Document:

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                                                                    Exhibit 10.9

BENEFIT PLAN - LYDALL, INC. 1992 STOCK INCENTIVE COMPENSATION PLAN

1.   Purpose
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     The purpose of the Plan is to further the growth and prosperity of the
     Company and its Subsidiaries through payment of incentive compensation in
     the form of Common Stock to officers, key employees and directors and by
     encouraging investment in the Company's Common Stock by officers, key
     employees and directors who are in a position to contribute materially to
     the Company's prosperity.

2.   Definitions
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     Unless the context clearly indicates otherwise, the following terms, when
     used in this Plan, shall have the meanings set forth in this Section 2.

     "Annual Retainer" means the annual retainer payable to each Outside
      ---------------
     Director of the Company for each full year of service as such, the amount
     of which for purposes of this Plan may not be changed more than once every
     12 months.

     "Award Period" means for each Restricted Stock Award, the period beginning
      ------------
     with the date on which such Award is granted and ending on a date specified
     by the Committee at the time of the granting of such Award. In no event
     shall the Award Period be greater than ten (10) years.

     "Board of Directors" or "Board" means the Board of Directors of the
      ------------------      -----
     Company.

     "Change in Control of the Company" means (i) an acquisition of the Company
      --------------------------------
     by means of a merger or consolidation or purchase of
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     substantially all of its assets if and when incident thereto (a) the
     composition of the Board of Directors or its successor changes so that a
     majority of the Board is not comprised of individuals who were members of
     the Board immediately prior to such merger, consolidation or purchase of
     assets or (b) the stockholders of the Company acquire a right to receive,
     in exchange for or upon surrender of their stock, cash or other securities
     or a combination of the two, or (ii) the acquisition by a Person (as that
     term is hereafter defined) of the voting rights with respect to 25 percent
     or more of the outstanding Common Stock of the Company if such person was
     not an officer or director of the Company on May 13, 1992.

     "Code" means the Internal Revenue Code of 1986, as amended, and any
      ----
     successor Code, related rules, regulations and interpretations.

     "Committee" means the committee of the Board of Directors that has been
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     designated to administer the Plan. The Committee shall consist of not less
     than two members of the Board of Directors as so designated and appointed
     from time to time by the Board. To be eligible to serve as a member of the
     Committee, a director must qualify as (i) a "Non-Employee Director" within
     the meaning of Rule 16b-3(b)(3) promulgated under the Securities Exchange
     Act of 1934, as amended, and any successor to such rule, and (ii) an
     "Outside Director" within the meaning of Section 162(m) of the code and any
     successor to such Section.
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     "Common Stock" means the common stock of the Company with the par value set
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     forth in the Certificate of Incorporation.

     "Company" means Lydall, Inc.
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     "Director" means a member of the Board of Directors.
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     "Fair Market Value" means the closing sale price per share on the New York
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     Stock Exchange (or if not traded on the New York Stock Exchange, then on
     whatever national exchange the shares of the Common Stock of the Company
     are traded) on the day before the award date or on the day before the
     exercise date, as appropriate. If no trade occurred on the Exchange on the
     day before the award date or on the day before the exercise date, the
     closing sale price per share on the most recent date on which sales were
     reported will be substituted for the closing sale price on that day.

     "Incentive Award" means an Option, a Restricted Stock Award, a Stock Bonus
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     Award, or a combination of them.

     "Incentive Stock Option" means an Option which meets the requirements of
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     Section 422A of the Code.

     "Nonqualified Option" means an Option not qualifying for Incentive Stock
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     Option treatment under the Code.

     "Option" means a Nonqualified Option or Incentive Stock Option.
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     "Outside Director" means a member of the Board of Directors who, as of the
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     close of business on the date of grant of any Incentive Award hereunder, is
     not an employee of the Company or any of its Subsidiaries.
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     "Person" - for purposes of the definition of "Change in Control of the
      ------
     Company," a "person" means an individual, corporation, trust or other legal
     or commercial entity and includes two or more persons acting as a
     partnership, limited partnership, syndicate, or other group for the purpose
     of acquiring, holding, or disposing of securities of the Company.

     "Plan" means the Lydall, Inc. 1992 Stock Incentive Compensation Plan.
      ----

     "Restricted Stock Award" means the right to receive a specified number of
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     shares of Common Stock in annual installments over a designated Award
     Period.

     "Stock Bonus Award" means an award of shares of Common Stock to an Outside
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     Director pursuant to Section 6 or to an employee of the Company pursuant to
     Section 11 hereof.

     "Subsidiary" or "Subsidiaries" means a corporation or other form of
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     business entity, more than 50 percent of the voting interest of which is
     owned or controlled, directly or indirectly, by the Company.

3.   Shares of Common Stock Subject to the Plan
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     (a)  Subject to the provisions of paragraph (c) of this Section 3 and
          Section 12, the total number of shares of Common Stock which may be
          issued or transferred under this Plan 1) upon exercise of Options; 2)
          when an Outside Director or employee becomes entitled to receive
          shares of stock pursuant to a
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          Stock Bonus Award; and 3) under the terms of a Restricted Stock Award,
          shall not exceed 2,420,000 shares.

     (b)  Shares to be issued or transferred to employees will be made
          available, at the discretion of the Board of Directors, either from
          authorized but unissued shares of Common Stock, or from shares of
          Common Stock held by the Company as treasury shares, including shares
          purchased in the open market.

     (c)  If any share of Common Stock issuable or transferable under an
          Incentive Award is not issued or transferred and ceases to be issuable
          or transferable because (i) of the lapse, in whole or in part, of such
          Incentive Award; (ii), it is subject to the provisions of paragraph
          (b) of Section 9 or paragraph (d) Section 10, or (iii) for any other
          reason, the shares not so issued or transferred shall no longer be
          charged against the limitation provided for in paragraph (a) of this
          Section 3 and may again be used for Incentive Awards.

4.   Administration of the Plan
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     The Plan shall be administered by the Committee. The Committee shall have
     authority, in its discretion and after receiving the recommendations of the
     Chairman of the Company, to determine the employees to whom Incentive
     Awards will be granted, the time or times at which Incentive Awards will be
     granted, and the number of shares to be subject to each Incentive Award. In
     making such determinations, the nature of the services rendered by the
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     respective employees, their present and potential contributions to the
     Company's success and such other factors deemed to be relevant will be
     taken into account. Subject to the express provisions of the Plan, the
     Committee shall also have authority to interpret the Plan, to prescribe,
     amend and rescind rules and regulations relating to it, to determine the
     terms and provisions of the respective Incentive Award Agreements (which
     need not be identical) including the determination of whether Options
     granted will be designated as Incentive Stock Options and to make all other
     determinations necessary or advisable for the administration of the Plan.
     The Committee will hold its meetings at such times and places as it may
     determine. A majority of its members will constitute a quorum, and all
     determinations of the Committee shall be made by a majority of its members.

5.   Participation
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     (a)  Except as set forth in Sections 6, 7 and 8 hereof, Incentive Awards
          may be granted to officers and other key employees of the Company and
          its Subsidiaries.

     (b)  From time to time the Chairman of the Company will determine and
          recommend to the Committee those officers and key employees of the
          Company and of its Subsidiaries who should be granted Incentive
          Awards, the type of Incentive Awards to be granted, and the number of
          shares subject to each Incentive Award; provided, however, that no
          person may be granted in any calendar year Incentive Awards covering
          more
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          than 100,000 shares of Common Stock. The Committee shall approve or
          disapprove such recommendations.

     (c)  Incentive Awards may be granted in the following forms:

          (i)   a Restricted Stock Award, in accordance with Section 9,

          (ii)  an Option, in accordance with Section 10, which may be
                designated as an Incentive Stock Option as that term is defined
                in Section 422A of the Code,

          (iii) a Stock Bonus Award, in accordance with Section 11, or

          (iv)  a combination of the foregoing.

