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 3, 2009o

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 350
Charlotte, North Carolina(Address of Principal Executive Offices)

28277(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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K 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 of the registrant at June 28, 2008 was
$517,598,000, 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 44,377,560 shares of the registrant's common stock outstanding as of March 6, 2009.

DOCUMENTS INCORPORATED BY REFERENCE

Portions
of the registrant's definitive proxy statement for the 2008 Annual Meeting of Stockholders, which will be filed within 120 days of January 3, 2009, 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 3, 2009

PagePart IItem 1.

Business

5Item 1A.

Risk Factors

16Item 1B.

Unresolved Staff Comments

23Item 2.

Properties

23Item 3.

Legal Proceedings

23Item 4.

Submission of Matters to a Vote of Security Holders

24Part IIItem 5.

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

24Item 6.

Selected Financial Data

26Item 7.

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

28Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

45Item 8.

Financial Statements and Supplementary Data

47Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

93Item 9A.

Controls and Procedures

93Item 9B.

Other Information

93Part IIIItem 10.

Directors, Executive Officers and Corporate Governance

94Item 11.

Executive Compensation

94Item 12.

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

94Item 13.

Certain Relationships and Related Transactions, and Director Independence

94Item 14.

Principal Accountant Fees and Services

94Part IVItem 15.

Exhibits and Financial Statement Schedules

94Signatures

98


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 year
ended January 3, 2009, or "fiscal 2008," included 53 weeks. The fiscal years ended December 29, 2007, or "fiscal 2007," and December 30, 2006, or "fiscal 2006," each
included 52 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," or the Company's financial statements or the notes thereto.

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.

We
have filed this Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and will file or
furnish other reports pursuant to Section 13(a) or 15(d) under the Exchange Act, with the Securities and Exchange Commission ("Commission" or "SEC"). You may inspect a copy of any of our
filings without charge at the Public Reference Room of the SEC at 100 F Street, NE, Washington, DC 20549. You may obtain copies of our filings from such office at prescribed rates. You may also
obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site at http://www.sec.gov that
contains reports, proxy and information statements and other information regarding issuers, including Polypore International, Inc., that file electronically with the SEC. Our reports are
available on the SEC website as soon as reasonably practicable after we electronically file such materials with the SEC. The reports are also available in print to any stockholder who requests
them by contacting our corporate secretary at the Company's principal executive offices: 11430 North Community House Road, Suite 350, Charlotte, NC 28277. Our website address is http://www.polypore.net.

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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 74% of our fiscal 2008 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 and mobile phones to cordless power tools, and are emerging in applications such as electric and hybrid electric vehicles ("HEVs"). Lead-acid
batteries are used in transportation and industrial applications. The separations media segment accounted for approximately 26% of our fiscal 2008 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 20Segment Information" in the Notes to Consolidated Financial Statements for the year
ended January 3, 2009 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 83% of our fiscal 2008 net sales. These products include lead-acid battery membrane separators, lithium battery membrane separators, blood oxygenation membranes,
membrane contactors for gasification/degasification of liquids and plasmapheresis membranes.



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. Our research and development effort is supported by approximately 75 engineers, scientists, PhDs and other personnel. These personnel work closely 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 applications such as semiconductor and flat panel display manufacturing. 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 teams, technical service staff and application development groups work closely with our customers. We often enter into joint agreements in which we
partner with our customers on product development and

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end-use
testing. 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 3, 2009, 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 membrane 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. 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 a 60% share in a
lead-acid battery membrane separator production facility in Tianjin, China in 2007 and acquiring a finishing operation in Bangalore, India in 2008.

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 and cameras. Also cordless
power tools and hybrid/electric vehicles, such as bikes, scooters, cars, trucks, buses and industrial utility vehiclesSeparations 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 proceduresPlasmapheresis

MicroPES®
PLASMAPHAN®

Blood cell and plasma separation equipmentIndustrial and specialty filtration applications

Liqui-Flux®

Potable water treatment, beverage filtration, and prefiltration for reverse osmosisAccurel®

Specialty filtration applications including chemical filtration for microelectronics manufacturing, vent and process air,
industrial wastewater treatment, and pharmaceutical processingLiqui-Cel®

Liquid gasification/degasification for beverage processing and pharmaceutical, semiconductor and flat panel display
manufacturingMicroPES®
DuraPES®

Specialty filtration applications including ultrapure water, cold sterile filtration of beverages and pharmaceutical
processingSuperPhobic®

Solvent/ink deaeration for ink jet printers and semiconductor manufacturingMicroModule®
MiniModule®

Liquid degasification in laboratory, biotechnology and analytical testing equipment, ink degasification for ink jet
printersP.E.T.®

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




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

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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. During fiscal 2008, fiscal 2007 and fiscal 2006, our energy storage businesses
accounted for 74%, 71% and 71% of our net sales, 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 personal electronic devices, cordless power tools and HEVs and other electric vehicles. According to the
Institute of Information Technology, unit sales of lithium batteries are expected to experience average annual growth of 10% through 2013. 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 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 one of the top three lithium battery membrane 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 over 80% of the membrane separator requirements for
the global lithium battery market. Major lithium battery manufacturers include A123 Systems, Amperex Technology Limited, BYD Company Limited, China BAK Battery, Inc., Energizer
Holdings, Inc., Hitachi Maxell Limited, LG Chem Ltd., NEC Tokin Corporation, Panasonic CorporationEnergy Company (formerly known as Matsushita Battery Industrial Company
Limited), Saft Groupe SA, Samsung SDI Co. Ltd., Sanyo Electric Company Limited, 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, which provide backup power for applications such as computers,
mobile phone towers and hospitals. 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 20 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. Currently, membrane separator market growth is strongest in the Asia Pacific region due, we believe, to increasing per capita
penetration of automobiles, growth in the industrial and manufacturing sectors, and a high rate of conversion to polyethylene-based membrane separators.

We
believe, based on published industry data, we are the global market leader in the lead-acid battery separator market and the only supplier serving both the automotive and
industrial segments. We supply most of the world's major lead-acid battery manufacturers including East Penn Manufacturing Co., Inc., EnerSys, Exide Technologies, GS Yuasa
Corporation 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
industrial and specialty filtration 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. During fiscal 2008, fiscal 2007 and
fiscal 2006, our separations media business accounted for 26%, 29% and 29% of our sales, 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%.

In
2006, we ceased production of cellulosic membranes and focused on growing our new PUREMA® synthetic membrane. We believe that PUREMA® is superior in
performance compared to all 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 (i.e., not a supplier of dialyzers) of synthetic
hemodialysis membranes. Major dialyzer manufacturers include Asahi Kasei Kuraray Medical Co., Ltd., Bellco S.r.l., Fresenius Medical Care AG, Gambro AG 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

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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 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.

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 AG and Sorin Group Italia S.r.l.

Industrial and specialty filtration applications.

We produce a wide range of membranes and membrane-based elements for micro- and ultrafiltration and gasification/degasification of
liquids, covering a broad range of applications in the filtration market. According to Frost & Sullivan, the U.S. micro- and ultrafiltration
membrane element market is approximately $1.3 billion and growing in excess of 8% annually. 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. 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 and
independent industry research, 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 $18.2 million (3% of our net sales), $16.0 million (3% of our net sales)
and $13.1 million (3% of our net sales) in fiscal 2008, fiscal 2007 and fiscal 2006, 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; and Charlotte, North
Carolina. 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 76 experienced people 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 and can last up to ten years. 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 2008, net sales to our top five customers represented approximately 36% of our total net sales. Exide Technologies represented approximately 14% of our net sales in fiscal
2008.

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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, 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 facility in Charlotte,
North Carolina, and have a finishing operation at our facility in Shanghai, China. In May 2008, we acquired a facility in South Korea that is scheduled to begin production of lithium battery
separators in fiscal 2009 after we complete improvements to their manufacturing processes and products. We manufacture our healthcare membranes and industrial and specialty filtration membranes and
membrane modules at facilities in Wuppertal and Obernberg, Germany and Charlotte, North Carolina.

In
fiscal 2008, fiscal 2007 and fiscal 2006, we generated sales from customers outside the United States of approximately 77%, 83%, and 81%, 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 38% of total sales for fiscal 2008, with facilities in Europe accounting for 48% and facilities in Asia accounting for 14%.
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.

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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 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. Although we use different equipment for the flat sheet and fiber products, the operating
conditions of temperature, stress, and line speed are similar for both. 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, 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, Taiwan and North America. We also compete with Asahi Kasei Chemicals
Corporation, Tonen Chemical Corporation (a subsidiary of ExxonMobil) and Ube Industries Limited 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 AG 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. Also within our separations media segment, 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, paper, 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).

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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 manufacturers 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.

Employees

At January 3, 2009, we had approximately 1,900 employees worldwide. Employees at six of our 14 facilities are unionized and
account for approximately 40% of our total employees. The following summarizes those employees represented by unions as of January 3, 2009:

Location

Number of
unionized
employees

% of
total

Date of contract
renegotiationCorydon, Indiana


85


78

January 2010Obernberg, Germany


19


76

AnnualOwensboro, Kentucky


131


74

April 2012Selestat, France


138


77

June 2010Wuppertal, Germany


346


87

AnnualNorderstedt, Germany


47


84

AnnualTotal


766


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. For more information, see "Item 3. Legal Proceedings" below.

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 and
Potenza, Italy facilities. The Italian facility was closed in 2008 in connection with a restructuring. We have established reserves for environmental liabilities of $49.2 million as of
January 3, 2009. However, 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. 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 3, 2009 was $17.9 million. To date we have
not had any significant disagreement with Akzo Nobel N.V. over its environmental indemnity obligations to us.

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Intellectual property rights

We consider our patents and trademarks, in the aggregate, to be important to our business and seek to protect this proprietary
know-how in part through United States and foreign patent and trademark registrations. 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 127 patents and patent applications relating to our membrane and module technologies. The term of each of our U.S.
patents depends on when the patent application was filed. A patent will expire either 20 years from the date the application was filed, or 17 years from the date of issuance.

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 company policies
require our employees to assign their intellectual property rights to us and to treat all 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 facilities.

If
we fail to adequately protect our intellectual property rights, competitors may manufacture and market products similar to ours. 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. See "Item 1A. Risk factorsRisks relating to our
businessif we are unable to adequately protect our intellectual property, we could lose a significant competitive advantage."

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 year after year.

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 would
likely further increase competition between us and other producers of membranes. This increased competition could cause us to reduce our prices, which could lower our profit margins and impair our
ability to grow our business year after year.

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

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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. For example, one of our customers, Exide
Technologies, represented approximately 14% of our net sales in fiscal 2008. As a result, a decrease in business from, or the loss of, large volume customers such as Exide could impact our sales and
our profits.

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 their
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, paper
and oil. In fiscal 2008, 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 3, 2009, our consolidated indebtedness, including our
capital lease obligation, is $803.3 million. For fiscal 2008, our interest expense was $60.7 million.

Our
substantial level of indebtedness, as well as any additional borrowings we may make under the unused portions of the senior secured credit facilities, 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.

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

At January 3, 2009, we had variable rate debt of $366.1 million. In January 2008, we entered into two interest rate swap
agreements with notional principal amounts totaling $250.0 million. The swap agreement with a notional amount of $50.0 million effectively fixes the interest rate on that amount of debt
at 5.58% and expires on June 30, 2009. The swap agreement with a notional amount of $200.0 million effectively fixes the interest rate on that amount of debt at 5.54% and expires on

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December 31,
2009. 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.

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 facilities 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 83/4%
senior subordinated notes and the credit agreement for the senior secured credit facilities may restrict us from adopting any of these alternatives.

The terms of the senior secured credit facilities and the indenture related to the 83/4% senior subordinated 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 facilities and the indenture related to the 83/4% senior subordinated 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 facilities include
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 83/4% senior subordinated notes, and other material agreements. The senior secured credit facilities also include
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 83/4% senior subordinated 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 facilities or the 83/4%
senior subordinated notes. If any such default occurs, the lenders and the holders of the 83/4% senior subordinated 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 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 83/4%
senior subordinated notes, we will be unable to access the capital and other resources necessary to operate our business, and we could incur immediate and significant losses.

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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 40% 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. The collective bargaining agreement covering the workers at the Corydon, Indiana facility
expires in January 2010.

We
may not be able to maintain constructive relationships with these labor unions. We may not be able to successfully negotiate new collective bargaining agreements on satisfactory terms
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.

Our manufacturing facilities in North America accounted for 38% of total net sales for fiscal 2008, with facilities in Europe
accounting for 48% and facilities in Asia accounting for 14%. 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 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.

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

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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.

Even
though we have filed patent applications, we may not be granted patents for those applications. 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

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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.

In 2008, we completed three acquisitions and we may enter into acquisitions in the future. Acquisitions involve risks that the
businesses acquired will not perform in accordance with expectations and 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 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.

Our restructuring activities could have an adverse impact on our financial condition.

In response to the loss of a customer, in 2008 we implemented a restructuring plan in 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 initial plan includes 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 separator business.
The total estimated cost of the plan is expected to be approximately $61.7 million, including cash charges of $32.8 million for severance, environmental, and other exit costs and a
non-cash impairment charge of $28.9 million. We began implementing the restructuring plan during the fourth quarter and recorded a restructuring charge of $59.9 million.

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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 is expected to be approximately $33.8 million, consisting of a $17.5 million non-cash impairment charge for buildings and equipment, $10.5 million for employee
layoffs and $5.8 million for other costs related to the shutdown of portions of the Wuppertal facility. The other costs included in the restructuring plan are related to local regulations
surrounding complete or partial shutdowns of a facility.

The
timing, scope and costs of any restructuring plans are subject to change. As a result, our restructuring activities could disrupt our business and have an adverse impact on our
financial condition.

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

Our net identifiable intangible assets at January 3, 2009 were approximately 12% 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 40% of our total assets at January 3, 2009. Goodwill and identifiable intangible assets are recorded at fair value on the date of acquisition and, under FASB Statement
No. 142,Goodwill and Other Intangible Assets, 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.

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. Proceedings will be held before an Administrative Law Judge of the FTC with an initial
hearing currently scheduled to begin on May 12, 2009. The timing of a final resolution of this matter is uncertain.

It
is not possible to predict with certainty whether we will be successful in this legal proceeding and the impact of its resolution. If the FTC and the courts were to reach a conclusion
adverse to us, the FTC could seek remedies including divestiture of some or all of the assets acquired in the Microporous acquisition.

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 is 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 such as avian influenza or severe acute respiratory syndrome, 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.

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The economic uncertainty and current crisis in global credit and financial markets could materially and adversely affect our business and results of operations.

As
has been widely reported, global credit and financial markets have been experiencing extreme disruptions in recent months, including severely diminished liquidity and credit
availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates, and uncertainty about economic stability. There can be no assurance that there will not be
further deterioration in credit and financial markets and confidence in economic conditions. These economic uncertainties affect our business in a number of ways, making it difficult to accurately
forecast and plan our future business activities. The current tightening of credit in financial markets and the general economic downturn has led consumers and businesses to postpone spending, which
has caused our customers to delay orders with us. In addition, financial difficulties experienced by our suppliers or distributors could result in product delays, increased accounts receivable
defaults and challenges associated with inventory management. We are unable to predict the likely duration and severity of the current disruptions in the credit and financial markets and adverse
global economic conditions, and if the current uncertain economic conditions continue or further deteriorate, our business and results of operations could be materially and adversely affected.

Item 1B.    Unresolved Staff Comments

None.

Item 2.    Properties

Our corporate headquarters are located in leased office space in Charlotte, North Carolina. Our manufacturing facilities are
strategically located to serve our customers globally:

Location(1)

Floor area
(sq. ft.)

Business segment

CertificationOwensboro, Kentucky(2)


277,000

Energy Storage

ISO 14001, ISO 9001Corydon, Indiana(2)


161,000

Energy Storage

ISO 14001, ISO 9001Piney Flats, Tennessee(2)


121,000

Energy Storage

ISO 9001Selestat, France


113,000

Energy Storage

ISO 14001, ISO 9001Norderstedt, Germany


124,000

Energy Storage

ISO 14001, ISO 9001Potenza, Italy(4)


143,000

Energy Storage

ISO 14001, ISO 9001Feistritz, Austria


52,000

Energy Storage

Prachinburi, Thailand


166,000

Energy Storage

ISO 14001, ISO 9001Tianjin, China(5)


47,000

Energy Storage

ISO 9001Shanghai, China(3)


40,000

Energy Storage

ISO 14001, ISO 9001Bangalore, India(3)


10,000

Energy Storage

ISO 14001, ISO 9001Ochang, South Korea


105,000

Energy Storage

Charlotte, North Carolina(2)


249,000

Energy Storage and Separations Media

ISO 14001, ISO 9001Wuppertal, Germany


1,503,000

Separations Media

ISO 14001, ISO 9001Obernberg, Germany(3)


23,000

Separations Media

ISO 9001


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Item 3.    Legal Proceedings

On March 20, 2008 we received a letter from the Federal Trade Commission (the "FTC") requesting that the Company voluntarily
provide certain documents and information to the FTC

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regarding
our acquisition of Microporous, which was completed on February 29, 2008. The letter stated that the FTC was conducting an investigation to determine whether the Microporous
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 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. Proceedings will
be held before an Administrative Law Judge of the FTC with an initial hearing currently scheduled to begin on May 12, 2009. The timing of a final resolution of this matter is uncertain.

We
believe that the complaint is unfounded and that the Microporous acquisition is and will continue to be beneficial to our customers and the industry. Therefore, we intend to
vigorously defend this action by the FTC. It is not possible, however, to predict with certainty whether we will be successful in the litigation or through a judicial appellate process. If the FTC and
the courts were to reach a conclusion adverse to us, the FTC could seek remedies including divestiture of some or all of the assets acquired in the Microporous acquisition. We believe that a final
judicial resolution to the challenge by the FTC to the Microporous acquisition could take several 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.

Item 4.    Submission of Matters to a Vote of Security Holders

None.

