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

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.

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.

Allowance for doubtful accounts

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.

Impairment of intangibles and goodwill

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

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.

Pension and other postretirement benefits

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.

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      2006
        Net sales                                    $ 610.5   $ 534.7   $ 478.2

        Gross profit                                   215.7     197.0     164.9
        Selling, general and administrative
        expenses                                       108.3      93.6      87.5
        Business restructuring                          59.9      (0.9 )    37.0
        Change in accounting principle related to
        postemployment benefits                            -         -      (2.6 )

        Operating income                                47.5     104.3      43.0
        Interest expense, net                           60.7      81.0      92.3
        Costs 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

        Loss 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 )

                                                            Fiscal Year
      (percent of sales)                            2008       2007       2006
      Net sales                                      100.0 %    100.0 %    100.0 %

      Gross profit                                    35.3       36.8       34.5
      Selling, general and administrative
      expenses                                        17.7       17.5       18.3
      Business restructuring                           9.8       (0.1 )      7.7
      Change in accounting principle related to
      postemployment benefits                            -          -       (0.5 )

      Operating income                                 7.8       19.4        9.0
      Interest expense, net                            9.9       15.1       19.3
      Costs 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        0.7

      Loss 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 )%

Fiscal 2008 compared with fiscal 2007

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.

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 2007
    U.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              7.7
    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 2008 restructuring                           (91.0 )              -
    Other                                                   (1.3 )              -
    Impact of Italian tax reform legislation                   -             10.0
    Impact of German tax reform legislation                    -             45.0

    Total effective tax rate on continuing
    operations                                             (63.6 )%         102.9 %

Fiscal 2007 compared with fiscal 2006

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

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 . . .