6.   Stock Bonus Awards To Outside Directors in Lieu of Annual Cash Retainers.
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     On June 30 and December 31 of each year during the term of the Plan, each
     person then serving as an Outside Director of the Company shall be granted
     a Stock Bonus Award in respect of that number of whole shares of Common
     Stock obtained by dividing fifty percent (50%) of the Annual Retainer then
     in effect by the Fair Market Value of a share of Common Stock as of the
     date of grant, in each case rounded upward to the nearest number of whole
     shares. The Stock Bonus Awards contemplated by this Section 6 shall be
     granted in lieu of any future cash payments to Outside Directors in respect
     of the Annual Retainer.

7.   Non-Qualified Option Awards to Directors in Lieu of Cash-Based Retirement
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     Benefits.
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     a)   On December 31 of each year during the term of the Plan, each person
          then serving as an Outside Director and the Chairman of the Company
          shall be granted a Non-Qualified Option covering three hundred
          twenty-five (325) shares of Common Stock. The Non-Qualified Options
          contemplated by this Section 7 shall be granted in lieu of any future
          accruals under the Lydall, Inc. Board of Directors Deferred
          Compensation Plan.

     b)   The purchase price of each share of Common Stock under a Non-
          Qualified Option granted under this section 7 shall be Fair Market
          Value of a share of Common Stock as of the date each such
          Non-Qualified Option is granted.

     c)   Each Non-Qualified Option granted under this Section 7 shall become
          exercisable in three equal annual installments commencing as of the
          first anniversary of the date of grant and shall be exercisable until
          the earlier of ten (10) years from the date of grant or the expiration
          of the three (3) year period provided in paragraph (d) below.

     d)   Whenever a recipient of Non-Qualified Option granted under this
          Section 7 ceases to be a Director of the Company for any reason
          whatsoever, all outstanding Non-Qualified options granted under this
          Section 7 then held by such person shall continue to vest and be
          exercisable in whole or in part for a period of three (3) years from
          the date on which such person ceases to be a Director of the Company;
          provided, however,
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          that, if the effective date of any such cessation of service occurs on
          or before March 31 of any given year, the Non- Qualified Option
          granted as of the previous December 31 (and only that Non-Qualified
          Option), if any, shall continue to vest and be exercisable in whole or
          in part until March 31 of the year that is three (3) years from the
          date on which such person ceases to be a Director of the Company; and
          provided further that, in no event, shall any such Non-Qualified
          Option be exercisable beyond the ten (10) year term of the Option
          specified in paragraph (c) above.

     e)   Except as set forth above, the terms and conditions of each Non-
          Qualified Stock Option granted under this Section 7 shall be specified
          in Section 10 below.

8.   Additional Automatic Awards to Directors
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     a)   On each of May 7, 1999 and May 7, 2002, each person then serving as a
          Director of the Company shall be granted a Non- Qualified Option
          covering the lesser of 9,000 shares of Common Stock or a number of
          shares of Common Stock having an aggregate Fair Market Value on the
          date of grant equal to $100,000. Each person who is first elected a
          Director of the Company after May 13, 1992 shall be granted,
          automatically upon such election, a Non-Qualified Option covering the
          lesser of 9,000 shares of Common Stock or a number of shares of Common
          Stock having an aggregate Fair Market Value on the date of grant equal
          to $100,000. The Non-Qualified Options
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          contemplated by this Section 8 represent a continuation of the
          automatic awards of Non-Qualified Options to Directors approved by the
          stockholders of the Company at the 1992 Annual Meeting of
          Stockholders.

     b)   The purchase price of each share of Common Stock under a Non-
          Qualified Option granted under this Section 8 shall be the Fair Market
          Value of a share of Common Stock as of the date each such
          Non-Qualified Option is granted.

     c)   Each Non-Qualified Option granted under this Section 8 shall become
          exercisable in four equal annual installments commencing as of the
          first anniversary of the date of grant, provided the holder of such
          Non-Qualified Option is a Director or employee of the Company on such
          anniversary, and shall be exercisable until the earlier of ten (10)
          years from the date of grant or the expiration of the applicable
          period specified in paragraph (d) or (e) below.

     d)   Each Non-Qualified Option granted under this Section 8 to an Outside
          Director of the Company shall terminate if and when the optionee shall
          cease to serve as a Director of the Company, except as follows:

          (i)   If the optionee has continuously served as a Director of the
                Company for at least one year from the date of grant of a Non-
                Qualified Option and dies (x) while serving as a Director of the
                Company or (y) during any period after
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                having ceased to be a Director when the Non-Qualified Option
                would otherwise be exercisable under subparagraph (ii) below,
                the Non-Qualified Option theretofore granted to him/her may be
                exercised by a representative of his/her estate provided that
                such Non-Qualified Option may be exercised only within six
                months after the date of death and prior to the expiration date
                specified in such Non-Qualified Option.

          (ii)  If the optionee ceases for any reason (other than death) to be a
                Director of the Company subsequent to one year from the date of
                grant, such Non-Qualified Option may be exercised within three
                months from the date of such cessation and prior to the
                expiration date specified in such Non-Qualified Option.

          (iii) No Non-Qualified Option may be exercised for more than the
                number of shares for which the optionee might have exercised
                his/her Option at the time he/she ceased for any reason to be
                Director of the Company.

     e)   Each Non-Qualified Option granted under this Section 8 to a Director
          who is an employee of the Company shall terminate in accordance with
          Section 10(e) below.

     f)   Except as set forth above, the terms and conditions of each
          Non-Qualified Stock Option granted under this Section 8 shall be as
          specified in Section 10 below.
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9.   Restricted Stock Awards
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     An Incentive Award in the form of a Restricted Stock Award shall be subject
     to the following provisions:

     (a)  The restricted stock agreement shall specify (i) the number of shares
          of Common Stock to be transferred to the recipient over the Award
          Period, and (ii) the times at which portions of those shares shall be
          transferred to the recipient. In no event may shares be transferred
          before one year after the date of the Award, or later than ten years
          from such date, except, however, that for persons who are not officers
          of the Company, the Committee may waive any part of the one-year
          period after the date of the Award during which the shares may not be
          transferred.

     (b)  The Restricted Stock Award shall terminate if the holder, with or
          without cause, shall cease to be an employee of the Company or any of
          its Subsidiaries and any installments of shares of Common Stock which
          have not yet become transferable to such holder shall be forfeited
          upon cessation of employment; provided, however, in the event that an
          employee's employment shall terminate as a result of death or
          disability, the foregoing provision of this subparagraph (b) shall not
          apply and all shares of stock subject to Restricted Stock Awards shall
          immediately become vested.

     (c)  At the time an installment of shares of Common Stock is
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          transferred to the holder of a Restricted Stock Award, an additional
          payment shall be made to such holder, either in cash or shares of
          Common Stock as the Committee shall determine in its sole discretion,
          in an amount equal to the cash dividends which would have been payable
          to the holder of the Restricted Stock Award in respect to the shares
          transferred to the holder at the time the Restricted Stock Award was
          granted.

     (d)  Each Restricted Stock Award shall be evidenced by a written instrument
          containing terms and conditions determined by the Committee,
          consistent with the terms of the Plan.

10.  Options
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     An Incentive Award in the form of an Option shall be subject to the
     following provisions:

     (a)  At the time of grant, the Option shall specify (i) the number of
          shares of Common Stock which may be purchased by the recipient over
          the term of the Option; (ii) the times at which portions of such
          shares may be purchased by the recipient; and (iii) whether the Option
          is an Incentive Stock Option. No Option shall be deemed to be an
          Incentive Stock Option unless the Committee has so designated such
          Option and the Option states that it is an Incentive Stock Option.

     (b)  The purchase price of each share of Common Stock under each Option
          will be at least 100 percent of the Fair Market Value of a share of
          Common Stock at the time of grant.
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     (c)  The Option must provide that it is not transferable and may be
          exercised solely by the person to whom granted, except as provided in
          paragraph (e) of this Section 10 in the event of such person's death.

     (d)  Each Option granted to an employee will be subject to the condition
          that it may be exercised only if the optionee remains in the employ of
          the Company and/or a Subsidiary for at least one year after the date
          of the granting of the Option. An Option may be exercised at the times
          and in the amounts determined by the Committee. In no event, however,
          shall an Option be exercisable after ten years from the granting of
          the Option.