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 47.8% of our common stock. As of February 6, 2009, there were approximately 4,750 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 2008, and we do not expect to pay any such dividends in 2009. The indenture relating to our 83/4%
senior subordinated notes and our senior secured credit facility restrict or limit our ability to, among other things, declare dividends, 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 after our initial public offering on June 28, 2007 were as follows:

Fiscal 2008

Fiscal 2007First Quarter

$15.01$22.33

N/ASecond Quarter

$19.90$27.24

N/AThird Quarter

$17.27$29.26

$12.15$19.14Fourth Quarter

$3.59$23.67

$13.67$18.60


24

---



The
following table summarizes information about the options under our equity compensation plans as of January 3, 2009.

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)


2,136,979

$
7.05


1,395,471


---

A
description of the equity compensation plans described above appears under "Note 18Stock-Based Compensation Plans" in the Notes to the Consolidated
Financial Statements for the year ended January 3, 2009 included in Item 8 of this Report.

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

Jun-07

Jul-07

Aug-07

Sep-07

Oct-07

Nov-07

Dec-07

Jan-08

Feb-08

Mar-08

Apr-08

May-08

Jun-08

Jul-08

Aug-08

Sep-08

Oct-08

Nov-08

Dec-08Polypore International Inc


100.00


97.45


102.05


79.03


77.98


95.17


96.56


97.06


103.00


99.67


114.75


129.84


131.45


140.49


145.04


152.14


119.30


47.31


25.01


41.93Russell 2000


100.00


98.54


91.80


93.88


95.49


98.23


91.18


91.12


84.91


81.76


82.10


85.54


89.47


82.58


85.64


88.73


81.66


64.67


57.02


60.33S&P Industrial Machinery


100.00


102.11


100.20


103.42


107.42


105.19


104.15


103.17


91.35


90.67


91.03


99.33


104.01


94.26


91.54


93.58


79.28


60.21


58.69


61.86


25

---



Item 6.  Selected Financial Data

The following table presents selected historical consolidated financial data of Polypore International for the years ended
January 3, 2009, December 29, 2007, December 30, 2006 and December 31, 2005 (Successor), the period from May 2, 2004 through January 1, 2005 (Successor) and
the period from January 4, 2004 through May 1, 2004 (Predecessor). The selected historical consolidated financial data has been derived from Polypore International's audited consolidated
financial statements.

On
May 13, 2004, Polypore International, Inc. acquired 100% of the outstanding common stock of PP Holding Corporation and its wholly-owned subsidiary, PP Acquisition
Corporation. On May 13, 2004, Polypore, Inc. and its shareholders consummated a stock purchase agreement with PP Acquisition Corporation, our indirect, wholly-owned subsidiary, pursuant
to which PP Acquisition Corporation purchased all of the outstanding shares of Polypore, Inc.'s capital stock. At the time of the closing of the acquisition, PP Acquisition merged with and into
Polypore, Inc. with Polypore, Inc. as the surviving corporation.

26

---





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."

Successor

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

Fiscal
2008

Fiscal
2007

Fiscal
2006

Fiscal
2005

Period from
May 2, 2004
to
January 1,
2005

Period from
January 4,
2004
to
May 1, 2004Net sales

$
610.5

$
534.7

$
478.2

$
431.1

$
311.1

$
179.3Gross profit


215.7


197.0


164.9


150.5


85.2


69.1Selling, general and administrative expenses


108.3


93.6


87.5


75.1


50.2


24.9Business restructuring


59.9


(0.9
)

37.0


8.7


13.9


Change in accounting principle related to postemployment benefits








(2.6
)







In process research and development














5.3


Other

















(1.5
)Operating income


47.5


104.3


43.0


66.7


15.8


45.7Interest expense, net


60.7


81.0


92.3


82.0


42.1


6.0Costs related to purchase of 10.50% senior discount notes





30.1











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





7.2











Foreign currency and other


(2.5
)

1.6


3.2


(4.5
)

1.7


0.5Unrealized gain on derivative instrument

















(1.3
)Income (loss) from continuing operations before income taxes


(10.7
)

(15.6
)

(52.5
)

(10.8
)

(28.0
)

40.5Income taxes


6.8


(16.0
)

(22.9
)

(8.3
)

(8.7
)

13.7Income (loss) from continuing operations


(17.5
)

0.4


(29.6
)

(2.5
)

(19.3
)

26.8Income (loss) from discontinued operations, net of income taxes


2.3


0.1


(0.2
)

(0.4
)




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


(15.2
)

0.5


(29.8
)

(2.9
)

(19.3
)

26.8Cumulative effect of change in accounting principle, net of income taxes








0.2








Net income (loss)


(15.2
)

0.5


(29.6
)

(2.9
)

(19.3
)

26.8Redeemable preferred stock dividends

















(0.4
)Net income (loss) applicable to common stock

$
(15.2
)
$
0.5

$
(29.6
)
$
(2.9
)
$
(19.3
)
$
26.4Cash dividends declared per common share

$


$


$


$


$
1.87

$
Net income (loss) per common share basic and diluted:(1)(2)Continuing operations

$
(0.41
)
$
0.02

$
(1.17
)
$
(0.10
)
$
(0.76
)
$
170.29Discontinued operations


0.06





(0.01
)

(0.02
)




Cumulative effect of change in accounting principle, net of income taxes








0.01








Net income (loss) per share

$
(0.36
)
$
0.02

$
(1.17
)
$
(0.12
)
$
(0.76
)
$
170.29Weighted average shares outstanding:Basic(1)(2)


42,777,531


32,942,214


25,313,130


25,271,252


25,250,613


155,086Diluted(1)(2)


42,777,531


33,237,230


25,313,130


25,271,252


25,250,613


155,086


---

27

---



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

Fiscal
2008

Fiscal
2007

Fiscal
2006

Fiscal
2005

Fiscal
2004Total assets

$
1,498.9

$
1,429.0

$
1,389.9

$
1,364.6

$
1,490.8Total debt and capital lease obligations, including current portion


803.3


822.8


1,048.9


1,002.8


1,065.3Shareholders' equity


392.9


335.3


69.7


93.3


105.9




Successor

PredecessorOther financial data
(in millions):

Fiscal
2008

Fiscal
2007

Fiscal
2006

Fiscal
2005

Period from
May 2, 2004
to January 1,
2005

Period from
January 4,
2004 to May 1,
2004Depreciation and amortization

$
55.1

$
48.9

$
60.2

$
54.1

$
33.7

$
15.2Capital expenditures


48.0


29.8


24.0


13.0


9.9


5.5Net cash provided by (used in):Operating activities


94.7


69.3


50.0


64.2


21.0


28.9Investing activities


(129.8
)

(35.3
)

(23.9
)

(13.0
)

(877.2
)

(3.6
)Financing activities


65.7


(40.4
)

(3.0
)

(52.8
)

849.8


(7.4
)


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 included elsewhere in this report.
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 the "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.

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 2008, we generated total net sales of $610.5 million. We operate in two business segments: (i) the energy storage segment, which
accounted for approximately 74% of our fiscal 2008 net sales; and (ii) the separations media segment, which accounted for approximately 26% of our fiscal 2008 net sales. We manufacture our
products at facilities in North America, Europe and Asia. Net sales from foreign locations were $388.4 million for fiscal 2008.



In the energy storage segment, our membrane separators are a critical performance component in lithium batteries, which are primarily
used in consumer electronic applications, and lead-acid batteries, which are used globally in transportation and
industrial applications. Although the short-term economic outlook is uncertain, especially for the more economically sensitive consumer electronics portion of our business, we believe that
the energy storage segment will continue to benefit from continued growth in demand by consumers for mobile power.

Lithium
batteries are the power source in a wide variety of electronics applications ranging from notebook computers and mobile phones to cordless power tools. In addition, many new and
developing applications such as electric and hybrid electric vehicles incorporate large-format batteries that will require much greater membrane separator volume per battery. As a result, we believe
that membrane separator growth will exceed battery unit sales growth. In the third quarter of 2008, we completed a

28

---



lithium
battery separator capacity expansion at our Charlotte, North Carolina facility and in the fourth quarter of 2008, began ramping up production.

In
May 2008, we acquired Yurie-Wide Corporation, a South Korean company, which we subsequently renamed Celgard Korea, Inc. ("Celgard Korea"). The acquisition broadens
our participation in the lithium battery separator market, adds to our membrane technology portfolio and product breadth and adds cost-effective production capacity. After the acquisition,
we discontinued Celgard Korea sales and made significant operational changes to align Celgard Korea's operations with our global standards. Celgard Korea will not generate any revenues until their
manufacturing processes and products meet our higher quality standards, which we expect to occur during 2009.

In
the motor vehicle battery market, the high proportion of aftermarket sales and the steady growth of the worldwide fleet of motor vehicles provide us with a growing, recurring revenue
base in lead-acid battery membrane separators. We believe we will also benefit from the worldwide conversion of alternative separator materials to the higher-performance polyethylene-based
membrane separators such as those we produce. Growth is strongest in the Asia-Pacific region as a result of increasing per capita penetration of automobiles, growth in the industrial and
manufacturing sectors, and a high rate of conversion to polyethylene-based membrane separators. We have positioned ourselves to benefit from this growth by expanding capacity at our Prachinburi,
Thailand facility, acquiring a production facility in Tianjin, China and establishing an Asian Technical Center in Thailand.

In
February 2008, we purchased 100% of the stock of Microporous Holding Corporation, the parent company of Microporous Products L.P. ("Microporous"). The acquisition of
Microporous adds rubber-based battery separator technology to our product line. This acquisition broadens our participation in the deep-cycle industrial battery market
(e.g.,forklift and stationary batteries), adds to our membrane technology portfolio and product breadth, enhances service to common customers
and adds cost-effective production capacity. On April 1, 2008, we acquired the battery separator manufacturing assets of Super-Tech Battery Components Pvt. Ltd.,
located in Bangalore, India.

A
supply contract between our lead-acid battery separator business and Johnson Controls, Inc. ("JCI") expired on December 31, 2008. In response, we implemented a
restructuring plan in 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 initial plan includes 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 separator business. The total estimated cost of the plan is expected to be approximately $61.7 million, including cash charges of
$32.8 million for severance, environmental, and other exit costs and a non-cash impairment charge of $28.9 million. We began implementing the restructuring plan during the
fourth quarter and recorded a restructuring charge of $59.9 million.



In the separations media segment, our filtration membranes and modules are used in healthcare and high-performance
filtration and specialty applications. The healthcare business and a portion of the filtration and specialty business have historically been relatively unaffected by the economy, and 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 estimate that conversion to single-use dialyzers and increasing treatment frequency will result in additional dialyzer market growth.

29

---



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.



In May 2008, we 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 us and 4,281,000 shares were sold by certain selling shareholders, including certain of our executive officers. We received net proceeds from the offering of
$84.8 million, net of underwriting fees of $4.3 million and other offering related costs. The net proceeds were used to repay outstanding borrowings under our revolving credit facility
and for general corporate purposes.

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 elsewhere in this Annual Report on Form 10-K.



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. 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. In accordance with FASB Statement No. 142,Goodwill and Other Intangible Assets, goodwill and indefinite-lived intangible
assets are not amortized, but are subject to an annual impairment test unless circumstances dictate more frequent assessments. 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 using the income approach, corroborated by a 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, then the

30

---



second
step must be completed to measure the amount of impairment, if any. Step two of the goodwill impairment test calculates the implied fair value of the reporting unit's goodwill with the carrying
value of its goodwill. 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, operating margins,
discount rates, strategic plans and future market conditions, among others. Given the current economic environment and the uncertainties regarding the impact on the Company's business, there can be no
assurance that the Company's estimates and assumptions made for purposes of the Company's goodwill impairment testing will prove to be accurate predictions of the future. If the Company's assumptions
regarding forecasted revenue or margin growth rates of certain reporting units are not achieved, or changes in strategy or market conditions occur, the Company may be required to record goodwill
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.

A
5% decrease in the estimated free cash flow assumptions would have resulted in a reduction in fair values of approximately $49.5 million for our energy storage segment and
$20.1 million for our separations media segment, but would not have resulted in an impairment charge to goodwill or intangible assets. A 10% decrease in the estimated free cash flow assumptions
would have resulted in a reduction in fair values of approximately $99.1 million for our energy storage segment and $40.2 million for our separations media segment. For the energy
storage segment, the 10% decrease would have resulted in the carrying value of the lead-acid battery separator reporting unit exceeding its fair value by $26.1 million and would
require a step two analysis to determine the amount of goodwill impairment, if any.

A
1% increase in the discount rate would have resulted in a reduction in fair values of $90.1 million for our energy storage segment and $37.6 million for our separations
media segment. For the energy storage segment, the 1% increase in the discount rate would have resulted in the carrying value of the lead-acid battery separator reporting unit exceeding
its fair value by $20.7 million and would require a step two analysis to determine the amount of goodwill impairment, if any.



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 3, 2009, a 1% decrease in the discount rate would
increase our projected benefit obligations and the unfunded status of our pension plans by $12.8 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. At January 3, 2009, 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 2008 by $0.2 million dollars. At January 3, 2009, if the actual plan assets were reduced by 1%, the unfunded status of
our pension plans would increase by $0.2 million.

31

---





We account for environmental liabilities in accordance with AICPA Statement of Position 96-1,
"Environmental Remediation Liabilities." 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 GmbH ("Membrana") in 2002, we recorded a reserve for costs to remediate known environmental issues and operational upgrades at the
Wuppertal, Germany facility. In 2004, we identified and accrued for potential environmental contamination at our manufacturing facility in Potenza, Italy. In December 2008, we implemented a
restructuring plan which included the closure of this manufacturing facility and increased the environmental reserve for the estimated additional costs of environmental remediation and monitoring
activities that will be required after closing the facility.

We
have indemnification agreements for certain environmental matters from Acordis A.G. ("Acordis") and Akzo Nobel N.V. ("Akzo"), the prior owners of Membrana. Recoveries of
environmental costs from other parties are recognized as assets when their receipt is deemed probable. We have recorded a receivable with regard to the Akzo indemnification agreement. If
indemnification claims cannot be enforced against Acordis and Akzo, we may be required to reduce the amount of indemnification receivable recorded.

Results of operations

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

Fiscal Year(in millions)

2008

2007

2006Net sales

$
610.5

$
534.7

$
478.2Gross profit


215.7


197.0


164.9Selling, general and administrative expenses


108.3


93.6


87.5Business restructuring


59.9


(0.9
)

37.0Change in accounting principle related to postemployment benefits








(2.6
)Operating income


47.5


104.3


43.0Interest expense, net


60.7


81.0


92.3Costs related to purchase of 10.50% senior discount notes





30.1


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





7.2


Foreign currency and other


(2.5
)

1.6


3.2Loss from continuing operations before income taxes


(10.7
)

(15.6
)

(52.5
)Income taxes


6.8


(16.0
)

(22.9
)Income (loss) from continuing operations

$
(17.5
)
$
0.4

$
(29.6
)


32

---





Fiscal Year(percent of sales)

2008

2007

2006Net sales


100.0
%

100.0
%

100.0
%Gross profit


35.3


36.8


34.5Selling, general and administrative expenses


17.7


17.5


18.3Business restructuring


9.8


(0.1
)

7.7Change in accounting principle related to postemployment benefits








(0.5
)Operating income


7.8


19.4


9.0Interest expense, net


9.9


15.1


19.3Costs related to purchase of 10.50% senior discount notes





5.6


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





1.3


Foreign currency and other


(0.4
)

0.3


0.7Loss from continuing operations before income taxes


(1.8
)

(2.9
)

(11.0
)Income taxes


1.1


(3.0
)

(4.8
)Income (loss) from continuing operations


(2.9
)%

0.1
%

(6.2
)%




Net sales.Net sales for fiscal 2008 were $610.5 million, an increase of $75.8 million, or 14.2%, from fiscal 2007. Energy
storage
sales for fiscal 2008 were $450.2 million, an increase of $70.8 million, or 18.7%. The increase in energy storage sales was due to higher lead-acid and lithium battery
separator sales and the positive impact of dollar/euro exchange rate fluctuations of $11.8 million. Lead-acid battery separator sales increased by 19.5%, due primarily to the
acquisition of Microporous, as well as the positive impact of dollar/euro exchange rate fluctuations and price increases earlier in 2008 to partially offset the escalation in raw material and energy
costs. The expiration of a lead-acid separator supply contract with JCI will impact our sales for fiscal 2009. Sales of automotive lead-acid battery separators covered by the
expired contract were approximately 9.0% of fiscal 2008 consolidated net sales. In response, we implemented a restructuring plan to align lead-acid battery separator production capacity
with demand, reduce costs and position us to meet future growth opportunities. Lithium battery separator sales increased by 16.0% due to increasing demand for mobile power and the penetration of
lithium-ion batteries in an increasing number of electronic devices and into new applications for large format cells.

Separations
media sales for fiscal 2008 were $160.3 million, an increase of $5.0 million, or 3.2% from fiscal 2007. The increase in separations media sales was due to
higher sales of industrial and filtration specialty products and the positive impact of dollar/euro exchange rate fluctuations of $8.7 million. Healthcare sales were consistent with the prior
year as growth in sales of synthetic hemodialysis membranes and the positive impact of dollar/euro exchange rate fluctuations offset the impact of discontinued sales of cellulosic membranes.
Industrial and filtration specialty product sales increased by
9.9%, driven by continued demand for high performance filtration applications and the positive impact of dollar/euro exchange rate fluctuations.

Gross Profit.Gross profit as a percent of net sales was 35.3% for fiscal 2008 as compared to 36.8% for fiscal 2007. Energy storage
gross profit as a
percent of net sales was 35.1% as compared to 38.8% for fiscal 2007. The decline was primarily attributable to the acquisition of Microporous, which has lower gross profit margins than our other
lead-acid battery separator production facilities, increased raw material and energy costs, and costs associated with the strike at our Owensboro, Kentucky facility. Separations media
gross profit as a percent of net sales increased to 36.5% for fiscal 2008 from 32.1% for fiscal 2007. The increase was due primarily to increased hemodialysis membrane production volumes and
investments to enhance production efficiencies.

