EXHIBIT 13.1

[GRAPHIC DESIGN APPEARS HERE]

One Colonial Road
P.O. Box 151
Manchester, CT 06045-0151

+++++++++++++++++++++++++++++++++++++
+[LOGO OF LYDALL, INC. APPEARS HERE]+
+++++++++++++++++++++++++++++++++++++

++++++++++++++++++++
+1997 ANNUAL REPORT+
++++++++++++++++++++

[GRAPHIC DESIGN APPEARS HERE]

+++++++++++++++++++++++++++++++++++++
+[LOGO OF LYDALL, INC. APPEARS HERE]+
+++++++++++++++++++++++++++++++++++++

+++++++++++++++++++
+TABLE OF CONTENTS+
+++++++++++++++++++

1 Financial Highlights

2 Letter to Stockholders

7 Lydall Products

16 Directory of Lydall Companies

18 Financial Review

- --------------------------------------------------------------------------------
Lydall, Inc.
- --------------------------------------------------------------------------------

Lydall possesses extensive fiber and fiber-composite knowledge as well as a
variety of proprietary manufacturing capabilities. The Company's core
competence is designing and producing technologically advanced, unique materials
for critical, high-performance applications.

Lydall develops engineered, specialty products primarily in the areas of air and
liquid filtration, thermal barriers and insulation, and materials handling. A
customer-driven company, Lydall is known for its exceptional service, high
quality, and innovative product solutions.

- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
Percent
------------------ Increase
In thousands except per-share data 1997 1996 (Decrease)
- --------------------------------------------------------------------------------

Net sales $244,289 $252,652 (3)
................................................................................
Net income 21,911 24,736 (11)
................................................................................
Diluted earnings per common share 1.27 1.38 (8)
................................................................................
Stockholders' equity 113,030 117,844 (4)
................................................................................
Stockholders's equity per share 7.04 6.89 2
................................................................................
Market capitalization at December 31, 313,277 384,570 (19)
................................................................................
Closing price NYSE on December 31, 19.50 22.50 (13)
................................................................................
Weighted average common
stock and equivalents outstanding 17.319 17,988 (4)
- --------------------------------------------------------------------------------

1 LYDALL, INC.

TO OUR STOCKHOLDERS AND EMPLOYEES

"Lydall embraces a four-pronged strategy to promote its growth: participation in
expanding, dynamic markets; new product and market development; unique quality
programs; and strategic acquisitions."

Although results for 1997 were solid, they did not keep up with the pace set in
prior years. Lower sales and earnings in 1997 followed 12 years of consecutive
earnings increases and 6 years of sales growth. We are dedicated to repeating
and exceeding these records in the future, and we have the means to meet this
goal. The fundamentals of Lydall are sound, and many growth opportunities
exist, especially in our core businesses.

Lydall embraces a four-pronged strategy to promote its growth: participation in
expanding, dynamic markets; new product and market development; unique quality
programs; and strategic acquisitions. Although we encountered obstacles of
varying degrees in 1997, I am confident in the potential that each holds for
Lydall's future.

Lydall's Markets

Lydall's engineered materials, including specialty nonwovens, various fabricated
components, and fiberboard systems, serve a variety of markets. Our strongest
focus is in the air and liquid filtration and heat-management markets. Sales to
these markets represented 59 percent of our business in 1997.

Air Filtration

During 1997, sales of our high-efficiency air filtration materials for clean-
room applications were down approximately 10 percent from 1996, a year bolstered
by extraordinary sales levels in the first half. Erratic shipping schedules and
postponements of planned clean-room construction continued through early 1997.
We began to see increased requests for quotes and smaller clean-room contracts
coming onstream toward the end of the year; however, this market did not return
to its previous robust levels of growth.

The slowdown in sales of materials for clean-room applications was primarily
related to a decline in the semiconductor industry and the resultant
postponements of chip manufacturing clean-room fabrications. We typically lag
semiconductor market recoveries in the same manner that we lag market declines.
The lag has been more lengthy through this most recent lull. Semiconductor
industry analysts are predicting renewed growth of associated markets in 1998,
and the trend toward faster, more complex and more powerful semiconductors bodes
well for suppliers to this market,

2 LYDALL, INC.

including Lydall. Lydall's market share is solid, and as I've stated many times,
increased sales and a return to historical growth in this market is not a
question of "if", just a question of "when."

