOE grant awards of $13.1 million) in fiscal 2010. Based on approved and announced investments, we currently expect capital expenditures to be
approximately $110.0 million (net of the DOE grant awards) in fiscal 2011.

As
a result of the March 9, 2010 stock sale of our Italian subsidiary, Daramic S.r.l., the buyer acquired the Potenza, Italy manufacturing facility and assumed all
liabilities of the subsidiary, including environmental obligations and severance costs associated with closing this facility in 2008. As a result of the stock sale, we were required to make net cash
payments to the buyer of $21.5 million.

Financing activities.During fiscal 2010, we used $61.3 million of cash in financing activities. The primary financing activity
consisted of a
$65.5 million net use of cash from issuing new 7.5% senior notes, purchasing the 8.75% senior subordinated notes and paying related transaction expenses. We also made principal payments of
$10.0 million on our term loans, including a $7.1 million mandatory prepayment associated with the fiscal 2009 excess cash flow calculation as defined in our senior secured credit
agreement.

We
intend to fund our ongoing operations with cash on hand, cash generated by operations and borrowings available under the senior secured credit agreement.

Our
senior secured credit agreement provides for a U.S. dollar term loan facility ($305.3 million outstanding at January 1, 2011), a euro term loan facility
($45.0 million outstanding at January 1, 2011) and a $90.0 million revolving credit facility. At January 1, 2011, we had $80.9 million of borrowings available under
the revolving credit facility, consisting of the $90.0 million facility less undrawn standby letters of credit. The term loans mature in July 2014 and the revolving credit facility matures in
July 2013. Interest rates under the senior secured credit agreement are, at our option, equal to either an alternate base rate or the Eurocurrency base rate plus a specified margin. At
January 1, 2011, interest rates on the U.S. dollar term loan and Eurodollar term loan were 2.27% and 2.72%, respectively.

When
loans are outstanding under the revolving credit facility, we are required to maintain a senior leverage ratio of indebtedness to Adjusted EBITDA of less than 3.00 to 1.00. At
January 1, 2011, our senior leverage ratio was 1.62 to 1.00 and therefore, had no effect on borrowings available under the revolving credit facility.

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Adjusted
EBITDA, as defined under the senior secured credit agreement, was as follows:

(in millions)

Fiscal 2010Net income

$
63.6Add/Subtract:Depreciation and amortization


47.9Interest expense, net


46.7Income taxes


25.0Stock-based compensation


2.3Foreign currency gain


(0.9
)Loss on disposal of property, plant and equipment


1.1Business restructuring


(0.8
)Gain on sale of Italian subsidiary


(3.3
)Costs related to purchase of 8.75% senior subordinated notes


2.3Costs related to the FTC litigation


1.1Other non-cash or non-recurring charges


(0.1
)Adjusted EBITDA

$
184.9


The
calculation of the senior leverage ratio as defined under the senior secured credit agreement as of January 1, 2011 was as follows:

(in millions)

Fiscal 2010Indebtedness(1)

$
300.3Adjusted EBITDA


184.9Actual leverage ratio


1.62x


(1)Calculated
as the sum of outstanding borrowings under the senior secured credit agreement, less cash on hand (not to exceed $50.0 million).


The
senior secured credit agreement contains certain restrictive covenants which, among other things, limit capital spending, the incurrence of additional indebtedness, investments,
dividends, transactions with affiliates, asset sales, acquisitions, mergers and consolidations, prepayments of other indebtedness, liens and encumbrances and other matters customarily restricted in
such agreements. The agreement also contains certain customary events of default, subject to grace periods, as appropriate. We believe
that annual capital expenditure limitations imposed by the senior credit agreement will not significantly inhibit us from meeting our ongoing capital expenditure needs.

The
7.5% senior notes will mature on November 15, 2017 and are guaranteed by most of our existing and future domestic restricted subsidiaries, subject to certain exceptions.
Except under certain circumstances, the 7.5% senior notes do not require principal payments prior to their maturity in 2017. Interest on the 7.5% senior notes is payable semi-annually on
May 15 and November 15. The 7.5% senior notes contain customary covenants and events of default, including covenants that limit our ability to incur debt, pay dividends and make
investments.

Future
principal debt service payments are expected to be paid out of cash flows from operations, borrowings on our revolving credit facility and future refinancing of our debt. Our cash
interest requirements for the next twelve months are estimated to be $35.3 million.

We
believe we have sufficient liquidity to meet our cash requirements over both the short (next twelve months) and long term (in relation to our debt service requirements). In evaluating
the sufficiency of our liquidity, we considered cash on hand, expected cash flow to be generated from operations and available borrowings under our senior secured credit agreement compared to our

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Table of Contents

anticipated
cash requirements for debt service, working capital, cash taxes and capital expenditures and funding requirements for long-term liabilities. We anticipate that our cash on hand
and operating cash flow, together with borrowings under the revolving credit facility, will be sufficient to meet our anticipated future operating expenses, capital expenditures and debt service
obligations as they become due for at least the next twelve months. However, our ability to make scheduled payments of principal, to pay interest on or to refinance our indebtedness and to satisfy our
other debt obligations will depend upon our future operating performance, which will be affected by general economic, financial, competitive, legislative, regulatory, business and other factors beyond
our control. See "Item 1A. Risk Factors" in this Annual Report on Form 10-K.

From
time to time, we may explore additional financing methods and other means to lower our cost of capital, which could include equity or debt financings and the application of the
proceeds therefrom to the repayment of bank debt or other indebtedness. In addition, in connection with any future acquisitions, we may require additional funding which may be provided in the form of
an additional equity or debt financing or a combination thereof. There can be no assurance that any additional financing will be available to us on acceptable terms or at all.



Environmental obligations are accrued when such expenditures are probable and reasonably estimable. The amount of liability recorded is
based on currently available information, including the progress of remedial investigations, current status of discussions with regulatory authorities regarding the method and extent of remediation,
presently enacted laws and existing technology. Accruals for estimated losses from environmental obligations are adjusted as further information develops or circumstances change. Costs of future
expenditures for environmental obligations are not discounted to their present value. We do not currently anticipate any material loss in excess of the amounts accrued. Future remediation expenses may
be affected by a number of uncertainties including, but not limited to, the difficulty in estimating the extent and method of remediation, the evolving nature of environmental regulations and the
availability and application of technology. We do not expect the resolution of such uncertainties to have a material adverse effect on our consolidated financial position or liquidity. Recoveries of
environmental costs from other parties are recognized as assets when their receipt is deemed probable. At January 1, 2011, environmental reserves, which are predominately
euro-denominated, were $15.6 million.

On
March 9, 2010, we sold 100% of the stock of our Italian subsidiary, Daramic S.r.l. As a result of the stock sale, the buyer acquired all assets and liabilities of
Daramic S.r.l., including the Potenza, Italy facility and environmental obligations of $22.3 million associated with the Potenza site. The buyer has fully indemnified us with regard to
environmental, health and safety matters related to this site.

In
connection with the acquisition of Membrana in 2002, we recorded a reserve for environmental obligations. The reserve provides for costs to remediate known environmental issues and
operational upgrades which are required in order for us to remain in compliance with local regulations. The initial estimate and subsequent finalization of the reserve was included in the allocation
of purchase price at the date of acquisition. At January 1, 2011, the environmental reserve for the Membrana facility was $15.2 million. We anticipate that expenditures will be made over
the next three to five years.

We
have indemnification agreements for certain environmental matters from Acordis and Akzo, the prior owners of Membrana. Akzo originally provided broad environmental protections to
Acordis with the right to assign such indemnities to Acordis's successors. Akzo's indemnifications relate to conditions existing prior to December 1999, which is the date that Membrana was sold to
Acordis. In addition to the Akzo indemnification, Acordis provides separate indemnification of claims incurred from December 1999 through February 2002, the acquisition date. We will receive
indemnification

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payments
under the indemnification agreements as expenditures are made against approved claims. At January 1, 2011 amounts receivable under the indemnification agreements were
$12.5 million.

Contractual Obligations

The following table sets forth our contractual obligations at January 1, 2011. Some of the amounts included in this table are
based on management's estimates and assumptions about these obligations, including their duration, anticipated actions by third parties and other actions. Because these estimates and assumptions are
necessarily subjective, the timing and amount of payments under these obligations may vary from those reflected in this table. For more information on these obligations, see the notes to consolidated
financial statements included in "Item 8. Financial Statements and Supplementary Data."

Payment due by Period(in millions)

Total

2011

2012 - 2013

2014 - 2015

ThereafterLong-term debt(1)

$
350.3

$
3.7

$
7.4

$
339.2

$
7.5% senior notes


365.0











365.0Cash interest payments(2)


220.4


35.3


71.6


58.7


54.8Operating lease obligations(3)


7.6


2.1


2.3


0.9


2.3$
943.3

$
41.1

$
81.3

$
398.8

$
422.1


(1)The
term loan facilities include euro-denominated debt held by one of our foreign subsidiaries. The table assumes that the dollar/euro exchange
rate is the rate at January 1, 2011 for all periods presented and that the debt is held to its stated maturity.(2)Includes
cash interest requirements on long-term debt and the 7.5% senior notes. Interest rates under the term loan facilities are variable and
the table assumes that these rates are the same rates that were in effect at January 1, 2011. For the euro-denominated debt, the table assumes that the dollar/euro exchange rate is
the rate at January 1, 2011 for all periods presented.(3)We
lease certain equipment and facilities under operating leases. Some lease agreements provide us with the option to renew the lease agreement. Our future
operating lease obligations would change if we exercised these renewal options. For euro-denominated leases, the table assumes that the dollar/euro exchange rate is the period average rate
for 2010 and for all periods presented.(4)As
discussed in the notes to consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data," we have
long-term liabilities for pension and postretirement benefits of $73.8 million as of January 1, 2011. Our contributions for these benefit plans are not included in the table
above since the timing and amount of payments are dependent upon many factors, including when an employee retires or leaves the Company, certain benefit elections by employees, return on plan assets,
minimum funding requirements and foreign currency exchange rates. We estimate that contributions to the pension and postretirement plans in fiscal 2011 will be $1.9 million.(5)As
discussed in the notes to consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data," we have net
environmental obligations of $3.1 million, consisting of environmental obligations of $15.6 million less related indemnification receivables of $12.5 million. Payments related to
these obligations are made and then submitted against approved indemnification claims. These amounts are not included in the table above since the timing of payments and receipts is not certain. In
2010, we received net cash receipts of $0.5 million and in 2011, we estimate net cash payments will be $7.7 million. We expect that net payments of $3.1 million will occur over
the next three to five years.


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(6)As
discussed in the notes to consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data," we have recorded a
liability at January 1, 2011 of $8.4 million for uncertain tax positions. Payments related to this liability are not included in the table above since the timing and actual amounts of
the payments, if any, are not known.


Off Balance Sheet Arrangements

We are not a party to any off-balance sheet arrangements that have, or are reasonably likely to have, a material current or
future effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.

Item 7A.    Quantitative and Qualitative Disclosures About Market Risk

We are exposed to various market risks, which are potential losses arising from adverse changes in market rates and prices, such as
interest rates and foreign exchange fluctuations. We do not enter into derivatives or other financial instruments for trading or speculative purposes.



At January 1, 2011, we had fixed rate debt of $365.0 million and variable rate debt of $350.3 million. To reduce
the interest rate risk inherent in our variable rate debt, we may utilize interest rate swap agreements to convert all or a portion of the variable rate debt to a fixed rate obligation. As of
January 1, 2011, there were no outstanding interest rate swap agreements. The pre-tax earnings and cash flow impact resulting from a 100 basis point increase in interest rates on
our variable rate debt, holding other variables constant, would be $3.5 million per year.



Outside of the United States, we maintain assets and operations in Europe and Asia. The results of operations and financial position of
our foreign operations are principally measured in their respective currency and translated into U.S. dollars. As a result, exposure to foreign currency gains and losses exists. The reported income of
these subsidiaries will be higher or lower depending on a weakening or strengthening of the U.S. dollar against the respective foreign currency. Our subsidiaries and affiliates also purchase and sell
products and services in various currencies. As a result, we may be exposed to cost increases relative to the local currencies in the markets in which we sell. Because the percentage of our sales in
foreign currencies differs from the percentage of our costs in foreign currencies, a change in the relative value of the U.S. dollar could have a disproportionate impact on our sales compared to our
costs, which could impact our margins. A portion of our assets are based in our foreign locations and are translated into U.S. dollars at foreign currency exchange rates in effect as of the end of
each period, with the effect of such translation reflected in accumulated other comprehensive income (loss). Accordingly, our consolidated shareholders' equity will fluctuate depending upon the
weakening or strengthening of the U.S. dollar against the respective foreign currency, primarily the euro.

The
dollar/euro exchange rates used in our financial statements for the fiscal years ended as set forth below were as follows:

2010

2009

2008Period end rate


1.3342


1.4317


1.3925Period average rate


1.3294


1.3939


1.4715


Our
strategy for management of currency risk relies primarily on conducting our operations in a country's respective currency and may, from time to time, involve foreign currency
derivatives. As of January 1, 2011, we did not have any foreign currency derivatives outstanding.

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Item 8.    Financial Statements and Supplementary Data

The Company's report of independent registered public accounting firm and consolidated financial statements and related notes appear on
the following pages of this Annual Report on Form 10-K.

Report of Independent Registered Public Accounting Firm

The
Board of Directors and Shareholders
of Polypore International, Inc.

We
have audited the accompanying consolidated balance sheets of Polypore International, Inc. as of January 1, 2011 and January 2, 2010 and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended January 1, 2011. Our audits also included the financial statement schedule listed
in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements
and schedule based on our audits.

We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.

In
our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Polypore International, Inc. at
January 1, 2011 and January 2, 2010, and the consolidated results of its operations and its cash flows for each of the three years in the period ended January 1, 2011, in
conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a
whole, presents fairly in all material respects the information set forth therein.