     (e)  An Option granted to an employee shall terminate if and when the
          optionee shall cease to be an employee of the Company and its
          Subsidiaries, except as follows:

          (i)  If an optionee who has been continuously employed by the Company
               or any of its Subsidiaries for at least one year from the date of
               grant of an Option dies (x) while employed by the Company or a
               Subsidiary, or (y) during any period after retirement or the
               termination of his/her employment when the Option would otherwise
               be exercisable under subparagraph (ii) below, the Option
               theretofore granted to him/her may be exercised (x) by the
               beneficiary designated pursuant to paragraph (g) of Section 13 or
               (y) in the absence of
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               such designation, or if no such beneficiary survives the
               optionee, by a representative of such optionee's estate, provided
               that such Option may be exercised only within six months from the
               date of death and within ten years from the date of grant of the
               Option.

         (ii)  If an optionee retires or if his/her employment with the Company
               or a Subsidiary is terminated for any reason (other than death)
               subsequent to one year from the date of grant of any Option, such
               Option may be exercised within three years (or such lesser period
               as the Option Agreement shall specify) from the date of such
               retirement or termination of employment, but in no event after
               ten years from date of grant of the Option; provided, however,
               that if such Option is an Incentive Stock Option, it may be
               exercised only within ninety (90) days (or such lesser period as
               the Option Agreement shall specify) from the date of such
               retirement or termination of employment, but in no event after
               ten years from the date of grant of the Option.

         (iii) Notwithstanding (i) and (ii) above, if an optionee is dismissed
               for cause, of which the Committee shall be the sole judge,
               his/her Option shall expire immediately upon termination.

         (iv)  The Committee may determine that, for the purpose of
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               the Plan, an employee who is on a leave of absence will be
               considered as still in the employ of the Company, provided that
               such leave of absence meets the requirements of Treasury
               Regulation ss.1.421-7(h) promulgated under the Code and provided
               that an Option shall be exercisable during a leave of absence
               only as to the number of shares which were exercisable at the
               commencement of such leave of absence.

          (v)  No Option may be exercised for more than the number of shares for
               which the optionee might have exercised his/her Option at the
               time he/she ceased for any reason to be an employee of the
               Company or a Subsidiary.

     (f)  A person electing to exercise an Option will give written notice to
          the Company of such election and of the number of shares he/she has
          elected to purchase and the date on which he/she wishes to exercise
          the Option. Any person exercising an Option may tender the full
          purchase price plus taxes, if applicable, in cash of the shares he/she
          has elected to purchase on the date specified by him/her for
          completion of such purchase. If authorized by the Chairman, in his
          discretion, at or after the time of grant, payment in full or in part
          may also be made by an employee of the Company in the form of shares
          of Common Stock not then subject to restric-
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          tion under any Company plan (but which may include shares the
          disposition of which constitutes a disqualifying disposition for
          purposes of obtaining incentive stock option treatment for federal tax
          purposes); provided, however, that shares of Common Stock may not be
          used to pay any of the purchase price of an Option unless such shares
          have been owned by the employee for at lease six months, or such
          longer period as the Chairman shall determine, prior to being
          surrendered as payment in full or in part of the purchase price of an
          Option. Such surrendered shares shall be valued at "Fair Market
          Value."

     (g)  The Option agreements or Option grants authorized by the Plan may
          contain such other provisions, consistent with the terms of the Plan,
          as the Committee shall consider advisable.

     (h)  Incentive Stock Options may not be issued to any person who at the
          time of grant owns stock possessing more than 10 percent of the total
          combined voting power of all classes of stock of the Company or any of
          its Subsidiaries.

     (i)  The aggregate Fair Market Value (determined at the time an option is
          granted) of stock of the Company (including Common Stock) granted an
          employee to which Incentive Stock Options are exercisable for the
          first time by such employee during any calendar year (under all
          incentive stock option plans of the Company or its Subsidiaries) shall
          not exceed $100,000.

11.  Stock Bonus Awards
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     A Stock Bonus Award may be granted to any employee of the Company or its
     Subsidiaries whom the Committee determines, upon recommendation of the
     Chairman of the Company, should be rewarded for exemplary performance,
     subject to the following provisions:

     (a)  The Committee shall determine, in its discretion, the number of shares
          of stock to be granted pursuant to a Stock Bonus Award and the time at
          which an Award shall be made.

     (b)  A Stock Bonus Award shall be evidenced by the delivery to the employee
          of a stock certificate representing the shares awarded.

     (c)  Shares of Common Stock transferred pursuant to a Stock Bonus Award
          shall be subject only to such conditions as are directed by the Board
          of Directors in accordance with Section 13(a) hereof.

12.  Adjustment Provisions
     ---------------------

     Except as otherwise provided herein, the following provisions shall apply
     to all Common Stock authorized for issuance, and optioned, granted or
     awarded under the Plan:

     (a)  Stock Dividends, Splits, etc. In the event of a stock dividend, stock
          split, or other subdivision or combination of the Common Stock, the
          number of shares of Common Stock authorized under the Plan will be
          adjusted proportionately. Similarly, in any such event there will be a
          proportionate adjustment in the number of shares of Common Stock
          subject to unexercised Options (but without adjustment to the
          aggregate
<PAGE>

          option price) and in the number of shares of Common Stock then subject
          to Restricted Stock Awards.

     (b)  Divisive Reorganization, Merger, Exchange or other Reorganization. In
          the event that the outstanding shares of Common Stock are changed or
          converted into, exchanged or exchangeable for, a different number or
          kind of shares or other securities of the Company or of another
          corporation, by reason of a reorganization, merger, consolidation,
          reclassification or combination, or in the event that the Company
          engages in a divisive reorganization, such as a spin-off of any
          significant portion of its business, the total number of shares of
          Common Stock which may be issued under the Plan shall be appropriately
          adjusted and appropriate adjustment shall be made by the Committee in
          the number of shares, kind of Common Stock and/or the Option price for
          which Incentive Awards may be or may have been awarded under the Plan,
          to the end that the proportionate interests of participants and
          inherent values of outstanding Incentive Awards shall be maintained as
          before the occurrence of such event.

     (c)  Adjustments. Adjustments under this Section 12 shall be made by the
          Committee whose determination as to what adjustments shall be made,
          and the extent thereof, shall be final, binding and conclusive. No
          fractional shares of Common Stock shall be issued under the Plan on
          account of any such adjustments.
<PAGE>

     (d)  Change in control of the Company. If, and at such time as, a "change
          in control of the Company" (as defined in Section 2) shall have
          occurred, any and all provisions of any and all outstanding Incentive
          Awards which condition the right to exercise such Incentive Awards
          upon the holder of any such Incentive Award having been an employee of
          the Company or any of its Subsidiaries or a director of the Company
          for a period of time shall be deemed to have been rescinded, so that
          such holder, upon the occurrence of such change in control, shall have
          the right to exercise such Incentive Award in full, (including, in the
          case of Restricted Stock Awards, the right to be issued the stock
          awarded and any dividend accrued thereon), irrespective of whether
          such holder has been an employee or director for the period of time
          specified in the Incentive Award; provided, however, if any such
          recision would cause the maximum period during which an Option may be
          exercised or a Restricted Stock Award transferred to exceed nine
          years, such recision shall not occur with respect to such Option or
          Restricted Stock Award unless and until such Option or Restricted
          Stock Award is amended, with the consent of the holder, to reduce such
          maximum period to nine years or less.

13.  General Provisions
     ------------------

     (a)  With respect to any shares of Common Stock issued or
<PAGE>

          transferred under the provisions of this Plan, such shares may be
          issued or transferred subject to such conditions, in addition to those
          specifically provided in the Plan, as the Committee may direct.

     (b)  Nothing in the Plan or in any instrument executed pursuant thereto
          will confer upon any employee any right to continue in the employ of
          the Company or a Subsidiary or will affect the right of the Company or
          of a Subsidiary to terminate the employment of any employee with or
          without cause. Nothing in the Plan or in any instrument executed
          pursuant thereto will confer upon any Director of the Company any
          right to continue in such capacity or will affect the right of
          stockholders to remove or not reelect such person as a Director of the
          Company with or without cause.