The strength of sales of materials for other types of clean-rooms, such as those
used by pharmaceutical manufacturers, hospitals, coating and painting
operations, and research laboratories, partially offset the lackluster
semiconductor-related sales in 1997. Lydall also entered the consumer air
purification market, and our Lydair(R) filtration materials can now be found in
portable air purifiers, vacuum cleaners, and central home air cleaning systems.
In fact, in some instances, filter manufacturers have incorporated Lydall's
Certified HEPA Seal into their packaging graphics and are including Lydall's
informational pamphlet regarding filtration technology together with their
product.

Healthy prospects exist in all three arenas served by Lydall air filtration
products. We expect growth to be fueled by renewed strength of the semiconductor
industry, expanding use of clean-room environments by all kinds of industrial
and medical applications, and extensive interest by consumers in clean air in
their homes and offices.

Heat Management

Lydall supplies a wide variety of materials and components to heat-management
applications within temperatures ranging from absolute zero, or -459(degrees) F,
up to 3000(degrees) F. Sales of these products, which include cryogenic
insulation used for the storage of liquid natural gases, automotive thermal
barriers and heat-shields, and various higher temperature industrial insulating
materials, represented 37 percent of total 1997 sales. Thermal markets have been
an important source of growth for the Company in the past and will be a major
focus in the future.

Sales to these markets were down by 7 percent in 1997 compared with 1996. The
decline related primarily to the automotive market. The continuous flow of new
products being designed into vehicles and older products being designed out is a
common dynamic of this business. Normally the number of new Lydall products
being introduced far outnumbers those being phased out. However, sales of a
large insulation part lost at the end of 1996 was not replaced by new business
in 1997. Also, in mid-1997, Ford discontinued its T-Bird, Cougar, and Aerostar
models, and the popularity of the Taurus and Sable waned somewhat during the
year. Each of these models contained a number of Lydall thermal barriers and
shields.

We strongly believe that the circumstances affecting us in our automotive
markets are temporary. Automotive engineers specify our products to solve a
variety of specific heat problems throughout a vehicle. Heat management has
become a major concern of car companies as vehicle designs move toward larger
passenger cabins and smaller engine compartments. Increasingly aerodynamic lines
have resulted in components being packed into tighter spaces with less free air
flow. Stricter emission standards have translated into increasing heat issues.
Also, high-performance workhorses like trucks and sport-utility vehicles, which
create the most heat issues, have been extremely popular. These market trends
have meant increasing use of Lydall's thermal barriers and heat shields.

Of all the thermal barrier markets we serve, the automotive market holds the
most significant growth opportunities. Our work continues with Ford, Chrysler,
and General Motors on a wide variety of cars, sport-utility vehicles, and
trucks. We are also working on proposals with several of the European auto
manufacturers to supply their U.S.

[BAR GRAPH APPEARS HERE] [BAR GRAPH APPEARS HERE]

OPERATING CASH CAPITAL
$ millions FLOW - EBITDA $ millions INVESTMENT
93 23.9 93 6.3
94 35.1 94 8.0
95 45.2 95 12.0
96 48.2 96 10.9
97 42.3 97 17.1

3 LYDALL, INC.

operations, as well as to expand our automobile thermal business into Europe
through joint ventures and acquisitions.

New Product and Market Development

In the Analysis of Results portion of our annual report we have always
classified annual incremental sales emanating from products and technology
introduced within the preceding three years as new in the current year. By this
definition, prior to 1997, we averaged around $8 million a year of incremental
sales attributable to new products. We did not match our historical performance
in 1997. If, however, we were to take a broader, more conventional, viewpoint,
well over $50 million of our 1997 sales were of products we did not produce five
years ago - better than 20 percent.

We targeted a great deal of effort and investment at new-product development
during the year. A 29 percent increase in research and development spending in
1997 supported an extensive roster of programs. Despite these initiatives and
financial support, customer program delays and market circumstances hampered
commercialization efforts during the year.

In addition to advancing development within our current product lines, we are
diversifying products into new markets,
moving forward into fabrication in some instances, and exploring a
number of opportunities for combinations of materials from two or more of our
divisions. For example, we extended our high-efficiency filtration products
into the consumer market. Certain grades of our filtration materials,
previously sold only for industrial clean-room applications, are now employed in
consumer air cleaning appliances as well.

