The following discussion of our financial condition and results of operations should be read together with our unaudited condensed consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q and our audited consolidated financial statements and the related notes included in our Annual Report on Form 10-K for the fiscal year ended January 3, 2009.

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.

Energy Storage Segment

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. We believe the global economic recession adversely impacted sales in the first half of 2009 and may continue to have an adverse impact in the second half of 2009. Although the short-term economic outlook is uncertain, 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 in the long term, membrane separator growth will exceed battery unit sales growth. We completed a lithium battery separator capacity expansion at our Charlotte, North Carolina facility in the third quarter of 2008.

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. In the second quarter of 2009, Celgard Korea made its first post-acquisition sales.

On August 5, 2009, Celgard, LLC, our 100% owned subsidiary, was selected for a grant award of $49.2 million from the U.S. Department of Energy (DOE). The grant, which is contingent upon finalizing the contractual agreement with the DOE, will fund an expansion of our existing lithium battery separator capacity.

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 addition, on April 1, 2008, we acquired the battery separator manufacturing assets of Super-Tech Battery Components Pvt. Ltd., located in Bangalore, India.

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.

A supply contract between our lead-acid battery separator business and Johnson Controls, Inc. ("JCI") expired on December 31, 2008 and was not renewed. 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 included closing our facility in Potenza, Italy, streamlining production at our facility in Owensboro, Kentucky and reducing selling, general and administrative resources associated with the lead-acid battery

separator business. The total estimated cost of the plan is expected to be approximately $61.5 million, including cash charges of $32.6 million for severance and environmental, and a $28.9 million non-cash impairment charge. We began implementing the restructuring plan during the fourth quarter and recorded restructuring charges of $59.9 million.

A supply agreement with Exide Corporation ("Exide"), a customer of our energy storage segment, expires on December 15, 2009. We are currently engaged in discussions with Exide but do not have a new agreement at this time.

Separations Media Segment

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.

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

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.

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. Our reporting units are at the operating segment level. Step one compares the fair value of our reporting units to their carrying amount. The fair value of the reporting unit is determined using the income approach, corroborated by a comparison to market capitalization and key multiples of comparable companies. Under the income approach, we determine fair value based on estimated future cash flows of each reporting unit, discounted by an estimated weighted-average cost of capital. If the fair value of the reporting unit is greater than its carrying amount, there is no impairment. If the reporting unit's carrying amount exceeds its fair value, then the second step must be completed to measure the amount of impairment, if any. Step two of the goodwill impairment test calculates the implied fair value of the reporting unit's goodwill with the carrying value of its goodwill. If the carrying amount of goodwill exceeds the implied fair value of goodwill, an impairment loss will be recognized in an amount equal to the excess.

Determining the fair value of a reporting unit is judgmental in nature and requires the use of significant estimates and assumptions, including revenue growth rates, operating margins, discount rates, strategic plans and future market conditions, among others. Given the current economic environment and the uncertainties regarding the impact on our business, there can be no assurance that our estimates and assumptions made for purposes of our goodwill impairment testing will prove to be accurate predictions of the future. If our assumptions regarding forecasted revenue or margin growth rates are not achieved, or changes in discount rates, strategy or market conditions occur, we may be required to record goodwill impairment charges in

future periods. It is not possible at this time to determine if a future impairment charge will occur and if it does, whether such charge will be material. At April 4, 2009, the date of our last interim step one impairment analysis, a 5% decrease in the estimated free cash flow assumptions would have resulted in a reduction in fair values of approximately $47.9 million for our energy storage segment and $19.0 million for our separations media segment. For the energy storage segment, the 5% decrease would have resulted in the carrying value of the lead-acid battery separator reporting unit exceeding its fair value by $12.7 million and would have required a step two analysis to determine the amount of goodwill impairment, if any.

At April 4, 2009, a .5% increase in the discount rate would have resulted in a reduction in fair values of $42.2 million for our energy storage segment and $17.3 million for our separations media segment. For the energy storage segment, the .5% 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 $9.1 million and would have required a step two analysis to determine the amount of goodwill impairment, if any.