We
also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Polypore International, Inc.'s internal control over
financial reporting as of January 1, 2011 based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
and our report dated February 25, 2011 expressed an unqualified opinion thereon.

/s/ERNST & YOUNG LLP


Charlotte,
North Carolina
February 25, 2011

43

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Table of Contents

Report of Independent Registered Public Accounting Firm

The
Board of Directors and Shareholders
of Polypore International, Inc.

We
have audited Polypore International, Inc.'s internal control over financial reporting as of January 1, 2011, based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Polypore International, Inc.'s management is
responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying
Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company's internal control over financial reporting based on our audit.

We
conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and
performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A
company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for
external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the company's assets that could have a material effect on the financial statements.

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

In
our opinion, Polypore International, Inc. maintained, in all material respects, effective internal control over financial reporting as of January 1, 2011, based on the
COSO criteria.

We
also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the accompanying consolidated balance sheets of Polypore
International, Inc. as of January 1, 2011 and January 2, 2010, and the related consolidated statement of operations, shareholders' equity, and cash flows for each of the three
years in the period ended January 1, 2011, and our report dated February 25, 2011 expressed an unqualified opinion thereon.

/s/ERNST & YOUNG LLP


Charlotte,
North Carolina
February 25, 2011

44

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Table of Contents

Polypore International, Inc.        Consolidated balance sheets

(in thousands, except share data)

January 1, 2011

January 2, 2010AssetsCurrent assets:Cash and cash equivalents

$
89,955

$
114,975Accounts receivable, net


116,716


107,122Inventories


76,954


72,498Deferred income taxes


2,241


1,791Prepaid and other


14,958


15,373Total current assets


300,824


311,759Property, plant and equipment, net


415,297


388,036Goodwill


469,319


469,319Intangibles and loan acquisition costs, net


152,556


165,971Environmental indemnification receivable


7,249


14,667Other


3,251


2,841Total assets

$
1,348,496

$
1,352,593Liabilities and shareholders' equityCurrent liabilities:Accounts payable

$
29,585

$
17,570Accrued liabilities


67,099


59,835Income taxes payable


5,262


608Current portion of debt


3,696


10,860Total current liabilities


105,642


88,873Debt, less current portion


711,636


792,573Pension and postretirement benefits, less current portion


71,986


66,269Environmental reserve, less current portion


2,517


30,412Deferred income taxes


66,158


74,160Other


12,507


15,961Commitments and contingenciesShareholders' equity:Preferred stock15,000,000 shares authorized, no shares issued and outstanding





Common stock, $.01 par value200,000,000 shares authorized, 45,582,557 and 44,417,326 issued and outstanding at January 1, 2011 and
January 2, 2010


456


444Paid-in capital


497,160


481,248Accumulated deficit


(120,423
)

(183,998
)Accumulated other comprehensive income (loss)


269


(13,349
)Total Polypore shareholders' equity


377,462


284,345Noncontrolling interest


588


Total shareholders' equity


378,050


284,345Total liabilities and shareholders' equity

$
1,348,496

$
1,352,593


See
notes to consolidated financial statements

45

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Table of Contents

Polypore International, Inc.        Consolidated statements of operations

(in thousands, except per share data)

Year ended
January 1, 2011

Year ended
January 2, 2010

Year ended
January 3, 2009Net sales

$
616,625

$
516,855

$
610,530Cost of goods sold


369,767


321,056


397,210Business interruption insurance recovery








(2,400
)Gross profit


246,858


195,799


215,720Selling, general and administrative expenses


114,714


100,411


108,304Business restructuring


(776
)

21,324


59,887Goodwill impairment





131,450


Operating income (loss)


132,920


(57,386
)

47,529Other (income) expense:Interest expense, net


46,747


57,097


60,740Gain on sale of Italian subsidiary


(3,327
)




Gain on sale of synthetic paper business








(3,774
)Foreign currency and other


(1,347
)

(704
)

1,290Costs related to purchase of 8.75% senior subordinated notes


2,263





44,336


56,393


58,256Income (loss) from continuing operations before income taxes


88,584


(113,779
)

(10,727
)Income taxes


25,009


3,548


6,820Income (loss) from continuing operations


63,575


(117,327
)

(17,547
)Income from discontinued operations, net of income taxes








2,360Net income (loss)

$
63,575

$
(117,327
)
$
(15,187
)Net income (loss) per sharebasic:Continuing operations

$
1.43

$
(2.64
)
$
(0.41
)Discontinued operations








0.06Net income (loss) per share

$
1.43

$
(2.64
)
$
(0.36
)Net income (loss) per sharediluted:Continuing operations

$
1.39

$
(2.64
)
$
(0.41
)Discontinued operations








0.06Net income (loss) per share

$
1.39

$
(2.64
)
$
(0.36
)Weighted average shares outstandingbasic


44,562,421


44,385,552


42,777,531Weighted average shares outstandingdiluted


45,748,058


44,385,552


42,777,531


See
notes to consolidated financial statements

46

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Table of Contents

Polypore International, Inc.        Consolidated statements of shareholders' equity

(in thousands,
except share data)

Shares of
Common
Stock

Common
Stock

Paid-in
Capital

Accumulated
Deficit

Accumulated
Other
Comprehensive
Income (Loss)

Non-
controlling
Interest

Total

Comprehensive
Income (Loss)Balance at December 29, 2007


40,326,537

$
403

$
390,337

$
(51,484
)
$
(3,925
)
$
2,950

$
338,281Net loss for the year ended January 3, 2009











(15,187
)







(15,187
)
$
(15,187
)Follow-on offering, net of offering costs


3,750,000


38


84,809











84,847


Stock-based compensation








1,264











1,264


Stock option exercises


299,379


3


1,537











1,540


Excess tax benefit from stock-based compensation








1,495











1,495


Restricted stock grants


1,644




















Unrealized loss on interest rate swap agreements, net of income tax benefit of $2,035














(3,442
)




(3,442
)

(3,442
)Change in net actuarial loss and prior service credit, net of income tax benefit of $330














(663
)




(663
)

(663
)Foreign currency translation adjustment, net of income tax benefit of $3,265














(12,322
)




(12,322
)

(12,322
)Balance at January 3, 2009


44,377,560


444


479,442


(66,671
)

(20,352
)

2,950


395,813Comprehensive loss for the year ended January 3, 2009






















$
(31,614
)Net loss for the year ended January 2, 2010











(117,327
)







(117,327
)
$
(117,327
)Stock-based compensation








2,265











2,265


Stock option exercises


36,602





191











191


Restricted stock grants


3,164




















Noncontrolling interest








(650
)







(2,950
)

(3,600
)

Reversal of unrealized loss on interest rate swap agreements, net of income tax expense of $2,035














3,442





3,442


3,442Change in net actuarial loss and prior service credit, net of income tax expense of $1,398














3,197





3,197


3,197Foreign currency translation adjustment, net of income tax expense of $978














364





364


364Balance at January 2, 2010


44,417,326


444


481,248


(183,998
)

(13,349
)




284,345Comprehensive loss for the year ended January 2, 2010






















$
(110,324
)Net income for the year ended January 1, 2011











63,575








63,575

$
63,575Stock-based compensation








2,295











2,295


Stock option exercises


1,161,815


12


6,848











6,860Excess tax benefit from stock-based compensation








6,769











6,769


Restricted stock grants


3,416




















Noncontrolling interest

















581


581


Change in net actuarial loss and prior service credit, net of income tax benefit of $2,311














(5,165
)




(5,165
)

(5,165
)Foreign currency translation adjustment, net of income tax benefit of $2,008














18,783


7


18,790


18,783Balance at January 1, 2011


45,582,557

$
456

$
497,160

$
(120,423
)
$
269

$
588

$
378,050Comprehensive income for the year ended January 1, 2011






















$
77,193


See notes to consolidated financial statements

47

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Table of Contents

Polypore International, Inc.        Consolidated statements of cash flows

(in thousands)

Year ended
January 1, 2011

Year ended
January 2, 2010

Year ended
January 3, 2009Operating activities:Net income (loss)

$
63,575

$
(117,327
)
$
(15,187
)Adjustments to reconcile net income (loss) to net cash provided by operating activities:Depreciation expense


31,492


34,616


36,459Amortization expense


16,415


16,779


18,585Amortization of loan acquisition costs


2,621


2,588


2,587Stock-based compensation


2,295


2,265


1,264Loss on disposal of property, plant and equipment


1,120


341


1,725Foreign currency gain


(1,416
)

(747
)

(1,859
)Excess tax benefit from stock-based compensation


(6,769
)




(1,495
)Deferred income taxes


4,292


(10,406
)

(3,646
)Business restructuring


(776
)

21,324


59,887Gain on sale of Italian subsidiary


(3,327
)




Gain on sale of synthetic paper business








(3,774
)Costs related to purchase of 8.75% senior subordinated notes


2,263





Goodwill impairment





131,450


Changes in operating assets and liabilities, net of acquisitions:Accounts receivable


(11,984
)

(6,174
)

20,065Inventories


(6,198
)

(1,148
)

(5,361
)Prepaid and other current assets


3,805


538


(556
)Accounts payable and accrued liabilities


22,626


(20,156
)

(18,562
)Income taxes payable


2,597


6,919


(885
)Other, net


4,576


(7,731
)

3,944Net cash provided by operating activities


127,207


53,131


93,191Investing activities:Purchases of property, plant and equipment, net


(68,787
)

(16,265
)

(48,013
)Payments associated with the stock sale of Italian subsidiary, net


(21,519
)




Acquisitions, net of cash acquired








(85,795
)Proceeds from sale of synthetic paper business








4,000Net cash used in investing activities


(90,306
)

(16,265
)

(129,808
)Financing activities:Proceeds from issuance of 7.5% senior notes


365,000





Payments for loan acquisition costs


(7,954
)




Purchase of 8.75% senior subordinated notes


(422,549
)




Principal payments on debt


(10,017
)

(7,041
)

(20,670
)Proceeds from revolving credit facility








46,000Payments on revolving credit facility








(46,000
)Proceeds from stock option exercises


6,860


191


1,540Excess tax benefit from stock-based compensation


6,769





1,495Noncontrolling interest


581


(3,600
)

Proceeds from issuance of common stock, net of underwriting fees and other offering related costs








84,847Net cash provided by (used in) financing activities


(61,310
)

(10,450
)

67,212Effect of exchange rate changes on cash and cash equivalents


(611
)

5,538


(2,508
)Net increase (decrease) in cash and cash equivalents


(25,020
)

31,954


28,087Cash and cash equivalents at beginning of year


114,975


83,021


54,934Cash and cash equivalents at end of year

$
89,955

$
114,975

$
83,021Supplemental cash flow informationCash paid for interest, net of capitalized interest

$
46,468

$
55,573

$
62,380Cash paid for income taxes, net of refunds


16,323


7,035


12,585AcquisitionsFair value of assets acquired

$


$


$
125,368Liabilities assumed and incurred








39,573Cash paid








85,795


See notes to consolidated financial statements

48

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Table of Contents

Polypore International, Inc.        Notes to consolidated financial statements

1. Description of Business

Polypore International, Inc. (the "Company") is a leading global high technology filtration company that develops, manufactures and markets specialized microporous membranes used
in separation and filtration processes. The Company has a global presence in the major geographic markets of North America, South America, Europe and Asia.

2. Accounting Policies

Basis of Presentation and Use of Estimates

The accompanying consolidated financial statements of the Company are prepared in accordance with U.S. generally accepted accounting
principles and include the accounts of the Company and its subsidiaries. All material intercompany accounts are eliminated in consolidation. Certain amounts previously presented in the consolidated
financial statements for prior periods have been reclassified to conform to current classifications. The preparation of financial statements in conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from
those estimates.

Accounting Period

The Company's fiscal year is the 52 or 53-week period ending the Saturday nearest to December 31. The fiscal years
ended January 1, 2011, January 2, 2010 and January 3, 2009 included 52, 52 and 53 weeks, respectively.

Revenue Recognition

Revenue from product sales is recognized when a firm sales agreement is in place, delivery of the product has occurred and
collectibility of the fixed and determinable sales price is reasonably assured. Amounts billed to customers for shipping and handling are recorded in "Net sales" in the accompanying consolidated
statements of operations. Shipping and handling costs incurred by the Company for the delivery of goods to customers are included in "Cost of goods sold" in the accompanying consolidated statements of
operations. Estimates for sales returns and allowances and product returns are recognized in the period in which the revenue is recorded. Product returns and warranty expenses were not material for
all periods presented.

Cash Equivalents

The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.

Accounts Receivable and Concentrations of Credit Risk

Accounts receivable potentially expose the Company to concentrations of credit risk. The Company provides credit in the normal course
of business and performs ongoing credit evaluations on certain of its customers' financial condition, but generally does not require collateral to support such receivables. Accounts receivable, net of
allowance for doubtful accounts, are carried at cost which approximates fair value. The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of
specific customers, historical trends and other information. The allowance for doubtful

49

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Table of Contents

Polypore International, Inc.

Notes to consolidated financial statements (Continued)

2. Accounting Policies (Continued)

accounts
was $2,521,000 and $7,179,000 at January 1, 2011 and January 2, 2010, respectively. The Company believes that the allowance for doubtful accounts is adequate to provide for
potential losses resulting from uncollectible accounts. The Company charges accounts receivables off against the allowance for doubtful accounts when it deems them to be uncollectible on a specific
identification basis. During 2010, the Company determined that $4,413,000 of specifically reserved accounts receivable were not collectible and wrote them off against the related allowance for
doubtful accounts. Exide Technologies, a customer of the Company's energy storage segment, accounted for less than 10% of the Company's sales in 2010 and approximately 13% and 14% of the Company's
sales in 2009 and 2008, respectively.