Another avenue of growth is the extension of our manufacturing and processing
technologies. We are in the midst of installing a melt-blown capability at our
Technical Papers facility. This operation produces the majority of the Company's
high-efficiency air filtration materials. The equipment is expected to be
operational early in the second quarter of 1998. The technology complements our
existing wet-laid process and opens us to new markets and applications,
particularly in liquid filtration. We also look forward to combining the
attributes of a melt-blown media with a variety of Lydall's other materials to
form composites with unique performance characteristics.

Unique Quality Programs

Our Cost of Quality Program is based on the ideal that everything should run
perfectly. Employees throughout the organization are trained to identify,
statistically measure, and track areas that need improvement with the goal of
making the Company more efficient and enabling us to produce the highest quality
products at a competitive price. This includes investment in computer systems
and plant machinery and equipment. Training and organizational programs to
increase efficiencies and improve productivity fall under this program as well.
Formal, third-party validated quality assurance programs, such as ISO9000
certification, also play an important role.

During 1997 all of Lydall Westex's plants plus its sales support office were
awarded QS9000 and ISO9002 quality assurance certification. QS9000 is an
ISO9000-based, supplier quality rating system established by the three major
U.S. automotive manufacturers. Certification covers key elements such as
customer satisfaction, continuous improvement, emphasis on defect prevention,
and reduction of variations and waste in the supply

[BAR GRAPH APPEARS HERE] [BAR GRAPH APPEARS HERE]

GROSS MARGIN AS NET
$ millions A PERCENT OF SALES $ millions SALES
93 30.8 93 157.4
94 30.5 94 213.1
95 30.8 95 252.1
96 32.5 96 252.7
97 31.8 97 244.3

4 LYDALL, INC.

chain, all of which reflect the mandate of Lydall's own comprehensive quality
program.

At the time of our certification, only about 10 percent of the estimated 15,000
to 20,000 direct automotive suppliers had been QS9000 certified. Although the
deadlines for certification varied by automotive manufacturer, all direct
suppliers were required to be certified by the end of 1997. We were very proud
to be among the first to successfully achieve this important quality rating.

Lydall's quality programs allow us to integrate and improve acquisitions and to
continually improve existing processes and products. We strive to deliver the
same high-quality product whether it's the first shipment or the ten thousandth.
These efforts act as our road map to continually improve margins in a
deliberate, systematic way. Over the past ten years, we have captured average
savings of over $2.0 million a year under these programs.

Strategic Acquisitions

We acquired a small business in December, 1996 (Textile Technologies Industries,
Inc.) which we incorporated into the Company during 1997 as the Fort Washington
Operation of Lydall Manning. In its first year, the operation did not perform to
Lydall standards, but I expect that to change by the end of 1998. During 1997,
we discontinued many of the operation's low-margin product lines which reduced
sales. Also, the operation, which manufactures components utilized in highly
specialized, advanced structural materials for the aerospace, marine, and
sporting goods industries, needed to be relocated. The move was both time
consuming and distracting but should provide improved operating efficiencies and
productivity in future years. The move is now complete, and the plant's
efficiency has benefited already. In addition, we suffered from a severe
shortage of a type of carbon fiber needed for many of Fort Washington's high-
performance products. We are in the process of qualifying alternate sources of
carbon fiber, and we are introducing our Lydall programs as well as aggressively
pursuing some intriguing market opportunities.

We intensified our acquisition efforts during 1997. We engaged the assistance
of investment bankers to focus specifically on filtration and automotive thermal
applications. We also carried out an extensive in-house search initiative aimed
at filtration applications. A similar program targeting thermal applications
began early in 1998.

Over the long term, acquisitions have represented 40 percent of Lydall's growth
and remain an important source of future expansion.

During the first quarter of 1998, Charter Medical, Ltd., a new corporate entity
established earlier in the year, acquired CharterMed, Inc., a privately held
company located in Lakewood, New Jersey. CharterMed, a growing and profitable
manufacturer of proprietary medical devices, serves applications such as biotech
and pharmaceutical processing, blood bank and transfusion services, neonatal
intensive care, open-heart surgery, and stem cell processing and freezing. These
products directly complement the Lypore(R) family of biomedical filtration media
and sub-assemblies of Lydall Westex in Hamptonville, North Carolina, and
represent Lydall's broadening presence in the market for advanced medical and
blood filtration devices. In the second quarter of 1998, Lydall will be spinning
off its biomedical filtration business into the new

[BAR GRAPH APPEARS HERE] [BAR GRAPH APPEARS HERE]

NET RETURN
$ millions INCOME $ millions ON SALES
93 10.2 93 6.5
94 15.5 94 7.3
95 22.4 95 8.9
96 24.7 96 9.8
97 21.9 97 9.0

5 LYDALL, INC.

entity, Charter Medical, Ltd. As part of this organizational change, the Westex
medical products operation will move to a new facility in Winston-Salem, North
Carolina.