     (c)  No shares of Common Stock will be issued or transferred pursuant to an
          Incentive Award unless and until all legal requirements applicable to
          the issuance or transfer of such shares have, in the opinion of
          counsel to the Company, been complied with. In connection with any
          such issuance or transfer, the person acquiring the shares will, if
          requested by the Company, give written assurances satisfactory to
          counsel to the Company that the shares are being acquired for
          investment and not with a view to resale or distribution thereof and
          assurances in respect of such other matters as
<PAGE>

          the Company or a Subsidiary may consider desirable to assure
          compliance with all applicable legal requirements.

     (d)  No employee (individually or as a member of a group), and no
          beneficiary or other person claiming under or through him/her, will
          have any right, title or interest in any shares of Common Stock
          allocated or reserved for the purposes of the Plan or subject to any
          Incentive Award except as to such shares of Common Stock, if any, as
          shall have been issued or transferred to him/her and except as
          otherwise provided in Section 14(a).

     (e)  In the case of any employee of a Subsidiary, the Committee may direct
          the Company to issue the shares covered by the Incentive Award to the
          Subsidiary for such lawful consideration as the Committee may specify
          upon the condition that the Subsidiary will transfer the shares to the
          employee in accordance with the terms of the Incentive Award.
          Notwithstanding any other provision of this Plan, an Incentive Award,
          excluding an Incentive Stock Option, may be issued by and in the name
          of the Subsidiary and shall be considered granted on the date it is
          approved by the Committee, on the date it is delivered by the
          Subsidiary, or on such other date between such two dates as the
          Committee will specify. For options which are intended to qualify as
          Incentive Stock Options, the date of grant shall be determined in
          accordance with the applicable regulations under the Code.
<PAGE>

     (f)  The Company or a Subsidiary may make such provisions as it may
          consider appropriate for the withholding of any taxes which the
          Company or Subsidiary determines it is required to withhold in
          connection with any Incentive Award.

     (g)  No Incentive Award and no rights under the Plan, contingent or
          otherwise, shall be assignable, transferable or subject to any
          encumbrance, pledge or charge of any nature, provided that, under such
          rules and regulations as the Committee may establish pursuant to the
          terms of the Plan, a beneficiary may be designated in respect of an
          Incentive Award in the event of the death of the holder of such
          Incentive Award and provided, also, that if such beneficiary shall be
          the executor or administrator of the estate of the holder of such
          Incentive Award, any rights in respect of such Incentive Award may be
          transferred to the person or persons or entity (including a trust)
          entitled thereto under the will of the holder of such Incentive Award
          or, in case of intestacy, under the laws relating to intestacy.

     (h)  Nothing in the Plan is intended to be a substitute for, or shall
          preclude or limit the establishment or continuation of, any other
          plan, practice or arrangement for the payment of directors' fees or
          compensation or fringe benefits to employees generally, or to any
          class or group of employees, which the Company or any Subsidiary now
          has or may hereafter lawfully put into effect, including, with
          limitation, any
<PAGE>

          retirement, pension, insurance, stock purchase, incentive compensation
          or bonus plan.

     (i)  Except as the Delaware Corporation law otherwise may require, the
          place of administration of the Plan will conclusively be deemed to be
          within the State of Connecticut and the validity, construction,
          interpretation and administration of the Plan and of any rules and
          regulations or determinations or decisions made thereunder, will be
          governed by, and determined exclusively and solely in accordance with,
          the laws of the State of Connecticut. Without limiting the generality
          of the foregoing, the period within which any action arising under or
          in connection with the Plan, or any payment or Award made or
          purportedly made under or in connection therewith, must be commenced
          and will be governed by the laws of the State of Connecticut,
          irrespective of the place where the act or omission complained of took
          place and of the residence of any party to such action and
          irrespective of the place where the action may be brought.

14.  Amendment, Suspension and Termination of Plan
     ---------------------------------------------

     (a)  The Board of Directors may at any time terminate, suspend or amend the
          Plan, provided, however, that no such amendment will, without approval
          of the stockholders of the Company, except as provided in Section 12
          hereof, (i) materially increase the aggregate number of shares which
          may be issued in connection with Incentive Awards; (ii) change the
          minimum
<PAGE>

          Option exercise price; (iii) increase the maximum period during which
          Options may be exercised, or Restricted Stock Awards transferred; (iv)
          extend the effective period of this Plan; or (v) materially modify the
          requirements as to eligibility for participation in the Plan.

     (b)  The Committee may, with the consent of the person by whom a Restricted
          Stock Award or an Option is held, modify or change the terms of any
          Option or Restricted Stock Award in a manner which does not conflict
          with the provisions of the Plan.

15.  Effective Date and Duration of Plan
     -----------------------------------

     This Plan becomes effective upon its approval by the stockholders of the
     Company on May 13, 1992. Any amendment to this Plan will become effective
     upon approval by Directors, unless stockholder approval is deemed
     necessary, in which case such amendment shall become effective upon
     approval by stockholders. Unless previously terminated by the Board of
     Directors, this Plan shall terminate at the close of business on May 12,
     2002, and no Restricted Stock Award or Option may be granted under it
     thereafter, but such termination shall not affect any Incentive Award
     theretofore granted.

     As amended March 10, 1999.<PAGE>

                                                                   Exhibit 10.10

                             EMPLOYMENT AGREEMENT
                             --------------------

     THIS AGREEMENT is made and entered into as of the 1st day of March, 2000,
by and between LYDALL, INC., a Delaware corporation (the "Company"), and James
P. Carolan (the "Executive").

                              W I T N E S S E T H
                              -------------------

     WHEREAS, the Company and the Executive (the "Parties") have agreed to enter
into this agreement (the "Agreement) relating to the employment of the Executive
by the Company and/or one of its subsidiaries;

     NOW, THEREFORE, in consideration of the premises and mutual covenants
contained herein and for other good and valuable consideration, the Parties,
intending to be legally bound, agree as follows:

     1. Term of Employment; Termination of Prior Agreement.
        --------------------------------------------------

        (a) The Company and/or one of its subsidiaries agrees to continue to
employ the Executive, and the Executive agrees to remain in the employment of
the Company and/or one of its subsidiaries, in accordance with the terms and
provisions of this Agreement.

        (b) The Employment Period under this Agreement shall be the period
commencing as of the date of this Agreement and ending on the date of
termination of the Executive's employment pursuant to Section 5, 6 or 7 below,
whichever is applicable.

        (c) Immediately upon the commencement of the Executive's employment
pursuant to the terms of this Agreement, that certain Agreement by and between
the Executive and the Company dated as of February 1, 1999 shall terminate and
shall be of no further force or effect.

     2. Duties. It is the intention of the Parties that during the term of the
        ------
Executive's employment under this Agreement, the Executive will serve as
Executive Vice President of the Company and/or Division President of a
subsidiary of the Company or in such other senior management position as the
Company shall determine. During the Employment Period, the Executive will devote
his full business time and attention and best
<PAGE>

                                      -2-

efforts to the affairs of the Company and its subsidiaries and his duties as
Executive Vice President of the Company and/or Division President of a
subsidiary of the Company. The Executive will have such duties as are
appropriate to his position as Executive Vice President of the Company and/or
Division President of a subsidiary of the Company, and will have such authority
as required to enable the Executive to perform these duties. Consistent with the
foregoing, the Executive shall comply with all reasonable instructions of the
Board of Directors of the Company (the "Board").

