The following Management's Discussion and Analysis ("MD&A") is intended to help the reader understand the results of operations and financial condition of the Company. The MD&A is provided as a supplement to, and should be read in conjunction with, the Company's Consolidated Financial Statements and the accompanying Notes.

Overview

Albany International Corp. (the Registrant, the Company, or we) and its subsidiaries are engaged in five business segments.

The Paper Machine Clothing segment includes fabrics and belts used in the manufacture of paper and paperboard (PMC or paper machine clothing). The Company designs, manufactures, and markets paper machine clothing for each section of the paper machine. It manufactures and sells more paper machine clothing worldwide than any other company. PMC consists of large permeable and non-permeable continuous belts of custom-designed and custom-manufactured engineered fabrics that are installed on paper machines and carry the paper stock through each stage of the paper production process. PMC products are consumable products of technologically sophisticated design that utilize polymeric materials in a complex structure. The design and material composition of PMC can have a considerable effect on the quality of paper products produced and the efficiency of the paper machines on which it is used. Principal products in the PMC segment include forming, pressing and dryer fabrics, and process belts. A forming fabric assists in sheet formation and conveys the very dilute sheet through the section. Press fabrics are designed to carry the sheet through the presses, where water pressed from the sheet is carried through the press nip in the fabric. In the dryer section, dryer fabrics manage air movement and hold the sheet against heated cylinders to enhance drying. Process belts are used in the press section to increase dryness and enhance sheet properties, as well as in other sections of the machine to improve runnability and enhance sheet qualities. The Company's customers in the PMC segment are paper industry companies, some of which operate in multiple regions of the world. The Company's products, manufacturing processes and distribution channels for PMC are substantially the same in each region of the world in which it operates.

Albany Door Systems (ADS) designs, manufactures, sells, and services high-speed, high-performance industrial doors worldwide, for a wide range of interior, exterior, and machine protection industrial applications. Already a high performance door leader, ADS added to its product offerings through its acquisitions of Aktor GmbH in 2008 and R-Bac Industries in 2007. The business segment also derives revenue from aftermarket sales and service.

The Company's other reportable segments are emerging businesses that apply the Company's core competencies in advanced textiles and materials to other industries, including specialty materials and composite structures for aircraft and other applications (Albany Engineered Composites); a variety of products similar to PMC for application in the corrugators, pulp, nonwovens, building products, tannery and textile industries (Albany Engineered Fabrics); and insulation for outdoor clothing, gloves, footwear, sleeping bags and home furnishings (PrimaLoft® Products). No class of similar products or services within these segments accounted for 10% or more of the Company's consolidated net sales in any of the past three years.

The Company's primary segment, Paper Machine Clothing, accounted for approximately 67% of consolidated revenues during 2008. Paper machine clothing is purchased primarily by manufacturers of paper and paperboard. According to data published by RISI, Inc., world paper and paperboard production volumes grew at an annual rate of approximately 2.6% between 1999 and 2008. However, recent economic changes have led to uncertainty about paper and paperboard production volumes in the near term.

The paper and paperboard industry has been characterized by an evolving but essentially stable manufacturing technology based on the wet-forming papermaking process. This process, of which paper machine clothing is an integral element, requires a very large capital investment. Consequently, management does not believe that a commercially feasible substitute technology to paper machine clothing is likely to be developed and incorporated into the paper production process by paper manufacturers in the foreseeable future. For this reason, management expects that demand for paper machine clothing will continue into the foreseeable future.

The world paper and paperboard industry tends to be cyclical, with periods of healthy paper prices followed by increases in new capacity, which then leads to increased production and higher inventories of paper and paperboard, followed by a period of price competition and reduced profitability among the Company's customers. Although sales of paper machine clothing do not tend to be as cyclical, the Company may experience somewhat greater demand during periods of increased production and somewhat reduced demand during periods of lesser production.

The world paper and paperboard industry has experienced a significant period of consolidation and rationalization since 2000. During this period, a number of older, less efficient machines in areas where significant established capacity existed were closed or were the subject of planned closure announcements, while at the same time a number of newer, faster and more efficient machines began production or plans for the installation of such newer machines were announced in areas of growing demand for paper and paperboard (such as Asia and South America). Management anticipates that this trend is likely to continue in the near term.