Financial Position

In addition to the four areas for growth discussed above, Lydall is financially
in excellent shape.

As of December 31, 1997, cash, cash equivalents, and short-term
investments totaled $12.8 million. This is after reinvesting $27.4 million to
purchase 1.3 million shares of Lydall Common Stock throughout the year. Working
capital was $39.2 million, total debt to total capitalization was 4 percent,
debt to equity, 4 percent, and our current ratio was 2.39. We realize that a
debt-to-capital ratio of 4 percent is an under-utilization of assets, and we are
not comfortable with that. We plan to use our healthy borrowing capacity to
acquire companies that fit our strategic focus. Using a conservative debt-to-
total-capitalization ratio of 40 percent, or a reasonable debt-to-cash-flow
ratio to maintain investment quality ratings, we could borrow from $75 million
to $125 million to finance corporate development. We would certainly consider
going above a 40-percent debt-to-total-capitalization ratio if the right
opportunity arose and feel comfortable that our earnings stream and cash flow
would provide adequate funding. Operating cash flow (operating income plus
depreciation and amortization) totaled $42.3 million in 1997.

Capital expenditures in 1997 amounted to $17.1 million. Our 1998 budget plan
calls for capital expenditures totaling $17.2 million. Expenditures related to
"Lydall 2000" amounted to about $6.6 million in 1997. Additional implementation
costs in 1998 and 1999 are expected to bring total expenditures for the project
to around $9 million.

Lydall 2000 is a proactive information technology effort which has included
evaluating and selecting enterprisewide software and hardware that will provide
the Company with a competitive platform to last well into the next decade.
Lydall expects to complete implementation of its Lydall 2000 systems over the
next two years without any material disruption of operations. Through this
enhanced information system we will gain the benefits of improved customer
response, lower cost of delivering products and services, better internal and
external communications, and access to real-time information. Solving the
century-dating issue will be an added benefit of these extensive efforts.

1998

Many of the same market conditions and product delays that affected us in 1997
continue to be a factor early in 1998. Although we've begun the year somewhat
behind the same period last year, we are optimistic that a number of programs
currently underway will begin to benefit operating results as we move further
into 1998. Longer term, we will concentrate on harvesting the potential of the
four areas of growth I've discussed in this letter--expanding markets, new
products, internal quality programs, and acquisitions. I am confident in our
strategy and direction, and I am enthusiastic about the opportunities on the
horizon.

LEONARD R. JASKOL
Chairman and Chief Executive Officer

[BAR GRAPH APPEARS HERE] [BAR GRAPH APPEARS HERE]

TOTAL RESEARCH AND
$ millions CAPITALIZATION $ millions DEVELOPMENT SPENDING

Debt Equity Total
93 13.8 60.1 73.9 93 4.8
94 13.5 76.2 89.7 94 5.5
95 10.6 101.8 112.4 95 6.2
96 9.5 117.8 127.3 96 6.8
97 5.1 113.0 118.1 97 8.7

6 LYDALL, INC.

LYDALL PRODUCTS

Lydall's engineered materials and components serve a wide variety of demanding,
high-performance applications. In most cases, Lydall's products are not visible
or apparent to the general public. The following illustrations depict some
examples of where Lydall's products are employed to perform critical filtration
and heat-management functions.

7 LYDALL, INC.

CLEAN ROOMS

Lydair(R) filtration materials are specified throughout the world for filter
systems installed in the ceilings, floors, walls, workbenches, and mini-
environments of semiconductor and microchip manufacturing facilities, hospital
operating rooms, industrial clean rooms, food and pharmaceutical processing
plants, and biotechnology laboratories.

Lydall's filtration materials serve a wide range of performance efficiencies,
from 40 percent ASHRAE up to 99.999999 percent ULPA at the most penetrating
particle size -- particles as minute as one-tenth of one micron (3000 times
smaller than the period at the end of this sentence.)