33

---



Selling, general and administrative expenses.Selling, general and administrative expenses as a percent of net sales were 17.7% for
fiscal 2008,
which is comparable to 17.5% for fiscal 2007.

Interest expense.Interest expense for fiscal 2008 decreased by $20.3 million from fiscal 2007. The decrease in interest expense
was primarily
driven by the purchase of our 10.50% senior discount notes in July 2007 and lower interest rates under our senior credit facilities.

Income taxes.Income taxes as a percentage of pre-tax income from continuing operations for fiscal 2008 were (63.6)% as compared to
102.9% for fiscal 2007. 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 before income taxes.

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.

In
fiscal 2008, the effective tax rate was also impacted by the restructuring charge in Potenza, Italy. Net operating losses generated in Italy as a result of the restructuring charge
were offset by a valuation allowance because the benefit of these net operating losses may never be realized since the Company will no longer have operations in Italy.

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

Fiscal 2008

Fiscal 2007U.S. Federal statutory rate


35.0
%

35.0
%State income taxes


0.7


(2.5
)Mix of income in taxing jurisdictions


(7.1
)

(20.0
)Other permanent differences and valuation allowances


0.1


7.7Purchase of 10.50% senior discount notes and write-off of loan acquisition costs associated with refinancing of senior secured credit
facility





27.7Impact of 2008 restructuring


(91.0
)

Other


(1.3
)

Impact of Italian tax reform legislation





10.0Impact of German tax reform legislation





45.0Total effective tax rate on continuing operations


(63.6
)%

102.9
%




Net sales.Net sales for fiscal 2007 were $534.7 million, an increase of $56.5 million, or 11.8%, from fiscal 2006. Energy
storage net
sales for fiscal 2007 were $379.4 million, an increase of $37.9 million, or 11.1%, from fiscal 2006. The increase in energy storage sales was primarily due to higher
lead-acid and lithium battery separator sales volume, higher average sales prices for lead-acid battery separators and the $11.9 million positive impact of dollar/euro
exchange rate fluctuations. Lead-acid separator sales growth of 11.4% was driven by the increasing size of the automotive market and the trend of conversion from alternative separator
materials to superior performing polyethylene-based separators, particularly in Asia. Average sales prices increased due to global price increases implemented to offset higher raw material and energy
costs. Lithium battery separator sales increased

34

---



by
10.3% due to increased demand for consumer electronic products and expanding applications for lithium batteries.

Separations
media net sales for fiscal 2007 were $155.3 million, an increase of $18.6 million, or 13.6%, from fiscal 2006 due to higher sales of industrial and specialty
filtration products and hemodialysis membranes. Included in this increase was a $9.9 million positive impact of dollar/euro exchange rate fluctuations. Healthcare product sales increased by
9.7% due to strong growth in sales of synthetic hemodialysis membranes combined with the positive impact of dollar/euro exchange rate fluctuations, offset by the expected decline in sales of
cellulosic hemodialysis membranes due to our exit of this product line. Filtration and specialty product sales increased by 22.3%, driven by continued strong demand for high performance filtration
applications and the positive impact of dollar/euro exchange rate fluctuations.

Gross Profit.Gross profit as a percent of net sales was 36.8% for fiscal 2007, as compared to 34.5% for fiscal 2006. Energy storage
gross profit as
a percent of net sales was 38.8% for the fiscal 2007, which was comparable to the prior year percentage of 38.8%. Separations media gross profit as a percent of net sales increased to 32.1% for fiscal
2007 from 23.7% for fiscal 2006. The increase in separations media gross profit percentage is due primarily to the successful transformation of our hemodialysis membrane business from cellulosic to
synthetic products, investments to enhance production efficiencies and growth in our high performance filtration business.

Selling, general and administrative expenses.Selling, general and administrative expenses as a percent of net sales were 17.5% for
fiscal 2007, as
compared to 18.3% for fiscal 2006. The increase in selling, general and administrative expenses is due to increased costs strategically aimed at driving growth, including selling and marketing costs
and personnel costs.

Interest expense.Interest expense for fiscal 2007 decreased by $11.3 million from fiscal 2006. The decrease in interest expense
was primarily
driven by the purchase of our 10.50% senior discount notes in July 2007 and lower interest rates under our refinanced senior credit facilities.

Income taxes, net.Income taxes as a percentage of income before income taxes for fiscal 2007 were 102.9% as compared to 43.7% for
fiscal 2006. 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, certain export sales which are excluded from taxable income, various changes in estimates of permanent differences and valuation allowances, and the relative size of our
consolidated income or loss before income taxes.

The
primary factor impacting our effective tax rate is the mix of earnings between the various tax jurisdictions in which we do business. Each tax jurisdiction has its own set of tax
laws and tax rates. The income earned by our subsidiaries in each jurisdiction is taxed independently by these various jurisdictions. Currently, the applicable statutory income tax rates in the
jurisdictions that we operate in 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.

In
2007, our effective tax rate was also impacted by significant events related to financing activities and tax reforms that occurred during fiscal 2007. These events resulted in an
increase in our income tax benefit of $20.5 million. In July 2007, we purchased the 10.50% senior discount notes and refinanced our senior secured credit facilities. The cost of these
transactions was $37.2 million, consisting of redemption and tender premiums and the write-off of unamortized loan acquisition costs, and resulted in an income tax benefit of
$12.0 million in fiscal 2007.

On
August 17, 2007, the German government enacted the 2008 Tax Reform Act legislation. This comprehensive German tax reform legislation reduces corporate tax rates for 2008 and
beyond and also

35

---



fundamentally
changes the calculation of taxable income in Germany. While the corporate income tax and trade tax regime within Germany have remained, the Act reduces the maximum corporate income tax
rate from 25% to 15% and the maximum trade tax rate from approximately 18% to 15.2%. Additional provisions of the legislation include the disallowance of deductions of the trade tax and certain
interest expense from taxable income. As a result of the Act, our German deferred tax liabilities existing as of January 1, 2008 will reverse in future years at a lower effective tax rate. We
recognized the effect of the new tax legislation, which resulted in an increase in the income tax benefit of $6.9 million in fiscal 2007.

On
December 21, 2007, the Italian Parliament approved the 2008 Finance Bill, which affected taxation of corporations doing business in Italy. The most significant change was the
reduction of the corporate income tax rate from 33% to 27.5% and a reduction of the local income tax rate from 4.25% to 3.9%. As a result, our Italian deferred tax liabilities existing as of
January 1, 2008 will reverse in future years at a lower effective tax rate. We recognized the effect of the new tax legislation, which resulted in an increase in the income tax benefit of
$1.6 million in fiscal 2007.

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

Fiscal 2007

Fiscal 2006U.S. Federal statutory rate


35.0
%

35.0
%State income taxes


(2.5
)

2.9Mix of income in taxing jurisdictions


(20.0
)

10.9Export sales excluded from taxable income





2.6Other permanent differences and valuation allowances


7.7


(7.7
)Purchase of 10.50% senior discount notes and write-off of loan acquisition costs associated with refinancing of senior secured credit
facility


27.7


Impact of Italian tax reform legislation


10.0


Impact of German tax reform legislation


45.0


Total effective tax rate on continuing operations


102.9
%

43.7
%




The pre-tax components of restructuring activity in 2008 were as follows:

(in millions)

Balance at
December 29,
2007

Restructuring
charges

Asset
Writedown

Cash
Payments

Foreign
currency
translation

Balance at
January 3,
20092008 Restructuring Plan:Severance and benefit costs

$


$
10.4

$


$
(1.4
)
$
0.9

$
9.9Impairment





28.9


(28.9
)







Other





2.0





(1.3
)

0.1


0.8


41.3


(28.9
)

(2.7
)

1.0


10.72006 Restructuring Plan:Severance and benefit costs


3.5








(0.5
)

(0.1
)

2.9Other


1.3








(0.8
)




0.54.8








(1.3
)

(0.1
)

3.42005 Restructuring Plan:Severance and benefit costs


0.4








(0.3
)

(0.1
)

Total

$
5.2

$
41.3

$
(28.9
)
$
(4.3
)
$
0.8

$
14.1


36

---



In
addition to the amounts in the table above, the 2008 restructuring charge included $18.6 million in environmental costs.

The
business restructuring activity in 2007 was as follows:

(in millions)

Balance at
December 30,
2006

Restructuring
charges

Cash
payments

Foreign
currency
translation

Balance at
December 29,
20072006 Restructuring Plan:Severance and benefit costs

$
11.5

$
(0.9
)
$
(7.7
)
$
0.6

$
3.5Other


5.7


0.2


(4.8
)

0.2


1.317.2


(0.7
)

(12.5
)

0.8


4.82005 Restructuring Plan:Severance and benefit costs


0.9


0.1


(0.7
)

0.1


0.4Other





0.2


(0.2
)




0.9


0.3


(0.9
)

0.1


0.42004 Restructuring Plan:Severance and benefit costs


1.2


(0.5
)

(0.7
)




Total

$
19.3

$
(0.9
)
$
(14.1
)
$
0.9

$
5.2


All
restructuring charges, except for the asset impairments, will result in cash outflows which will be funded by cash from operations. We expect to make payments against
the restructuring reserve of $3.3 million in fiscal 2009.

2008 restructuring plan.A supply contract between our lead-acid battery separator business and JCI expired on December 31, 2008.
In response, we implemented a restructuring plan in 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 initial plan includes 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 separator business. The total estimated cost of the plan is expected to be approximately $61.7 million, including cash charges
of $32.8 million for severance, environmental, and other exit costs and a non-cash impairment charge of $28.9 million. We began implementing the restructuring plan during the
fourth quarter and recorded a restructuring charge of $59.9 million. Cash payments for severance and other exit costs associated with the plan are expected to be paid over the next three years.
The timing, scope and costs of these restructuring measures are subject to change we implement the plan and continue to evaluate our business needs and costs.

2006 restructuring plan.In December 2006, our separations media segment exited the production of cellulosic membranes and we realigned
the cost
structure at our Wuppertal, Germany facility. The total
cost of the plan is expected to be approximately $33.8 million, consisting of a $17.5 million non-cash impairment charge for buildings and equipment, $10.5 million for
employee layoffs and $5.8 million for other costs related to the shutdown of portions of the Wuppertal facility. The other costs included in the restructuring plan are related to local
regulations surrounding complete or partial shutdowns of a facility. During fiscal 2007, the reserve for severance and benefit costs was reduced as a result of lower actual severance expenses than
originally estimated.

2005 restructuring plan.In order to better accommodate customer growth and related demand for both lead-acid and lithium battery
separators in the greater Asian market, our energy storage segment transferred certain assets from Europe and the United States to our facilities in Thailand and China. The total cost of the
realignment plan was $9.1 million, including a non-cash impairment charge of $1.3 million.

37

---





At January 3, 2009, we manufacture our products at 14 strategically located facilities in North America, Europe and Asia. Net
sales from the foreign locations were $388.4 million for fiscal 2008, $349.4 million for fiscal 2007 and $298.2 million for fiscal 2006. 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 years 2008, 2007 and 2006 were, 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 increased to $83.0 million at January 3, 2009 from $54.9 million at December 29,
2007. The $28.1 million increase consists of cash flow from operations of $94.7 million and cash from financing activities of $65.7 million, offset by cash used in investing
activities of $129.8 million and the negative impact of exchange rate changes on cash and cash equivalents of $2.5 million.

Operating activities.Net cash provided by operating activities was $94.7 million in fiscal 2008, as compared to
$69.3 million in
fiscal 2007. Cash provided by operating activities in fiscal 2008 consisted of cash flows from operations partially offset by an increase in working capital of $1.3 million, excluding the
impact of foreign exchange rate fluctuations. Accounts receivable decreased by $20.1 million (excluding the $4.9 million decrease due to movements in foreign exchange rates) due to the
normal fluctuations in the timing of sales in the quarter. Days sales outstanding at January 3, 2009 were comparable to the prior year. Inventories increased $5.4 million (excluding the
$0.7 million decrease due to movements in foreign exchange rates) due to timing of sales and production. Accounts payable and accrued liabilities decreased by $18.6 million (excluding
the $8.3 million decrease due to movements in foreign exchange rates) primarily due to timing of payments on accounts payable and accrued liabilities.

Net
cash provided by operating activities was $69.3 million in fiscal 2007, as compared to $50.0 million in fiscal 2006. Cash provided by operating activities in fiscal
2007 consisted of cash flows from operations partially offset by an increase in working capital of $2.4 million, excluding the impact of foreign exchange rate fluctuations. Accounts receivable
increased by $7.0 million (excluding the $6.5 million increase due to movements in foreign exchange rates) due to the increase in sales during the fourth quarter of 2007 as compared to
the same period last year. Days sales outstanding decreased by approximately 3% at December 29, 2007 and were impacted by normal fluctuations in the mix of sales by country and customer.
Inventories decreased $8.3 million (excluding the $4.9 million increase due to movements in foreign exchange rates) due to the reduction of cellulosic hemodialysis membrane inventories
as we made final shipments out of inventory to our customers. Accounts payable and accrued liabilities decreased by $13.9 million (excluding the $10.7 million increase due to movements
in foreign exchange rates) primarily due to restructuring payments.

38

---





Investing activities.Cash used in investing activities was $129.8 million, consisting of capital expenditures and acquisitions,
partially
offset by $4.0 million in proceeds from the sale of a non-core synthetic paper business. Capital expenditures in fiscal 2008 were $48.0 million. Included in this amount were
expenditures for the completion of the lithium capacity expansion in Charlotte, North Carolina and the lead-acid capacity expansion in Prachinburi, Thailand. For 2009, we expect to spend
approximately $15 million to $20 million to maintain our existing facilities. Because of current economic conditions, the timing and amounts of capital expenditures in excess of normal
maintenance requirements will be intensely scrutinized and approved on a case-by-case basis.

In
fiscal 2008, we completed three acquisitions in our energy storage segment for an aggregate purchase price of $85.8 million.

Financing activities.Cash provided by financing activities was $65.7 million in fiscal 2008. In May 2008, we completed a
follow-on public offering with net proceeds of $84.8 million. The proceeds were used to repay outstanding borrowings under our revolving credit facility and for general corporate
purposes. We made debt payments of $20.7 million, including the repayment of the $14.2 million of debt assumed in the Microporous acquisition.

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

On
July 3, 2007, we refinanced Polypore's senior secured credit facility with a new senior secured credit facility that provides improved financial flexibility and lower interest
rate spreads. The new credit
facility provides for a $322.9 million term loan facility ($318.1 million outstanding at January 3, 2009) and a €35.0 million term loan facility
($48.0 million at January 3, 2009) and a $90.0 million revolving credit facility. At January 3, 2009, we had $87.3 million of borrowings available under the
revolving credit facility ($90.0 million revolving credit facility less $2.7 million of 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 facility are, at our option, equal to either an alternate base rate plus a 1.00% margin or the Eurocurrency base rate plus
a 2.00% margin. At January 3, 2009, the interest rates on the U.S. dollar term loan and Eurodollar term loan were 2.45% and 4.73%, 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 3, 2009, our senior leverage ratio was 1.82, and the entire amount of the revolving credit facility was available for borrowing.

39

---



Adjusted
EBITDA, as defined under the senior secured credit facility, for fiscal 2008 was as follows:

(in millions)

Fiscal 2008Net loss

$
(15.2
)Add/Subtract:Depreciation and amortization


55.1Interest expense, net


60.7Income taxes


6.8Stock-based compensation expense


1.3Foreign currency gain


(1.6
)Loss on disposal of property, plant, and equipment


1.7Business restructuring


59.9Pro forma results for acquisitions


0.5Costs related to the strike at our Owensboro, Kentucky facility


6.7Costs related to the FTC complaint


1.1Discontinued operations


(2.4
)Other non-cash or non-recurring charges


1.1Adjusted EBITDA

$
175.7


The
calculation of the senior leverage ratio as defined under the senior credit facility as of January 3, 2009 is as follows:

(in millions)

Fiscal 2008Indebtedness(1)

$
319.4Adjusted EBITDA


175.7Actual leverage ratio


1.82x






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 facilities also contain certain customary events of default, subject to grace periods, as appropriate. We believe that annual capital expenditure limitations imposed by the senior
credit facilities will not significantly inhibit us from meeting our ongoing capital expenditure needs.

In
January 2008, the Company entered into interest rate swap agreements that effectively fix the interest rate on $250.0 million of the Company's term loans. The interest rate
swap agreement which terminates on June 30, 2009 fixes the interest rate on $50.0 million of the term loans at 5.58%. The interest rate swap agreement which terminates on
December 31, 2009 fixes the interest rate on $200.0 million of the term loans at 5.54%.

Future
principal debt 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 $55.7 million.

The
83/4% senior subordinated notes ($433.9 million outstanding at January 3, 2009) will mature in 2012 and are guaranteed by most of our existing and future
domestic restricted subsidiaries, subject to certain exceptions. Except under certain circumstances, the 83/4% senior subordinated notes do not require principal payments prior to their
maturity in 2012. Interest on the 83/4% senior subordinated notes is payable semi-annually in cash. The 83/4% senior subordinated notes contain customary

40

---



covenants
and events of default, including covenants that limit our ability to incur debt, pay dividends and make investments.

As
stated in the credit agreement, the term loans mature in July 2014 and the revolving credit facility matures in July 2013. The 8.75% senior subordinated notes mature on May 15,
2012. Because the senior subordinated notes are subordinated to the senior secured credit facility, if any amounts are outstanding under the senior subordinated notes at February 1, 2012, the
maturity dates for the term loans and the revolving credit facility will be accelerated to February 1, 2012.

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 for both the shorter and longer term, we considered cash on hand, the expected cash flow to be generated by our operations and the available borrowings under our
senior secured credit facility compared to our 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 stock issuance or debt financing 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 additional debt or equity financing or a combination thereof. There can be no assurance that any additional financing will be available to us on acceptable terms.