     3. Compensation and Benefits.
        -------------------------

     3.1 Salary. During the Employment Period, the Company will pay the
         ------
Executive a base salary at an initial annual rate of Three Hundred Fifteen
Thousand Dollars ($315,000). The Company may, in its sole and absolute
discretion, increase the Executive's base salary in light of the Executive's
performance, inflation, changes in the cost of living and other factors deemed
relevant by the Company. The Executive's base salary may not be decreased during
the term of this Agreement. The Chief Executive Officer of the Company shall
meet with the Executive annually to review the Executive's performance,
objectives and compensation, including salary, bonus and stock options, and the
Chief Executive Officer shall then meet with the Compensation and Stock Option
Committee of the Board (the "Compensation Committee") to discuss the same. If
the Compensation Committee determines that any adjustments thereto are
appropriate, such committee shall make a recommendation to the full Board and
the Board shall make such adjustments, if any, as the Board deems appropriate
and consistent with this Agreement. The Executive's base salary will be paid in
accordance with the standard practices for other corporate executives of the
Company.

     3.2 Bonuses. During the Employment Period, the Executive will be eligible
         -------
to receive annually or otherwise such bonus awards, if any, as shall be
determined by the Board in its sole and absolute discretion after receiving the
recommendation of the Compensation Committee.

     3.3 Benefit Programs. During the Employment Period, the Executive will be
         ----------------
entitled to participate on substantially the same terms as other senior
executives of the Company in all employee benefit plans and programs of the
Company (subject to any restrictions or eligibility requirements under such
plans and programs) from time to time in effect for the benefit of senior
executives of the Company, including, but not limited
<PAGE>

                                      -3-

to, pension and other retirement plans, profit sharing plans, stock incentive
and annual incentive bonus plans, group life insurance, hospitalization and
surgical and major medical coverages (excluding the Lydall, Inc. Executive
Medical Plan), short-term and long-term disability, and such other benefits as
are or may be made available from time to time to senior executives of the
Company.

     3.4 Vacations and Holidays. During the Employment Period, the Executive
         ----------------------
will be entitled to vacation leave of five (5) weeks per year at full pay or
such greater vacation benefits as may be provided for by the Company's vacation
policies applicable to senior executives. The Executive will be entitled to such
holidays as are established by the Company for all employees.

     3.5 Automobile. During the Employment Period, the Company will provide the
         ----------
Executive with an automobile in accordance with Company policy.

     4.  Business Expenses. The Executive will be entitled to prompt
         -----------------
reimbursement for all reasonable, documented and necessary expenses incurred by
the Executive in performing his services hereunder, provided the Executive
properly accounts therefor in accordance with the policies and procedures
established by the Company.

     5.  Termination of Employment by the Company.
         ----------------------------------------

     5.1 Involuntary Termination by the Company Other Than For Permanent and
         -------------------------------------------------------------------
Total Disability or Cause. The Company may terminate the Executive's employment
-------------------------
at any time other than (i) by reason of the Executive's Permanent and Total
Disability (as defined in Section 5.2) or (ii) for Cause (as defined in Section
5.3), by giving the Executive a written notice of termination at least 30 days
before the date of termination (or such lesser notice period as the Executive
may agree to). In the event of such a termination of employment pursuant to this
Section 5.1, the Executive shall be entitled to receive (i) the benefits
described in Section 8 if such termination of employment does not occur within
12 months following a "Change of Control" (as defined in Section 10), or (ii)
the benefits described in Section 9 if such termination of employment occurs
within 12 months following a "Change of Control" (as defined in Section 10).

     5.2 Termination Due to Permanent and Total Disability. If the Executive
         -------------------------------------------------
incurs a Permanent and Total Disability,
<PAGE>

                                      -4-

as defined below, the Company may terminate the Executive's employment by giving
the Executive written notice of termination at least 30 days before the date of
such termination (or such lesser notice period as the Executive may agree to).
In the event of such termination of the Executive's employment because of
Permanent and Total Disability, the Executive shall be entitled to receive (i)
his base salary pursuant to Section 3.1 through the date which is twelve months
following the date of such termination of employment, reduced by any amounts
paid to the Executive under any disability program maintained by the Company,
such base salary to be paid at the normal time for the payment of such base
salary, (ii) a bonus for the year of termination of employment and for the next
succeeding year (to be paid at the normal time for payment of such bonuses) in
an amount equal to the average of the three highest annual bonuses earned by the
Executive under the Company's annual incentive bonus plan for any of the five
calendar years preceding the calendar year of his termination of employment (or,
if the Executive was not eligible for a bonus for at least three calendar years
in such five-year period, then the average of such bonuses for all of the
calendar years in such five-year period for which the Executive was eligible),
with any deferred bonuses counting for the year earned rather than the year
paid; (iii) any other compensation and benefits to the extent actually earned by
the Executive under any other benefit plan or program of the Company as of the
date of such termination of employment, such compensation and benefits to be
paid at the normal time for payment of such compensation and benefits, and (iv)
any reimbursement amounts owing under Section 4. In addition, if the Executive
elects to continue coverage under the Company's health plan pursuant to COBRA,
the Company for a period of twelve months following termination of the
Executive's employment by reason of Permanent and Total Disability will pay the
same percentage of the Executive's premium for COBRA coverage for the Executive
and, if applicable, his spouse and dependent children, as the Company paid at
the applicable time for coverage under such plan for actively employed senior
executives generally. For the period of twelve months following the termination
of the Executive's employment by reason of Permanent and Total Disability, the
Company will continue to provide the life insurance benefits that the Company
would have provided to the Executive if the Executive had continued in
employment with the Company for such period, but only if the Executive timely
pays the portion of the premium for such coverage that senior executives of the
Company generally are required to pay for such coverage, if any. For purposes of
this Agreement, the Executive shall be considered to have incurred a Permanent
and Total Disability if and only if the Executive has
<PAGE>

                                      -5-

incurred a disability entitling the Executive to disability benefits under the
Company's long-term disability plan.

     5.3 Termination for Cause. The Company may terminate the Executive's
         ---------------------
employment immediately for Cause for any of the following reasons: (i) an act or
acts of dishonesty or fraud on the part of the Executive resulting or intended
to result directly or indirectly in substantial gain or personal enrichment to
which the Executive was not legally entitled at the expense of the Company or
any of its subsidiaries; (ii) a willful material breach by the Executive of his
duties or responsibilities under this Agreement resulting in demonstrably
material injury to the Company or any of its subsidiaries; (iii) the Executive's
conviction of a felony or any crime involving moral turpitude, (iv) habitual
neglect or insubordination (defined as refusal to execute or carry out
directions from the Board or its duly appointed designees) where the Executive
has been given written notice of the acts or omissions constituting such neglect
or insubordination and the Executive has failed to cure such conduct, where
susceptible to cure, within thirty days following such notice, or (v) a material
breach by the Executive of any of his obligations under the Lydall Employee
Agreement executed by the Executive and attached hereto as Exhibit A. The
Company shall exercise its right to terminate the Executive's employment for
Cause by giving the Executive written notice of termination specifying in
reasonable detail the circumstances constituting such Cause. In the event of
such termination of the Executive's employment for Cause, the Executive shall be
entitled to receive only (i) his base salary pursuant to Section 3.1 earned
through the date of such termination of employment plus his base salary for the
period of any vacation time earned but not taken for the year of termination of
employment, such base salary to be paid at the normal time for payment of such
base salary, (ii) any other compensation and benefits to the extent actually
earned by the Executive under any other benefit plan or program of the Company
as of the date of such termination of employment, such compensation and benefits
to be paid and at the normal time for payment of such compensation and benefits
and (iii) any reimbursement amounts owing under Section 4.