[DRAWING APPEARS IN BACKGROUND]

Lydall is a pioneer and a world leader in High Efficiency Particulate Arrestance
(HEPA) technology. HEPA-standard filtration materials filter out 99.97 percent
of all contaminants as small as 0.3 micron. These include but are not limited
to tobacco smoke, pollen, dust, dust mite allergens, mold spores, bacteria, and
other airborne allergens. The Company's Lydair(R) filtration materials can be
found in consumer applications such as portable air purifiers, vacuum cleaners
and central home air cleaning systems.

HOME FILTRATION

[DRAWING OF HOUSE APPEARS IN BACKGROUND]

AUTOMOTIVE DESIGN

Lydall's patented thermal barrier and heat-shield components provide automotive
design engineers with effective solutions to heat-management problems within
stringent space, weight and cost constraints. Lydall products solve heat-
management issues throughout a vehicle. Examples of applications include:
catalytic converters, exhaust systems, transmissions, floor pans, gas tanks,
fuel systems, brakes, electronic components, steering gears, and batteries.

[DRAWING OF CAR APPEARS IN BACKGROUND]

Lydall's Cryotherm(R) and CRS Wrap(R) superinsulating materials insulate at
temperatures as low as absolute zero (-459(degrees) F). Applications include
tanker trucks which transport liquid gases, fleet vehicles fueled by liquid
natural gas, and other cryogenic storage vessels.

CRYOGENIC STORAGE VESSELS

[DRAWING OF TANKER TRUCK APPEARS HERE]

LYDAL COMPANIES

CORPORATE HEADQUARTERS
- -------------------------------------------------------------------------------

Lydall, Inc.
One Colonial Road
P. O. Box 151
Manchester, Connecticut 06045-0151
Telephone (860) 646-1233
Facsimile (860) 646-4917
Facsimile (860) 646-8847

Producer of technologically advanced engineered materials for demanding
specialty applications.

Products whose technologies are continuously being upgraded and which are sold
to niche markets.

Customer-driven, highly responsive to service, quality, and end-use
requirements.

LYDALL AXOHM
- -------------------------------------------------------------------------------
President: James P. Carolan
Saint-Rivalain
56310 Melrand
France
Telephone 33-2-97-28-5300
Facsimile 33-2-97-39-5890

Lydall Axohm produces high-efficiency air filtration media as well as thermal
barrier products. The operation also manufactures and converts nonwoven battery
separators sold primarily to European automotive markets.

LYDALL COMPOSITE MATERIALS
- --------------------------------------------------------------------------------
President: John J. Worthington
12 Davis Street
P. O. Box 400
Hoosick Falls, New York 12090-0400
Telephone (518) 686-7313
Facsimile (518) 686-7205

Covington Operation
230 Industrial Park Road
P. O. Box 599
Covington, Tennessee 38019-0599
Telephone (901) 476-7174
Facsimile (901) 476-9685

Lydall Composite Materials manufactures high-performance specialty products
including fiber composites and fiberboard products for gasket, thermal barrier,
electrical insulation, and packaging applications. Composite Materials also
produces Cycle-Write(R) wood replacement board which is currently being used in
the manufacture of pencils both in the U.S. and overseas.

LYDALL LOGISTICS MANAGEMENT
- --------------------------------------------------------------------------------
President: Bill W. Franks, Jr.
615 Parker Street
P. O. Box 151
Manchester, Connecticut 06045-0151
Telephone (860) 646-1233
Facsimile (860) 645-0822

Logistics Management provides specialized distribution and warehouse services on
a national basis to other Lydall companies and various American, Canadian, and
European manufacturers of newsprint, specialty papers and other assorted
products.

LYDALL & FOULDS
- --------------------------------------------------------------------------------
President: Bill W. Franks, Jr.
615 Parker Street
P. O. Box 151
Manchester, Connecticut 06045-0151
Telephone (860) 646-1233
Facsimile (860) 646-4448

Lydall & Foulds produces chip, white-lined, and solid kraft paperboard used
primarily by the setup and folding box industries and is a major consumer of
recycled materials.