At the same time, technological advances in paper machine clothing, while contributing to the papermaking efficiency of customers, have lengthened the useful life of many of the Company's products and reduced the number of pieces required to produce the same volume of paper. As the Company introduces new value creating products and services, it is often able to charge higher prices or increase market share in certain areas as a result of these improvements. However, increased prices and share have not always been sufficient to offset completely a decrease in the number of fabrics sold.

The factors described above result in a steady decline in the number of pieces of paper machine clothing, while the average fabric size is increasing. The net effect of these trends in recent years was that the specific volume of paper machine clothing consumption (measured in kilograms or square meters) had been increasing at a rate of approximately 1% per year. For the first six months of 2009, however, the global recession contributed to a reduction of 26% in the Company's PMC sales, compared to the same period in 2008. Although there is evidence that the decline in sales has reached the bottom in some regions and some product lines, the Company is unable to determine whether overall consumption of PMC will increase or decrease in the short term.

During 2006, the Company reported that price competition in Western Europe had an adverse impact on the Company's operating results in the PMC segment. In the third and fourth quarters of 2006, and in the first two quarters of 2007, sales of paper machine clothing to customers in Western Europe were significantly lower

The Company's response to that pricing disruption was to initiate a deliberate, intensive three-year process of restructuring and performance improvement initiatives. In PMC, the Company's strategy has been to offset the impacts of the maturation of the North American and Western European markets by (a) growing volume in these mature markets, (b) growing with the emerging markets in Asia and South America, and (c) reducing costs significantly through a company-wide, three-year restructuring and performance improvement program.

During this process of adjusting its manufacturing footprint to align with these regional markets, the Company has incurred restructuring charges. Specific charges reported have been incurred in connection with the reduction of PMC manufacturing capacity in the United States, Canada, Germany, Finland, France and Australia, and Doors segment manufacturing in Sweden and Germany. The Company has also incurred costs for idle capacity and equipment relocation that are related to the shutdown of these plants, and underutilized costs related to the new PMC plant in China. Expenses related to these items are included in "Cost of Goods Sold". In addition, the Company also incurred restructuring charges related to the centralization of PMC administrative functions in Europe, and reorganization of the Company's research and development function that has improved the Company's ability to bring value-added products to market faster.

In addition to these restructuring and restructuring-related activities, management has launched significant cost reduction and performance improvement initiatives. In 2006, the Company announced a plan to migrate its global enterprise resource planning system to SAP, and began a strategic procurement initiative designed to establish a world-class supply chain organization and processes that would lead to significant cost savings. Expenses incurred in connection with these actions are included in Selling Technical, General and Research (STG&R) expenses. These expenses were not allocated to the reportable segments because they are Corporate-wide initiatives.

The Company expects its three-year plan of restructuring and performance improvement initiatives to come to a conclusion by the end of 2009. The only remaining planned process improvement initiatives that will run through 2010 will be the conversion of the Company's Eurasia and Brazilian operations to SAP, and the relocation of equipment related to recent restructuring announcements.

The Albany Door Systems segment derives most of its revenue from the sale of high-performance doors, particularly to customers in Europe. The purchase of these doors is normally a capital expenditure item for customers and, as such, market opportunities tend to fluctuate with industrial capital spending. If economic conditions weaken, customers may reduce levels of capital expenditures, which could have a negative effect on sales and earnings in the Albany Door Systems segment. The Company's response to this trend includes expansion of its aftermarket business which tends to be more profitable than sales of new doors. The large amount of revenue derived from sales and manufacturing outside the United States could cause the reported financial results for the Albany Door Systems segment to be more sensitive than the other segments of the Company to changes in currency rates. Orders for new doors began to drop off at the end of the year and into January, and the Company experienced a substantial decline in product and aftermarket sales in the first half of 2009. Accordingly, the Company has been taking steps, across the business, to accelerate structural changes that permanently reduce costs.