We account for environmental liabilities in accordance with AICPA Statement of Position 96-1,
"Environmental Remediation Liabilities." 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.
However, 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. Environmental reserves, which are predominately
euro-denominated, were $49.2 million and $29.2 million as of January 3, 2009 and December 29, 2007, respectively.

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

41

---



the
date of acquisition. At January 3, 2009, the environmental reserve for the Membrana facility was $22.6 million. We anticipate that expenditures will be made over the next seven to
ten years.

We
have 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. The Akzo agreement provides indemnification of claims through December 2007, with the indemnification percentage decreasing each year during the
coverage period. Through December 2003, Akzo pays 75% of any approved claim. After that, Akzo pays 65% of claims reported through December 2006 and 50% of claims reported through December 2007. 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 3, 2009 and December 29, 2007, amounts receivable under the indemnification
agreements were $17.9 million and $20.0 million, respectively. The current portion of the indemnification receivable is included in "Prepaid and other" in the accompanying consolidated
balance sheets.

In
2004, we identified potential environmental contamination at our manufacturing facility in Potenza, Italy. Based on environmental studies and the initial remediation plan presented to
local authorities, we recorded a reserve for environmental obligations. In 2006, we further refined the remediation plan after consultations with local authorities. In December 2008, we implemented a
restructuring plan which included the closure of this manufacturing facility. Based on discussions with local authorities, environmental consultants and internal personnel, we increased the
environmental reserve at Potenza by $18.6 million for the estimated additional costs of environmental remediation and monitoring activities that will be required after closing the facility.
Discussions with the local authorities regarding the required level of site clean-up and remediation are ongoing. The increase in the environmental reserve was included in "Business
restructuring" in the accompanying consolidated statements of operations. At January 3, 2009, the environmental reserve for the Potenza, Italy facility was $23.5 million. We anticipate
that expenditures will be made over the next seven to ten years.

In
connection with the acquisition of Microporous on February 29, 2008, we identified potential environmental contamination at the manufacturing site in Piney Flats, Tennessee.
Subsequent to the acquisition, we performed additional environmental studies and confirmed that environmental contamination was present. The estimated cost of remediation is $3.1 million. As
part of the acquisition, the seller purchased an environmental insurance policy on behalf of the Company and also provided indemnification for a portion of the insurance policy deductible. Amounts due
under the insurance policy and indemnification agreement are estimated to be $2.5 million. We recorded the estimated cost
of remediation and the related receivables from the insurance company and indemnification agreement in applying purchase accounting for the acquisition. The current portion of the indemnification
receivable is included in "Prepaid and other" in the accompanying consolidated balance sheets.

In
2006, we identified instances of potential non-compliance with environmental operating permits at our Corydon, Indiana and Owensboro, Kentucky facilities. We recorded our
best estimate of potential penalties at that time. In March 2008, we reached agreement with the Indiana Department of Environmental Management and agreed to pay fines consistent with the our original
estimate. We do not believe that additional fines or penalties will be assessed.

Contractual Obligations

The following table sets forth our contractual obligations at January 3, 2009. Some of the amounts included in this table are
based on management's estimates and assumptions about these obligations,

42

---



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

2009

20102011

20122013

ThereafterLong-term debt(1)

$
366.1

$
3.8

$
7.4

$
7.4

$
347.583/4% senior subordinated notes(2)


433.9








433.9


Cash interest payments(3)


196.7


55.7


96.9


39.3


4.8Capital lease obligation(4)


3.5


1.6


1.9





Operating lease obligations(5)


4.3


1.4


2.1


0.8


Business restructuring


14.0


3.9


9.6


0.2


0.3$
1,018.5

$
66.4

$
117.9

$
481.6

$
352.6


---

43

---





Off Balance Sheet Arrangements

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

New Accounting Standards

In September 2006, the FASB issued Statement No. 157,Fair Value Measurement("FAS 157"), which clarifies the definition of fair value whenever another standard requires or permits assets or liabilities to be measured at fair value, establishes a framework for measuring
the fair value of assets and liabilities under generally accepted accounting principles and expands disclosure about fair value measurements. In February 2008, the FASB issued FSP 157-2, Effective Date of SFAS
No. 157("FSP 157-2"), which delays the effective date of FAS 157 for nonfinancial assets and
liabilities to fiscal years beginning after Nov. 15, 2008. In October 2008, the FASB issued FSP No. SFAS 157-3,Determining Fair Value of a Financial
Asset in a Market That Is Not Active("FSP 157-3"), which clarifies the application of FAS 157 when the market for a financial asset is not active.
FAS 157-3 was effective upon issuance, including reporting for prior periods for which financial statements have not been issued. The partial adoption of FAS 157 in the first
quarter of 2008 did not have a material impact on the consolidated financial statements. We are currently evaluating the impact on the consolidated financial statements of adopting the additional
requirements of SFAS 157, which were deferred by FSP 157-2.

In
September 2006, the FASB issued Statement No. 158,Employers' Accounting for Defined Benefit Pension and Other Postretirement Plansan
amendment of FASB Statements No. 87, 88, 106, and 132(R)("FAS 158"). FAS 158 requires an employer to recognize the funded status of a defined benefit
postretirement plan as an asset or liability in its balance sheet and to recognize changes in that funded status through comprehensive income in the year in which the changes occur. We adopted
FAS 158 in fiscal 2007. As a result of the adoption, we increased our pension and postretirement benefits liabilities by $4.2 million and our accumulated other comprehensive loss by
$2.9 million, net of applicable income taxes.

In
February 2007, the FASB issued Statement No. 159,The Fair Value Option for Financial Assets and Financial Liabilities("FAS 159"). FAS 159 permits entities to choose to measure eligible items at fair value at specified election dates and report unrealized gains and losses on items for which the fair
value option has been elected in earnings at each subsequent reporting date. We adopted FAS 159 in

44

---



the
first quarter of fiscal 2008. The adoption of FAS 159 did not have a material impact on the consolidated financial statements because we have not made any fair value measurement elections.

In
December 2007, the FASB issued Statement No. 141(R),Business Combinationsa replacement of FASB Statement
No. 141("FAS 141(R)"). FAS 141(R) changes the principles and requirements for how the acquirer of a business recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree.
FAS 141(R) also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business combination. FAS 141(R) is effective prospectively for fiscal years beginning after December 15, 2008.

In
December 2007, the FASB issued Statement No. 160,Noncontrolling Interests in Consolidated Financial Statements("FAS 160"). FAS 160 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income
attributable to the parent and to the noncontrolling interest, changes in a parent's ownership interest and the valuation of retained noncontrolling equity investments when a subsidiary is
deconsolidated. FAS 160 also establishes reporting requirements that provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests
of the noncontrolling owners. This standard is effective for fiscal years beginning after December 15, 2008. We do not expect the adoption of FAS 160 to have a material impact on its
consolidated financial statements.

In
March 2008, the FASB issued Statement No. 161,Disclosures about Derivative Instruments and Hedging Activities("FAS 161"). FAS 161 requires companies with derivative instruments to disclose information about how and why a company uses derivative instruments, how derivative instruments and
related hedged items are accounted for under FAS 133 and how derivative instruments and related hedged items affect a company's financial position, financial performance and cash flows.
FAS 161 is effective for financial statements issued for fiscal years beginning after November 15, 2008.

In
May 2008, the FASB issued Statement No. 162,The Hierarchy of Generally Accepted Accounting Principles("FAS 162").
FAS 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements. FAS No. 162 is effective
November 15, 2008. We do not expect the adoption of FAS 162 to have a material impact on its consolidated financial statements.

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 3, 2009, we had fixed rate debt of $433.9 million and variable rate debt of $366.1 million. In January
2008, we entered into interest rate swap agreements that effectively fix the interest rate on $250.0 million of our variable rate debt. The pre-tax earnings and cash flow impact
resulting from a 100 basis point increase in interest rates on our variable rate debt, giving effect to the interest rate swap agreements and holding other variables constant, would be
$1.2 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

45

---



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 a different percentage of our sales are in a foreign currency than our costs, 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 other comprehensive income
(loss). We have a euro-denominated term loan and senior subordinated notes that effectively hedge our net investment in foreign subsidiaries. Therefore, foreign currency gains and losses
resulting from the translation of the euro-denominated debt are included 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:

2008

2007

2006Period end rate


1.3925


1.4655


1.3170Period average rate


1.4715


1.3694


1.2552


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 3, 2009, we did not have any foreign currency derivatives outstanding.

46

---





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 3, 2009 and December 29, 2007, and the related
consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended January 3, 2009. 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 3, 2009 and December 29, 2007, and the consolidated results of its operations and its cash flows for each of the three years in the period ended January 3, 2009, 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 3, 2009, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
and our report dated March 6, 2009 expressed an unqualified opinion thereon.

/s/ ERNST & YOUNG LLPCharlotte, North Carolina
March 6, 2009


47

---





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 3, 2009, 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.

As
indicated in the accompanying Management's Report on Internal Control over Financial Reporting, management's assessment of and conclusion on the effectiveness of internal control over
financial reporting did not include the internal controls of Microporous Holding Corporation and Yurie-Wide Corporation which are included in the 2008 consolidated financial statements of
Polypore International, Inc. and constituted approximately 5.3% and 0.9% of total assets at January 3, 2009, respectively. Our audit of internal control over financial reporting of
Polypore International, Inc. also did not include an evaluation of the internal control over financial reporting of Microporous Holding Corporation and Yurie-Wide Corporation,
excluded from the scope of Management's assessment.

48

---



In
our opinion, Polypore International, Inc. maintained, in all material respects, effective internal control over financial reporting as of January 3, 2009, 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 3, 2009 and December 29, 2007, and the related consolidated statement of operations, shareholders' equity, and cash flows for each of the three
years in the period ended January 3, 2009, and our report dated March 6, 2009 expressed an unqualified opinion thereon.

/s/ ERNST & YOUNG LLPCharlotte, North Carolina
March 6, 2009


49

---





Polypore International, Inc.        Consolidated balance sheets

(in thousands, except share data)

January 3, 2009

December 29, 2007AssetsCurrent assets:Cash and cash equivalents

$
83,021

$
54,934Accounts receivable, net


100,409


115,619Inventories


70,398


64,329Refundable income taxes


6,277


Deferred income taxes


1,222


1,808Prepaid and other


14,275


12,665Total current assets


275,602


249,355Property, plant and equipment, net


416,796


401,284Goodwill


601,564


568,784Intangibles and loan acquisition costs, net


184,854


187,861Environmental indemnification receivable


17,389


15,640Other


2,649


6,119Total assets

$
1,498,854

$
1,429,043Liabilities and shareholders' equityCurrent liabilities:Accounts payable

$
23,806

$
33,795Accrued liabilities


58,777


50,759Income taxes payable





424Current portion of debt


3,780


4,549Current portion of capital lease obligation


1,495


1,435Fair value of interest rate swap agreements


5,477


Total current liabilities


93,335


90,962Debt, less current portion


796,216


813,536Capital lease obligation, less current portion


1,824


3,319Pension and postretirement benefits, less current portion


66,266


65,779Postemployment benefits


2,425


3,673Environmental reserve, less current portion


40,484


22,627Deferred income taxes


78,815


74,833Other


26,626


18,983Commitments 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, 44,377,560 and 40,326,537 issued and outstanding at January 3, 2009 and
December 29, 2007, respectively


444


403Paid-in capital


479,442


390,337Retained deficit


(66,671
)

(51,484
)Accumulated other comprehensive loss


(20,352
)

(3,925
)392,863


335,331Total liabilities and shareholders' equity

$
1,498,854

$
1,429,043


See
notes to consolidated financial statements

50

---





Polypore International, Inc.        Consolidated statements of operations

(in thousands, except per share data)

Year ended
January 3, 2009

Year ended
December 29, 2007

Year ended
December 30, 2006Net sales

$
610,530

$
534,667

$
478,156Cost of goods sold


397,210


337,682


313,254Business interruption insurance recovery


(2,400
)




Gross profit


215,720


196,985


164,902Selling, general and administrative expenses


108,304


93,624


87,473Business restructuring


59,887


(886
)

37,027Change in accounting principle related to postemployment benefits








(2,593
)Operating income


47,529


104,247


42,995Other (income) expense:Interest expense, net


60,740


80,998


92,287Costs related to purchase of 10.5% senior discount notes





30,057


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





7,173


Foreign currency and other


(2,484
)

1,621


3,20758,256


119,849


95,494Loss from continuing operations before income taxes


(10,727
)

(15,602
)

(52,499
)Income taxes


6,820


(16,049
)

(22,942
)Income (loss) from continuing operations


(17,547
)

447


(29,557
)Income (loss) from discontinued operations, net of income taxes


2,360


99


(243
)Income (loss) before the cumulative effect of a change in accounting principle


(15,187
)

546


(29,800
)Cumulative effect of a change in accounting principle related to stock compensation, net of income taxes








231Net income (loss)

$
(15,187
)
$
546

$
(29,569
)Net income (loss) per sharebasic and diluted:Continuing operations

$
(0.41
)
$
0.02

$
(1.17
)Discontinued operations


0.06





0.01Cumulative effect of a change in accounting principle related to stock compensation, net of income taxes








0.01Net income (loss) per share

$
(0.36
)
$
0.02

$
(1.17
)Weighted average shares outstanding:Basic


42,777,531


32,942,214


25,313,130Diluted


42,777,531


33,237,230


25,313,130


See
notes to consolidated financial statements

51

---





Polypore International, Inc.        Consolidated statements of shareholders' equity

(In thousands, except share data)

Shares of
Common Stock

Common
Stock

Paid-in
Capital

Retained
Deficit

Accumulated
Other
Comprehensive Loss

Total

Comprehensive
Income (Loss)Balance at December 31, 2005


25,271,252

$
253

$
124,673

$
(22,207
)
$
(9,387
)
$
93,332Net loss for the year ended December 30, 2006











(29,569
)




(29,569
)
$
(29,569
)Stock-based compensation








162








162


Issuance of common stock


76,218





399








399


Foreign currency translation adjustment, net of income tax expense of $0














6,786


6,786


6,786Additional minimum pension liability, net of income tax benefit of $956














(1,448
)

(1,448
)

(1,448
)Balance at December 30, 2006


25,347,470


253


125,234


(51,776
)

(4,049
)

69,662Comprehensive loss for the year ended December 30, 2006



















$
(24,231
)Net income for the year ended December 29, 2007











546





546

$
546Initial public offering, net of offering costs


15,000,000


150


264,687








264,837


Stock-based compensation








706








706


Repurchases of common stock, net of issuances


(20,933
)




(290
)







(290
)

Cumulative effect of adjustments from the adoption of FIN 48











(254
)




(254
)

Adjustment to apply FAS 158, net of income tax benefit of $1,260














(2,920
)

(2,920
)

Additional minimum pension liability, net of income tax expense of $2,954














4,197


4,197


4,197Foreign currency translation adjustment, net of income tax expense of $6,910














(1,153
)

(1,153
)

(1,153
)Balance at December 29, 2007


40,326,537


403


390,337


(51,484
)

(3,925
)

335,331Comprehensive income for the year ended December 29, 2007



















$
3,590Net 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, net of shares required to satisfy employee tax withholding obligations


299,379


3


1,537








1,540


Restricted stock grants


1,644

















Tax benefit of stock option exercises








1,495








1,495


Unrealized loss on interest rate swap, 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
)
$
392,863Comprehensive loss for the year ended January 3, 2009



















$
(31,614
)


See notes to consolidated financial statements

52

---





Polypore International, Inc.        Consolidated statements of cash flows

(in thousands)

Year ended
January 3, 2009

Year ended
December 29, 2007

Year ended
December 30, 2006Operating activities:Net income (loss)

$
(15,187
)
$
546

$
(29,569
)Adjustments to reconcile net income (loss) to net cash provided by operating activities:Depreciation expense


36,459


31,344


42,512Amortization expense


18,585


17,509


17,700Amortization of loan acquisition costs


2,587


2,793


2,994Amortization of debt discount





13,297


24,336Stock compensation


1,264


706


532Loss on disposal of property, plant and equipment


1,725


1,236


1,297Foreign currency (gain) loss


(1,859
)

189


1,678Deferred income taxes


(3,646
)

(32,236
)

(34,908
)Business restructuring


59,887


(886
)

37,027Gain on sale of synthetic paper business


(3,774
)




Costs related to purchase of 10.50% senior discount notes





30,057


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





7,173


Change in accounting principle related to postemployment benefits








(2,593
)Cumulative effect of a change in accounting principle related to stock compensation








(370
)Changes in operating assets and liabilities:Accounts receivable


20,065


(7,010
)

(7,659
)Inventories


(5,361
)

8,282


(2,652
)Prepaid and other current assets


(556
)

1,153


(3,735
)Accounts payable and accrued liabilities


(18,562
)

(13,895
)

(20
)Income taxes payable


(885
)

1,901


(1,025
)Other, net


3,944


7,147


4,420Net cash provided by operating activities


94,686


69,306


49,965Investing activities:Acquisitions, net of cash acquired


(85,795
)

(5,475
)

Purchases of property, plant and equipment, net


(48,013
)

(29,775
)

(23,912
)Proceeds from sale of synthetic paper business


4,000





Net cash used in investing activities


(129,808
)

(35,250
)

(23,912
)Financing activities:Proceeds from issuance of common stock, net of underwriting fees and other offering related costs


84,847


264,837


Proceeds from revolving credit facility


46,000





Payments on revolving credit facility


(46,000
)




Principal payments on debt


(20,670
)

(372,611
)

(3,433
)Proceeds from stock option exercises


1,540





Proceeds from the senior secured credit facility





370,000


Purchase of the 10.50% senior discount notes





(293,666
)

Loan acquisition costs





(8,672
)

(15
)Repurchase of common stock





(320
)

Issuance of common stock





30


399Net cash provided by (used in) financing activities


65,717


(40,402
)

(3,049
)Effect of exchange rate changes on cash and cash equivalents


(2,508
)

6,568


3,648Net increase in cash and cash equivalents


28,087


222


26,652Cash and cash equivalents at beginning of year


54,934


54,712


28,060Cash and cash equivalents at end of year

$
83,021

$
54,934

$
54,712Supplemental cash flow informationCash paid for interest

$
62,380

$
65,444

$
65,944Cash paid for income taxes


12,585


13,762


12,985AcquisitionsFair value of assets acquired

$
126,380

$
8,972

$
Liabilities assumed and incurred


40,585


3,497


Cash paid


85,795


5,475





See notes to consolidated financial statement

53

---





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, Western 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. 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 year
ended January 3, 2009 included 53 weeks. The fiscal years ended December 29, 2007 and December 30, 2006 included 52 weeks.