     6.  Termination of Employment by the Executive.
         ------------------------------------------

     (a) Good Reason. The Executive may terminate his employment for Good Reason
         -----------
by giving the Company a written notice of termination at least 30 days before
the date of such termination (or such lesser notice period as the Company may
agree to) specifying in reasonable detail the circumstances
<PAGE>

                                      -6-

constituting such Good Reason. In the event of the Executive's termination of
his employment for Good Reason, the Executive shall be entitled to receive (i)
the benefits described in Section 8 if such termination of employment does not
occur within 12 months following a "Change of Control" (as defined in Section
10), or (ii) the benefits described in Section 9 if such termination of
employment occurs within 12 months following a "Change of Control" (as defined
in Section 10). For purposes of this Agreement, Good Reason shall mean (i) a
significant reduction in the scope of the Executive's authority, functions,
duties or responsibilities from that which is contemplated by this Agreement,
(ii) any reduction in the Executive's base salary, (iii) a significant reduction
in the employee benefits provided to the Executive (excluding the Lydall, Inc.
Executive Medical Plan) other than in connection with an across-the-board
reduction similarly affecting substantially all senior executives of the
Company, or (iv) any material breach by the Company of any provision of this
Agreement without the Executive having committed any material breach of the
Executive's obligations hereunder or under the Lydall Employee Agreement which
breach is not cured within thirty days following written notice thereof to the
Company of such breach. In addition, in the case of a termination of employment
within 12 months following a "Change of Control" (as defined in Section 10),
Good Reason shall also include the relocation of the Executive's office location
to a location more than 50 miles away from the Executive's then current
principal place of employment. If an event constituting a ground for termination
of employment for Good Reason occurs, and the Executive fails to give notice of
termination within 90 days after the occurrence of such event, the Executive
shall be deemed to have waived his right to terminate employment for Good Reason
in connection with such event (but not for any other event for which the 90-day
period has not expired).

     (b) Other. The Executive may terminate his employment at any time and for
         -----
any reason, other than pursuant to subsection (a) above, by giving the Company a
written notice of termination to that effect at least 30 days before the date of
termination (or such lesser notice period as the Company may agree to);
provided, however, that the Company following receipt of such notice from the
Executive may elect to have the Executive's employment terminate immediately
following its receipt of such notice. In the event of the Executive's
termination of his employment pursuant to this subsection (b), the Executive
shall be entitled to receive only (i) his base salary pursuant to Section 3.1
earned through the date of such termination of employment plus his base salary
for the period of va-
<PAGE>

                                      -7-

cation time earned but not taken for the year of termination of employment, such
base salary to be paid at the normal time for payment of such base salary, (ii)
any other compensation and benefits to the extent actually earned by the
Executive under any other benefit plan or program of the Company as of the date
of such termination of employment, such compensation and benefits to be paid at
the normal time for payment of such compensation and benefits, and (iii) any
reimbursement amounts owing under Section 4.

     7. Termination of Employment By Death. In the event of the death of the
        ----------------------------------
Executive during the course of his employment hereunder, the Executive's estate
(or other person or entity having such entitlement pursuant to the terms of the
applicable plan or program) shall be entitled to receive (i) the Executive's
base salary pursuant to Section 3.1 earned through the date of the Executive's
death plus the Executive's base salary for the period of vacation time earned
but not taken for the year of the Executive's death, such base salary to be paid
at the normal time for payment of such base salary, (ii) a bonus for the year of
the Executive's death (to be paid within 90 days after the Executive's death) in
an amount equal to a pro rata portion of the average of the three highest annual
bonuses earned by the Executive under the Company's annual incentive bonus plan
for any of the five calendar years preceding the calendar year of the
Executive's death (or, if the Executive was not eligible for a bonus for at
least three calendar years in such five-year period, then the average of such
bonuses for all of the calendar years in such five-year period for which the
Executive was eligible), with any deferred bonuses counting for the year earned
rather than the year paid and with the pro rata portion being determined by
dividing the number of days of the Executive's employment during such calendar
year up to his death by 365 (366 if a leap year), (iii) any other compensation
and benefits to the extent actually earned by the Executive under any other
benefit plan or program of the Company as of the date of such termination of
employment, such compensation and benefits to be paid at the normal time for
payment of such compensation and benefits, and (iv) any reimbursement amounts
owing under Section 4. In addition, in the event of such death, the Executive's
beneficiaries shall receive any death benefits owed to them under the Company's
employee benefit plans. If the Executive's spouse and/or dependent children
elect to continue coverage under the Company's health plan following the
Executive's death pursuant to COBRA, the Company for a period of 12 months
following the Executive's death will pay the same percentage of the premium for
COBRA
<PAGE>

                                      -8-

coverage for the Executive's spouse and/or dependent children, as applicable, as
the Company would have paid in respect of the Executive's coverage under such
plan if the Executive had continued in employment with the Company for such
period.

     8. Benefits Upon Termination Without Cause or For Good Reason (No Change of
        ------------------------------------------------------------------------
Control). If (a) the Executive's employment hereunder shall terminate (i)
-------
because of termination by the Company other than for Cause or Permanent and
Total Disability pursuant to Section 5.1, or (ii) because of termination by the
Employee for Good Reason pursuant to Section 6(a), and (b) such termination of
employment does not occur within 12 months following a "Change of Control" of
the Company (as defined in Section 10), the Executive shall be entitled to the
following:

          (a) The Company shall pay to the Executive his base salary pursuant to
     Section 3.1 earned through the date of such termination of employment and
     any other compensation and benefits to the extent actually earned by the
     Executive under any benefit plan or program of the Company as of the date
     of such termination of employment, such base salary, compensation and
     benefits to be paid at the normal time for payment of such base salary,
     compensation and benefits.

          (b) The Company shall pay the Executive any reimbursement amounts
     owing under Section 4.

          (c) The Company shall pay to the Executive in equal installments
     spread over the period of 12 months beginning on the date of the
     Executive's termination of employment an amount equal in the aggregate to
     the sum of (i) the Executive's annual rate of base salary immediately
     preceding his termination of employment, and (ii) the average of his annual
     bonuses earned under the Company's annual incentive bonus plan for the
     three calendar years preceding his termination of employment (or, if the
     Executive was not eligible for a bonus in each of those three calendar
     years, then the average of such bonuses for all of the calendar years in
     such three-year period for which he was eligible), with any deferred
     bonuses counting for the year earned rather than the year paid. Such
     installments shall be paid at the times that salary payments are normally
     made by the Company.

          (d) If the Executive elects to continue coverage under the Company's
     health plan pursuant to COBRA, then for
<PAGE>

                                      -9-

     the period beginning on the date of the Executive's termination of
     employment and ending on the earlier of (i) the date which is 12 months
     after the date of such termination of employment or (ii) the date on which
     the Executive commences substantially full-time employment as an employee
     of an employer that offers health benefits, the Company will pay the same
     percentage of the Executive's premium for COBRA coverage for the Executive
     and, if applicable, his spouse and dependent children, as the Company paid
     at the applicable time for coverage under such plan for actively employed
     senior executives generally. In addition, for the period beginning on the
     date of the Executive's termination of employment and ending on the earlier
     of (i) the date which is 12 months after the date of such termination of
     employment or (ii) the date on which the Executive commences substantially
     full-time employment as an employee of an employer that offers life
     insurance benefits, the Company will continue to provide the life insurance
     benefits that the Company would have provided to the Executive if the
     Executive had continued in employment with the Company for such period, but
     only if the Executive timely pays the portion of the premium for such
     coverage that senior executives of the Company generally are required to
     pay for such coverage, if any. The Executive shall notify the Company
     promptly if he, while eligible for benefits under this subsection (d),
     commences substantially full-time employment as an employee of an employer
     that offers health and/or life insurance benefits.

          (e) The Company will provide the Executive with outplacement services
     selected by the Executive, at the Company's expense not to exceed $10,000.

          9. Benefits Upon Termination Without Cause or For Good Reason (Change
             ------------------------------------------------------------------
of Control). If (a) the Executive's employment hereunder shall terminate (i)
----------
because of termination by the Company other than for Cause or Permanent and
Total Disability pursuant to Section 5.1, or (ii) because of termination by the
Employee for Good Reason pursuant to Section 6(a), and (b) such termination of
employment occurs within 12 months following a "Change of Control" of the
Company (as defined in Section 10), the Executive shall be entitled to the
following:

          (a) The Company shall pay to the Executive his base salary pursuant to
     Section 3.1 earned through the date of such termination of employment and
     any other compensation and benefits to the extent actually earned by the
     Executive under any benefit plan or program of the Company as
<PAGE>

                                      -10-

     of the date of such termination of employment, such base salary,
     compensation and benefits to be paid at the normal time for payment of such
     base salary, compensation and benefits.

          (b) The Company shall pay the Executive any reimbursement amounts
     owing under Section 4.