The Engineered Fabrics segment derives its revenue from various industries that use fabrics and belts for industrial applications other than the manufacture of paper and paperboard. Approximately 40% of revenue in this segment is derived from sales to the nonwovens industry, which includes the manufacture of diapers, personal care and household wipes, and fiberglass-reinforced roofing shingles. Approximately 30% of segment revenue is derived from sales to markets that are adjacent to the paper industry, and 20% of revenue is derived from the building products market. Segment sales in the European and Pacific regions combined

The Engineered Composites segment (AEC) serves primarily the aerospace industry, with custom-designed composite and advanced composite parts for static and dynamic applications. AEC has experienced significant growth in net sales during the last few years, due both to the introduction of new products as well as growth in demand and application for previously existing products. The global recession is forcing many of AEC's customers to sharply curtail production, which has led to a sharp decline in segment sales and operating income.

The PrimaLoft® Products segment includes sales of insulation for outdoor clothing, gloves, footwear, sleeping bags, and home furnishings. The segment has manufacturing and sales operations in the United States, Europe, and Asia. Reflecting global economic pressures, segment sales for the first half of 2009 were 6.5 percent lower than the same period of 2008.

Foreign Currency

The Company operates in many geographic regions of the world, and more than half of the Company's business is in countries outside the United States. A substantial portion of the Company's sales is denominated in euros or other foreign currencies. As a result, changes in the relative values of U.S. dollars, euros and such other currencies impact reported net sales and operating income. If the value of the euro or other currencies were to decline relative to the U.S. dollar, the Company's reported net sales and operating income could decline. In some locations, the profitability of transactions is affected by the fact that sales are denominated in a currency different from the currency in which the costs to manufacture and distribute the products are denominated. These sales are typically denominated in U.S. dollars while the manufacturing costs are based mainly on local currencies, which could have a negative effect on earnings if the local currencies were to strengthen against the U.S. dollar. As a result, the Company enters into foreign currency contracts from time to time, which are generally less than 12 months in duration, in order to mitigate volatility in the Company's earnings that can be caused by changes in currency exchange rates. There were no foreign currency forward contracts designated as hedging instruments at June 30, 2009.

Total Company - three months ended June 30, 2009

In Q1 2009, the Company modified its business segment reporting by reclassifying global information systems expenses from each of the segments to unallocated expenses. Also during that quarter, the Company implemented Financial Accounting Standards Board Staff Position No. APB 14-1 (FSP 14-1). Prior year data has been modified to conform to the current year presentation. The Company filed a Form 8-K on May 1, 2009 with reclassified segment data and restated income statement and balance sheet items for quarterly periods in 2008, as well as annual data for 2006, 2007, and 2008.

Net sales were $212.6 million, an increase of 1.6 percent compared to Q1 2009 and a decrease of 28.5 percent compared to Q2 2008. Excluding the effect of changes in currency translation rates, net sales in Q2 2009 decreased 23.0 percent as compared to Q2 2008, as shown in Table 1 below:

Table 1


                                                        Impact of
                                Net Sales                Changes   Percent Change
                           Three Months ended          in Currency   excluding
                                June 30,       Percent Translation Currency Rate
    (in thousands)           2009      2008    Change     Rates        Effect
    Paper Machine Clothing  $145,533  $199,477  -27.0%    ($9,247)         -22.4%
    Albany Door Systems       30,530    48,845 -37.5       (4,225)        -28.8
    Engineered Fabrics        21,629    27,255 -20.6       (2,330)        -12.1
    Engineered Composites      7,379    13,977 -47.2             -        -47.2
    PrimaLoft® Products        7,488     7,647  -2.1         (341)          2.4
    Total                   $212,559  $297,201  -28.5%   ($16,143)         -23.0%

Gross profit was 32.4 percent of net sales in Q2 2009, compared to 34.7 percent in the same period of 2008. Cost-reduction initiatives helped to offset the effects of lower sales. As described in the paragraphs that follow Table 4, costs associated with idle-capacity and performance-improvement initiatives were $6.2 million in Q2 2009 and $7.9 million in Q2 2008.