Inventories

Inventories are carried at the lower of cost or market using the first-in, first-out method of accounting and
consist of:

(in thousands)

January 1, 2011

January 2, 2010Raw materials

$
31,304

$
30,466Work-in-process


13,434


15,909Finished goods


32,216


26,123$
76,954

$
72,498


Property, Plant and Equipment

Property, plant and equipment are stated at cost. Depreciation is computed for financial reporting purposes on the
straight-line method over the estimated useful lives of the related assets. The estimated useful lives for buildings and land improvements range from 20 to 40 years and the
estimated useful lives for machinery and equipment range from 5 to 15 years. Costs of the construction of certain long-term assets include capitalized interest which is amortized
over the estimated useful life of the related asset. The Company capitalized interest of $1,432,000 and $270,000 in 2010 and 2009, respectively.

Property,
plant and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the sum of the expected
undiscounted cash flows is less than the carrying value of the related asset or group of assets, a loss is recognized for the difference between the fair value and carrying value of the asset or group
of assets.

Goodwill, Intangible Assets and Loan Acquisition Costs

Goodwill and indefinite-lived intangible assets are not amortized, but are subject to annual impairment testing unless circumstances
dictate more frequent assessments. The Company performs its annual impairment assessment as of the first day of the fourth quarter of each fiscal year and more frequently whenever events or changes in
circumstances indicate that the fair value of the asset may be less than the carrying amount.

Goodwill
impairment testing is a two-step process performed at the reporting unit level. The Company's reporting units are at the operating segment level. Step one compares
the fair value of the Company's reporting units to their carrying amount. The fair value of the reporting unit is determined

50

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Table of Contents

Polypore International, Inc.

Notes to consolidated financial statements (Continued)

2. Accounting Policies (Continued)

using
the income approach, corroborated by comparison to market capitalization and key multiples of comparable companies. Under the income approach, the Company determines fair value based on
estimated future cash flows of each reporting unit, discounted by an estimated weighted-average cost of capital. If the fair value of the reporting unit is greater than its carrying amount, there is
no impairment. If the reporting unit's carrying amount exceeds its fair value, the second step must be completed to measure the amount of impairment, if any. Step two calculates the implied fair value
of goodwill by deducting the fair value of all tangible and intangible net assets of the reporting unit from the fair value of the reporting unit as calculated in step one. In this step, the fair
value of the reporting unit is allocated to all of the reporting unit's assets and liabilities in a hypothetical purchase price allocation as if the reporting unit had been acquired on that date. If
the carrying amount of goodwill exceeds the implied fair value of goodwill, an impairment loss will be recognized in an amount equal to the excess.

For
indefinite-lived intangible assets, the fair value of the assets is compared to the carrying value and if the carrying value is greater, an impairment loss is recognized for the
difference.

Intangible
assets with finite lives are amortized over their respective estimated useful lives using the straight-line method. The useful life of customer relationships is
based upon historical customer attrition rates and represents the estimated economic life of those relationships. Loan acquisition costs are amortized over the term of the related debt. Amortization
expense for loan
acquisition costs is classified as interest expense. Intangible assets with finite lives are reviewed for impairment whenever events or circumstances indicate that the carrying amount may not be
recoverable. If the sum of the expected undiscounted cash flows is less than the carrying value of the related asset, a loss is recognized for the difference between the fair value and carrying value
of the intangible asset.

Derivatives

Derivative instruments are recorded at fair value on the balance sheet and changes in fair value are recorded to earnings or to
shareholders' equity in "Accumulated other comprehensive income (loss)," depending on whether a derivative is designated as part of a hedge transaction and the type of hedge transaction. Ineffective
portions of hedges, if any, are recognized in current earnings. The Company does not use derivatives for trading or speculative purposes. The Company enters into derivative instruments with high
credit quality counterparties and has not experienced any credit losses on derivatives.

To
reduce the interest rate risk inherent in the Company's variable rate debt, the Company may utilize interest rate swap agreements to convert all or a portion of the variable rate debt
to a fixed rate obligation. In January 2008, the Company entered into two interest rate swap agreements that effectively fixed the interest rate on a portion of its term debt. The interest rate swap
agreements had notional amounts of $50,000,000 and $200,000,000 and expired on June 30, 2009 and December 31, 2009, respectively. The Company designated these swap agreements as cash
flow hedges with changes in fair value, net of income taxes, recorded to "Accumulated other comprehensive income (loss)" in the accompanying consolidated balance sheets. The Company recognized
additional interest expense of $6,683,000 and $1,015,000 in fiscal 2009 and 2008, respectively, representing the difference between the fixed interest rate on the swap agreements and the variable
interest rate on the term debt.

51

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Table of Contents

Polypore International, Inc.

Notes to consolidated financial statements (Continued)

2. Accounting Policies (Continued)

Income Taxes

Deferred tax assets and liabilities are based on temporary differences between the basis of certain assets and liabilities for income
tax and financial reporting purposes. A valuation allowance is recognized if it is more likely than not that a portion of the deferred tax assets will not be realized in the future. The tax effects
from uncertain tax positions are recognized in the
financial statements if the position is more likely than not to be sustained upon audit, based on the technical merits of the position.

Stock-Based Compensation

The Company records stock-based compensation based on the fair value of the award at the grant date. Stock-based compensation expense
is recorded over the requisite service period using the straight-line method for service based awards and in the service period corresponding to the performance target for performance
based awards. Excess tax benefits from employee stock option exercises are recorded as an increase to additional paid-in capital if an incremental tax benefit is realized following the
ordering provisions of the tax law. Excess tax benefits are reported as a financing cash inflow rather than as a reduction of income taxes paid in the statement of cash flows.

Research and Development

The cost of research and development is charged to expense as incurred and is included in "Selling, general and administrative
expenses" in the accompanying consolidated statements of operations. Research and development expense was $14,752,000, $16,789,000 and $18,167,000 in 2010, 2009 and 2008, respectively.

Government Grants

Grant awards are recognized when there is reasonable assurance that the Company will receive the grant and comply with the conditions
attached to the grant. For capital expenditures, the Company deducts grant awards from the cost of the related asset. For expense reimbursements, the Company deducts grant awards from the related
expenses. On February 1, 2010, the Company finalized an agreement with the U.S. Department of Energy ("DOE"), formally awarding the Company a grant of $49,264,000 to help fund an estimated
$102,000,000 expansion of its U.S. lithium battery separator production capacity. The Company also received state and local grants beginning in 2010 in connection with its U.S. expansions.

The
Company recognized grant awards for capital expenditures of $13,762,000 and $2,535,000 in 2010 and 2009, respectively. The Company recognized grant awards for expenses of $2,731,000
and $183,000
in 2010 and 2009, respectively. Amounts due from government agencies were $2,546,000 and $2,718,000 at January 1, 2011 and January 2, 2010, respectively, and are classified as "Prepaid
and other" in the accompanying consolidated balance sheets.

Net Income (Loss) Per Share

Basic net income (loss) per common share is based on the weighted-average number of common shares outstanding in each year. Diluted net
income (loss) per common share considers the impact of dilution from stock options and unvested restricted stock shares as measured under the treasury stock

52

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Table of Contents

Polypore International, Inc.

Notes to consolidated financial statements (Continued)

2. Accounting Policies (Continued)

method.
Potential common shares that would increase net income per share amounts or decrease net loss per share amounts are antidilutive and excluded from the diluted net income (loss) per common
share computation. For 2009 and 2008, no stock options or restricted stock shares were included in the computation of diluted loss per common share because the Company reported net losses.

Foreign Currency Translation

The local currencies of the Company's foreign subsidiaries are the functional currencies. Assets and liabilities of the Company's
foreign subsidiaries are translated into United States dollars at current exchange rates and resulting translation adjustments are reported in "Accumulated other comprehensive income (loss)." Income
statement amounts are translated at weighted average exchange rates prevailing during the period. Transaction gains and losses are included in the determination of net income.

Fair Value of Financial Instruments

The Company's financial instruments include cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities and
long-term debt. The carrying value of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximates their fair value due to the
short-term maturities of these assets and liabilities. The carrying amount of borrowings under the senior secured credit agreement
approximates fair value because the interest rate adjusts to market interest rates. The fair value of the 7.5% senior notes, based on a quoted market price, was $375,038,000 at January 1, 2011.

Fair Value Measurements

Authoritative guidance establishes the following hierarchy that prioritizes the inputs to valuation methodologies used to measure fair
value:



As
of January 1, 2011, the Company did not have any financial assets and liabilities required to be measured at fair value on a recurring basis. See Note 9 for pension
assets measured at fair value on a recurring basis. See Note 4 for goodwill measured at fair value in 2009 on a nonrecurring basis.

53

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Table of Contents

Polypore International, Inc.

Notes to consolidated financial statements (Continued)

3. Property, Plant and Equipment

Property, plant and equipment consist of:

(in thousands)

January 1, 2011

January 2, 2010Land

$
22,995

$
19,182Buildings and land improvements


130,850


131,722Machinery and equipment


387,397


398,984Construction in progress


59,317


11,891600,559


561,779Less accumulated depreciation


185,262


173,743$
415,297

$
388,036


4. Goodwill

The changes in carrying amount of goodwill were as follows:

(in thousands)

Energy Storage

Separations Media

TotalGoodwill

$
389,285

$
212,279

$
601,564Accumulated impairment charges








Balance as of January 3, 2009


389,285


212,279


601,564Purchase accounting adjustment related to Microporous acquisition


(795
)




(795
)Goodwill impairment


(131,450
)




(131,450
)Balance as of January 2, 2010 and January 1, 2011

$
257,040

$
212,279

$
469,319Goodwill

$
388,490

$
212,279

$
600,769Accumulated impairment charges


(131,450
)




(131,450
)Balance as of January 1, 2011

$
257,040

$
212,279

$
469,319


The
Company performs its annual impairment assessment as of the first day of the fourth quarter of each fiscal year. Based on the step one analysis performed in 2010, the Company
determined that the fair value of its reporting units exceeded the carrying amount and there was no impairment of goodwill.

In
2009, because of a decline in estimated future cash flows due to the economic environment and estimates of future lead-acid demand in North America at that time, the
Company determined that the carrying value of the lead-acid reporting unit's goodwill exceeded its implied fair value and recorded a goodwill impairment charge of $131,450,000. Goodwill
impairment was measured on a nonrecurring basis using the income approach, which utilizes inputs classified as level three in the fair value hierarchy.

54

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Table of Contents

Polypore International, Inc.

Notes to consolidated financial statements (Continued)

5. Intangibles, Loan Acquisition and Other Costs

Intangibles, loan acquisition and other costs consist of:

January 1, 2011

January 2, 2010(in thousands)

Weighted
Average
Life (years)

Gross
Carrying
Amount

Accumulated
Amortization

Gross
Carrying
Amount

Accumulated
AmortizationIntangible and other assets subject to amortization:Customer relationships

18

$
193,754

$
75,172

$
194,479

$
63,903Technology and patents

9


40,780


31,231


42,831


28,107Loan acquisition costs

7


17,018


4,441


19,087


10,721Trade names

15


400


76


400


49Intangible assets not subject to amortization:Trade names

Indefinite


11,524





11,954


$
263,476

$
110,920

$
268,751

$
102,780


Amortization
expense, including amortization of loan acquisition costs classified as interest expense, was $19,036,000 in 2010, $19,367,000 in 2009 and $21,172,000 in 2008. The Company's
estimate of amortization expense for the next five years is as follows:

(in thousands)2011

$
18,8432012


15,8112013


14,2952014


14,2862015


13,662


6. Accrued Liabilities

Accrued liabilities consist of:

(in thousands)

January 1, 2011

January 2, 2010Compensation expense and other fringe benefits

$
27,803

$
16,104Current portion of environmental reserve


13,058


14,985Taxes other than income


4,066


1,684Accrued interest


2,936


5,092Current portion of business restructuring


243


7,540Other


18,993


14,430$
67,099

$
59,835


55

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Table of Contents

Polypore International, Inc.

Notes to consolidated financial statements (Continued)

7. Debt

Debt, in order of priority, consists of:

(in thousands)

January 1, 2011

January 2, 2010Senior credit agreement:Revolving credit facility

$


$
Term loan facilities


350,332


363,6787.5% senior notes


365,000


8.75% senior subordinated notes





439,755715,332


803,433Less current maturities


3,696


10,860Long-term debt

$
711,636

$
792,573


The
senior secured credit agreement provides for a U.S. dollar term loan facility ($305,269,000 outstanding at January 1, 2011), a euro term loan facility ($45,063,000 outstanding
at January 1, 2011) and a $90,000,000 revolving credit facility. At January 1, 2011, the Company had $80,949,000 of borrowings available under the revolving credit facility, consisting
of the $90,000,000 facility less undrawn standby letters of credit. Interest rates under the senior secured credit facilities are, at the Company's option, equal to either an alternate base rate or
the Eurocurrency base rate plus a specified margin. The Company is subject to limitations on capital spending and, when loans are outstanding under the revolving credit facility, a maximum net senior
leverage ratio. The term loans mature in July 2014 and the revolving credit facility matures in July 2013.

The
Company's domestic subsidiaries guarantee indebtedness under the credit agreement. Substantially all assets of the Company and its domestic subsidiaries and a first priority pledge
of 66% of the voting capital stock of its foreign subsidiaries secure indebtedness under the credit agreement. The Company's ability to pay dividends on its common stock is limited under the terms of
the credit agreement.

Under
certain conditions, the Company is required to make a mandatory prepayment of term loans within ninety days of its fiscal year-end based on a specified percentage of
excess cash flow, as defined in the credit agreement. The Company was not required to make an excess cash flow payment for the year ended January 1, 2011. In March 2010, the Company made an
excess cash flow payment of $7,130,000 for the year ended January 2, 2010.