LYDALL MANNING
- --------------------------------------------------------------------------------
President: William J. Rankin
P. O. Box 328
Troy, New York 12181-0328
Telephone (518) 273-6320
Facsimile (518) 273-6361

Fort Washington Operation
1100 Virginia Avenue, Suite 100
Fort Washington, Pennsylvania 19034-3295
Telephone (215) 542-2433
Facsimile (215) 542-1696

Lydall Manning manufactures specialty materials and technical paper products
that offer a wide variety of performance capabilities. Manning's products are
used as cryogenic superinsulating media, thermal, flame, and electrical
barriers, and high-performance, lightweight structural composites.

16 LYDALL, INC.

LYDALL SOUTHERN PRODUCTS
- --------------------------------------------------------------------------------
President: Raymond J. Lanzi
3021 Vernon Road
P. O. Box 9550
Richmond, Virginia 23228-3737
Telephone (804) 266-9611
Facsimile (804) 266-3875

Jacksonville Operation
500-B North Ellis Road
Jacksonville, Florida 32254
Telephone (904) 783-1247
Facsimile (904) 783-8907

Sales Office
1300 West Lodi Avenue, Suite A9
Lodi, California 95242
Telephone (209) 333-0885
Facsimile (209) 333-0887

Lydall Southern Products produces laminated fiberboard sheets which replace wood
pallets in materials-handling applications. These operations also make bulk
palletizing tier sheets used in the shipping and storing of products like glass
bottles and a variety of protective dunnage products used in the shipping
industry.

LYDALL TECHNICAL PAPERS
- --------------------------------------------------------------------------------
President: James P. Carolan
Chestnut Hill Road
P. O. Box 1960
Rochester, New Hampshire 03866-1960
Telephone (603) 332-4600
Facsimile (603) 332-9602
Facsimile (603) 332-3734

Lydall Technical Papers manufactures air filtration media serving a wide range
of performance efficiencies, from 40 percent ASHRAE up to 99.999999 percent ULPA
at the most penetrating particle size. The operation also manufactures thermal
barrier materials for use in high-temperature applications and liquid filtration
media used primarily in high-efficiency, high-capacity hydraulic oil and
lubrication oil elements for off-road vehicles, trucks, and heavy machinery.

LYDALL WESTEX
- --------------------------------------------------------------------------------
President: Christopher R. Skomorowski
Brooks Crossroads
P. O. Box 109
Hamptonville, North Carolina 27020
Telephone (910) 468-8522
Facsimile (910) 468-8555

Columbus Operation
6767 Huntley Road
Columbus, Ohio 43229
Telephone (614) 885-6379
Facsimile (614) 885-5967

Rockwell Operation
711 Palmer Road
Rockwell, North Carolina 28138
Telephone (704) 279-5031
Facsimile (704) 279-6104

Sales Office
4555 Investment Drive
Suite 205
Troy, Michigan 48098
Telephone (248) 952-5570
Facsimile (248) 952-5575

Lydall Westex is a leader in the automotive heat-management field. Westex makes
a range of patented thermal barrier and heat-shield products for mid-to-high-
temperature applications throughout a vehicle.

LYDALL INTERNATIONAL, INC.
- --------------------------------------------------------------------------------

Saint-Rivalain
56310 Melrand
France
Telephone 33-2-97-28-8989
Facsimile 33-2-97-28-8980

Branch Office
Comodo Nishi-Azabu Building
25-22, Nishi-Azabu 2-Chome
Minato-ku, Tokyo 106 Japan
Telephone 81-3-3406-1575/6
Facsimile 81-3-3406-1577

An international sales and marketing arm of all Lydall Companies.

LYDALL ON-LINE
- --------------------------------------------------------------------------------
info@lydall.com www.lydall.com

17 LYDALL, INC.

FINANCIAL REVIEW

19 Analysis of Results

28 Key Financial Items

29 Income Statements

30 Balance Sheets

32 Statements of Cash Flows

33 Statements of Changes in Stockholders' Equity

34 Notes to Consolidated Financial Statements

44 Report of Independent Accountants

44 Management's Report

45 Five-Year Statistical Review

46 Officers, Directors, and Stockholder Information

Sales

Overview

Sales in 1997 declined by 3 percent to $244.3 million from $252.7 million in
1996. The net sales change was a function of several factors:

- -- Acquisition of a specialty materials company increased sales by $9.8 million.

- -- Internal marketing actions resulted in a net sales decrease of $13.0 million.

- -- External forces reduced sales by $5.2 million.