Selling, technical, general, and research (STG&R) expenses were $64.6 million, or 30.4 percent of net sales, in Q2 2009 in comparison to $86.9 million or 29.3 percent of net sales in Q2 2008. Changes in currency translation rates had the effect of decreasing STG&R expenses by $6.9 million in comparison to Q2 2008. Q2 STG&R expenses include costs related to performance-improvement initiatives totaling $1.4 million in 2009 and $7.9 million in 2008. Revaluation of non-functional currency assets and liabilities resulted in losses of $1.7 million in Q2 2009 and $0.5 million in Q2 2008.

STG&R expenses were $67.6 million, or 32.3 percent of net sales, in Q1 2009. Q1 2009 STG&R expenses included costs related to performance-improvement initiatives totaling $2.2 million. Revaluation of non-functional currency assets and liabilities resulted in a gain of $1.9 million in Q1 2009.

Operating income/loss was a loss of $29.6 million in Q2 2009, compared to income of $14.5 million for the same period of 2008.

Table 2

                                         Operating (loss)/income
                                           Three Months ended
                                                June 30,
                 (in thousands)             2009         2008
                 Paper Machine Clothing      ($8,732)    $31,231
                 Albany Door Systems          (1,639)      4,836
                 Engineered Fabrics              837       3,880
                 Engineered Composites        (2,372)       (217)
                 PrimaLoft® Products           2,594       1,718
                 Research expenses            (5,767)     (8,288)
                 Unallocated expenses        (14,476)    (18,634)
                 Total                      ($29,555)    $14,526

Q2 segment operating income included the following expenses associated with restructuring and performance-improvement initiatives:

Table 3

                                                  Q2 2009
                                Restructuring  Idle-   Performance-
                                 and Other,   capacity improvement
         (in thousands)              Net       Costs   Initiatives   Total
         Paper Machine Clothing       $27,923   $3,099       $2,781 $33,803
         Albany Door Systems            1,900        -           99   1,999
         Engineered Fabrics             2,515        -            -   2,515
         Engineered Composites            110        -          205     315
         PrimaLoft® Products               19        -            -      19
         Research expenses                  -        -            -       -
         Unallocated expenses           1,343        -        1,374   2,717
         Total                        $33,810   $3,099       $4,459 $41,368


Table 4

                                                         Q2 2008
                                Restructuring  Idle-   Performance-
                                 and Other,   capacity improvement
         (in thousands)              Net       Costs   Initiatives   Total
         Paper Machine Clothing         $628    $1,735       $7,225  $9,587
         Albany Door Systems             322         -           78     400
         Engineered Fabrics                -         -            -       -
         Engineered Composites             -         -            -       -
         PrimaLoft® Products               -         -            -       -
         Research expenses             1,827         -            -   1,827
         Unallocated expenses         (1,045)        -        6,759   5,714
         Total                        $1,732    $1,735      $14,062 $17,528

Q2 2009 idle-capacity costs of $3.1 million were related to previously announced restructuring at PMC plants in the U.S. and Europe. As a result of the recent restructuring announcements, the Company expects idle-capacity costs to continue at least through the next two quarters.

Q2 2009 performance-improvement initiatives totaled $4.5 million, of which $3.1 million was reported in cost of goods sold, and $1.4 million was reported in STG&R expenses. Items reported in cost of goods sold include $1.3 million for equipment relocation and $1.1 million related to underutilized capacity at the new plant in Hangzhou, China. Included in underutilized expense and idle-capacity costs was $0.9 million of depreciation expense.
Performance-improvement costs reported as STG&R expenses included $1.4 million related to the ongoing implementation of SAP.

Q2 2008 costs for restructuring and performance-improvement initiatives amounted to $17.5 million, of which $1.7 million was reported as restructuring, $7.9 million was included in cost of goods sold, and $7.9 million was included in STG&R expenses.

Cost reduction initiatives contributed to an improvement of $3.7 million in Q2 2009 Adjusted EBITDA, compared with Q1 2009. The Company estimates that cost reduction initiatives announced to date will contribute to an improvement in Adjusted EBITDA of $3.0 million per quarter by Q4 2009, growing to $7.0 million per quarter by Q2 2010. These estimates assume all other factors that influence EBITDA such as sales, currency, and inflation remain constant.