In
the fourth quarter of 2010, the Company issued $365,000,000 aggregate principal amount of 7.5% senior notes due 2017. The senior notes were issued in a private offering conducted
pursuant to Rule 144A and Regulation S under the Securities Act of 1933, as amended. The Company has agreed to use reasonable best efforts to file with the Securities and Exchange
Commission and cause to become effective a registration statement relating to an offer to exchange the notes for publicly tradable notes having substantially identical terms. Interest on the notes is
payable semi-annually on May 15 and November 15. The notes are effectively subordinated to all of the Company's existing and future secured debt and will rank senior to any
of the Company's existing and future senior subordinated debt. The Company's domestic subsidiaries, subject to certain exceptions, guarantee the notes. At any time prior to November 15, 2013,
the Company may redeem the notes, in whole or in part, at a price equal to 100% of the principal amount of the notes plus a make-whole premium. On or after November 15, 2013, the
Company may redeem some or all of the notes at redemption prices

56

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Table of Contents

Polypore International, Inc.

Notes to consolidated financial statements (Continued)

7. Debt (Continued)

specified
in the indenture governing the notes. In addition, the Company may on any one or more occasions redeem up to 35% of the notes using the proceeds of certain equity offerings completed before
November 15, 2013 at the redemption price defined in the indenture. The Company incurred loan acquisition costs of $8,347,000 in connection with the issuance of the notes.

The
Company used proceeds from the issuance of the 7.5% senior notes and cash on hand to purchase and retire all of the outstanding 8.75% senior subordinated notes through tender offer
or redemption. The total purchase price for the notes was $422,549,000, consisting of principal of $421,801,000 and tender premiums and expenses of $748,000. In connection with the purchase, the
Company incurred a $2,263,000 charge to income, comprised of the tender premiums and expenses and write-off of unamortized loan acquisition costs of $1,515,000.

Minimum
scheduled principal repayments of the term loans are as follows:

(in thousands)2011

$
3,6962012


3,6962013


3,6962014


339,244$
350,332


8. Income Taxes

Significant components of deferred tax assets and liabilities consist of:

(in thousands)

January 1, 2011

January 2, 2010Deferred tax assets:Pension and postretirement benefits

$
20,165

$
18,074Foreign tax credits


1,850


1,850State tax credits


1,178


1,178Net operating loss carryforwards


43,421


43,987Environmental reserve


1,238


9,588Other


7,174


7,061Total deferred tax assets


75,026


81,738Valuation allowance


(8,613
)

(16,826
)Net deferred tax assets


66,413


64,912Deferred tax liabilities:Property, plant and equipment


(73,988
)

(75,569
)Goodwill and intangibles


(52,971
)

(56,009
)Other


(3,371
)

(5,703
)Total deferred tax liabilities


(130,330
)

(137,281
)Net deferred taxes

$
(63,917
)
$
(72,369
)


57

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Table of Contents

Polypore International, Inc.

Notes to consolidated financial statements (Continued)

8. Income Taxes (Continued)

The
valuation allowance decreased due primarily to the sale of the Company's Italian subsidiary, Daramic S.r.l. on March 9, 2010 (Note 15). As a result of the stock
sale, the buyer acquired all of the assets and liabilities of Daramic S.r.l., including deferred tax assets associated with environmental and restructuring obligations at the Potenza, Italy
facility that were fully reserved by a valuation allowance at January 2, 2010. The decrease in the valuation allowance was somewhat offset by a $1,140,000 increase for net operating losses in
foreign countries for which the benefit may never be realized.

The
Company had the following uncertain tax positions:

(in thousands)

January 1, 2011

January 2, 2010Balance at beginning of year

$
7,628

$
8,040Increase related to prior year positions


1,100


62Decrease related to settlements with taxing authorities


(288
)

(474
)Balance at end of year

$
8,440

$
7,628


The
Company recognizes accrued interest and penalties related to uncertain tax positions as a component of income tax expense in its financial statements. The accrual for potential
payment of penalties and interest was $337,000 and $398,000 at January 1, 2011 and January 2, 2010, respectively.

The
Company has operations in North America, Europe and Asia and files tax returns in numerous tax jurisdictions. The Company is not subject to income tax adjustments in the U.S. for tax
years before 2005 and in foreign jurisdictions for tax years prior to 2004. The Company has been notified that tax audits will be conducted on one of its German subsidiaries for the tax years 2004
through 2008. Although the outcome of tax audits is uncertain, management believes that adequate provisions for income taxes have been made for potential liabilities resulting from such matters.
Because audit outcomes and the timing of audit settlements are subject to significant uncertainty, the Company cannot make a reasonable estimate of the impact on earnings in the next twelve months
from these audits. Management is not aware of any issues for open tax years that upon final resolution will have a material adverse effect on the Company's consolidated financial position, cash flows
or operating results. In 2009, the Company collected refunds in final settlement of U.S. and Austrian tax audits of $5,430,000 and $1,311,000, respectively.

At
January 1, 2011, the Company has net operating loss carryforwards in the United States of $98,264,000 that expire beginning in 2026. The Company also has foreign net operating
losses of $28,833,000 that expire at various dates beginning in 2015. The Company utilized approximately $13,537,000 of net operating losses during 2010.

Deferred
taxes are reflected in the consolidated balance sheet as follows:

(in thousands)

January 1, 2011

January 2, 2010Current deferred tax asset

$
2,241

$
1,791Non-current deferred tax liability


(66,158
)

(74,160
)Net deferred taxes

$
(63,917
)
$
(72,369
)


58

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Table of Contents

Polypore International, Inc.

Notes to consolidated financial statements (Continued)

8. Income Taxes (Continued)

Income
(loss) from continuing operations before income taxes includes the following components:

Year Ended(in thousands)

January 1, 2011

January 2, 2010

January 3, 2009United States

$
17,900

$
(168,493
)
$
4,610Foreign


70,684


54,714


(15,337
)$
88,584

$
(113,779
)
$
(10,727
)


Income
tax expense from continuing operations consists of:

Year Ended(in thousands)

January 1, 2011

January 2, 2010

January 3, 2009Current:U.S. taxes on domestic income

$
1,732

$
501

$
850Foreign taxes


18,985


13,453


11,010Total current


20,717


13,954


11,860Deferred:U.S. taxes on domestic income


8,120


(14,158
)

1,813Foreign taxes


(3,828
)

3,752


(6,853
)Total deferred


4,292


(10,406
)

(5,040
)$
25,009

$
3,548

$
6,820


Income
taxes on continuing operations at the Company's effective tax rate differed from income taxes at the statutory rate as follows:

Year Ended(in thousands)

January 1, 2011

January 2, 2010

January 3, 2009Computed income taxes at the expected statutory rate

$
31,004

$
(39,823
)
$
(3,754
)State and local taxes


560


(569
)

182Foreign taxes


(10,712
)

(2,931
)

(2,081
)Valuation allowance


1,140


829


9,866Goodwill impairment





44,808


Provision for uncertain tax positions


812


61


2,407Other


2,205


1,173


200Income tax expense

$
25,009

$
3,548

$
6,820


Taxes
have been provided on earnings distributed and expected to be distributed by the Company's foreign subsidiaries. All other foreign earnings are undistributed and considered to be
indefinitely reinvested and, accordingly, no provision for U.S. federal and state income taxes has been provided thereon. Upon distribution of those earnings in the form of dividends or otherwise, the
Company would be subject to both U.S. income taxes and withholding taxes payable to the various foreign countries. Determination of the amount of unrecognized deferred U.S. income tax liability is not

59

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Table of Contents

Polypore International, Inc.

Notes to consolidated financial statements (Continued)

8. Income Taxes (Continued)

practicable
because of the complexities associated with its hypothetical calculations; however, unrecognized foreign tax credit carryforwards would be available to reduce some portion of the U.S.
liability.

The
Company has entered into an agreement with the Board of Investment in Thailand under which the Company's Thailand subsidiary is exempt from that country's corporate income tax on
income derived from manufacturing activities. Subject to certain limitations, this agreement provides for 100% of the Company's income from manufacturing activities in Thailand to be
tax-free through 2010 and portions of income to be tax-free for another five years. The income tax benefits recognized from this tax holiday were $2,128,000, $2,094,000 and
$1,969,000 in 2010, 2009 and 2008, respectively.

9. Employee Benefit Plans

Pension and Other Postretirement Benefits

The Company and its subsidiaries sponsor multiple defined benefit pension plans and an other postretirement benefit plan. The Company's
pension plans are based in subsidiaries located outside of

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Table of Contents

Polypore International, Inc.

Notes to consolidated financial statements (Continued)

9. Employee Benefit Plans (Continued)

the
United States. The following table sets forth the funded status of the defined benefit pension plans and the postretirement plan.

Pension Plans

Other Postretirement Benefits(in thousands)

January 1, 2011

January 2, 2010

January 1, 2011

January 2, 2010Change in benefit obligationBenefit obligation at beginning of year

$
(90,459
)
$
(88,834
)
$
(2,501
)
$
(2,181
)Service cost


(1,357
)

(1,669
)

(14
)

(13
)Interest cost


(4,752
)

(4,845
)

(136
)

(131
)Participant contributions








(22
)

(29
)Actuarial (loss) gain


(6,426
)

4,029


(85
)

(263
)Benefit payments


3,140


3,309


109


116Sale of Italian subsidiary


3,022








Foreign currency translation and other


5,951


(2,449
)




Benefit obligation at end of year


(90,881
)

(90,459
)

(2,649
)

(2,501
)Change in plan assetsFair value of plan assets at beginning of year


22,591


21,170





Actual return on plan assets


51


2,047





Company contributions


1,773


2,066


87


87Participant contributions








22


29Benefit payments


(3,140
)

(3,309
)

(109
)

(116
)Foreign currency translation and other


(1,546
)

617





Fair value of plan assets at end of year


19,729


22,591





Funded status at end of year

$
(71,152
)
$
(67,868
)
$
(2,649
)
$
(2,501
)Amounts recognized in the consolidated balance sheet consist of:Accrued liabilities

$
(1,661
)
$
(3,922
)
$
(154
)
$
(178
)Pension and postretirement benefits liabilities


(69,491
)

(63,946
)

(2,495
)

(2,323
)Net amount recognized

$
(71,152
)
$
(67,868
)
$
(2,649
)
$
(2,501
)Amounts recognized in accumulated other comprehensive income (loss), pre-tax, consist of:Net actuarial loss

$
8,873

$
1,548

$
479

$
405Prior service credit


(288
)

(365
)




Net amount recognized

$
8,585

$
1,183

$
479

$
405


The
accumulated benefit obligation for all defined benefit pension plans was $84,762,000 and $84,899,000 at January 1, 2011 and January 2, 2010, respectively. Each of the
Company's defined benefit pension plans had accumulated benefit obligations in excess of plan assets at January 1, 2011.

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Table of Contents

Polypore International, Inc.

Notes to consolidated financial statements (Continued)

9. Employee Benefit Plans (Continued)

The
following table provides the components of net periodic benefit cost:

Pension PlansYear ended(in thousands)

January 1, 2011

January 2, 2010

January 3, 2009Service cost

$
1,357

$
1,669

$
2,344Interest cost


4,752


4,845


4,433Expected return on plan assets


(1,068
)

(1,077
)

(993
)Amortization of prior service cost


(52
)

(55
)

(82
)Recognized net actuarial (gain) loss


(41
)

(50
)

851Other


82





Net periodic benefit cost

$
5,030

$
5,332

$
6,553




Other Postretirement BenefitsYear ended(in thousands)

January 1, 2011

January 2, 2010

January 3, 2009Service cost

$
14

$
13

$
15Interest cost


136


131


119Recognized net actuarial loss


11





Net periodic benefit cost

$
161

$
144

$
134


Weighted
average assumptions used to determine the benefit obligation and net periodic benefit costs consist of:

Pension Plans

Other Postretirement BenefitsWeighted average assumptions as of the end of year

January 1, 2011

January 2, 2010

January 1, 2011

January 2, 2010Discount rate used to determine the benefit obligation


5.40
%

6.00
%

5.25
%

5.75
%Discount rate used to determine the net periodic benefit costs


6.00
%

5.70
%

5.75
%

6.25
%Expected return on plan assets


4.98
%

4.99
%

N/A


N/ARate of compensation increase


2.52
%

2.52
%

N/A


N/A


The
Company's pension plan assets are invested to obtain a reasonable long-term rate of return at an acceptable level of investment risk. Risk tolerance is established
through consideration of plan liabilities, plan funded status and corporate financial condition. Investment risk is measured and monitored on an ongoing basis through periodic investment portfolio
reviews, liability measurements and asset/liability studies. The Company's expected return on plan assets is based on historical market data for each asset class and expected market conditions. The
assets in the pension plans are diversified across equity and fixed income investments, except for certain pension plans funded by insurance contracts. The investment portfolio has target allocations
of approximately 23% equity and 77% fixed income. The actual portfolio allocation was 24% equity, 44% bonds and 32% insurance contracts at January 1, 2011 and was 8% equity, 64% bonds and 28%
insurance contracts at January 2, 2010. The equity securities are considered level one securities in the fair value hierarchy and primarily include

62

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Table of Contents

Polypore International, Inc.

Notes to consolidated financial statements (Continued)

9. Employee Benefit Plans (Continued)

investments
in European companies. The bonds, which are primarily investment grade European bonds, and insurance contracts are level two securities.

The
weighted-average annual assumed rate of increase in the per capita cost of covered benefits (i.e., health care cost trend rate for the medical plan) is 8.2% for 2011 and is
assumed to trend down to 4.8% by 2026 and thereafter. A one-percentage-point change in the health care trend rates would not have a material effect on the post-retirement
benefit obligation.

In
2011, the Company expects to contribute $1,722,000 and $154,000 to its pension and postretirement benefit plans, respectively.