          (c) The Company shall pay to the Executive as a severance benefit an
     amount equal to two (2) times the sum of (i) his annual rate of base salary
     immediately preceding his termination of employment, and (ii) the average
     of his three highest annual bonuses earned under the Company's annual
     incentive bonus plan for any of the five calendar years preceding his
     termination of employment (or, if the Executive was not eligible for a
     bonus for at least three calendar years in such five-year period, then the
     average of such bonuses for all of the calendar years in such five-year
     period for which the Executive was eligible), with any deferred bonuses
     counting for the year earned rather than the year paid. Such severance
     benefit shall be paid in a lump sum within 30 days after the date of such
     termination of employment.

          (d) The Company shall pay to the Executive as a bonus for the year of
     termination of his employment an amount equal to a portion (determined as
     provided in the next sentence) of the Executive's maximum bonus opportunity
     under the Company's annual incentive bonus plan for the calendar year of
     termination of the Executive's employment or, if none, such portion of the
     bonus awarded to the Executive under the Company's annual incentive bonus
     plan for the calendar year immediately preceding the calendar year of the
     termination of his employment, with deferred bonuses counting for the year
     earned rather than the year paid. Such portion shall be determined by
     dividing the number of days of the Executive's employment during such
     calendar year up to his termination of employment by 365 (366 if a leap
     year). Such payment shall be made in a lump sum within 30 days after the
     date of such termination of employment, and the Executive shall have no
     right to any further bonuses under said plan.

          (e) During the period of 24 months beginning on the date of the
     Executive's termination of employment, the Executive (and, if applicable,
     the Executive's spouse and dependent children) shall remain covered by the
     medical, dental, life insurance, and, if reasonably commercially
<PAGE>

                                      -11-

     available through nationally reputable insurance carriers, long-term
     disability plans of the Company that covered the Executive immediately
     prior to his termination of employment as if the Executive had remained in
     employment for such period; provided, however, that the coverage under any
                                 --------  -------
     such plan is conditioned on the timely payment by the Executive (or his
     spouse or dependent children) of the portion of the premium for such
     coverage that actively employed senior executives with the Company
     generally are required to pay for such coverage. In the event that the
     Executive's participation in any such plan is barred, the Company shall
     arrange to provide the Executive (and, if applicable, his spouse and
     dependent children) with substantially similar benefits (but, in the case
     of long-term disability benefits, only if reasonably commercially
     available).

          (f) The Company shall supplement the benefits payable in respect of
     the Executive under the Company's Pension Plan and Supplemental Executive
     Retirement Plan (and any successor plans thereto) (collectively, the
     "Pension Plans") by paying the difference between (i) the benefits that the
     Executive would have been entitled to receive under the Pension Plans if he
     had been credited with two additional years of service (but no additional
     years of age) for purposes of the benefit accrual formula under the Pension
     Plans as of the date of termination of the Executive's employment and (ii)
     the benefits that the Executive is entitled to receive under the Pension
     Plans determined without regard to this subsection (f). Such benefits shall
     be payable in the same form and at the same time as the benefits under the
     respective Pension Plans.

          (g) Each stock option granted by the Company to the Executive and
     outstanding immediately prior to termination of his employment shall be
     fully vested and immediately exercisable and may be exercised by the
     Executive (or, following his death, by the person or entity to which such
     option passes) at any time prior to the expiration date of the applicable
     option (determined without regard to any earlier termination of the option
     that would otherwise occur by reason of termination of his employment).
     Each restricted stock award granted by the Company to the Executive and
     outstanding immediately prior to termination of the Executive's employment
     shall be fully vested upon such termination of employment.
<PAGE>

                                      -12-

          (h) The Company will pay the Executive a car allowance of $500 per
     month for 24 months following termination of the Executive's employment to
     replace the Company-leased automobile, which leased automobile will be
     returned to the Company by the Executive on the date of termination of the
     Executive's employment.

          (i) The Company will provide the Executive with out-placement services
     selected by the Executive, at the Company's expense not to exceed $10,000.

          (j) The Company shall promptly pay all reasonable attorneys' fees and
     related expenses incurred by the Executive in seeking to obtain or enforce
     any right or benefit under this Agreement or to defend against any claim or
     assertion in connection with this Agreement, but only to the extent the
     Executive substantially prevails.

          10. Change of Control. For the purposes of this Agreement, a "Change
              -----------------
of Control" shall be deemed to have occurred if (a) any person or persons acting
together which would constitute a "group" for purposes of Section 13(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), (other than
the Company or any subsidiary of the Company) shall beneficially own (as defined
in Rule 13d-3 of the Exchange Act), directly or indirectly, at least 25% of the
total voting power of all classes of capital stock of the Company entitled to
vote generally in the election of the Board; (b) Current Directors (as herein
defined) shall cease for any reason to constitute at least a majority of the
members of the Board (for this purpose, a "Current Director" shall mean any
member of the Board as of the date hereof and any successor of a Current
Director whose election, or nomination for election by the Company's
shareholders, was approved by at least a majority of the Current Directors then
on the Board); (c) the shareholders of the Company approve (i) a plan of
complete liquidation of the Company or (ii) an agreement providing for the
merger or consolidation of the Company other than a merger or consolidation in
which (x) the holders of the common stock of the Company immediately prior to
the consolidation or merger have, directly or indirectly, at least a majority of
the common stock of the continuing or surviving corporation immediately after
such consolidation or merger or (y) the Board immediately prior to the merger or
consolidation would, immediately after the merger or consolidation, constitute a
majority of the board of directors of the continuing or surviving corporation;
or (d) the shareholders of the Company approve an agreement (or agreements)
providing for the sale or other disposition (in one transaction
<PAGE>

                                      -13-

or a series of transactions) of all or substantially all of the assets of the
Company.

          11. Golden Parachute Excise Tax.
              ---------------------------

          (a) In the event that any payment or benefit received or to be
     received by the Executive pursuant to this Agreement or any other plan,
     program or arrangement of the Company or any of its affiliates would
     constitute an "excess parachute payment" within the meaning of Section 280G
     of the Internal Revenue Code of 1986, as amended (the "Code"), then the
     payments under this Agreement shall be reduced (by the minimum possible
     amounts) until no amount payable to the Executive under this Agreement
     constitutes an "excess parachute payment" within the meaning of Section
     280G of the Code; provided, however, that no such reduction shall be made
     if the net after-tax payment (after taking into account Federal, state,
     local or other income and excise taxes) to which the Executive would
     otherwise be entitled without such reduction would be greater than the net
     after-tax payment (after taking into account Federal, state, local or other
     income and excise taxes) to the Executive resulting from the receipt of
     such payments with such reduction. If, as a result of subsequent events or
     conditions (including a subsequent payment or absence of a subsequent
     payment under this Agreement or other plan, program or arrangement of the
     Company or any of its affiliates), it is determined that payments under
     this Agreement have been reduced by more than the minimum amount required
     to prevent any payments from constituting an "excess parachute payment",
     then an additional payment shall be promptly made to the Executive in an
     amount equal to the additional amount that can be paid without causing any
     payment to constitute an excess parachute payment.

          (b) All determinations required to be made under this Section 11 shall
     be made by a nationally recognized independent accounting firm mutually
     agreeable to the Company and the Executive (the "Accounting Firm") which
     shall provide detailed supporting calculations to the Company and the
     Executive as requested by the Company or the Executive. All fees and
     expenses of the Accounting Firm shall be borne solely by the Company and
     shall be paid by the Company upon demand of the Executive as incurred or
     billed by the Accounting Firm. All determinations made by the Accounting
     Firm pursuant to this Section 11 shall be final and binding upon the
     Company and the Executive.

          (c) To the extent any payment or benefit is to be reduced pursuant to
     this Section 11, the severance payment de-
<PAGE>

                                      -14-

     scribed in Section 8(c) or 9(c) will first be reduced, then the bonus
     described in Section 9(d), and then the supplemental pension benefits
     described in Section 9(f), in each case only to the extent necessary.