Research expense decreased $2.5 million due to reductions from restructuring and cost reduction initiatives. Unallocated expenses decreased by $4.2 million principally due to lower restructuring and performance expenses.

Interest expense increased to $6.1 million for Q2 2009, compared with $5.9 million for Q2 2008. The increase is due to slightly higher average levels of debt outstanding during 2009.

Other income/expense, net was income of $37.2 million in Q2 2009, including a $36.6 million or $0.73 per share gain on extinguishment of debt and income of $1.2 million related to revaluation of non-functional currency intercompany balances. Other income/expense, net was expense of $2.1 million for Q2 2008. Other income/expense, net was expense of $0.2 million in Q1 2009, including a $2.8 million or $0.06 per share gain on extinguishment of debt, which was partially offset by losses totaling $1.5 million related to revaluation of non-functional currency intercompany balances.

Q2 2009 income tax benefit/expense includes a provision of $14.3 million related to the gain on extinguishment of debt. Additionally, Q2 2009 results include a discrete tax charge of $0.7 million or $0.02 per share, and an income tax benefit in the quarter related to a change in the estimated tax rate that increased earnings by $2.7 million or $0.09 per share. Q2 2008 income tax expense includes discrete tax adjustments that decreased net income by $0.3 million or $0.01 per share.

Net loss per share was $0.41, after reductions of $1.04 from net restructuring charges, related idle-capacity costs, and costs related to continuing performance-improvement initiatives. A gain on extinguishment of debt increased earnings by $0.73 per share and tax adjustments increased earnings by $0.07 per share. Results for Q2 2009 also include a charge of $10 million, or $0.33 per share, representing an estimated purchase price

Net Income per share for Q2 2008 was $0.18, after reductions of $0.47 from net restructuring charges, related idle-capacity costs, and costs related to performance-improvement initiatives and $0.01 for income tax adjustments.

Total Company - six months ended June 30, 2009

Net sales were $421.8 million, a decrease of 26.1 percent compared to the same period last year. Excluding the effect of changes in currency translation rates, net sales decreased 19.4 percent as shown in Table 5 below:

Table 5


                                                       Impact of
                                Net Sales               Changes   Percent Change
                            Six Months ended          in Currency   excluding
                                June 30,      Percent Translation Currency Rate
     (in thousands)           2009     2008   Change     Rates        Effect
     Paper Machine Clothing $284,607 $382,492  -25.6%   ($22,296)         -19.8%
     Albany Door Systems      64,856   93,977 -31.0       (9,983)        -20.4
     Engineered Fabrics       43,199   55,365 -22.0       (5,224)        -12.5
     Engineered Composites    16,464   25,065 -34.3           -          -34.3
     PrimaLoft® Products      12,638   13,510  -6.5         (472)         -3.0
     Total                  $421,764 $570,409  -26.1%   ($37,975)         -19.4%

Gross profit was 32.9 percent of net sales compared to 34.7 percent in the same period of 2008. Cost-reduction initiatives helped to offset the effects of lower sales. As described in the paragraphs that follow Table 8, costs associated with idle-capacity and performance-improvement initiatives were $16.7 million in 2009 and $23.9 million in 2008.

Selling, technical, general, and research (STG&R) expenses were $132.3 million, or 31.4 percent of net sales, in 2009, in comparison to $169.3 million, or 29.7 percent of net sales, in 2008. Changes in currency translation rates had the effect of decreasing STG&R expenses by $14.7 million in comparison to 2008. STG&R expenses in 2009 include costs related to performance-improvement initiatives totaling $3.6 million in 2009 and $13.1 million in 2008. STG&R expenses were reduced by employee reductions due to restructuring activities along with reductions in travel and other expenses due to cost reduction initiatives. Revaluation of non-functional currency assets and liabilities resulted in a gain of $0.3 million in 2009 and a loss of $1.0 million in 2008.

Operating income/loss was a loss of $44.3 million compared to income of $21.7 million for the same period of 2008.

Table 6

. . .