Revenue Recognition

Revenue from product sales is recognized when a firm sales agreement is in place, delivery of the product has occurred and
collectability 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.

54

---



Polypore International, Inc.

Notes to consolidated financial statements (Continued)

2. Accounting Policies (Continued)

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 3, 2009

December 29, 2007Raw materials

$
29,266

$
23,545Work-in-process


12,100


11,544Finished goods


29,032


29,240$
70,398

$
64,329


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 39.5 years and the
estimated useful lives for machinery and equipment range from 5 to 15 years.

In
accordance with FASB Statement No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets, 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

In accordance with FASB Statement No. 142,Goodwill and Other Intangible Assets,goodwill and indefinite-lived intangible assets are not amortized, but are subject to annual impairment testing unless circumstances dictate more frequent assessments.

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 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 of the goodwill impairment test calculates the implied fair value of the reporting unit's goodwill
with the carrying value of its goodwill. 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.

The
impairment test for indefinite-lived intangible assets consists of a comparison between their fair values and carrying values. If the carrying amounts of indefinite-lived intangible
assets exceed their fair values, an impairment loss will be recognized in an amount equal to the sum of any such excesses.

55

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Polypore International, Inc.

Notes to consolidated financial statements (Continued)

2. Accounting Policies (Continued)

In
accordance with FAS 144, intangible assets with estimable 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 estimable 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 or group of assets, a loss is recognized for the difference between the fair value and carrying value of the intangible asset.

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 consolidated statements of operations. Research and development expense was $18,167,000, $16,048,000 and $13,135,000 in 2008, 2007 and 2006, respectively.

Stock Based Compensation

On January 1, 2006, the Company adopted FASB Statement No. 123(R),Share-Based
Payment("FAS 123(R)") using the modified prospective transition method, which does not require the restatement of prior periods. Prior to adopting FAS 123(R),
the Company accounted for employee share-based compensation using the fair value method under FASB Statement No. 123,Accounting for Stock Based
Compensation("FAS 123"). FAS 123(R) requires forfeitures to be estimated at the time of grant with the estimate revised, if necessary, in subsequent periods if
actual forfeitures differ materially from those estimates. Prior to the adoption of FAS 123(R), the Company accounted for forfeitures as they occurred as allowed under FAS 123. The
change in accounting for forfeitures under FAS 123(R) resulted in an increase of $231,000 to net income, net of applicable income taxes of $139,000, that was recorded as a cumulative effect of
a change in accounting principle in 2006.

Income Taxes

The provision for income taxes and corresponding balance sheet accounts are determined in accordance with FASB Statement
No. 109,Accounting for Income Taxes("FAS 109"). Under FAS 109, 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.

On
the first day of fiscal 2007, the Company adopted FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxesan Interpretation
of FASB Statement 109("FIN 48"), which
clarifies the accounting for uncertain tax positions. FIN 48 allows the tax effects from an uncertain tax position to be 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. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim
periods and disclosure. The Company recognized the cumulative effect of adopting FIN 48 by increasing the existing reserve for uncertain tax positions by $854,000, recording a deferred tax
asset of $643,000, decreasing goodwill by $43,000 and decreasing retained earnings by $254,000.

56

---



Polypore International, Inc.

Notes to consolidated financial statements (Continued)

2. Accounting Policies (Continued)

Foreign Currency Translation

The local currencies of the Company's foreign subsidiaries are the functional currencies in accordance with FASB Statement
No. 52,Foreign Currency Translation.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 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.

The
Company has euro-denominated senior subordinated notes held in the U.S. that effectively hedge a portion of the Company's net investment in foreign subsidiaries. The
translation of euro-denominated notes held in the U.S. resulted in foreign currency gains of $10,950,000 and losses of $22,275,000 recorded in "Accumulated other comprehensive loss" at
January 3, 2009 and December 29, 2007, respectively.

Net Income (Loss) Per Share

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

Accounts Receivable and Concentrations of Credit Risk

Accounts receivable potentially expose the Company to concentrations of credit risk, as defined by FASB Statement No. 105, Disclosure of Information about
Financial Instruments with Off-Balance Sheet Risk and Financial Instruments with Concentration 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 accounts was $7,742,000 and
$8,812,000 at January 3, 2009 and December 29, 2007, 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. Exide
Corporation, a customer of the Company's energy storage segment, accounted for approximately 14%, 15% and 15% of the Company's sales in 2008, 2007 and 2006, respectively.

Derivatives

The Company accounts for derivative instruments in accordance with FASB Statement No. 133,Accounting
for Derivatives and Hedging Activity("FAS 133"). Under FAS 133, all derivative instruments are recorded at fair value on the balance sheet and all changes in
fair value are recorded to earnings or to shareholders' equity through other comprehensive income, depending on whether a derivative is

57

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Polypore International, Inc.

Notes to consolidated financial statements (Continued)

2. Accounting Policies (Continued)

designated
as part of a hedge transaction and the type of hedge transaction. Ineffective portions of hedges, if any, are recognized in current earnings.

From
time to time, the Company uses derivative financial instruments to manage interest rate risk and 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. The Company's interest rate derivatives are designated as cash flow hedges
of variable rate debt obligations with derivative gains and losses recognized as "Interest expense, net" in the consolidated statements of operations.

Recent Accounting Pronouncements

In September 2006, the FASB issued Statement No. 157,Fair Value Measurement("FAS 157"), which clarifies the definition of fair value whenever another standard requires or permits assets or liabilities to be measured at fair value, establishes a framework for measuring
the fair value of assets and liabilities under generally accepted accounting principles and expands disclosure about fair value measurements. In February 2008, the FASB issued FSP 157-2, Effective Date of SFAS
No. 157("FSP 157-2"), which delays the effective date of FAS 157 for nonfinancial assets and
liabilities to fiscal years beginning after Nov. 15, 2008. In October 2008, the FASB issued FSP No. SFAS 157-3,Determining Fair Value of a Financial
Asset in a Market That Is Not Active("FSP 157-3"), which clarifies the application of FAS 157 when the market for a financial asset is not active.
FAS 157-3 was effective upon issuance, including reporting for prior periods for which financial statements have not been issued. The partial adoption of FAS 157 in the first
quarter of 2008 did not have a material impact on the consolidated financial statements. The Company is currently evaluating the impact on the consolidated financial statements of adopting the
additional requirements of SFAS 157, which were deferred by FSP 157-2.

In
September 2006, the FASB issued Statement No. 158,Employers' Accounting for Defined Benefit Pension and Other Postretirement Plansan
amendment of FASB Statements No. 87, 88, 106, and 132(R)("FAS 158"). FAS 158 requires an employer to recognize the funded status of a defined benefit
postretirement plan as an asset or liability in its balance sheet and to recognize changes in that funded status through comprehensive income in the year in which the changes occur. The Company
adopted FAS 158 in fiscal 2007. As a result of the adoption, the Company increased its pension and postretirement benefits liabilities by $4,180,000 and its accumulated other comprehensive loss
by $2,920,000, net of applicable income taxes.

In
February 2007, the FASB issued Statement No. 159,The Fair Value Option for Financial Assets and Financial Liabilities("FAS 159"). FAS 159 permits entities to choose to measure eligible items at fair value at specified election dates and report unrealized gains and losses on items for which the fair
value option has been elected in earnings at each subsequent reporting date. The Company adopted FAS 159 in the first quarter of fiscal 2008. The adoption of FAS 159 did not have a
material impact on the consolidated financial statements because the Company has not made any fair value measurement elections.

In
December 2007, the FASB issued Statement No. 141(R),Business Combinationsa replacement of FASB Statement
No. 141("FAS 141(R)"). FAS 141(R) changes the principles and requirements for how the acquirer of a business recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. FAS 141(R) also provides guidance for recognizing and measuring the
goodwill acquired in the business

58

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Polypore International, Inc.

Notes to consolidated financial statements (Continued)

2. Accounting Policies (Continued)

combination
and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. FAS 141(R) is
effective prospectively for fiscal years beginning after December 15, 2008.

In
December 2007, the FASB issued Statement No. 160,Noncontrolling Interests in Consolidated Financial Statements("FAS 160"). FAS 160 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income
attributable to the parent and to the noncontrolling interest, changes in a parent's ownership interest and the valuation of retained noncontrolling equity investments when a subsidiary is
deconsolidated. FAS 160 also establishes reporting requirements that provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests
of the noncontrolling owners. This standard is effective for fiscal years beginning after December 15, 2008. The Company does not expect the adoption of FAS 160 to have a material impact
on its consolidated financial statements.

In
March 2008, the FASB issued Statement No. 161,Disclosures about Derivative Instruments and Hedging Activities("FAS 161"). FAS 161 requires companies with derivative instruments to disclose information about how and why a company uses derivative instruments, how derivative instruments and
related hedged items are accounted for under FAS 133 and how derivative instruments and related hedged items affect a company's financial position, financial performance and cash flows.
FAS 161 is effective for financial statements issued for fiscal years beginning after November 15, 2008.

In
May 2008, the FASB issued Statement No. 162,The Hierarchy of Generally Accepted Accounting Principles("FAS 162").
FAS 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements. FAS No. 162 is effective
November 15, 2008. The Company does not expect the adoption of FAS 162 to have a material impact on its consolidated financial statements.

3. Issuance of Common Stock

On June 27, 2007, the Company priced its initial public offering of common stock and signed an underwriting agreement, pursuant to which the underwriters agreed to purchase
15,000,000 shares of its common stock on a firm commitment basis at a price of $19.00 per share. Public trading of the Company's common stock commenced on June 28, 2007. The Company received
net proceeds from the offering of $264,837,000, net of underwriting fees of $17,100,000 and other offering related costs. The net proceeds from the offering and cash on hand were used to purchase and
retire the 10.50% senior discount notes that were outstanding at that time.

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.

59

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Polypore International, Inc.

Notes to consolidated financial statements (Continued)

4. Acquisitions

On February 29, 2008, the Company purchased 100% of the capital stock of Microporous Holding Corporation, the parent company of Microporous Products L.P. ("Microporous").
The acquisition broadens the Company's participation in the deep-cycle industrial battery market, adds to its membrane technology portfolio and product breadth, enhances service to common
customers and adds 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 provides for additional cash payments of up to
$1,500,000 in each of the two years following the acquisition and up to $750,000 in the third year following the acquisition, contingent upon the acquired business meeting defined earn-out
provisions. The earn-out for fiscal 2008 was estimated to be $1,062,000 and was allocated to goodwill. The Company is currently engaged in discussions with the seller regarding
acquisition-related matters that may influence the timing and/or amount of this payment.

On
April 1, 2008, the Company acquired the 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 broadens the Company's participation in the lithium battery separator market, adds to its membrane technology portfolio and product breadth and
adds cost-effective production capacity.

The
results of operations from the acquisitions described above are included in the Company's energy storage segment from the date of acquisition. The Company accounts for acquisitions
in conformity with FASB Statement No. 141,Business Combinations,and FASB Statement No. 142,Goodwill and Other
Intangible Assets. The following table summarizes the aggregate preliminary purchase price allocations
for these acquisitions based upon the fair values of the assets acquired and liabilities assumed at the date of acquisition.

(in thousands)Current assets

$
16,374Property, plant and equipment


58,807Intangible assets


19,194Goodwill


32,005Total assets acquired


126,380Current liabilities


8,767Debt assumed


14,235Deferred taxes and other liabilities


17,583Total liabilities assumed


40,585Net assets acquired

$
85,795


The
excess of the purchase price over the fair value of the net assets acquired was allocated to goodwill. The goodwill is not deductible for income tax purposes.

60

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Polypore International, Inc.

Notes to consolidated financial statements (Continued)

4. Acquisitions (Continued)

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.

Effective
January 1, 2007, the Company purchased from Nippon Sheet Glass Company, Limited ("NSG") a 60% share in Daramic NSG Tianjin PE Separator Co., LTD ("DNPET")
for $5,475,000, including acquisition-related costs. DNPET is a lead-acid battery separator manufacturing facility located in Tianjin, China. The acquisition supports the Company's
strategy of expanding capacity in the high growth Asia-Pacific region. The excess of the purchase price over the fair value of the net assets acquired was $1,240,000 and was allocated to
goodwill.
Beginning January 1, 2007, DNPET's assets, liabilities, results of operations and cash flows are consolidated with those of the Company and NSG's interest in DNPET is included in the Company's
consolidated balance sheet as minority interest within other liabilities. The Company is entitled to all of the earnings and cash flow from DNPET for the first two years and beginning in fiscal 2009,
earnings and cash flows will be allocated based on ownership percentages. Under the original terms of the agreement, on January 1, 2009 and January 1, 2012, the Company can exercise a
call option and NSG can exercise a put option for the Company to purchase NSG's 40% ownership interest for $3,600,000. The Company and NSG agreed to extend the first option date to July 1,
2009. DNPET is included in the Company's energy storage segment.

5. Property, Plant and Equipment

Property, plant and equipment consist of:

(in thousands)

January 3, 2009

December 29, 2007Land

$
18,689

$
17,850Buildings and land improvements


123,799


114,843Machinery and equipment


402,677


370,122Construction in progress


14,733


20,869559,898


523,684Less accumulated depreciation


143,102


122,400$
416,796

$
401,284


61

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Polypore International, Inc.

Notes to consolidated financial statements (Continued)

6. Intangibles, Loan Acquisition and Other Costs

Intangibles, loan acquisition and other costs consist of:

January 3, 2009

December 29, 2007(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

$
194,187

$
52,220

$
181,236

$
40,861Technology and patents


9


42,371


22,798


38,828


18,188Loan acquisition costs


7


19,087


8,133


19,087


5,546Supply agreement


5


9,070


8,869


9,070


6,968Trade names


15


978


22





Intangible assets not subject to amortization:Trade names


Indefinite


11,203





11,203


$
276,896

$
92,042

$
259,424

$
71,563


Amortization
expense, including amortization of loan acquisition costs classified as interest expense, was $21,172,000 in 2008, $20,302,000 in 2007 and $20,694,000 in 2006. The Company's
estimate of amortization expense for the five succeeding years is as follows:

(in thousands)2009

$
19,0622010


18,8172011


18,6922012


14,5612013


12,838


7. Goodwill

The changes in carrying amount of goodwill during        were as follows:

(in thousands)

Energy
Storage

Separations
Media

TotalBalance as of December 30, 2006

$
356,173

$
211,414

$
567,587Acquisition


1,240





1,240Adoption of FIN 48


(43
)




(43
)Balance as of December 29, 2007


357,370


211,414


568,784Acquisitions


32,005





32,005Income tax adjustments


(90
)

865


775Balance as of January 3, 2009

$
389,285

$
212,279

$
601,564


62

---



Polypore International, Inc.

Notes to consolidated financial statements (Continued)

7. Goodwill (Continued)

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, the Company determined that
the fair value of its reporting units exceeded the carrying amount and there was no impairment of goodwill as of September 28, 2008.

During
the fourth quarter of 2008, the Company experienced a significant decline in its stock price, resulting in a reduction in the market capitalization. At January 3, 2009, the
Company's market capitalization approximated its book value. As a result of the decline in stock price, the Company updated its annual impairment test for goodwill as of January 3, 2009. In
preparing the step one analysis, future cash flows were based on the Company's most recent budget and, for years beyond the
budget, the Company's estimates based on assumed growth rates. The determination of the discount rate was based on a weighted average cost of capital using a risk-free rate adjusted by a
stock-beta-adjusted risk premium and a size premium. Additionally, the aggregate estimated fair value of the reporting units, determined with the use of the income approach
model, was compared with the Company's market capitalization and tested for reasonableness using the market approach, including key multiples of comparable companies. In considering Polypore's market
capitalization, an estimated premium to reflect the fair value on a control basis was applied. This premium was estimated based on an evaluation of control premiums identifiable in comparable
transactions. Based on the step one analysis performed, the Company determined that the fair value of its reporting units exceeded the carrying amount and there was no impairment of goodwill as of
January 3, 2009.

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, operating margins,
discount rates, strategic plans and future market conditions, among others. If the Company's assumptions regarding forecasted revenue or margin growth rates of certain reporting units are not
achieved, or changes in strategy or market conditions occur, the Company may be required to record goodwill 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.

8. Accrued Liabilities

Accrued liabilities consist of:

(in thousands)

January 3, 2009

December 29, 2007Compensation expense and other fringe benefits

$
21,447

$
21,184Current portion of environmental reserve


8,736


6,526Accrued interest


5,291


6,749Current portion of business restructuring


3,932


2,060Taxes other than income


2,374


1,500Other


16,997


12,740$
58,777

$
50,759


63

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Polypore International, Inc.

Notes to consolidated financial statements (Continued)

9. Debt

Debt, in order of priority, consists of:

(in thousands)

January 3, 2009

December 29, 2007Senior credit facilities:Revolving credit facility

$


$
Term loan facilities


366,057


373,1228.75% senior subordinated notes


433,875


444,825Other


64


138799,996


818,085Less current maturities


3,780


4,549Long-term debt

$
796,216

$
813,536


On
July 3, 2007, the Company refinanced the senior secured credit facility with a new senior secured credit facility. The new credit facility provides for a $322,894,000 term loan
facility and a €35,000,000 term loan facility and a $90,000,000 revolving credit facility. At January 3, 2009, the Company had $87,349,000 of borrowings available under the
revolving credit facility ($90,000,000 revolving credit facility less $2,651,000 of 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 plus a 1.00% margin or the Eurocurrency base rate plus a 2.00% margin. The senior secured credit facility is subject to limitations on capital spending
and, when loans are outstanding under the revolving credit facility, a maximum net senior leverage ratio. The Company capitalized loan acquisition costs of $8,672,000 in connection with the
refinancing and wrote-off loan acquisition costs of $7,173,000 associated with the previous senior secured credit facility.