Goodwill is tested annually for impairment as of the first day of the fourth quarter and at interim dates upon the occurrence of certain events or substantive changes in circumstances. Because of fluctuations in our stock price, we tested goodwill for impairment at January 3, 2009 and April 4, 2009 and concluded that the fair value of our reporting units exceeded the carrying amount and there was no impairment of goodwill. No events or substantive changes in circumstances have occurred since the last interim test that would indicate an interim goodwill impairment test should be performed as of July 4, 2009.

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.

Environmental matters

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 the Potenza, Italy 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 periods indicated, certain operating
data in amount and as a percentage of net sales:



                                                                          Percentage of Net Sales
                                         Three Months Ended                 Three Months Ended
($'s in millions)                  July 4, 2009      June 28, 2008     July 4, 2009    June 28, 2008

Net sales                         $        118.2    $         164.7           100.0 %          100.0 %

Gross profit                                46.6               61.1            39.4             37.1
Selling, general and
administrative expenses                     25.1               29.7            21.2             18.1
Business restructuring                         -                  -               -                -
Operating income                            21.5               31.4            18.2             19.0
Interest expense, net                       14.6               16.1            12.4              9.8
Foreign currency and other                   1.3               (0.5 )           1.1             (0.3 )
Income from continuing
operations before income taxes               5.6               15.8             4.7              9.6
Income taxes                                 1.4                4.6             1.2              2.8
Income from continuing
operations=                       $          4.2    $          11.2             3.5 %            6.8 %




                                                                          Percentage of Net Sales
                                          Six Months Ended                   Six Months Ended
($'s in millions)                  July 4, 2009      June 28, 2008     July 4, 2009    June 28, 2008

Net sales                         $        227.1    $         310.0           100.0 %          100.0 %

Gross profit                                90.0              116.6            39.6             37.6
Selling, general and
administrative expenses                     50.3               55.1            22.1             17.8
Business restructuring                       0.6                  -             0.3                -
Operating income                            39.1               61.5            17.2             19.8
Interest expense, net                       28.8               32.0            12.7             10.3
Foreign currency and other                   0.7               (0.6 )           0.3             (0.2 )
Income from continuing
operations before income taxes               9.6               30.1             4.2              9.7
Income taxes                                 2.4                8.4             1.0              2.7
Income from continuing
operations                        $          7.2    $          21.7             3.2 %            7.0 %

Comparison of the three months ended July 4, 2009 with the three months ended June 28, 2008

Net sales. Net sales for the three months ended July 4, 2009 were $118.2 million, a decrease of $46.5 million, or 28.2%, from the same period in the prior year. Energy storage sales for the three months ended July 4, 2009 were $82.3 million, a decrease of $39.7 million, or 32.5%. Energy storage sales of lead-acid and lithium battery separators decreased by 36.6% and 16.8%, respectively, due to current macro-economic conditions and the negative impact of dollar/euro exchange rate fluctuations of $4.0 million. Lead-acid battery separator sales were also impacted by the loss of a customer at the end of fiscal 2008. Sales to this customer in the three months ended June 28, 2008 were $15.3 million.

Separations media sales for the three months ended July 4, 2009 were $35.9 million, a decrease of $6.8 million, or 15.9% from the same period in the prior year, including the negative impact of dollar/euro exchange rate fluctuations of $4.3 million. Healthcare sales decreased 9.5% as the impact of higher sales volumes of synthetic hemodialysis membranes was more than offset by the negative impact of dollar/euro exchange rate fluctuations. Filtration and specialty product sales decreased by 27.8% due to current macro-economic conditions and the negative impact of dollar/euro exchange rate fluctuations.

Gross Profit. Gross profit as a percent of net sales was 39.4% for the three months ended July 4, 2009, as compared to 37.1% in the same period of the prior year. Energy storage gross profit as a percent of net sales was 36.2% for the three months ended July 4, 2009, which is consistent with the prior year percentage. Separations media gross profit as a percent of net sales

increased to 46.8% for the three months ended July 4, 2009, as compared to 36.8% in the same period of the prior year. The increase was due primarily to production efficiencies and decreased energy costs.

Selling, general and administrative expenses. Selling, general and administrative expenses decreased by $4.6 million for the three months ended July 4, 2009. Excluding the impact of dollar/euro exchange rate fluctuations, the decrease was $3.3 million, consisting of $4.1 million of reduced discretionary spending and cost savings from the 2008 restructuring plan, partially offset by $1.0 million of increased operating costs in 2009 due to the acquisition of Yurie-Wide Corporation in May 2008.