The
estimated future benefit payments expected to be paid for each of the next five years and the sum of payments expected for the next five years thereafter are:

(in thousands)

Pension
Plans

Other
Postretirement
Benefits2011

$
3,298

$
1542012


3,476


1462013


3,646


1332014


3,751


1472015


3,957


1562016 - 2020


25,104


801


401(k) Plans

The Company sponsors a 401(k) plan for U.S. salaried employees. Salaried employees are eligible to participate in the plan on
January 1, April 1, July 1 or October 1 after their date of employment. Under the plan, employer contributions are defined as 5% of a participant's base salary plus a
matching of employee contributions allowing for a maximum matching contribution of 3% of a participant's earnings. The cost of the plan recognized as expense was $2,557,000, $2,661,000 and $2,545,000
in 2010, 2009 and 2008, respectively.

The
Company sponsors a 401(k) plan for U.S. hourly employees subject to collective bargaining agreements. Depending on the applicable collective bargaining agreement, employer basic
contributions are defined as 3.00% or 3.50% of a participant's base earnings plus a matching of employee contributions allowing for a maximum matching contribution of 3.80% or 3.40% of a participant's
earnings. The Company also makes a separate contribution for employees hired prior to January 1, 2000 and who are not eligible for the postretirement benefit plan. The cost of the plan
recognized as expense was $592,000, $503,000 and $546,000 in 2010, 2009 and 2008, respectively.

10. Environmental Matters

Environmental obligations are accrued when such expenditures are probable and reasonably estimable. The amount of liability recorded is based on currently available information,
including the progress of remedial investigations, current status of discussions with regulatory authorities regarding the method and extent of remediation, presently enacted laws and existing
technology. Accruals for estimated losses from environmental obligations are adjusted as further information develops or circumstances change. Costs of future expenditures for environmental
obligations are not discounted to

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Table of Contents

Polypore International, Inc.

Notes to consolidated financial statements (Continued)

10. Environmental Matters (Continued)

their
present value. The Company does not currently anticipate any material loss in excess of the amounts accrued. However, the Company's future remediation expenses may be affected by a number of
uncertainties including, but not limited to, the difficulty in estimating the extent and method of remediation, the evolving nature of environmental regulations and the availability and application of
technology. The Company does not expect the resolution of such uncertainties to have a material adverse effect on its consolidated financial position or liquidity. Recoveries of environmental costs
from other parties are recognized as assets when their receipt is deemed probable. Environmental reserves, which are predominately euro-denominated, were $15,575,000 and $45,397,000 as of
January 1, 2011 and January 2, 2010, respectively.

On
March 9, 2010, the Company sold 100% of the stock of its Italian subsidiary, Daramic S.r.l. (Note 15). As a result of the stock sale, the buyer acquired all
assets and liabilities of Daramic S.r.l., including the
Potenza, Italy facility and environmental obligations of $22,291,000 associated with the Potenza site. The buyer has fully indemnified the Company with regard to environmental, health and safety
matters related to this site.

In
connection with the acquisition of Membrana GmbH ("Membrana") in 2002, the Company recorded a reserve for environmental obligations. The reserve provides for costs to remediate
known environmental issues and operational upgrades which are required in order for the Company to remain in compliance with local regulations. The initial estimate and subsequent finalization of the
reserve was included in the allocation of purchase price at the date of acquisition. The environmental reserve for the Membrana facility was $15,202,000 and $19,852,000 at January 1, 2011 and
January 2, 2010, respectively. The Company anticipates that expenditures will be made over the next three to five years.

The
Company has indemnification agreements for certain environmental matters from Acordis A.G. ("Acordis") and Akzo Nobel N.V. ("Akzo"), the prior owners of Membrana. Akzo
originally provided broad environmental protections to Acordis with the right to assign such indemnities to Acordis's successors. Akzo's indemnifications relate to conditions existing prior to
December 1999, which is the date that Membrana was sold to Acordis. In addition to the Akzo indemnification, Acordis provides separate indemnification of claims incurred from December 1999 through
February 2002, the acquisition date. The Company will receive indemnification payments under the indemnification agreements as expenditures are made against approved claims. At January 1, 2011
and January 2, 2010, amounts receivable under the indemnification agreements were $12,465,000 and $17,618,000, respectively. The current portion of the indemnification receivable is included in
"Prepaid and other" in the accompanying consolidated balance sheets.

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Table of Contents

Polypore International, Inc.

Notes to consolidated financial statements (Continued)

11. Business Restructuring

2009 Restructuring Plan

In 2009, the North American market for lead-acid battery separators had significant excess capacity and a highly
consolidated customer base. As a result of these factors and management estimates at that time about future demand requirements in North America, the Company implemented a restructuring plan in its
energy storage segment to better align lead-acid battery separator production capacity with demand in North America. The restructuring plan included idling capacity and reducing headcount
at the Company's manufacturing facility in Owensboro, Kentucky. The Company recognized total costs in connection with the plan of $20,417,000, consisting of $521,000 for severance and benefits and
other exit costs and a non-cash impairment of $19,896,000 for buildings and equipment. During 2010, due to economic improvement and growing demand in Asia, worldwide demand for
lead-acid battery separators improved from previous estimates. As a result, the Company is utilizing the previously idled portions of the facility and does not expect additional
restructuring costs to be incurred.

2008 Restructuring Plan

A supply contract between the Company's lead-acid battery separator business and a large customer expired on
December 31, 2008 and was not renewed. In response, the Company implemented a restructuring plan for its energy storage segment to align lead-acid battery separator production
capacity with demand, reduce costs and position the Company to meet future growth opportunities. The plan included closing the Company's facility in Potenza, Italy, streamlining production at the
Company's facility in Owensboro, Kentucky and reducing selling, general and administrative resources associated with the lead-acid battery separator business. The total cost of the
restructuring plan, including $18,560,000 for environmental costs recorded in the environmental reserve for the Potenza, Italy facility, was $61,407,000. The restructuring plan included costs
associated with closing the Potenza, Italy facility and the termination of production employees at Potenza, Italy and Owensboro, Kentucky and certain selling, general and administrative employees. The
restructuring charge also included a non-cash impairment charge of $28,929,000 for buildings and machinery and equipment that will no longer be used in Potenza, Italy. On March 9,
2010, the Company sold 100% of the stock of its Italian subsidiary, Daramic S.r.l. (Note 15). As a result of the stock sale, the buyer acquired all of the assets and liabilities of
Daramic S.r.l., including restructuring obligations associated with the Potenza, Italy facility of $7,207,000. Total cash costs for the plan, excluding the restructuring and environmental
obligations assumed by the buyer of Daramic S.r.l., were $7,408,000.

2006 Restructuring Plan

In December 2006, the Company's separations media segment exited the production of cellulosic membranes and realigned the cost
structure at its Wuppertal, Germany facility. The total cost of the plan was $32,419,000, consisting of $9,132,000 for employee layoffs, $5,795,000 for other costs related to the shutdown of portions
of the Wuppertal, Germany facility and a noncash impairment charge of $17,492,000 for buildings and equipment. In 2010, the Company reduced the cost of severance and benefits and related accrual by
$1,334,000 to reflect actual costs incurred.

65

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Table of Contents

Polypore International, Inc.

Notes to consolidated financial statements (Continued)

11. Business Restructuring (Continued)

Restructuring
reserve activity in 2010, including the impact of the stock sale of Daramic S.r.l. on the 2008 plan, consisted of:

(in thousands)

Balance at
January 2,
2010

Restructuring
Charges

Other

Cash
Payments

Foreign
Currency
Translation

Balance at
January 1,
20112009 Restructuring Plan:Severance and benefits

$
132

$
(44
)
$


$
(60
)
$


$
28Other





360





(360
)




132


316





(420
)




282008 Restructuring Plan:Severance and benefits


7,312





(6,616
)

(337
)

(359
)

Other


617


242


(591
)

(242
)

(26
)

7,929


242


(7,207
)

(579
)

(385
)

2006 Restructuring Plan:Severance and benefits


2,674


(1,334
)




(294
)

(258
)

788Total

$
10,735

$
(776
)
$
(7,207
)
$
(1,293
)
$
(643
)
$
816


Restructuring
reserve activity in 2009 consisted of:

(in thousands)

Balance at
January 3,
2009

Restructuring
Charges

Non-Cash
Charges

Cash
Payments

Foreign
Currency
Translation

Balance at
January 2,
20102009 Restructuring Plan:Severance and benefits

$


$
132

$


$


$


$
132Impairment





19,896


(19,896
)







Other





73





(73
)







20,101


(19,896
)

(73
)




1322008 Restructuring Plan:Severance and benefits


9,847


(826
)




(1,899
)

190


7,312Other


829


2,049





(2,245
)

(16
)

61710,676


1,223





(4,144
)

174


7,9292006 Restructuring Plan:Severance and benefits


2,884








(284
)

74


2,674Other


492








(472
)

(20
)

3,376








(756
)

54


2,674Total

$
14,052

$
21,324

$
(19,896
)
$
(4,973
)
$
228

$
10,735


12. Commitments and Contingencies

Leases

The Company leases certain equipment and facilities under operating leases. Rent expense was $2,279,000, $1,508,000 and $1,534,000 in
2010, 2009 and 2008, respectively.

66

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Table of Contents

Polypore International, Inc.

Notes to consolidated financial statements (Continued)

12. Commitments and Contingencies (Continued)

Future
minimum operating lease payments at January 1, 2011 are:

(in thousands)2011

$
2,0632012


1,4462013


8792014


5512015


318$
5,257


Raw Materials

The Company employs a global purchasing strategy to achieve pricing leverage on its purchases of major raw materials. Accordingly, the
Company purchases the majority of each type of raw material from one primary supplier with additional suppliers having been qualified to supply the Company if an interruption in supply were to occur.
The Company believes that alternative sources of raw materials are readily available and the loss of any particular supplier would not have a material impact on the results of operations. However, the
loss of raw material supply sources could, in the short term, adversely affect the Company's business until alternative supply arrangements were secured.

Collective Bargaining Agreements

On January 1, 2011, approximately 35% of the Company's employees are represented under collective bargaining agreements. A
majority of those employees are located in Germany and France and are represented under industry-wide agreements that are
subject to national and local government regulations. Labor unions also represent the Company's employees in Owensboro, Kentucky and Corydon, Indiana.

Federal Trade Commission Litigation

On September 9, 2008, the Federal Trade Commission ("FTC") issued an administrative complaint against the Company alleging that
its actions and the acquisition of Microporous have substantially lessened competition in North American markets for lead-acid battery separators. The Company filed an answer to the
complaint on October 15, 2008 denying the material allegations of the complaint. The matter was presented before an Administrative Law Judge ("ALJ") of the FTC and the hearing concluded on
June 12, 2009. In October 2009, the ALJ granted the Company's request to re-open the record to take additional evidence. On February 22, 2010, the FTC's ALJ issued an initial
decision in which he recommended to the FTC that it order the Company to divest substantially all of the acquired Microporous assets, which include the manufacturing facilities located in Piney Flats,
Tennessee and Feistritz, Austria and restore the competitive environment to that which existed prior to the acquisition, while ruling in the Company's favor on other portions of the complaint. On
March 15, 2010, the Company filed a Notice of Appeal with the FTC. On November 5, 2010, the Company was notified that the FTC commissioners affirmed the relief initially granted by the
FTC's ALJ issued on February 22, 2010. The Commissioners ordered that the Company proceed with the ALJ's recommendations to divest substantially all of the Microporous assets acquired in
February 2008.

67

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Table of Contents

Polypore International, Inc.

Notes to consolidated financial statements (Continued)

12. Commitments and Contingencies (Continued)

The
Company believes that this decision is inconsistent with the law and the facts presented at the hearing and that the Microporous acquisition is and will continue to be beneficial to
its customers and the industry. On January 28, 2011, the Company filed a petition with the U.S. Court of Appeals for the 11th Circuit to review the FTC's November 5,
2010 order and opinion. It is not possible to predict with certainty whether the Company will be successful in the appellate process or the timing of a final decision. If the appellate court affirms
the FTC's decision, and the Company chooses not to seek Supreme Court review or the Supreme Court denies its petition seeking review of the case, then the Company will be required to divest
substantially all of the assets acquired in the Microporous acquisition, and the Company will be subject to some prospective restrictions on its future conduct.

The
Company believes that a final judicial resolution to the challenge by the FTC to the Microporous acquisition could take one or more years. The Company believes that the final
resolution of this matter will not have a material adverse impact on its business, financial condition or results of operations.

Other

The Company is from time to time subject to various claims and other matters arising out of the normal conduct of business. The amount
recorded for identified contingent liabilities is based on estimates. Amounts recorded are reviewed periodically and adjusted to reflect additional information that becomes available. Actual costs to
be incurred in future periods may vary from the estimates, given the inherent uncertainties in evaluating certain exposures. Subject to the imprecision in estimating future contingent liability costs,
the Company believes that based on present information, it is unlikely that a liability, if any, exists that would have a materially adverse effect on the consolidated operating results, financial
position or cash flows of the Company.

13. Stock-Based Compensation Plans

The Company offers stock option plans to attract, retain, motivate and reward key officers, non-employee directors and employees. The 2007 Stock Incentive Plan ("2007 Plan")
allows for the grant of stock options, restricted stock and other instruments for up to a total of 1,751,963 shares of common stock. Stock options granted under the 2007 Plan have 10-year
terms and are issued with an exercise price not less than the fair market value of the Company's stock on the grant date. Stock options granted under the 2007 Plan may vest based on satisfaction of
certain annual performance criteria or may vest over time. Stock options granted under the 2006 Stock Option Plan ("2006 Plan") have a 10-year term and are fully vested as of
January 1, 2011.