The
Company's domestic subsidiaries guarantee indebtedness under the credit agreement. Substantially all assets of Polypore International, Inc. 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.

In
2004, the Company issued $225,000,000 8.75% senior subordinated dollar notes due 2012 and €150,000,000 8.75% senior subordinated euro notes due 2012. Interest is
payable semi-annually on May 15 and November 15. The notes are subordinated to all of the Company's existing and future senior debt and will rank senior to any future
subordinated debt. The Company's domestic subsidiaries, subject to certain exceptions, guarantee the notes.

In
2004, the Company issued 10.5% senior discount notes due 2012. In July 2007, the Company used the proceeds from the initial public offering and cash on hand to purchase and retire the
10.5% senior discount notes. The purchase of the notes was accomplished by a tender offer and subsequent redemption of the notes not tendered. The total purchase price for the notes was $293,666,000,
consisting of principal of $264,144,000 and tender and redemption premiums of $29,522,000. As a result of the purchase of the notes, the Company incurred a $30,057,000 charge to income, consists of
redemption and tender premiums of $29,522,000 and the write-off of unamortized loan acquisition costs of $535,000.

64

---



Polypore International, Inc.

Notes to consolidated financial statements (Continued)

9. Debt (Continued)

Minimum
scheduled principal repayments of debt are as follows:

(in thousands)2009

$
3,7802010


3,7162011


3,7162012


437,5912013


3,716Thereafter


347,477$
799,996


As
stated in the credit agreement, the term loans mature in July 2014 and the revolving credit facility matures in July 2013. The 8.75% senior subordinated notes mature on May 15,
2012. Because the senior subordinated notes are subordinated to the senior secured credit facility, if any amounts are outstanding under the senior subordinated notes at February 1, 2012, the
maturity dates for the term loans and the revolving credit facility will be accelerated to February 1, 2012.

In
January 2008, the Company entered into two interest rate swap agreements with notional principal amounts totaling $250,000,000. The swap agreement with a notional amount of
$50,000,000 effectively fixes the interest rate on that amount of term debt at 5.58% and expires on June 30, 2009. The swap agreement with a notional amount of $200,000,000 effectively fixes
the interest rate on that amount of term debt at 5.54% and expires on December 31, 2009.The swap agreements are accounted for under FAS 133. In accordance with FAS 133, the
Company designated these swap agreements as cash flow hedges with changes in fair value, net of income taxes, recorded to "Accumulated other comprehensive loss" in the accompanying balance sheet. In
fiscal 2008, the Company recognized additional interest expense of $1,015,000, representing the difference between the fixed interest rate on the swaps and the variable interest rate on the term debt.

10. Fair Value of Financial Instruments

The Company's financial instruments include cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, interest rate swaps 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 facilities approximates fair value
because the interest rate adjusts to market interest rates. The fair value of the 8.75% senior subordinated notes, based on a quoted market price, was $276,881,000 at January 3, 2009.

The
Company measures the fair value of the interest rate swap agreements on a recurring basis. FAS 157 establishes a three-tier value hierarchy, which prioritizes the
inputs used in measuring fair value as follows:



65

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Polypore International, Inc.

Notes to consolidated financial statements (Continued)

10. Fair Value of Financial Instruments (Continued)



This
hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value.

At
January 3, 2009, the fair value of the interest rate swap agreements was $5,477,000. The fair value of the swap agreements was determined within level two of the fair value
hierarchy under a market approach model using the notional amount of the interest rate swap agreements multiplied by the observable inputs of time to maturity, interest rates and credit spreads.

11. Commitments and Contingencies

Leases

The Company leases certain equipment and facilities under operating leases. Rent expense was $1,534,000, $1,262,000 and $1,877,000 in
2008, 2007 and 2006, respectively.

The
Company leases certain machinery and equipment under a capital lease agreement. The capital lease agreement expires in February 2011 and has an early buyout option in October 2009.
Assets recorded under the capital lease are included in property, plant and equipment. At January 3, 2009 and December 29, 2007, the cost of assets under the capital lease agreement was
$8,823,000 and accumulated depreciation was $5,882,000 and $4,470,000, respectively. Amortization of assets under the capital lease is included in depreciation expense.

Future
minimum capital and operating lease payments at January 3, 2009 are:

(in thousands)

Capital Leases

Operating Leases2009

$
1,604

$
1,4342010


1,604


1,1252011


268


9812012





4432013





3613,476

$
4,344Less amounts representing interest


157Present value of minimum lease payments


3,319Less current portion


1,495Capital lease obligation, less current portion

$
1,824


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.

66

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Polypore International, Inc.

Notes to consolidated financial statements (Continued)

11. Commitments and Contingencies (Continued)

Collective Bargaining Agreements

Approximately 40% 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 our employees in
Owensboro, Kentucky and Corydon, Indiana. On August 6, 2008, the union at the Company's lead-acid battery separator facility in Owensboro, Kentucky initiated a strike. On
September 26, 2008, the Company and the union agreed to an extension of the current labor contract and employees returned to work. On December 30, 2008 the Company and the union agreed
to a new labor contract that expires on April 1, 2012.

FTC Complaint

On April 7, 2008, the Company and its wholly-owned subsidiary, Daramic LLC, received a document subpoena and
interrogatories from the Federal Trade Commission (the "FTC") regarding the acquisition of Microporous. The Company responded fully to this request and met on several occasions with various members of
the FTC staff in an effort to answer their questions and resolve the investigation. On September 9, 2008, the 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. Proceedings will be held before an Administrative Law Judge of the FTC with an initial hearing currently scheduled to
begin on May 12, 2009. The timing of a final resolution of this matter is uncertain. The Company cannot predict the outcome of the investigation at this time and does not believe that the final
resolution of this matter will have a material adverse impact on the business, financial condition or results of operations of the Company. The costs associated with this complaint for fiscal 2008
were $2,646,000 and are included in selling, general and administrative costs.

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.

67

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Polypore International, Inc.

Notes to consolidated financial statements (Continued)

12. Income Taxes

Significant components of deferred tax assets and liabilities consist of:

(in thousands)

January 3, 2009

December 29, 2007Deferred tax assets:Pension and postretirement benefits

$
18,414

$
18,222Foreign tax credits


1,850


1,850State tax credits


1,642


1,751Net operating loss carryforwards


41,171


44,211Environmental reserve


7,856


3,522Other


9,753


5,836Total deferred tax assets


80,686


75,392Valuation allowance


(15,423
)

(6,050
)Net deferred tax assets


65,263


69,342Deferred tax liabilities:Property, plant and equipment


(75,849
)

(81,778
)Goodwill and intangibles


(61,983
)

(54,003
)Other


(5,024
)

(6,586
)Total deferred tax liabilities


(142,856
)

(142,367
)Net deferred taxes

$
(77,593
)
$
(73,025
)


In
2008, the valuation allowance increased by $9,373,000. The increase is primarily attributable to the restructuring charge in Potenza, Italy, the benefit of which may never be realized
since the Company will no longer have operations in Italy, partially offset by the reversal of a portion of the allowance relating to net operating losses in Austria which the Company believes it will
realize as a result of the Microporous acquisition.

The
Company had the following uncertain tax positions:

(in thousands)

January 3, 2009

December 29, 2007Balance at beginning of the year

$
11,308

$
8,703Increase related to current year positions


2,533


2,401Increase related to prior year positions


97


71Decrease related to settlements with taxing authorities


(5,797
)

Other


(101
)

133Balance at end of the year

$
8,040

$
11,308


The
Company recognizes accrued interest and penalties related to uncertain tax positions as a component of income tax expense in its financial statements. As of January 3, 2009
and December 29, 2007, the Company had accrued $336,000 and $485,000, respectively, for the potential payment of penalties and interest.

68

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Polypore International, Inc.

Notes to consolidated financial statements (Continued)

12. Income Taxes (Continued)

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 2000.

During
2008, the U.S. tax authority substantially completed its audit of the Company's Federal income tax returns for tax years 2003 and 2004. In accordance with FIN 48, the
Company reclassified $5,484,000 from its FIN 48 reserve (included in "Other" non-current liabilities in the accompanying balance sheet) to non-current deferred income
tax liabilities to reflect the effective settlement of tax issues in these tax years.

The
German tax authority has informed the Company that they will audit the 2001, 2002 and 2003 tax years of one of the Company's German subsidiaries. In addition, audits are being
conducted on the Company's subsidiaries in Austria and Italy for the 2005 and 2006 tax years, respectively. 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 results of operations, cash flows or financial position.

At
January 3, 2009, the Company has net operating loss carryforwards in the United States of $91,986,000 that expire beginning in 2026. During 2008, the Company utilized
$14,264,000 of the U.S. net operating loss carryforwards. The Company has total German net operating loss carryforwards of $18,124,000. During 2008 and 2007, the Company utilized $14,944,000 and
$17,100,000, respectively, of the German net operating loss carryforwards. The carryforwards in Germany do not expire but are subject to certain limitations in their use. The Company has net operating
loss carryforwards in Austria of $7,392,000 that do not expire but are subject to certain limitations in their use.

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

(in thousands)

January 3, 2009

December 29, 2007Current deferred tax asset

$
1,222

$
1,808Non-current deferred tax liability


(78,815
)

(74,833
)Net deferred taxes

$
(77,593
)
$
(73,025
)


Loss
from continuing operations before income taxes includes the following components:

Year Ended(in thousands)

January 3, 2009

December 29, 2007

December 30, 2006United States

$
4,610

$
(59,902
)
$
(39,247
)Foreign


(15,337
)

44,300


(13,252
)$
(10,727
)
$
(15,602
)
$
(52,499
)


69

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Polypore International, Inc.

Notes to consolidated financial statements (Continued)

12. Income Taxes (Continued)

Income
tax expense (benefit) from continuing operations consists of:

Year Ended(in thousands)

January 3, 2009

December 29, 2007

December 30, 2006Current:U.S. taxes on domestic income

$
850

$
2,592

$
1,631Foreign taxes


11,010


13,615


10,329Total current


11,860


16,207


11,960Deferred:U.S. taxes on domestic income


1,813


(22,232
)

(14,486
)Foreign taxes


(6,853
)

(10,024
)

(20,416
)Total deferred


(5,040
)

(32,256
)

(34,902
)$
6,820

$
(16,049
)
$
(22,942
)


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 3, 2009

December 29, 2007

December 30, 2006Computed income taxes at the expected statutory rate

$
(3,754
)
$
(5,465
)
$
(18,375
)State and local taxes


182


(1,337
)

(1,525
)Foreign taxes


(2,081
)

(3,439
)

(5,738
)Changes in tax laws





(8,529
)

Valuation allowance


9,866


(150
)

2,163Provision for uncertain tax positions


2,407


2,605


1,235Other


200


266


(702
)Income tax expense (benefit)

$
6,820

$
(16,049
)
$
(22,942
)


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
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 $1,969,000, $1,700,000 and
$1,300,000 in 2008, 2007 and 2006, respectively.

70

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Polypore International, Inc.

Notes to consolidated financial statements (Continued)

13. 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 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 3,
2009

December 29,
2007

January 3,
2009

December 29,
2007Change in Benefit ObligationBenefit obligation at beginning of year

$
(88,743
)
$
(85,706
)
$
(2,162
)
$
(1,926
)Service cost


(2,344
)

(2,171
)

(15
)

(67
)Interest cost


(4,433
)

(3,865
)

(119
)

(135
)Participant contributions








(37
)

(38
)Actuarial gain (loss)


1,672


8,176


(121
)

(359
)Benefit payments


2,941


2,273


222


363Settlements





59





Curtailments





635





Plan amendments


(550
)

1,067





Foreign currency translation and other


2,623


(9,211
)

51


Benefit obligation at end of year


(88,834
)

(88,743
)

(2,181
)

(2,162
)Change in Plan AssetsFair value of plan assets at beginning of year


23,915


21,401





Actual return on plan assets


(1,817
)

261





Company contributions


2,278


2,165


185


325Participant contributions








37


38Benefit payments


(2,941
)

(2,273
)

(222
)

(363
)Settlements





(59
)




Foreign currency translation and other


(265
)

2,420





Fair value of plan assets at end of year


21,170


23,915





Funded status at end of year

$
(67,664
)
$
(64,828
)
$
(2,181
)
$
(2,162
)Amounts recognized in the consolidated balance sheet consist of:Accrued liabilities

$
(3,388
)
$
(1,016
)
$
(191
)
$
(195
)Pension and postretirement benefits liabilities


(64,276
)

(63,812
)

(1,990
)

(1,967
)Net amount recognized

$
(67,664
)
$
(64,828
)
$
(2,181
)
$
(2,162
)Amounts recognized in accumulated other comprehensive loss (pre-tax) consist of:Net actuarial loss

$
6,450

$
6,230

$
142

$
20Prior service credit


(409
)

(1,060
)




Net amount recognized

$
6,041

$
5,170

$
142

$
20


The accumulated benefit obligation for all defined benefit pension plans was $85,997,000 and $81,942,000 at January 3, 2009 and
December 29, 2007, respectively. Each of the Company's defined benefit pension plans had accumulated benefit obligations in excess of plan assets at January 3, 2009.

71

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Polypore International, Inc.

Notes to consolidated financial statements (Continued)

13. Employee Benefit Plans (Continued)

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

Pension PlansYear ended(in thousands)

January 3, 2009

December 29, 2007

December 30, 2006Service cost

$
2,344

$
2,171

$
2,981Interest cost


4,433


3,865


3,180Expected return on plan assets


(993
)

(1,033
)

(75
)Amortization of prior service cost


(82
)

(76
)

16Recognized net actuarial loss


851


404


343Settlement gain, net





(59
)

(944
)Curtailment gain





(461
)

Net periodic benefit cost

$
6,553

$
4,811

$
5,501




Other Postretirement BenefitsYear ended(in thousands)

January 3, 2009

December 29, 2007

December 30, 2006Service cost

$
15

$
67

$
34Interest cost


119


135


111Recognized net actuarial loss





18


Net periodic benefit cost

$
134

$
220

$
145


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 3,
2009

December 29,
2007

January 3,
2009

December 29,
2007Discount rate used to determine the benefit obligation


5.70
%

5.25
%

6.25
%

6.00
%Discount rate used to determine the net periodic benefit costs


5.26
%

4.40
%

6.00
%

5.75
%Expected return on plan assets


4.97
%

5.00
%

N/A


N/ARate of compensation increase


2.52
%

2.00
%

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. 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 (including insurance

72

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Polypore International, Inc.

Notes to consolidated financial statements (Continued)

13. Employee Benefit Plans (Continued)

contracts).
At January 3, 2009, the actual portfolio allocations were 17% equity, 62% bonds and 21% insurance contracts.

The
estimated amounts that will be amortized from accumulated other comprehensive loss into net periodic benefit costs during 2009 are as follows:

(in thousands)

Pension PlansNet actuarial gain

$
(15
)Prior service credit


(54
)$
(69
)


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 9.0% for 2009, and is
assumed to trend down to 4.5% by 2028 and thereafter. The health care cost trend rate assumption has a significant effect on the amount of the obligation and periodic cost reported. A
one-percentage-point change in the health care trend rates would not have a material effect on the post-retirement benefit obligation.

In
2009, the Company expects to contribute $4,615,000 and $191,000 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
Benefits2009

$
5,414

$
1912010


3,990


1742011


3,403


1512012


3,648


1442013


3,836


1302014-2018


22,685


731


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 $2,545,000, $2,273,000 and $1,550,000
in 2008, 2007 and 2006, respectively.

73

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Polypore International, Inc.

Notes to consolidated financial statements (Continued)

13. Employee Benefit Plans (Continued)

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 2% or 3.25% of a participant's base earnings plus a matching of employee contributions allowing for a maximum matching contribution of 2.25% or 2.50% 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 $546,000, $707,000 and $613,000 in 2008, 2007 and 2006, respectively.

Postemployment Benefits

The Company provides postemployment benefits at its German subsidiary under the ATZ early retirement program. The ATZ program allows
older workers to stop working before they reach retirement age and receive a reduced salary and certain benefits until they reach retirement age. The Company accounts for benefits provided under the
ATZ program in accordance with FASB Statement No. 112,Employers' Accounting for Postemployment Benefits.

On
January 1, 2006, the Company adopted EITF Issue No. 05-5,Accounting for Early Retirement or Postemployment Programs with Specific
Features (Such As Terms Specified in Altersteilzeit Early Retirement Arrangements)("EITF 05-5"). Under EITF 05-5, the salary components
of Type I and Type II ATZ arrangements (excluding the bonus and additional contributions into the German government pension scheme) should be recognized over the period from the point at
which the ATZ period begins until the end of the active service period. The bonus feature and the additional contributions into the German government pension scheme (collectively, the additional
compensation) under a Type II ATZ arrangement should be accounted for as a postemployment benefit under FASB Statement No.112,Employers' Accounting for Postretirement
Benefits. An entity should recognize the additional compensation over the period from the point at which the employee signs the ATZ contract until the end of the active service
period. As a result of adopting this consensus, which was treated as a change in accounting estimate effected by a change in accounting principle, the Company reduced the accrual for postemployment
benefits and recognized $2,593,000 in operating income for the year ended December 30, 2006. The reduction in the postemployment benefits accrual decreased the net loss in fiscal 2006 by
$1,634,000, or $0.06 per share.

14. Environmental Matters

The Company accounts for environmental liabilities in accordance with AICPA Statement of Position 96-1, "Environmental Remediation
Liabilities." 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. 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

74

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Polypore International, Inc.

Notes to consolidated financial statements (Continued)

14. Environmental Matters (Continued)

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 $49,220,000 and $29,153,000 as of January 3, 2009 and December 29, 2007, respectively.