Interest expense. Interest expense for the three months ended July 4, 2009 decreased by $1.5 million from the same period in the prior year. The decrease in interest expense was primarily driven by the positive impact of dollar/euro exchange rate fluctuations on our euro-denominated debt and lower interest rates under our senior credit facilities.

Income taxes. The income tax provision for the interim periods presented is computed at the effective rate expected to be applicable in each respective full year using the statutory rates on a country-by-country basis. The effective tax rate on continuing operations was 24.5% for the three months ended July 4, 2009, as compared to 29.3% for the same period in the prior year. Our effective tax rate fluctuates due to a variety of factors, including state income taxes, the mix of income between U.S. and foreign jurisdictions taxed at varying rates, various changes in estimates of permanent differences and valuation allowances and the relative size of our consolidated income (loss) before income taxes.

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

Comparison of the six months ended July 4, 2009 with the six months ended June 28, 2008

Net sales. Net sales for the six months ended July 4, 2009 were $227.1 million, a decrease of $82.9 million, or 26.7%, from the same period in the prior year. Energy storage sales for the six months ended July 4, 2009 were $156.0 million, a decrease of $69.9 million, or 30.9%. Energy storage sales of lead-acid and lithium battery separators decreased by 33.6% and 21.2%, respectively, due to current macro-economic conditions and the negative impact of dollar/euro exchange rate fluctuations of $8.5 million. Lead-acid battery separator sales were also impacted by the loss of a customer at the end of fiscal 2008. Sales to this customer in the six months ended June 28, 2008 were $28.1 million.

Separations media sales for the six months ended July 4, 2009 were $71.1 million, a decrease of $13.0 million, or 15.5% from the same period in the prior year, including the negative impact of dollar/euro exchange rate fluctuations of $8.6 million. Healthcare sales decreased 9.0% as the impact of higher sales volumes of synthetic hemodialysis membranes was more than offset by the negative impact of dollar/euro exchange rate fluctuations. Filtration and specialty product sales decreased by 27.6% due to current macro-economic conditions and the negative impact of dollar/euro exchange rate fluctuations.

Gross Profit. Gross profit as a percent of net sales was 39.6% for the six months ended July 4, 2009, as compared to 37.6% in the same period of the prior year. Energy storage gross profit as a percent of net sales was 35.8% for the six months ended July 4, 2009, which is consistent with the prior year percentage. Separations media gross profit as a percent of net sales increased to 48.1% for the six months ended July 4, 2009, as compared to 36.1% in the same period of the prior year. The increase was due primarily to production efficiencies and decreased energy costs.

Selling, general and administrative expenses. Selling, general and administrative expenses decreased by $4.8 million for the six months ended July 4, 2009. Excluding the impact of dollar/euro exchange rate fluctuations, the decrease was $2.7 million, consisting of $6.2 million of reduced discretionary spending and cost savings from the 2008 restructuring plan, partially offset by $2.5 million of increased operating costs in 2009 for the acquisition of Yurie-Wide Corporation in May 2008.

Interest expense. Interest expense for the six months ended July 4, 2009 decreased by $3.2 million from the same period in the prior year. The decrease in interest expense was primarily driven by the positive impact of dollar/euro exchange rate fluctuations on our euro-denominated debt and lower interest rates under our senior credit facilities.

Income taxes. The income tax provision for the interim periods presented is computed at the effective rate expected to be applicable in each respective full year using the statutory rates on a country-by-country basis. The effective tax rate on continuing operations was 25.0% for the six months ended July 4, 2009, as compared to 27.8% for the same period in the prior year. Our effective tax rate fluctuates due to a variety of factors, including state income taxes, the mix of income between U.S. and foreign jurisdictions taxed at varying rates, various changes in estimates of permanent differences and valuation allowances, and the relative size of our consolidated income (loss) before income taxes.

The primary factor impacting our effective tax rate is the mix of earnings between the various tax jurisdictions in which we do business. Each tax jurisdiction has its own set of tax laws and tax rates. The income earned by our subsidiaries in each jurisdiction is taxed independently by these various jurisdictions. Currently, the applicable statutory income tax rates in the jurisdictions in which we operate range from 0% to 39%. Therefore, the amount of income tax expense in each jurisdiction as compared to our consolidated . . .