The acquisition in late 1996 of the Fort Washington Operation, formerly known as
the Hatboro Operation, resulted in $9.8 million of additional sales in 1997.
Acquisition effects in 1996 and 1995 included the incremental sales of the
Columbus and Jacksonville Operations. These two businesses were acquired in
1994.

Internal marketing actions and external forces produced a combined negative
impact of $18.2 million in 1997. In 1996, these two factors largely offset each
other. During 1995, major internal marketing efforts resulted in most of the
large increase in sales recorded in that year.

Acquisitions

For analytical purposes, Lydall isolates the impact of acquisitions for three
years, after which time the business is considered to be fully integrated into
Lydall's operations.

Lydall began operating the Fort Washington Operation at the beginning of 1997.
Acquisition of this business marked Lydall's entry into the specialty woven
fiber materials market. Lydall relocated the operation to a new facility late in
1997 to provide more efficient operating conditions and product flow. This
business was severely impacted by shortages of critical raw materials, which
hampered sales efforts. Initiatives to qualify additional raw material sources
are underway, although progress has been difficult in the face of strong demand
for the same raw materials by larger manufacturers in the aerospace industry.

During 1996, the Columbus and Jacksonville Operations produced modest additional
growth of $900 thousand, compared with incremental sales of $8.6 million in
1995. Results from these businesses were included with all other Lydall
operations in 1997.

Internal Marketing Actions

Normally a source of revenue growth, internal marketing actions resulted in a
net revenue drop of $13.0 million in 1997. Price decreases, which were the
largest factor, amounted to $7.9 million. A large portion of the price decreases
related to the materials-handling business. Internal marketing actions resulted
in net gains of $9.5 million in 1996 and $33.0 million in 1995.

Incremental new-product sales were $2.4 million in 1997, following $11.8 million
in 1996 and $17.6 million in 1995. Despite record spending for product
development on major new initiatives in 1997, commercialization did not meet
Company objectives. Efforts in filtration and thermal applications have been
extensive, and prospects for increased new-product sales are positive for later
in 1998. Sales of all-metal insulating shields to the domestic automotive
industry, a major contributor in 1996, increased again in 1997. Lydall launched
a concerted effort to penetrate the European market for these products during
1997 by pursuing acquisition possibilities and focusing on discrete product-
development opportunities and potential production joint ventures. These latter
efforts are expected to generate sales in 1998.

Market-share losses offset gains in 1997 resulting in a net sales reduction of
$1.4 million. Losses occurred primarily in the automotive market and were
related to Ford's discontinuing three models that contained Lydall's thermal
barriers in mid-1997 and the loss of a major part supplied to Chrysler at the
end of 1996. Gains were

19 LYDALL, INC.

ANALYSIS OF RESULTS
continued

made in the materials-handling and transportation markets to partially offset
losses. The net loss of market share in 1997 followed net gains of $1.5 million
in 1996 and $5.4 million in 1995. Gains in 1996 and 1995 occurred predominantly
in automotive heat-management products and high-efficiency air filtration
markets.

The Company discontinued $6.1 million of product sales in 1997 compared with
$2.8 million in 1996 and $3.1 million in 1995. The higher than normal level of
product discontinuations in 1997 included exiting some low-margin products,
primarily outside of Lydall's focus of thermal and filtration, and the
discontinuation of a unique flame barrier supplied to the office-panel market.

Net pricing actions in 1997 caused revenues to drop by $7.9 million. For the
third consecutive year, Lydall's materials-handling business drove net pricing
actions. Over the long term, raw-material costs and selling prices in this
market move in a relatively similar manner. Linerboard costs, the principal raw
material, stabilized after weakness early in the year. However, an extremely
competitive environment evolved, and average selling prices declined. Lydall's
equally aggressive response resulted in record unit volumes in the materials-
handling business for the year.

In 1997 and 1996, selling prices of materials-handling systems declined,
offsetting significant price increases which were instituted in 1995 in response
to rapidly rising raw material costs. In 1996, prices decreased by a net $1.0
million, following increases in 1995 totaling $13.1 million. In 1995, a year
characterized by severe commodity inflation, Lydall was able to pass most of its
raw-material increases on to customers.