In
connection with the acquisition of 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. At January 3, 2009, the environmental reserve for the Membrana facility was $22,627,000. The Company anticipates that
expenditures will be made over the next seven to ten 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. The Akzo agreement provides indemnification of claims through December 2007, with the indemnification percentage decreasing each
year during the coverage period. Through December 2003, Akzo pays 75% of any approved claim. After that, Akzo pays 65% of claims reported through December 2006 and 50% of claims reported through
December 2007. 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 3, 2009 and December 29, 2007, amounts receivable under
the indemnification agreements were $17,867,000 and $19,952,000, respectively. The current portion of the indemnification receivable is included in "Prepaid and other" in the accompanying consolidated
balance sheets.

In
2004, the Company identified potential environmental contamination at its manufacturing facility in Potenza, Italy. Based on environmental studies and the initial remediation plan
presented to local authorities, the Company recorded a reserve for environmental obligations. In 2006, the Company further refined the remediation plan after consultations with local authorities. In
December 2008, the Company implemented a restructuring plan which included the closure of this manufacturing facility. Based on discussions with local authorities, environmental consultants and
internal personnel, the Company increased the environmental reserve at Potenza by $18,560,000 for the estimated additional costs of environmental remediation and monitoring activities that will be
required after closing the facility. Discussions with the local authorities regarding the required level of site clean-up and remediation are ongoing. The increase in the environmental
reserve was included in "Business restructuring" in the accompanying consolidated statements of operations. At January 3, 2009, the environmental reserve for the Potenza, Italy facility was
$23,502,000. The Company anticipates that expenditures will be made over the next seven to ten years.

In
connection with the acquisition of Microporous on February 29, 2008, the Company identified potential environmental contamination at the manufacturing site in Piney Flats,
Tennessee. Subsequent

75

---



Polypore International, Inc.

Notes to consolidated financial statements (Continued)

14. Environmental Matters (Continued)

to
the acquisition, the Company performed additional environmental studies and confirmed that environmental contamination was present. The estimated cost of remediation is $3,076,000. As part of the
acquisition, the seller purchased an environmental insurance policy on behalf of the Company and also provided indemnification for a portion of the insurance policy deductible. Amounts due under the
insurance policy and indemnification agreement are estimated to be $2,522,000. The Company recorded the estimated cost of remediation and the related receivables from the insurance company and
indemnification agreement in applying purchase accounting for the acquisition. The current portion of the indemnification receivable is included in "Prepaid and other" in the accompanying consolidated
balance sheets.

In
2006, the Company identified instances of potential non-compliance with its environmental operating permits at its Corydon, Indiana and Owensboro, Kentucky facilities. The
Company recorded its best estimate of potential penalties at that time. In March 2008, the Company reached agreement with the Indiana Department of Environmental Management and agreed to pay fines
consistent with the Company's original estimate. The Company does not believe that additional fines or penalties will be assessed.

15. Business Restructuring

2008 Restructuring Plan

A supply contract between the Company's lead-acid battery separator business and Johnson Controls, Inc. ("JCI")
expired on December 31, 2008. The contract was not renewed and the Company will not have a material supply position with JCI for automotive lead-acid battery separators in 2009. In
response, the Company implemented a restructuring plan in 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
initial plan includes 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 separator business. The total estimated cost of the plan is expected to be approximately $61,718,000, including cash charges of
$32,789,000 for severance, environmental, and other exit costs and a non-cash impairment charge of $28,929,000. The Company began implementing the restructuring plan during the fourth
quarter and recorded a restructuring charge of $59,942,000. The timing, scope and costs of these restructuring measures are subject to change as the Company implements the plan and continues to
evaluate its business needs and costs.

The
restructuring plan includes the termination of approximately 175 employees, consisting of production employees at Potenza, Italy and Owensboro, Kentucky and certain selling, general
and administrative employees. The total cost of severance and benefits was approximately $10,406,000. The restructuring plan includes a non-cash impairment charge of $28,929,000,
consisting primarily of buildings and machinery and equipment that will no longer be used in Potenza, Italy. The Company estimates that other costs, consisting primarily of costs associated with
closing the Potenza, Italy facility, are expected to be approximately $3,823,000, of which $2,047,000 was recognized in 2008 and the remainder will be recognized over the next three years. Cash
payments for severance and other exit costs are expected to be paid over the next three years.

76

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Polypore International, Inc.

Notes to consolidated financial statements (Continued)

15. Business Restructuring (Continued)

In
connection with the closing of the Potenza, Italy facility, the Company increased the environmental reserve by $18,560,000 for the estimated environmental remediation and monitoring
costs that will be required after closing the facility. The increase in the environmental reserve is included in "Business restructuring" in the accompanying consolidated statement of operations.

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 is expected to be approximately $33,753,000, consisting of a $17,492,000 non-cash impairment charge for buildings
and equipment, $10,466,000 for employee layoffs and $5,795,000 for other costs related to the shutdown of portions of the Wuppertal facility. The other costs included in the restructuring plan are
related to local regulations surrounding complete or partial shutdowns of a facility. During 2007, the reserve for severance and benefit costs was reduced as a result of lower actual severance
expenses than originally estimated.

2005 Restructuring Plan

In order to better accommodate customer growth and related demand for both lead-acid and lithium battery separators in the
greater Asian market, the Company's energy storage segment transferred certain assets from Europe and the United States to its
facilities in Thailand and China. The total cost of the realignment plan was $9,062,000, including a non-cash impairment charge of $1,278,000.

Restructuring
reserve activity during 2008, excluding restructuring charges for environmental costs, consists of:

(in thousands)

Balance at
December 29,
2007

Restructuring
Charges

Non-Cash
Charges

Cash
Payments

Foreign
Currency
Translation

Balance at
January 3,
20092008 Restructuring Plan:Severance and benefit costs

$


$
10,406

$


$
(1,430
)
$
871

$
9,847Impairment





28,929


(28,929
)







Other





2,047





(1,255
)

37


829


41,382


(28,929
)

(2,685
)

908


10,6762006 Restructuring Plan:Severance and benefit costs


3,548








(520
)

(144
)

2,884Other


1,288








(761
)

(35
)

4924,836








(1,281
)

(179
)

3,3762005 Restructuring Plan:Severance and benefit costs


404


(55
)




(334
)

(15
)

Total

$
5,240

$
41,327

$
(28,929
)
$
(4,300
)
$
714

$
14,052


77

---



Polypore International, Inc.

Notes to consolidated financial statements (Continued)

15. Business Restructuring (Continued)

Restructuring
reserve activity during 2007 consists of:

(in thousands)

Balance at
December 30,
2006

Restructuring
Charges

Cash
Payments

Foreign
Currency
Translation

Balance at
December 29,
20072006 Restructuring Plan:Severance and benefit costs

$
11,559

$
(937
)
$
(7,684
)
$
610

$
3,548Other


5,684


158


(4,771
)

217


1,28817,243


(779
)

(12,455
)

827


4,8362005 Restructuring Plan:Severance and benefit costs


876


161


(690
)

57


404Other





211


(211
)




876


372


(901
)

57


4042004 Restructuring Plan:Severance and benefit costs


1,152


(479
)

(729
)

56


Total

$
19,271

$
(886
)
$
(14,085
)
$
940

$
5,240


In
the consolidated balance sheets, the current portion of the reserve for business restructuring costs is recorded in "Accrued liabilities" and the non-current portion is
recorded in "Other" non-current liabilities.

16. 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.

17. Accumulated Other Comprehensive Loss

The components of accumulated other comprehensive loss were as follows:

(in thousands)

January 3, 2009

December 29, 2007Foreign currency translation adjustment

$
(12,623
)
$
(301
)Net actuarial loss and prior service credit


(4,287
)

(3,624
)Unrealized loss on interest rate swap agreements


(3,442
)

Accumulated other comprehensive loss

$
(20,352
)
$
(3,925
)


18. Stock-Based Compensation Plans

The Company offers stock option plans to attract, retain, motivate and reward key officers,
non-employee directors and employees. Stock options are issued at a price not less than the fair market value on the grant date.

78

---



Polypore International, Inc.

Notes to consolidated financial statements (Continued)

18. Stock-Based Compensation Plans (Continued)

On
June 28, 2007, the Company adopted the 2007 Stock Incentive Plan ("2007 Plan"). The 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 will be 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.

On
June 15, 2006, the Company adopted the Polypore International, Inc. 2006 Stock Option Plan ("2006 Plan") and reserved 2,596,694 shares for issuance under the 2006 Plan.
Options granted under the 2006 Plan have 10-year terms and vest based on satisfaction of certain annual and cumulative performance criteria over the four fiscal year period ended
January 2, 2010. In addition, all or a portion of the options granted under the 2006 Plan will vest upon a change in control if equity investors receive predetermined rates of return on their
investment.

In
2004, the Company adopted the Polypore International, Inc. 2004 Stock Option Plan ("2004 Plan"). Under the 2004 Plan, options granted have 10-year terms. As a
condition to receiving stock option grants under the 2006 Plan, participants in the 2006 Plan agreed that all unvested stock options granted under the 2004 Plan would be forfeited. Additionally, the
participants in the 2006 Plan agreed that all vested stock options granted under the 2004 Plan would be subject to the terms and conditions of the 2006 Plan and that the exercise price and expiration
date of the previously vested options would remain unchanged.

Stock
option compensation expense was $1,264,000, $706,000 and $532,000 in 2008, 2007 and 2006, respectively, and was included in "Selling, general and administrative expenses" in the
accompanying consolidated statements of operations. As of January 3, 2009, the Company had $2,102,000 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.

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

Options

Weighted-
average
exercise
price

Weighted
average
remaining
contractual
term (years)

Aggregate
intrinsic
value
(in thousands)Outstanding at December 29, 2007


2,464,039

$
6.89Granted


25,000


5.63Exercised


(301,390
)

5.25Forfeited


(50,670
)

9.56Outstanding at January 3, 2009


2,136,979


7.05


7.7

$
3,571Vested and exercisable at January 3, 2009


694,211


6.72


7.6


1,389Expected to vest


1,309,302


7.21


7.8


1,937


Exercise
prices for options outstanding at January 3, 2009 ranged from $4.92 to $17.76. The total intrinsic value of options exercised during 2008 and 2007 amounted to $5,540,000
and $243,000, respectively.

79

---



Polypore International, Inc.

Notes to consolidated financial statements (Continued)

18. Stock-Based Compensation Plans (Continued)

The
total fair values of options vested during 2008, 2007 and 2006 were $634,000, $374,000 and $309,000, respectively.

Under
FAS 123(R), the Company is required to estimate the fair value of stock options on the date of the grant using an option-pricing model. The weighted average
grant-date fair value of options granted during 2008, 2007 and 2006 amounted to $1.89, $6.91 and $1.32 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 assumptions2008

2007

2006Weighted-average expected life (years)


4.0

6.3


3.5Risk-free interest rate


1.3
%
3.6%4.5%


5.1
%Expected volatility


40.9
%
23.0%34.9%


23.0
%Dividend yield










The
potential expected life of the stock options range from the vesting period of the options (three and a half years to five years) to the contractual life of the options of ten years.
During 2008, 2007 and 2006, 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's historical volatility since its initial public offering. The Company does not anticipate paying dividends.

Under
the 2007 Plan, the Company awarded 1,644 and 1,848 restricted shares in 2008 and 2007, respectively, to members of its Board of Directors for the Board service to the Company. The
cost associated with these restricted stock grants, which vest over periods of three years, was $16,000 and $2,000 for fiscal 2008 and 2007, 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 grants as of January 3, 2009, and changes during the year then ended is as follows:

Restricted stock

Weighted-average grant-date fair valueUnvested at December 29, 2007


1,848

$
16.23Granted


1,644


24.31Vested


(616
)

16.23Unvested at January 3, 2009


2,876


20.85


80

---



Polypore International, Inc.

Notes to consolidated financial statements (Continued)

19. Related Party Transactions

The Company's German subsidiary has equity investments in two companies that provide patent, trademark and research services for the Company. The investments represent approximately 25%
ownership in each of the firms and are accounted for by the equity method of accounting. The Company's equity investment account balance was $413,000 and $278,000 at January 3, 2009 and
December 29, 2007, respectively. Charges from the affiliates for work performed were $1,550,000, $1,266,000 and $961,000 in 2008, 2007 and 2006, respectively. The Company has amounts due to the
affiliates of $98,000 and $112,000 at January 3, 2009 and December 29, 2007, respectively.

20. 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.

The
Company evaluates the performance of segments and allocates resources to segments based on operating income before interest, income taxes, depreciation and amortization. In addition,
it evaluates business segment performance before business restructuring charges and the impact of certain non-recurring costs including strike and costs associated with the FTC complaint.
The accounting policies of the reportable segments are the same as those described in the summary of significant

81

---



Polypore International, Inc.

Notes to consolidated financial statements (Continued)

20. Segment Information (Continued)

accounting
policies. Financial information relating to the reportable operating segments is presented below:

Year ended(in thousands)

January 3, 2009

December 29, 2007

December 30, 2006Net sales to external customers (by major product group):Lead-acid battery separators

$
348,240

$
291,473

$
261,758Lithium battery separators


101,964


87,884


79,693Energy storage


450,204


379,357


341,451Healthcare


103,029


103,151


94,065Filtration and specialty


57,297


52,159


42,640Separations media


160,326


155,310


136,705Total net sales to external customers

$
610,530

$
534,667

$
478,156Operating income:Energy storage

$
89,737

$
81,427

$
72,469Separations media


27,251


22,205


5,218Corporate


(1,009
)

(271
)

(258
)Segment operating income


115,979


103,361


77,429Business restructuring


59,887


(886
)

37,027Non-recurring costs


8,563





Change in accounting principle related to postemployment benefits








(2,593
)Total operating income


47,529


104,247


42,995Reconciling items:Interest expense


60,740


80,998


92,287Costs related to purchase of 10.50% senior discount notes





30,057


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





7,173


Foreign currency and other


(2,484
)

1,621


3,207Loss from continuing operations before income taxes

$
(10,727
)
$
(15,602
)
$
(52,499
)Depreciation and amortization:Energy storage

$
37,121

$
32,334

$
31,453Separations media


17,923


16,519


28,759Total depreciation and amortization

$
55,044

$
48,853

$
60,212Capital expenditures:Energy storage

$
38,742

$
18,219

$
15,009Separations media


9,271


11,556


8,903Total capital expenditures

$
48,013

$
29,775

$
23,912


82

---



Polypore International, Inc.

Notes to consolidated financial statements (Continued)

20. Segment Information (Continued)



(in thousands)

January 3, 2009

December 29, 2007Assets:Energy storage

$
938,400

$
874,522Separations media


484,108


516,828Corporate assets


76,346


37,693Total assets

$
1,498,854

$
1,429,043


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

Year ended(in thousands)

January 3, 2009

December 29, 2007

December 30, 2006Net sales to unaffiliated customers:United States

$
222,146

$
185,315

$
179,965Germany


152,754


150,461


131,002France


86,409


80,259


73,290Other


149,221


118,632


93,899Total

$
610,530

$
534,677

$
478,156


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

(in thousands)

January 3, 2009

December 29, 2007United States

$
155,444

$
111,378Germany


163,617


180,557Thailand


48,348


44,620Other


49,387


64,729Total

$
416,796

$
401,284


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 for all periods presented in the Company's
consolidated statements of operations.

83

---



Polypore International, Inc.

Notes to consolidated financial statements (Continued)

22. Quarterly Results of Operations (Unaudited)

(in thousands, except per share data)

First
Quarter

Second
Quarter

Third
Quarter

Fourth
QuarterFiscal year ended January 3, 2009Net sales

$
145,329

$
164,665

$
154,923

$
145,613Gross profit


55,460


61,095


46,868


52,297Income (loss) from continuing operations


10,552


11,174


5,088


(44,361
)Income from discontinued operations, net of income taxes


2,360








Net income (loss)


12,912


11,174


5,088


(44,361
)Net income (loss) per common sharebasic and dilutedContinuing operations

$
0.26

$
0.26

$
0.11

$
(1.00
)Discontinued operations


0.06








Net income (loss) per common share

$
0.32

$
0.26

$
0.11

$
(1.00
)




(in thousands, except per share data)

First
Quarter

Second
Quarter

Third
Quarter

Fourth
QuarterFiscal year ended December 29, 2007Net sales

$
129,036

$
131,063

$
129,930

$
144,638Gross profit


48,146


47,775


45,839


55,225Income (loss) from continuing operations


2,094


(1,062
)

(14,622
)

14,037Income (loss) from discontinued operations, net of income taxes


16


11


42


30Net income (loss)


2,110


(1,051
)

(14,580
)

14,067Net income (loss) per common sharebasic and dilutedContinuing operations

$
(0.08
)
$
(0.04
)
$
(0.36
)
$
0.35Discontinued operations











Net income (loss) per common share

$
(0.08
)
$
(0.04
)
$
(0.36
)
$
0.35


During
the fourth quarter of 2008, the Company implemented a restructuring plan and recorded total restructuring charges of $59,887,000.

During
the third quarter of 2007, the Company used the proceeds from its initial public offering and cash on hand to purchase and retire its 10.50% senior discount notes. As a result of
the purchase of the notes, the Company incurred a $30,057,000 charge to income, which is comprised of redemption and tender premiums of $29,522,000 and the write-off of unamortized loan
acquisition costs of $535,000. The Company also refinanced Polypore's senior secured credit facility with a new senior secured credit facility. In connection with the refinancing, the Company
wrote-off loan acquisition costs of $7,173,000 associated with the previous senior secured credit facility.

During
the third quarter of 2007, the German government enacted the 2008 Tax Reform Act legislation which reduced corporate income tax rates and changed the calculation of taxable income
in Germany. The Company recognized the effect of the new tax legislation during the third quarter of 2007, resulting in an increase in the income tax benefit of $6,140,000.

During
the fourth quarter of 2007, the Italian Parliament approved the 2008 Finance Bill which reduced corporate income tax rates affected taxation of corporations doing business in
Italy. As a result of the changes in the Italian and German tax laws, the Company recorded an additional tax benefit of $2,389,000 in the fourth quarter of 2007 to reflect the new legislation.