Stock
option compensation expense was $2,295,000, $2,265,000 and $1,264,000 in 2010, 2009 and 2008, respectively, and was included in "Selling, general and administrative expenses" in
the accompanying consolidated statements of operations. The income tax benefit related to stock-based compensation expense was $850,000, $838,000 and $468,000 in 2010, 2009 and 2008, respectively. As
of January 1, 2011, the Company had $3,936,000 of total unrecognized stock option compensation expense, net of estimated forfeitures, which is expected to be recognized over a weighted average
period of 1.4 years.

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Table of Contents

Polypore International, Inc.

Notes to consolidated financial statements (Continued)

13. Stock-Based Compensation Plans (Continued)

A
summary of the status of the Company's stock option plans is as follows:

Stock Options

Weighted-
average
exercise
price

Weighted
average
remaining
contractual
term (years)

Aggregate
intrinsic
value
(in thousands)Outstanding at January 2, 2010


3,376,377

$
8.12Granted


120,000


20.04Exercised


(1,161,815
)

6.08Forfeited


(27,997
)

14.13Outstanding at January 1, 2011


2,306,565


9.69


7.5

$
71,598Vested and exercisable at January 1, 2011


1,249,023


8.17


6.6


40,674Expected to vest


1,051,542


11.44


8.4


30,800


Exercise
prices for options outstanding at January 1, 2011 ranged from $5.24 to $26.39. The total intrinsic value of options exercised during 2010 and 2009 amounted to $35,805,000
and $193,000, respectively. The total fair value of options vested during 2010, 2009 and 2008 were $2,098,000, $2,038,000 and $634,000, respectively.

The
Company is required to estimate the fair value of stock options on the grant date using an option-pricing model. The weighted average grant-date fair value of options
granted during 2010, 2009 and 2008 amounted to $9.40, $4.03 and $1.89 per share, respectively. The fair value of each stock option granted was estimated on the date of grant based on the Black-Scholes
option pricing model with the following weighted-average assumptions:

Weighted average
assumptions2010

2009

2008Weighted-average expected life (years)


4.5


4.0


4.0Risk-free interest rate


1.9
%

1.9
%

1.3
%Expected volatility


55.7
%

49.9
%

40.9
%Dividend yield











The
potential expected life of the stock options range from the vesting period of the options (three years to four years) to the contractual life of the options of ten years. During
2010, 2009 and 2008, the Company determined the expected life of the options based primarily on the Company's historical experience, the vesting periods, the structure of the option plans and the
contractual lives of the options.

The
Company's risk-free interest rate is based on the interest rate of U.S. Treasury bills with a term approximating the expected life of the option and is measured at the
date of the stock option grant. Since the Company's common stock has only been publicly traded since June 28, 2007, the expected volatility was estimated based on a mix of the historical
volatility of certain publicly-traded peer companies and the Company since its initial public offering. The Company does not anticipate paying dividends.

69

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Table of Contents

Polypore International, Inc.

Notes to consolidated financial statements (Continued)

13. Stock-Based Compensation Plans (Continued)

Under
the 2007 Plan, the Company granted restricted shares to members of its Board of Directors for service to the Company of 3,416, 3,164 and 1,644 in 2010, 2009 and 2008, respectively.
The cost associated with these restricted stock grants, which vest over three years, was $41,000, $29,000 and $16,000 in 2010, 2009 and 2008, respectively, and was included in "Selling, general and
administrative expenses" in the accompanying consolidated statements of operations.

A
summary of the status of the Company's unvested restricted stock is as follows:

Restricted stock

Weighted-average
grant-date
fair valueUnvested at January 2, 2010


4,876

$
15.73Granted


3,416


35.14Vested


(2,219
)

16.52Unvested at January 1, 2011


6,073


26.36


14. Accumulated Other Comprehensive Income (Loss)

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

(in thousands)

January 1, 2011

January 2, 2010Foreign currency translation adjustment

$
6,524

$
(12,259
)Net actuarial loss and prior service credit


(6,255
)

(1,090
)Accumulated other comprehensive income (loss)

$
269

$
(13,349
)


15. Sale of Italian Subsidiary

On March 9, 2010, the Company sold 100% of the stock of its wholly-owned Italian subsidiary, Daramic S.r.l., for €13,385,000 ($18,175,000 at March 9,
2010). The Company recognized a gain of $3,327,000 on the sale, net of direct transaction costs. As a result of the stock sale, the buyer acquired all of the assets and liabilities of
Daramic S.r.l., including the Potenza, Italy facility, which was closed in 2008, and environmental and restructuring obligations associated with the Potenza site. In addition to assuming all
assets and liabilities, the buyer fully indemnified the Company with regard to all environmental, health and safety matters related to this site. In connection with the sale, the Company was required
to make net cash payments to the buyer of €16,047,000, consisting of the settlement of an acquired intercompany receivable due to Daramic S.r.l. from affiliates of the Company,
reduced by the purchase price of Daramic S.r.l. due from the buyer. The Company paid €11,047,000 ($14,908,000) at closing and paid the remaining €5,000,000
($6,611,000) on December 15, 2010.

16. Related Party Transactions

The Company's German subsidiary has a 33% equity investment in a patent and trademark service provider and a 25% equity investment in a research company. The investments are accounted
for under the equity method of accounting. The Company's equity investment balance for these two investments was $585,000 and $434,000 at January 1, 2011 and January 2, 2010,
respectively. During the year ended January 1, 2011, the Company increased its ownership interest in the patent and trademark provider

70

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Table of Contents

Polypore International, Inc.

Notes to consolidated financial statements (Continued)

16. Related Party Transactions (Continued)

from
25% to 33% for an additional investment of $183,000. Charges from the affiliates for work performed were $1,269,000, $1,250,000 and $1,550,000 in 2010, 2009 and 2008, respectively. Amounts due to
the affiliates were $99,000 and $123,000 at January 1, 2011 and January 2, 2010, respectively.

17. Noncontrolling Interest

In 2010, the Company entered into a joint venture agreement with a customer, Camel Group Co., Ltd ("Camel"), a leading battery manufacturer in China, to produce
lead-acid battery
separators primarily for Camel's use. The joint venture, Daramic Xiangfan Battery Separator Co., Ltd. ("Daramic Xiangfan"), will be located at Camel's facility in Xiangfan, China and is
expected to start production in early 2012. The Company will contribute redeployed production assets from its former facility in Potenza, Italy and cash for a 65% ownership interest in the joint
venture. Camel will contribute land, buildings, utilities and cash for a 35% ownership interest.

In
December 2009, the Company acquired the remaining 40% noncontrolling interest in Daramic NSG Tianjin PE Separator Co., LTD ("DNPET") for $3,600,000. DNPET is a
lead-acid battery separator manufacturing facility located in Tianjin, China. The purchase price in excess of the carrying amount of the noncontrolling interest was recorded as additional
paid-in capital.

18. Issuance of Common Stock

In May 2008, the Company completed a follow-on public offering of 8,031,000 shares of common stock at $24.00 per share, pursuant to which 3,750,000 shares were sold by the
Company and 4,281,000 shares were sold by certain selling shareholders, including certain of the Company's executive officers. The Company received net proceeds from the offering of $84,847,000, net
of underwriting fees of $4,275,000 and other offering related costs. The net proceeds were used to repay outstanding borrowings under the Company's revolving credit facility and for general corporate
purposes.

19. Acquisitions

On February 29, 2008, the Company purchased 100% of the capital stock of Microporous Holding Corporation ("Microporous"). The acquisition broadened the Company's participation in
the deep-cycle industrial battery market, added to its membrane technology portfolio and product breadth, enhanced service to common customers and added cost-effective
production capacity. The purchase price for Microporous stock, including acquisition-related costs, was $26,980,000. The Company also repaid $33,643,000 in indebtedness of Microporous and assumed
$14,235,000 of debt. The assumed debt was repaid subsequent to the acquisition. The purchase agreement provided for additional cash payments to the seller for the three years following the acquisition
contingent upon the acquired business meeting defined earn-out provisions. At January 3, 2009, the Company estimated that the additional purchase price for the fiscal 2008
earn-out was $1,062,000 and allocated this amount to goodwill. In July 2009, the Company reached an agreement with the seller that effectively eliminated the Company's current and future
obligations under the earn-out provision in exchange for releasing the seller from all claims under the original purchase agreement, including its environmental indemnification
obligations. The impact of this agreement on amounts previously recognized in purchase accounting was a net reduction in future cash payments of $795,000. These amounts were reversed through purchase
accounting with a corresponding decrease to goodwill. In addition to the amounts previously recognized, the Company

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Table of Contents

Polypore International, Inc.

Notes to consolidated financial statements (Continued)

19. Acquisitions (Continued)

did
not have to make earn-out payments that would have been due under the original agreement for 2009 and 2010.

On
April 1, 2008, the Company acquired the lead-acid battery separator manufacturing assets of Super-Tech Battery Components Pvt. Ltd.,
("Super-Tech") located in Bangalore, India for $1,949,000.

On
May 20, 2008, the Company purchased 100% of the capital stock of Yurie-Wide Corporation ("Yurie-Wide"), a South Korean company, for $23,223,000,
including
acquisition-related costs. The acquisition broadened the Company's participation in the lithium battery separator market, added to its membrane technology portfolio and product breadth and added
cost-effective production capacity.

The
results of operations from the 2008 acquisitions described above are included in the Company's energy storage segment from the date of acquisition. Pro forma information is not
presented because the impact of these acquisitions, either individually or in the aggregate, on the Company's consolidated results of operations for the year ended January 3, 2009 is not
considered to be significant.

20. Business Interruption Insurance Recovery

On September 30, 2007, a customer in the Company's energy storage segment experienced a fire at one of their facilities. The Company filed a business interruption insurance claim
with its insurance provider and recovered $2,400,000 in 2008 related to this claim.

21. Discontinued Operations

In January 2008, the Company sold a non-core synthetic paper business, a component of the energy storage segment, for $4,000,000, resulting in a gain on sale of $2,372,000,
net of income taxes of $1,402,000. The results of operations and the gain on sale from the synthetic paper business are presented as discontinued operations in the Company's accompanying 2008
consolidated statements of operations.

22. Segment Information

The Company's operations are principally managed on a products basis and are comprised of three operating segments that have been aggregated into two reportable segments: energy storage
and separations media. The energy storage segment produces and markets membranes that provide the critical function of separating the cathode and anode in a variety of battery markets, including
lithium, industrial and transportation applications. The separations media segment produces and markets membranes used as the high technology filtration element in various medical and industrial
applications.

72

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Table of Contents

Polypore International, Inc.

Notes to consolidated financial statements (Continued)

22. Segment Information (Continued)

The Company evaluates the performance of segments and allocates resources to segments based on operating income before depreciation and amortization. In addition, it evaluates business
segment performance before business restructuring charges, goodwill impairment and other non-recurring costs. Financial information relating to the reportable operating segments is
presented below:

Year ended(in thousands)

January 1, 2011

January 2, 2010

January 3, 2009Net sales to external customers (by major product group):Lead-acid battery separators

$
314,727

$
281,456

$
348,240Lithium battery separators


131,036


86,136


101,964Energy storage


445,763


367,592


450,204Healthcare


107,345


102,088


103,029Filtration and specialty


63,517


47,175


57,297Separations media


170,862


149,263


160,326Total net sales to external customers

$
616,625

$
516,855

$
610,530Operating income:Energy storage

$
91,531

$
70,204

$
89,737Separations media


43,946


31,134


27,251Corporate


(2,295
)

(2,265
)

(1,009
)Segment operating income


133,182


99,073


115,979Business restructuring


(776
)

21,324


59,887Goodwill impairment





131,450


Non-recurring costs


1,038


3,685


8,563Total operating income (loss)


132,920


(57,386
)

47,529Reconciling items:Interest expense, net


46,747


57,097


60,740Gain on sale of Italian subsidiary


(3,327
)




Gain on sale of synthetic paper business








(3,774
)Foreign currency and other


(1,347
)

(704
)

1,290Costs related to purchase of 8.75% senior subordinated notes


2,263





Income (loss) from continuing operations before income taxes

$
88,584

$
(113,779
)
$
(10,727
)Depreciation and amortization:Energy storage

$
33,267

$
35,253

$
37,121Separations media


14,640


16,142


17,923Total depreciation and amortization

$
47,907

$
51,395

$
55,044Capital expenditures:Energy storage

$
54,843

$
12,459

$
38,742Separations media


13,944


3,806


9,271Total capital expenditures

$
68,787

$
16,265

$
48,013


73

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Table of Contents

Polypore International, Inc.

Notes to consolidated financial statements (Continued)

22. Segment Information (Continued)



(in thousands)

January 1, 2011

January 2, 2010Assets:Energy storage

$
819,161

$
786,677Separations media


486,272


485,515Corporate


43,063


80,401Total assets

$
1,348,496

$
1,352,593


Net
sales by geographic location, based on the country from which the product is shipped, were as follows:

Year ended(in thousands)

January 1, 2011

January 2, 2010

January 3, 2009Net sales to unaffiliated customers:United States

$
201,307

$
165,357

$
222,146Germany


155,539


148,500


152,754France


74,897


70,250


86,409China


78,171


56,299


50,971Other


106,711


76,449


98,250Total

$
616,625

$
516,855

$
610,530


Property,
plant and equipment by geographic location were as follows:

(in thousands)

January 1, 2011

January 2, 2010United States

$
133,268

$
117,859Germany


149,340


158,335Thailand


47,977


47,428Other


84,712


64,414Total

$
415,297

$
388,036


74

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Table of Contents

Polypore International, Inc.