          12. Entitlement to Other Benefits. Except as otherwise provided in
              -----------------------------
this Agreement, this Agreement shall not be construed as limiting in any way any
rights or benefits that the Executive or his spouse, dependents or beneficiaries
may have pursuant to any other plan or program of the Company.

          13. Indemnification. The parties agree to execute a separate
              ---------------
Indemnification Agreement in the form attached as Exhibit B.

          14. General Provisions.
              ------------------

          14.1 No Duty to Seek Employment. The Executive shall not be under any
               --------------------------
     duty or obligation to seek or accept other employment following termination
     of employment, and no amount, payment or benefits due to the Executive
     hereunder shall be reduced or suspended if the Executive accepts subsequent
     employment, except as expressly set forth herein.

          14.2 Deductions and Withholding. All amounts payable or which become
               --------------------------
     payable under any provision of this Agreement shall be subject to any
     deductions authorized by the Executive and any deductions and withholdings
     required by law.

          14.3 Notices. All notices, demands, requests, consents, approvals or
               -------
     other communications (collectively "Notices") required or permitted to be
     given hereunder or which are given with respect to this Agreement shall be
     in writing and may be personally served or may be faxed with a copy
     deposited in the United States mail, registered or certified, return
     receipt requested, postage prepaid, addressed as follows:

         To the Company:             Lydall, Inc.
                                     P.O. Box 151
                                     One Colonial Road
                                     Manchester, CT 06045-0151
                                     Attn: Chief Executive Officer

         To the Executive:           James P. Carolan
                                     11 Runnymede Drive
                                     North Hampton, NH 03862
<PAGE>

                                      -15-

     or such other address as such party shall have specified most recently by
     written notice. Notice mailed as provided herein shall be deemed given on
     the fifth business day following the date so mailed or on the date of
     actual receipt, whichever is earlier.

          14.4 No Disparagement. The Executive shall not during the period of
               ----------------
     his employment with the Company, nor during the two-year period beginning
     on the date of termination of his employment for any reason, disparage the
     Company or any of its subsidiaries or affiliates or any of their
     shareholders, directors, officers, employees or agents. The Executive
     agrees that the terms of this Section 14.4 shall survive the term of this
     Agreement and the termination of the Executive's employment.

          14.5 Proprietary Information and Inventions. The Lydall Employee
               --------------------------------------
     Agreement previously executed by the Executive and attached hereto as
     Exhibit A is incorporated by reference in this Agreement, and the Executive
     agrees to continue to be bound thereby.

          14.6 Covenant to Notify Management. The Executive agrees to abide by
               -----------------------------
     the ethics policies of the Company as well as the Company's other rules,
     regulations, policies and procedures. The Executive agrees to comply in
     full with all governmental laws and regulations as well as ethics codes
     applicable. In the event that the Executive is aware or suspects the
     Company, or any of its officers or agents, of violating any such laws,
     ethics, codes, rules, regulations, policies or procedures, the Executive
     agrees to bring all such actual and suspected violations to the attention
     of the Company immediately so that the matter may be properly investigated
     and appropriate action taken. The Executive understands that the Executive
     is precluded from filing a complaint with any governmental agency or court
     having jurisdiction over wrongful conduct unless the Executive has first
     notified the Company of the facts and permits it to investigate and correct
     the concerns.

          14.7 Amendments and Waivers. No provision of this Agreement may be
               ----------------------
     modified, waived or discharged unless such waiver, modification or
     discharge is agreed to in writing signed by the Executive and the Company.
     No waiver by either Party hereto at any time of any breach by the other
     Party hereto of, or compliance with, any condition or provision of this
     Agreement to be performed by such other Party shall be deemed a waiver of
     similar or dissimilar provisions or conditions at the same or at any prior
     or subsequent time.
<PAGE>

                                      -16-

          14.8 Beneficial Interests. This Agreement shall inure to the benefit
               --------------------
     of and be enforceable by a) the Company's successors and assigns and b) the
     Executive's personal and legal representatives, executors, administrators,
     successors, heirs, distributees, devisees and legatees. If the Executive
     shall die while any amounts are still payable to him hereunder, all such
     amounts, unless otherwise provided herein, shall be paid in accordance with
     the terms of this Agreement to the Executive's devisee, legatee, or other
     designee or, if there be no such designee, to the Executive's estate.

          14.9 Successors. The Company will require any successors (whether
               ----------
     direct or indirect, by purchase, merger, consolidation or otherwise) to all
     or substantially all of the business and/or assets of the Company to assume
     expressly and agree to perform this Agreement in the same manner and to the
     same extent that the Company would be required to perform.

          14.10 Assignment. This Agreement and the rights, duties, and
                ----------
     obligations hereunder may not be assigned or delegated by any Party without
     the prior written consent of the other Party and any attempted assignment
     or delegation without such prior written consent shall be void and be of no
     effect. Notwithstanding the foregoing provisions of this Section 14.10, the
     Company may assign or delegate its rights, duties and obligations hereunder
     to any affiliate or to any person or entity which succeeds to all or
     substantially all of the business of the Company or one of its subsidiaries
     through merger, consolation, reorganization, or other business combination
     or by acquisition of all or substantially all of the assets of the Company
     or one of its subsidiaries.

          14.11 Choice of Law. This Agreement shall be governed by and construed
                -------------
     in accordance with the laws of the State of Connecticut.

          14.12 Statute of Limitations. The Executive and the Company hereby
                ----------------------
     agree that there shall be a one year statute of limitations for the filing
     of any requests for arbitration or any lawsuit relating to this Agreement
     or the terms or conditions of Executive's employment by the Company. If
     such a claim is filed more than one year subsequent to the Executive's last
     day of employment it shall be precluded by this provision, regardless of
     whether or not the claim has accrued at that time.

          14.13 Right to Injunctive and Equitable Relief. The Executive's
                ----------------------------------------
     obligations under Section 14.4 are of a special
<PAGE>

                                      -17-

     and unique character, which gives them a peculiar value. The Company cannot
     be reasonably or adequately compensated for damages in an action at law in
     the event the Executive breaches such obligations. Therefore, the Executive
     expressly agrees that the Company shall be entitled to injunctive and other
     equitable relief without bond or other security in the event of such breach
     in addition to any other rights or remedies which the Company may possess
     or be entitled to pursue. Furthermore, the obligations of the Executive and
     the rights and remedies of the Company under Section 14.4 and this Section
     14.13 are cumulative and in addition to, and not in lieu of, any
     obligations, rights, or remedies as created by applicable law.

          14.14 Severability or Partial Invalidity. The invalidity or
                ----------------------------------
     unenforceability of any provisions of this Agreement shall not affect the
     validity or enforceability of any other provision of this Agreement, which
     shall remain in full force and effect.

          14.15 Entire Agreement. This Agreement, along with the Lydall Employee
                ----------------
     Agreement and the Indemnification Agreement by and between the Executive
     and the Company, constitutes the entire agreement of the Parties and
     supersedes all prior written or oral and all contemporaneous oral
     agreements, understandings, and negotiations between the Parties with
     respect to the subject matter hereof. This Agreement may not be changed
     orally and may only be modified in writing signed by both Parties. This
     Agreement, along with the Lydall Employee Agreement and the Indemnification
     Agreement, is intended by the Parties as the final expression of their
     agreement with respect to such terms as are included herein and therein and
     may not be contradicted by evidence of any prior or contemporaneous
     agreement. The Parties further intend that this Agreement, along with the
     Lydall Employee Agreement and the Indemnification Agreement, constitutes
     the complete and exclusive statement of their terms and that no extrinsic
     evidence may be introduced in any judicial proceeding involving such
     agreements.

          14.16 Counterparts. This Agreement may be executed in any number of
                ------------
     counterparts, each of which when so executed shall be deemed an original
     but all of which together shall constitute one and the same instrument.
<PAGE>

                                      -18-

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

                           LYDALL, INC.

                           By:
                                 ---------------------------------   -----------
                                 Christopher R. Skomorowski          Date
                                 President and Chief
                                 Executive Officer

                                 ---------------------------------   -----------
                                 James P. Carolan                    Date

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