23. Financial Statements of Guarantors

On July 31, 2007, Polypore merged with and into the Company, and the Company assumed all of Polypore's obligations under the 8.75% senior subordinated notes. The senior
subordinated notes are unconditionally guaranteed, jointly and severally, on a senior basis by certain of the Company's wholly-owned subsidiaries ("Guarantors"). Management has determined that
separate complete financial statements of the Guarantors would not be material to users of the financial statements.

84

---





Polypore International, Inc.

Notes to consolidated financial statements (Continued)

23. Financial Statements of Guarantors (Continued)

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

Condensed Consolidating Balance Sheet        As of January 3, 2009

(in thousands)

Combined
Guarantor
Subsidiaries

Combined
Non-Guarantor
Subsidiaries

The Company

Reclassifications
and Eliminations

ConsolidatedAssetsCash and cash equivalents

$


$
25,657

$
57,364

$


$
83,021Accounts receivable, net


36,383


64,026








100,409Inventories


25,444


44,954








70,398Refundable income taxes


617


14,492


(8,832
)




6,277Deferred income taxes








1,222





1,222Prepaid and other


3,831


10,541


(97
)




14,275Total current assets


66,275


159,670


49,657





275,602Due from affiliates


314,895


358,691


294,702


(968,288
)

Investment in subsidiaries


250,996


282,531


297,196


(830,723
)

Property, plant and equipment, net


155,444


261,352








416,796Goodwill








601,564





601,564Intangibles and loan acquisition costs, net


31





184,823





184,854Other


3,260


16,778








20,038Total assets

$
790,901

$
1,079,022

$
1,427,942

$
(1,799,011
)
$
1,498,854Liabilities and shareholders' equityAccounts payable and accrued liabilities

$
31,577

$
44,620

$
6,386

$


$
82,583Current portion of debt





550


3,230





3,780Current portion of capital lease obligation


1,495











1,495Fair value of interest rate swap agreements








5,477





5,477Total current liabilities


33,072


45,170


15,093





93,335Due to affiliates


368,754


326,642


272,892


(968,288
)

Debt, less current portion





47,520


748,696





796,216Capital lease obligation, less current portion


1,824











1,824Pension and postretirement benefits, less current portion


2,797


63,469








66,266Postemployment benefits





2,425








2,425Environmental reserve, less current portion


2,061


38,423








40,484Deferred income taxes and other


67,749


39,294


(1,602
)




105,441Shareholder's equity


314,644


516,079


392,863


(830,723
)

392,863Total liabilities and shareholders' equity

$
790,901

$
1,079,022

$
1,427,942

$
(1,799,011
)
$
1,498,854


85

---



Polypore International, Inc.

Notes to consolidated financial statements (Continued)

23. Financial Statements of Guarantors (Continued)

Condensed Consolidating Balance Sheet        As of December 29, 2007

(in thousands)

Combined
Guarantor
Subsidiaries

Combined
Non-Guarantor
Subsidiaries

The Company

Reclassifications
and Eliminations

ConsolidatedAssetsCash and cash equivalents

$


$
40,055

$
14,879

$


$
54,934Accounts receivable, net


36,116


79,503








115,619Inventories


20,360


43,969








64,329Deferred income taxes








1,808





1,808Prepaid and other


2,578


10,242


(155
)




12,665Total current assets


59,054


173,769


16,532





249,355Due from affiliates


237,033


324,314


287,491


(848,838
)

Investment in subsidiaries


224,443


283,721


270,952


(779,116
)

Property, plant and equipment, net


111,379


289,905








401,284Goodwill





1,240


567,544





568,784Intangibles and loan acquisition costs, net


44





187,817





187,861Other


1,552


17,659


2,548





21,759Total assets

$
633,505

$
1,090,608

$
1,332,884

$
(1,627,954
)
$
1,429,043Liabilities and shareholders' equityAccounts payable and accrued liabilities

$
30,548

$
47,206

$
6,800

$


$
84,554Income taxes payable








424





424Current portion of debt





513


4,036





4,549Current portion of capital lease obligation


1,435











1,435Total current liabilities


31,983


47,719


11,260





90,962Due to affiliates


315,847


310,017


222,974


(848,838
)

Debt, less current portion





50,661


762,875





813,536Capital lease obligation, less current portion


3,319











3,319Pension and postretirement benefits, less current portion


2,343


63,436








65,779Postemployment benefits





3,673








3,673Environmental reserve, less current portion





22,627








22,627Deferred income taxes and other


70,954


22,418


444





93,816Shareholder's equity


209,059


570,057


335,331


(779,116
)

335,331Total liabilities and shareholders' equity

$
633,505

$
1,090,608

$
1,332,884

$
(1,627,954
)
$
1,429,043


86

---





Polypore International, Inc.

Notes to consolidated financial statements (Continued)

23. Financial Statements of Guarantors (Continued)

Condensed Consolidating Statement of Operations        For the year ended January 3, 2009

(in thousands)

Combined
Guarantor
Subsidiaries

Combined
Non-Guarantor
Subsidiaries

The
Company

Reclassifications
and Eliminations

ConsolidatedNet sales

$
230,838

$
379,692

$


$


$
610,530Cost of goods sold


115,626


281,584








397,210Business interruption proceeds


(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


(7,872
)

11,689


54,439





58,256Equity 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
)


87

---



Polypore International, Inc.

Notes to consolidated financial statements (Continued)

23. Financial Statements of Guarantors (Continued)

Condensed Consolidating Statement of Operations        For the year ended December 29, 2007

(in thousands)

Combined
Guarantor
Subsidiaries

Combined
Non-Guarantor
Subsidiaries

The
Company

Reclassifications
and Eliminations

ConsolidatedNet sales

$
185,315

$
349,352

$


$


$
534,667Cost of goods sold


80,013


257,669








337,682Gross profit


105,302


91,683








196,985Selling, general and administrative expenses


58,955


34,119


550





93,624Business restructuring





(886
)







(886
)Operating income (loss)


46,347


58,450


(550
)




104,247Costs related to purchase of 10.50% senior discount notes








30,057





30,057Write-off of loan acquisition costs associated with refinancing of senior secured credit facilities








7,173





7,173Interest expense and other


(7,276
)

10,357


79,538





82,619Equity in earnings of subsidiaries








(64,151
)

64,151


Income (loss) before income taxes


53,623


48,093


(53,167
)

(64,151
)

(15,602
)Income taxes


29,432


8,133


(53,614
)




(16,049
)Income from continuing operations

$
24,191

$
39,960

$
447

$
(64,151
)
$
447


88

---



Polypore International, Inc.

Notes to consolidated financial statements (Continued)

23. Financial Statements of Guarantors (Continued)

Condensed Consolidating Statement of Operations    For the year ended December 30, 2006

(in thousands)

Combined
Guarantor
Subsidiaries

Combined
Non-Guarantor
Subsidiaries

The
Company

Reclassifications
and Eliminations

ConsolidatedNet sales

$
179,621

$
298,535

$


$


$
478,156Cost of goods sold


80,145


233,109








313,254Gross profit


99,476


65,426








164,902Selling, general and administrative expenses


54,112


32,630


731





87,473Business restructuring





37,027








37,027Change in accounting principle related to postemployment benefits





(2,593
)







(2,593
)Operating income (loss)


45,364


(1,638
)

(731
)




42,995Interest expense and other


(4,449
)

7,534


92,409





95,494Equity in earnings of subsidiaries








(21,579
)

21,579


Income (loss) before income taxes


49,813


(9,172
)

(71,561
)

(21,579
)

(52,499
)Income taxes


27,951


(8,889
)

(42,004
)




(22,942
)Income (loss) from continuing operations

$
21,862

$
(283
)
$
(29,557
)
$
(21,579
)
$
(29,557
)


89

---



Polypore International, Inc.

Notes to consolidated financial statements (Continued)

23. Financial Statements of Guarantors (Continued)

Condensed Consolidating Statement of Cash Flows        For the year ended January 3, 2009

(in thousands)

Combined
Guarantor
Subsidiaries

Combined
Non-Guarantor
Subsidiaries

The
Company

Reclassifications
and Eliminations

ConsolidatedNet cash provided by (used in) operating activities

$
60,271

$
69,579

$
(14,892
)
$
(20,272
)
$
94,686Investing activities:Acquisitions, net of cash acquired








(85,795
)




(85,795
)Purchases of property, plant and equipment


(23,128
)

(24,885
)







(48,013
)Proceeds from sale of synthetic paper business


4,000











4,000Net cash provided by (used in) investing activities


(19,128
)

(24,885
)

(85,795
)




(129,808
)Financing activities:Proceeds from issuance of common stock, net of underwriting fees and other offering related costs








84,847





84,847Principal payments on debt


(6,248
)

(10,391
)

(4,031
)




(20,670
)Proceeds from stock option issuances








1,540





1,540Intercompany transactions, net


(35,619
)

(45,469
)

60,816


20,272


Net cash provided by (used in) financing activities


(41,867
)

(55,860
)

143,172


20,272


65,717Effect of exchange rate changes on cash and cash equivalents


724


(3,232
)







(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


90

---





Polypore International, Inc.

Notes to consolidated financial statements (Continued)

23. Financial Statements of Guarantors (Continued)

Condensed Consolidating Statement of Cash Flows    For the year ended December 29, 2007

(in thousands)

Combined
Guarantor
Subsidiaries

Combined
Non-Guarantor
Subsidiaries

The Company

Reclassifications
and Eliminations

ConsolidatedNet cash provided by (used in) operating activities

$
27,467

$
50,013

$
48,548

$
(56,722
)
$
69,306Investing activities:Purchases of property, plant and equipment


(12,470
)

(17,305
)







(29,775
)Acquisitions, net of cash acquired





(5,475
)







(5,475
)Net cash provided by (used in) investing activities


(12,470
)

(22,780
)







(35,250
)Financing activities:Proceeds from the new senior secured credit facility





42,551


327,449





370,000Principal payments on debt


(1,377
)

(95
)

(371,139
)




(372,611
)Purchase of the 10.50% senior discount notes








(293,666
)




(293,666
)Proceeds from initial public offering, net of underwriting fees and other offering related costs








264,837





264,837Loan acquisition costs








(8,672
)




(8,672
)Repurchase of common stock








(320
)




(320
)Issuance of common stock








30





30Intercompany transactions, net


(13,671
)

(66,958
)

23,907


56,722


Net cash provided by (used in) financing activities


(15,048
)

(24,502
)

(57,574
)

56,722


(40,402
)Effect of exchange rate changes on cash and cash equivalents


51


6,517








6,568Net increase (decrease) in cash and cash equivalents





9,248


(9,026
)




222Cash and cash equivalents at beginning of year





30,807


23,905





54,712Cash and cash equivalents at end of year

$


$
40,055

$
14,879

$


$
54,934


91

---



Polypore International, Inc.

Notes to consolidated financial statements (Continued)

23. Financial Statements of Guarantors (Continued)

Condensed Consolidating Statement of Cash Flows    For the year ended December 30, 2006

(in thousands)

Combined
Guarantor
Subsidiaries

Combined
Non-Guarantor
Subsidiaries

The Company

Reclassifications
and Eliminations

ConsolidatedNet cash provided by (used in) operating activities

$
43,510

$
47,782

$
(20,196
)
$
(21,131
)
$
49,965Investing activities:Purchases of property, plant and equipment


(9,933
)

(13,979
)







(23,912
)Net cash provided by (used in) investing activities


(9,933
)

(13,979
)







(23,912
)Financing activities:Principal payments on debt


(1,299
)

(1,188
)

(946
)




(3,433
)Loan acquisition costs








(15
)




(15
)Issuance of common stock








399





399Intercompany transactions, net


(32,250
)

(23,682
)

34,801


21,131


Net cash provided by (used in) financing activities


(33,549
)

(24,870
)

34,239


21,131


(3,049
)Effect of exchange rate changes on cash and cash equivalents


(48
)

3,701


(5
)




3,648Net increase (decrease) in cash and cash equivalents


(20
)

12,634


14,038





26,652Cash and cash equivalents at beginning of year


20


18,173


9,867





28,060Cash and cash equivalents at end of year

$


$
30,807

$
23,905

$


$
54,712


92

---





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 provide a reasonable assurance 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 3, 2009 to provide reasonable assurance 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 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.

For
purposes of evaluating internal controls over financial reporting, management determined that the internal controls over financial reporting at Microporous Holding Corporation
("Microporous") and Yurie-Wide Corporation ("Yurie-Wide"), both acquired in 2008, would be excluded from the internal control assessment as of January 3, 2009, as
permitted by the rules and regulations of the SEC. Microporous and Yurie-Wide accounted for approximately 5.3% and 0.9% of total assets at January 3, 2009, respectively.

Based
on its assessment, management has concluded that the Company maintained effective internal control over financial reporting as of January 3, 2009, 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 3, 2009 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 2008, 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.

93

---



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 2009 Annual Meeting of Stockholders to be held on May 14, 2009.

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 2009 Annual Meeting of Stockholders to be held on May 14, 2009.

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 2009 Annual Meeting of Stockholders to be held on May 14, 2009.

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 2009 Annual Meeting of Stockholders to be held on May 14, 2009.

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 2009 Annual Meeting of Stockholders to be held on May 14, 2009.

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:



94

---





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 (Registration No. 333-141273), filed with the SEC on June 15, 2007)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 with the SEC 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)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))


95

---



Exhibit Number

Exhibit Description10.2

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*

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 with the SEC on May 1, 2008)10.8*

Amended Employment Agreement, dated as of December 18, 2008, by and between Polypore International, Inc. and Robert B. Toth10.9*

Employment Agreement, dated as of April 17, 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. Pulwer10.11*

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 Policy10.14

North American Supply Agreement, dated as of December 15, 1999, by and between Daramic, Inc. and Exide Corporation (incorporated by reference to Exhibit 10.20 to Amendment No. 5 to the Company's
Registration Statement on Form S-1 (Registration No. 333-141273), filed with the SEC on June 26, 2007)10.15

Automotive and Industrial Supply Agreement, dated as of July 31, 2001, by and between Daramic, Inc. and Exide Corporation (incorporated by reference to Exhibit 10.21 to Amendment No. 5 to the
Company's Registration Statement on Form S-1 (Registration No. 333-141273), filed with the SEC on June 26, 2007)


96

---



Exhibit Number

Exhibit Description10.16

Golf Cart Separator Supply Agreement, dated as of July 31, 2001, by and between Daramic, Inc. and Exide Corporation (incorporated by reference to Exhibit 10.22 to Amendment No. 5 to the Company's
Registration Statement on Form S-1 (Registration No. 333-141273), filed with the SEC on June 26, 2007)10.17

Amendment to Supply Contracts, dated July 31, 2001, by and between Daramic, Inc. and Exide Corporation (incorporated by reference to Exhibit 10.23 to Amendment No. 5 to the Company's Registration
Statement on Form S-1 (Registration No. 333-141273), filed with the SEC on June 26, 2007)10.18

Amendment No. 2 to Supply Contracts, dated as of July 11, 2002, by and between Daramic, Inc. and Exide Corporation (incorporated by reference to Exhibit 10.24 to Amendment No. 5 to the
Company's Registration Statement on Form S-1 (Registration No. 333-141273), filed with the SEC on June 26, 2007)10.19

Amendment to the Automotive and Industrial Supply Agreement, dated as of March, 2005, by and between Daramic, Inc. and Exide Corporation (incorporated by reference to Exhibit 10.25 to Amendment No. 5 to
the Company's Registration Statement on Form S-1 (Registration No. 333-141273), filed with the SEC on June 26, 2007)10.20*

Polypore International, Inc. 2007 Stock Incentive Plan (incorporated by reference to Exhibit 10.26 to Amendment No. 4 to the Company's Registration Statement on Form S-1 (Registration
No. 333-141273), filed with the SEC on June 15, 2007)10.21

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))10.22

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))10.23

Amended and Restated Credit Agreement, dated as of July 3, 2007, between 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)10.24

First Amendment and Reaffirmation Agreement, dated as of July 3, 2007, between PP Holding Corporation, Polypore, Inc. and all of Polypore, Inc.'s domestic restricted subsidiaries (incorporated by
reference to Exhibit 10.2 to the Company's Current Report on Form 8-K, filed on July 10, 2007)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 200232.1

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


---

97

---





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:
March 10, 2009

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 capacity and on the
dates indicated.

/s/ ROBERT B. TOTH Robert B. Toth

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

March 10, 2009/s/ LYNN AMOS Lynn Amos

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

March 10, 2009/s/ MICHAEL GRAFF Michael Graff

Chairman of the Board

March 10, 2009/s/ DAVID BARR David Barr

Director

March 10, 2009/s/ CHARLES L. COONEY Charles L. Cooney

Director

March 10, 2009/s/ WILLIAM DRIES William Dries

Director

March 10, 2009/s/ FREDERICK C. FLYNN, JR. Frederick C. Flynn, Jr.

Director

March 10, 2009/s/ W. NICHOLAS HOWLEY W. Nicholas Howley

Director

March 10, 2009/s/ KEVIN KRUSE Kevin Kruse

Director

March 10, 2009


98

---





Schedule II

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

For the years ended January 3, 2009, December 29, 2007 and December 30, 2006

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 3, 2009:Allowance for doubtful accounts

$
8,812

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


6,050


10,812


(493
)

(946
)

15,423$
14,862

$
10,660

$
(795
)
$
(1,562
)
$
23,165Year ended December 29, 2007:Allowance for doubtful accounts

$
8,610

$
134

$
775
(1)
$
(707
)(2)
$
8,812Valuation allowance of deferred tax asset


6,200








(150
)

6,050$
14,810

$
134

$
775

$
(857
)
$
14,862Year ended December 30, 2006:Allowance for doubtful accounts

$
6,815

$
1,887

$
530
(1)
$
(622
)(2)
$
8,610Valuation allowance of deferred tax asset


4,037


2,163








6,200$
10,852

$
4,050

$
530

$
(622
)
$
14,810


---

S-1

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