Notes to consolidated financial statements (Continued)

23. Quarterly Results of Operations (Unaudited)

(in thousands, except per share data)

First
Quarter

Second
Quarter

Third
Quarter

Fourth
QuarterFiscal year ended January 1, 2011:Net sales

$
145,339

$
150,118

$
151,650

$
169,518Gross profit


58,339


61,138


57,288


70,093Net income


17,548


15,942


12,372


17,713Net income per sharebasic

$
0.39

$
0.36

$
0.28

$
0.40Net income per sharediluted

$
0.38

$
0.34

$
0.27

$
0.38Fiscal year ended January 2, 2010:Net sales

$
108,910

$
118,179

$
137,737

$
152,029Gross profit


43,403


46,578


47,960


57,858Net income (loss)


2,961


4,210


6,461


(130,959
)Net income (loss) per sharebasic

$
0.07

$
0.09

$
0.15

$
(2.95
)Net income (loss) per sharediluted

$
0.07

$
0.09

$
0.14

$
(2.95
)


During
the fourth quarter of 2009, the Company recorded total restructuring charges of $20,568,000 and a goodwill impairment charge of $131,450,000.

24. Financial Statements of Guarantors

The Company's senior notes are unconditionally guaranteed, jointly and severally, on a senior basis by certain of the Company's 100% owned domestic subsidiaries ("Guarantors").
Management has determined that separate complete financial statements of the Guarantors would not be material to users of the financial statements.

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Table of Contents

Polypore International, Inc.

Notes to consolidated financial statements (Continued)

24. Financial Statements of Guarantors (Continued)

The
following sets forth condensed consolidating financial statements of the Guarantors and non-Guarantor subsidiaries.

Condensed consolidating balance sheet  January 1, 2011

(in thousands)

Combined
Guarantor
Subsidiaries

Combined
Non-Guarantor
Subsidiaries

The Company

Eliminations

ConsolidatedAssetsCash and cash equivalents

$


$
58,172

$
31,783

$


$
89,955Accounts receivable, net


45,695


71,021








116,716Inventories


29,571


47,383








76,954Deferred income taxes


2,121


120








2,241Prepaid and other


5,175


9,684


99





14,958Total current assets


82,562


186,380


31,882





300,824Due from affiliates


409,124


270,060


301,211


(980,395
)

Investment in subsidiaries


177,296


302,297


455,914


(935,507
)

Property, plant and equipment, net


174,717


240,580








415,297Goodwill








469,319





469,319Intangibles and loan acquisition costs, net


5





152,551





152,556Other


1,769


8,731








10,500Total assets

$
845,473

$
1,008,048

$
1,410,877

$
(1,915,902
)
$
1,348,496Liabilities and shareholders' equityAccounts payable and accrued liabilities

$
38,286

$
54,555

$
3,843

$


$
96,684Income taxes payable





5,032


230





5,262Current portion of debt





467


3,229





3,696Total current liabilities


38,286


60,054


7,302





105,642Due to affiliates


413,554


214,588


352,253


(980,395
)

Debt, less current portion





44,595


667,041





711,636Pension and postretirement benefits, less current portion


3,544


68,442








71,986Environmental reserve, less current portion


360


2,157








2,517Deferred income taxes and other


25,652


46,782


6,231





78,665Shareholders' equity


364,077


571,430


378,050


(935,507
)

378,050Total liabilities and shareholders' equity

$
845,473

$
1,008,048

$
1,410,877

$
(1,915,902
)
$
1,348,496


76

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Table of Contents

Polypore International, Inc.

Notes to consolidated financial statements (Continued)

24. Financial Statements of Guarantors (Continued)

Condensed consolidating balance sheet
January 2, 2010

(in thousands)

Combined
Guarantor
Subsidiaries

Combined
Non-Guarantor
Subsidiaries

The Company

Eliminations

ConsolidatedAssetsCash and cash equivalents

$


$
45,585

$
69,390

$


$
114,975Accounts receivable, net


40,965


66,157








107,122Inventories


27,094


45,404








72,498Deferred income taxes


2,369


(578
)







1,791Prepaid and other


5,180


10,131


62





15,373Total current assets


75,608


166,699


69,452





311,759Due from affiliates


348,934


326,033


293,841


(968,808
)

Investment in subsidiaries


186,148


308,965


366,661


(861,774
)

Property, plant and equipment, net


133,738


254,298








388,036Goodwill








469,319





469,319Intangibles and loan acquisition costs, net


18





165,953





165,971Other


2,283


15,225








17,508Total assets

$
746,729

$
1,071,220

$
1,365,226

$
(1,830,582
)
$
1,352,593Liabilities and shareholders' equityAccounts payable and accrued liabilities

$
17,547

$
54,754

$
5,104

$


$
77,405Income taxes payable





287


321





608Current portion of debt





501


10,359





10,860Total current liabilities


17,547


55,542


15,784





88,873Due to affiliates


380,397


279,283


309,128


(968,808
)

Debt, less current portion





48,356


744,217





792,573Pension and postretirement benefits, less current portion


3,026


63,243








66,269Environmental reserve, less current portion


1,101


29,311








30,412Deferred income taxes and other


35,630


42,739


11,752





90,121Shareholders' equity


309,028


552,746


284,345


(861,774
)

284,345Total liabilities and shareholders' equity

$
746,729

$
1,071,220

$
1,365,226

$
(1,830,582
)
$
1,352,593


77

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Table of Contents

Polypore International, Inc.

Notes to consolidated financial statements (Continued)

24. Financial Statements of Guarantors (Continued)

Condensed consolidating statement of operations  Year ended January 1, 2011

(in thousands)

Combined
Guarantor
Subsidiaries

Combined
Non-Guarantor
Subsidiaries

The
Company

Eliminations

ConsolidatedNet sales

$
213,491

$
403,134

$


$


$
616,625Cost of goods sold


87,714


282,053








369,767Gross profit


125,777


121,081








246,858Selling, general and administrative expenses


74,493


38,174


2,047





114,714Business restructuring


233


(1,009
)







(776
)Operating income (loss)


51,051


83,916


(2,047
)




132,920Interest expense and other


(8,631
)

7,775


46,256





45,400Gain on sale of Italian subsidiary





(3,327
)







(3,327
)Costs related to purchase of 8.75% senior subordinated notes








2,263





2,263Equity in earnings of subsidiaries








(85,932
)

85,932


Income before income taxes


59,682


79,468


35,366


(85,932
)

88,584Income taxes


35,882


17,336


(28,209
)




25,009Net income

$
23,800

$
62,132

$
63,575

$
(85,932
)
$
63,575


Condensed consolidating statement of operations  Year ended January 2, 2010

(in thousands)

Combined
Guarantor
Subsidiaries

Combined
Non-Guarantor
Subsidiaries

The
Company

Eliminations

ConsolidatedNet sales

$
171,736

$
345,119

$


$


$
516,855Cost of goods sold


79,977


241,079








321,056Gross profit


91,759


104,040








195,799Selling, general and administrative expenses


63,590


34,988


1,833





100,411Business restructuring


20,101


1,223








21,324Goodwill impairment








131,450





131,450Operating income (loss)


8,068


67,829


(133,283
)




(57,386
)Interest expense and other


(4,800
)

7,291


53,902





56,393Equity in earnings of subsidiaries








(43,700
)

43,700


Income (loss) before income taxes


12,868


60,538


(143,485
)

(43,700
)

(113,779
)Income taxes


11,455


18,251


(26,158
)




3,548Net income (loss)

$
1,413

$
42,287

$
(117,327
)
$
(43,700
)
$
(117,327
)


78

---



Table of Contents

Polypore International, Inc.

Notes to consolidated financial statements (Continued)

24. Financial Statements of Guarantors (Continued)

Condensed consolidating statement of operations  Year ended January 3, 2009

(in thousands)

Combined
Guarantor
Subsidiaries

Combined
Non-Guarantor
Subsidiaries

The
Company

Eliminations

ConsolidatedNet sales

$
230,838

$
379,692

$


$


$
610,530Cost of goods sold


115,626


281,584








397,210Business interruption insurance recovery


(2,400
)










(2,400
)Gross profit


117,612


98,108








215,720Selling, general and administrative expenses


69,656


37,637


1,011





108,304Business restructuring





59,887








59,887Operating income (loss)


47,956


584


(1,011
)




47,529Interest expense and other


(4,098
)

11,689


54,439





62,030Gain on sale of synthetic paper business


(3,774
)










(3,774
)Equity in earnings of subsidiaries








(10,275
)

10,275


Income (loss) before income taxes


55,828


(11,105
)

(45,175
)

(10,275
)

(10,727
)Income taxes


28,695


5,753


(27,628
)




6,820Income (loss) from continuing operations

$
27,133

$
(16,858
)
$
(17,547
)
$
(10,275
)
$
(17,547
)


79

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Table of Contents

Polypore International, Inc.

Notes to consolidated financial statements (Continued)

24. Financial Statements of Guarantors (Continued)

Condensed consolidating statement of cash flows  Year ended January 1, 2011

(in thousands)

Combined
Guarantor
Subsidiaries

Combined
Non-Guarantor
Subsidiaries

The
Company

Eliminations

ConsolidatedNet cash provided by (used in) operating activities

$
96,565

$
78,646

$
(52,953
)
$
4,949

$
127,207Investing activities:Purchases of property, plant and equipment, net


(52,679
)

(16,108
)







(68,787
)Payments associated with the stock sale of Italian subsidiary, net





(21,519
)







(21,519
)Net cash used in investing activities


(52,679
)

(37,627
)







(90,306
)Financing activities:Proceeds from issuance of 7.5% senior notes








365,000





365,000Payments for loan acquisition costs








(7,954
)




(7,954
)Purchase of 8.75% senior subordinated notes








(422,549
)




(422,549
)Principal payments on debt





(456
)

(9,561
)




(10,017
)Proceeds from stock option exercises








6,860





6,860Excess tax benefit from stock-based compensation








6,769





6,769Noncontrolling interest








581





581Intercompany transactions, net


(45,100
)

(26,151
)

76,200


(4,949
)

Net cash provided by (used in) financing activities


(45,100
)

(26,607
)

15,346


(4,949
)

(61,310
)Effect of exchange rate changes on cash and cash equivalents


1,214


(1,825
)







(611
)Net increase (decrease) in cash and cash equivalents





12,587


(37,607
)




(25,020
)Cash and cash equivalents at beginning of year





45,585


69,390





114,975Cash and cash equivalents at end of year

$


$
58,172

$
31,783

$


$
89,955


80

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Table of Contents

Polypore International, Inc.

Notes to consolidated financial statements (Continued)

24. Financial Statements of Guarantors (Continued)

Condensed consolidating statement of cash flows  Year ended January 2, 2010

(in thousands)

Combined
Guarantor
Subsidiaries

Combined
Non-Guarantor
Subsidiaries

The
Company

Eliminations

ConsolidatedNet cash provided by (used in) operating activities

$
36,801

$
54,855

$
(27,176
)
$
(11,349
)
$
53,131Investing activities:Purchases of property, plant and equipment, net


(9,382
)

(6,883
)







(16,265
)Net cash used in investing activities


(9,382
)

(6,883
)







(16,265
)Financing activities:Principal payments on debt


(3,319
)

(496
)

(3,226
)




(7,041
)Proceeds from stock option exercises








191





191Noncontrolling interest








(3,600
)




(3,600
)Intercompany transactions, net


(24,474
)

(32,712
)

45,837


11,349


Net cash provided by (used in) financing activities


(27,793
)

(33,208
)

39,202


11,349


(10,450
)Effect of exchange rate changes on cash and cash equivalents


374


5,164








5,538Net increase in cash and cash equivalents





19,928


12,026





31,954Cash and cash equivalents at beginning of year





25,657


57,364





83,021Cash and cash equivalents at end of year

$


$
45,585

$
69,390

$


$
114,975


81

---



Table of Contents

Polypore International, Inc.

Notes to consolidated financial statements (Continued)

24. Financial Statements of Guarantors (Continued)

Condensed consolidating statement of cash flows  Year ended January 3, 2009

(in thousands)

Combined
Guarantor
Subsidiaries

Combined
Non-Guarantor
Subsidiaries

The
Company

Eliminations

ConsolidatedNet cash provided by (used in) operating activities

$
60,565

$
65,313

$
(38,571
)
$
5,884

$
93,191Investing activities:Purchases of property, plant and equipment, net


(23,128
)

(24,885
)







(48,013
)Acquisitions, net of cash acquired








(85,795
)




(85,795
)Proceeds from sale of synthetic paper business


4,000











4,000Net cash used in investing activities


(19,128
)

(24,885
)

(85,795
)




(129,808
)Financing activities:Principal payments on debt


(6,248
)

(10,391
)

(4,031
)




(20,670
)Proceeds from stock option exercises








1,540





1,540Excess tax benefit from stock-based compensation








1,495





1,495Proceeds from issuance of common stock, net of underwriting fees and other offering related costs








84,847





84,847Intercompany transactions, net


(35,663
)

(41,453
)

83,000


(5,884
)

Net cash provided by (used in) financing activities


(41,911
)

(51,844
)

166,851


(5,884
)

67,212Effect of exchange rate changes on cash and cash equivalents


474


(2,982
)







(2,508
)Net increase (decrease) in cash and cash equivalents





(14,398
)

42,485





28,087Cash and cash equivalents at beginning of year





40,055


14,879





54,934Cash and cash equivalents at end of year

$


$
25,657

$
57,364

$


$
83,021


82

---





Table of Contents

Item 9.    Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

None.

Item 9A.    Controls and Procedures

Evaluation of Disclosure Controls and Procedures

An evaluation of the effectiveness of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e)
or 15d-15(e) promulgated under the Exchange Act) was performed under the supervision, and with the participation of, the Company's management, including the Chief Executive Officer and
Chief Financial Officer. The Company's disclosure controls were designed to ensure that information required to be disclosed in reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Based upon our evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures were effective as of January 1, 2011 to ensure that information required to be disclosed in the reports that we file
under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and is accumulated and
communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Management's Annual Report on Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting. Management has conducted
an assessment of the effectiveness of the Company's internal control over financial reporting using the criteria inInternal ControlIntegrated
Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's internal control over financial reporting is designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in
the United States of America. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.

Based
on its assessment, management has concluded that the Company maintained effective internal control over financial reporting as of January 1, 2011, based on criteria in Internal ControlIntegrated
Frameworkissued by the COSO.

The
effectiveness of the Company's internal control over financial reporting as of January 1, 2011 has been audited by Ernst & Young LLP, an independent registered
public accounting firm. Ernst & Young LLP has issued an attestation report to the Company's internal control over financial reporting,
which appears in Item 8 of Part II of this Annual Report on Form 10-K under the heading "Report of Independent Registered Public Accounting Firm."

Changes in Internal Control over Financial Reporting

During the Company's fourth fiscal quarter of fiscal year 2010, there has been no change in the Company's internal control over
financial reporting (as defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Exchange Act) that has materially affected, or is reasonably likely to materially
affect, the Company's internal control over financial reporting.

Item 9B.    Other Information

None.

83

---



Table of Contents

PART III

Item 10.    Directors, Executive Officers and Corporate Governance

The information required by this Item is incorporated by reference from the information contained in our Proxy Statement to be filed
with the Securities and Exchange Commission in connection with our 2011 Annual Meeting of Stockholders to be held on May 12, 2011.

Members
of our Board of Directors and all of our employees, including our Chief Executive Officer and Chief Financial Officer, are required to abide by our Code of Business Conduct and
Ethics to ensure that our business is conducted in a consistently legal and ethical manner. The full text of the Code of Business Conduct and Ethics is published on our website at http://investor.polypore.net/governance.cfm. We will disclose any future amendments to, or waivers from, these ethical policies and standards for senior
officers and directors on our website within four business days following the date of such amendment or waiver.

Item 11.    Executive Compensation

The information required by this Item is incorporated by reference from the information contained in our Proxy Statement to be filed
with the Securities and Exchange Commission in connection with our 2011 Annual Meeting of Stockholders to be held on May 12, 2011.

Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by this Item is incorporated by reference from the information contained in our Proxy Statement to be filed
with the Securities and Exchange Commission in connection with our 2011 Annual Meeting of Stockholders to be held on May 12, 2011.

Item 13.    Certain Relationships and Related Transactions, and Director Independence

The information required by this Item is incorporated by reference from the information contained in our Proxy Statement to be filed
with the Securities and Exchange Commission in connection with our 2011 Annual Meeting of Stockholders to be held on May 12, 2011.

Item 14.    Principal Accountant Fees and Services

The information required by this Item is incorporated by reference from the information contained in our Proxy Statement to be filed
with the Securities and Exchange Commission in connection with our 2011 Annual Meeting of Stockholders to be held on May 12, 2011.

PART IV

Item 15.    Exhibits and Financial Statement Schedules

1.Financial Statements.The following items, including Consolidated Financial Statements of the Company, are
set forth in Item 8 of this Annual Report on Form 10-K:



84

---



Table of Contents



2.Financial Statement Schedules.The following schedule is set forth on page S-1 of this
Annual Report on Form 10-K.



Information
required by other schedules has either been incorporated in the consolidated financial statements and accompanying notes or is not applicable to us.

3.Exhibits.

Exhibit
Number

Exhibit Description3.1

Form of Amended and Restated Certificate of Incorporation of Polypore International, Inc. (incorporated by reference to Exhibit 3.1 to Amendment No. 4 to the Company's Registration Statement on
Form S-1 filed on June 15, 2007 (Commission File No. 333-141273))3.2

Form of Amended and Restated Bylaws of Polypore International, Inc. (incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K, filed on October 29, 2008)3.3

Certificate of Amendment to the Certificate of Incorporation of Polypore International, Inc. (incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K, filed on June 29,
2007)4.1

Registration Rights Agreement, dated as of May 13, 2004, by and among Warburg Pincus Private Equity VIII, L.P., Warburg Pincus International Partners, L.P., PP Holding, LLC, Polypore International,
 Inc. and certain other persons a party thereto (incorporated by reference to Exhibit 10.8 to the Company's Registration Statement on Form S-4 filed on April 18, 2005 (Commission File No. 333-124142))4.2

Indenture, dated as of May 13, 2004, by and among PP Acquisition Corporation (merged with and into Polypore, Inc.), the Guarantors (as defined therein) and The Bank of New York, as Trustee (incorporated by
reference to Exhibit 10.7 to the Company's Registration Statement on Form S-4 filed on April 18, 2005 (Commission File No. 333-124142)) (the "8.75% Indenture")4.3

Form of 8.75% Senior Subordinated Dollar Notes due 2012 (incorporated by reference to Exhibit C of the 8.75% Indenture)4.4

Form of 8.75% Senior Subordinated Euro Notes due 2012 (incorporated by reference to Exhibit D of the 8.75% Indenture)4.5

Second Supplemental Indenture, dated as of July 31, 2007, between Polypore International, Inc., the Guarantors (as defined therein) and The Bank of New York (incorporated by reference to Exhibit 10.1 to
the Company's Current Report on Form 8-K, filed on August 3, 2007)


85

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Table of Contents

Exhibit
Number

Exhibit Description4.6

Supplemental Indenture, dated as of November 30, 2010, among Polypore International, Inc., the guarantors named therein and the Bank of New York Mellon, as trustee (incorporated by reference to Exhibit 4.3
to the Company's Current Report on Form 8-K, filed on December 2, 2010)4.7

Indenture, dated as of November 26, 2010 among Polypore International, Inc., the guarantors named therein and The Bank of New York Mellon, as trustee (incorporated by reference to Exhibit 4.1 to the
Company's Current Report on Form 8-K, filed on December 2, 2010) (the "7.5% Indenture")4.8

Form of 7.5% Senior Notes due 2017 (incorporated by reference to Exhibit B of the 7.5% Indenture)4.9

Registration Rights Agreement, dated as of November 26, 2010, among Polypore International, Inc., the guarantors named therein and J.P. Morgan Securities LLC for itself and on behalf of several
purchasers listed therein (incorporated by reference to Exhibit 4.2 to the Company's Current Report on Form 8-K, filed on December 2, 2010)10.1

Stock Purchase Agreement, dated as of January 30, 2004, by and among Polypore, Inc., PP Acquisition Corporation and the stockholders of Polypore, Inc. (incorporated by reference to Exhibit 10.1 to
the Company's Registration Statement on Form S-4 filed on April 18, 2005 (Commission File No. 333-124142))10.2

Guarantee and Collateral Agreement, dated as of May 13, 2004, by and among PP Holding Corporation, PP Acquisition Corporation and the subsidiaries of PP Acquisition Corporation identified therein (incorporated by
reference to Exhibit 10.4 to the Company's Registration Statement on Form S-4 filed on April 18, 2005 (Commission File No. 333-124142))10.3

Tax Sharing Agreement, dated as of May 13, 2004, by and among Polypore International, Inc., PP Holding Corporation and Polypore, Inc. (incorporated by reference to Exhibit 10.5 to the Company's
Registration Statement on Form S-4 filed on April 18, 2005 (Commission File No. 333-124142))10.4

Stockholders' Agreement, dated as of May 13, 2004, by and among Warburg Pincus Private Equity VIII, L.P., Warburg Pincus International Partners, L.P., PP Holding, LLC and Polypore International,
 Inc. (incorporated by reference to Exhibit 10.6 to the Company's Registration Statement on Form S-4 filed on April 18, 2005 (Commission File No. 333-124142))10.5
*
Polypore International, Inc. 2004 Stock Option Plan (incorporated by reference to Exhibit 10.9 to the Company's Registration Statement on Form S-4 filed on April 18, 2005 (Commission File
No. 333-124142))10.6
*
Form of Director and Officer Indemnification Agreement entered into between Polypore, Inc. and certain employees of Polypore, Inc. (incorporated by reference to Exhibit 10.12 to the Company's
Registration Statement on Form S-4 filed on April 18, 2005 (Commission File No. 333-124142))10.7
*
Amended and Restated Employment Agreement, dated as of April 28, 2008, by and between Polypore International, Inc. and Robert B. Toth (incorporated by reference to Exhibit 10.1 to the Company's Current
Report on Form 8-K, filed on May 1, 2008)10.8
*
Amendment to Employment Agreement, dated as of December 18, 2008, by and between Polypore International, Inc. and Robert B. Toth (incorporated by reference to Exhibit 10.8 to the company's Annual Report
on Form 10-K filed on March 12, 2009)


86

---



Table of Contents

Exhibit
Number

Exhibit Description10.9
*
Employment Agreement, dated as of April 7, 2006, by and between Polypore, Inc. and Mitchell J. Pulwer (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q filed on
August 15, 2006)10.10
*
Amended Employment Agreement, dated as of December 18, 2008, by and between Polypore International, Inc. and Mitchell J. Pulwer (incorporated by reference to Exhibit 10.10 to the company's Annual Report
on Form 10-K filed on March 12, 2009)10.11
*
Employment Agreement, dated as of April 4, 2006, by and between Membrana GmbH, a subsidiary of Polypore, Inc. and Josef Sauer (incorporated by reference to Exhibit 10.3 to the Company's Quarterly
Report on Form 10-Q filed on August 15, 2006)10.12
*
Polypore International, Inc. 2006 Stock Option Plan (incorporated by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q filed on August 15, 2006)10.13
*
Form of Executive Severance Plan Policy (incorporated by reference to Exhibit 10.13 to the company's Annual Report on Form 10-K filed on March 12, 2009)10.14
*
Polypore International, Inc. 2007 Stock Incentive Plan (incorporated by reference to Exhibit 4.2 to the Company's Registration Statement on Form S-8, filed on July 25, 2007 (Commission File
No. 333-144846))10.15

Form of Restricted Stock Grant Notice and Agreement under the Polypore International, Inc. 2007 Stock Incentive Plan (incorporated by reference to Exhibit 99.1 to the Company's Registration Statement on
Form S-8 filed on July 25, 2007 (Commission File No. 333-144846))10.16

Form of Option Grant Notice and Agreement under the Polypore International, Inc. 2007 Stock Incentive Plan (incorporated by reference to Exhibit 99.2 to the Company's Registration Statement on Form S-8
filed on July 25, 2007 (Commission File No. 333-144846))10.17

Amended and Restated Credit Agreement, dated as of July 3, 2007, among PP Holding Corporation, Polypore, Inc., Daramic Holding S.A.S., JPMorgan Chase Bank, N.A., as Administrative Agent, and the other
agents and lenders named therein (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K, filed on July 10, 2007)10.18

First Amendment and Reaffirmation Agreement, dated as of July 3, 2007, among PP Holding Corporation, Polypore, Inc., all of Polypore, Inc.'s domestic restricted subsidiaries and J.P. Morgan Chase Bank,
N.A., as Administrative Agent (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K, filed on July 10, 2007)10.19

Underwriting Agreement, dated as of December 7, 2010, among certain stockholders of Polypore International, Inc. and Barclays Capital Inc. (incorporated by reference to Exhibit 1.1 to the Company's
Current Report on Form 8-K, filed on December 13, 2010)21.1

Subsidiaries of Polypore International, Inc.23.1

Consent of Independent Registered Public Accounting Firm31.1

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002


87

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Table of Contents

Exhibit
Number

Exhibit Description32.1

Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2

Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


*Management
contract or compensatory plan or arrangement


88

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Table of Contents

Signatures

Pursuant to the requirements of Section 13 or 15(d) 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.

POLYPORE INTERNATIONAL, INC.By:

/s/ ROBERT B. TOTH Robert B. Toth President and Chief Executive Officer


Date:
February 25, 2011

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

/s/ ROBERT B. TOTH Robert B. Toth

President, Chief Executive Officer and Director (Principal Executive Officer)

February 25, 2011/s/ LYNN AMOS Lynn Amos

Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

February 25, 2011/s/ MICHAEL GRAFF Michael Graff

Chairman of the Board

February 25, 2011/s/ DAVID BARR David Barr

Director

February 25, 2011/s/ CHARLES L. COONEY Charles L. Cooney

Director

February 25, 2011/s/ WILLIAM DRIES William Dries

Director

February 25, 2011/s/ FREDERICK C. FLYNN, JR. Frederick C. Flynn, Jr.

Director

February 25, 2011/s/ W. NICHOLAS HOWLEY W. Nicholas Howley

Director

February 25, 2011/s/ KEVIN KRUSE Kevin Kruse

Director

February 25, 2011


89

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Table of Contents

Schedule II

Polypore International, Inc.  Financial statement scheduleValuation and qualifying accounts

For the years ended January 1, 2011, January 2, 2010 and January 3, 2009:

Additions(in thousands)

Balance at
beginning
of year

Charged to
costs and
expenses

Charged to
other
accounts

Deductions

Balance at
end
of yearYear ended January 1, 2011:Allowance for doubtful accounts

$
7,179

$
750

$
(995
)(1)
$
(4,413
)(2)
$
2,521Valuation allowance of deferred tax asset


16,826


1,140





(9,353
)(3)

8,613$
24,005

$
1,890

$
(995
)
$
(13,766
)
$
11,134Year ended January 2, 2010:Allowance for doubtful accounts

$
7,742

$
237

$
198
(1)
$
(998
)(2)
$
7,179Valuation allowance of deferred tax asset


15,423


829


574
(3)




16,826$
23,165

$
1,066

$
772

$
(998
)
$
24,005Year ended January 3, 2009:Allowance for doubtful accounts

$
8,812

$
(152
)
$
(302
)(1)
$
(616
)(2)
$
7,742Valuation allowance of deferred tax asset


6,050


9,866





(493
)(3)

15,423$
14,862

$
9,714

$
(302
)
$
(1,109
)
$
23,165


(1)Foreign
currency translation adjustment.(2)Charge-offs
net of recoveries.(3)Valuation
allowance related to temporary differences not impacting Consolidated Statement of Operations.


S-1

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