External Market Forces

Lydall defines external market forces as the effects of economic and market
changes beyond the influence of management, including the effects of market
decay and foreign exchange. In 1997, external forces reduced revenues by a net
$5.2 million. The major portion of this reduction resulted from the loss of
certain automotive thermal business to lower performance solutions. Shorter
product life-cycle trends, particularly evident in domestic automotive markets,
also impacted other Lydall businesses, although to a much lesser extent.
Offsetting these factors were the net positive effect of the economy plus market
growth, which increased sales by $6.1 million in 1997.

In 1996, external forces reduced sales by a net $9.8 million. The Company was
affected by market decay in leaf-type battery separators sold in Europe; loss of
certain heat shields; and the increased reuse of a particular materials-handling
product by customers.

During 1995, external effects resulted in a revenue drop of $2.6 million. Strong
growth in filtration and thermal product markets and other factors were offset
by decay in mature markets such as footwear.

Currency changes have traditionally had a minimal effect on Lydall. In 1997,
weaker currencies in relation to the U. S. dollar resulted in a $2.2 million
reduction in sales. Most of this reduction related to European sales. The
Asian currency crisis arising late in the year had no material impact on sales.
The effect of foreign currency in 1996 and 1995 was not material.

- -------------------------------------------------------------
STATEMENTS OF CHANGES IN SALES
- -------------------------------------------------------------
In millions 1997 1996 1995
- -------------------------------------------------------------
Prior year's net sales $252.7 $252.1 $213.1
- -------------------------------------------------------------
Acquisitions 9.8 .9 8.6
Internal marketing actions (13.0) 9.5 33.0
External market forces (5.2) (9.8) (2.6)
- -------------------------------------------------------------
Total change (8.4) .6 39.0
- -------------------------------------------------------------
Current year's net sales $244.3 $252.7 $252.1
- -------------------------------------------------------------

20 LYDALL, INC.

Gross Margin

Overview

Gross margin declined to $77.6 million, or 31.8 percent of sales, in 1997. This
compares with gross margin of $82.1 million, or 32.5 percent of sales, in 1996,
and $77.7 million, or 30.8 percent of sales, in 1995. Margins were
significantly affected by lower sales volume and the net effect of price
decreases, which were only partially offset by cost decreases from vendors.
Companywide cost-reduction programs continued to have a positive impact on gross
margin. The Fort Washington Operation produced modest incremental gains in
gross margin but lowered Lydall's average gross margin as a percent of sales by
approximately one percentage point.

In 1996, gross margin gains came from improvements in the Columbus and
Jacksonville Operations acquired in 1994. Over time, management expects to see
a similar pattern develop at the Fort Washington Operation where volume,
efficiencies, and quality programs are currently being implemented. Cost
reductions under Lydall's Cost of Quality Program also contributed positively to
gross margin in 1996, as did the net positive effect of price increases in
relation to cost increases.

Improvements in gross margin in 1995 were largely due to increased sales volume
from new products, market-share gains, and the impact on production costs from
the Cost of Quality Program.

Acquisitions

Lydall's Fort Washington Operation experienced many operating difficulties in
1997. Gross margin of $700 thousand, or 7 percent of the operation's sales, was
depressed for several reasons. Critical raw materials were in extremely short
supply, which caused inefficient production scheduling and an inability to meet
customer demand. As mentioned under Sales, initiatives are underway to
alleviate the problem.

For the years 1995 and 1996, acquisitions added $1.3 million and $2.2 million,
respectively, to consolidated gross margin totals. These improvements were
caused by the second- and third-year effects of Lydall's operating culture on
the Columbus and Jacksonville facilities acquired in 1994. During the first
year of ownership by Lydall, major process changes were instituted along with
improved management techniques. This has been a typical pattern. The immediate
results from acquisitions tend to be negative as local management implements the
changes, gradually turning to meaningful positive results in later years.

Effects of Changes in Sales Volume

Sales volume (excluding the effects of acquisitions and pricing actions)
declined in 1997, resulting in a drop in gross margin of $5.2 million. Loss of
operating leverage related to our products being designed out of certain
applications and the discontinuation of various products more than offset the
benefits of a stronger worldwide economy and market growth for many of Lydall's
products.

The dynamics in 1996 were similar, although less significant in their impact on
gross margin. A slight decline in sales volume caused a drop in gross margin of
approximately $1.0 million. This was mainly attributable to the transfer of
filtration media production to France, where manufacturing efficiencies did not
reach those achieved domestically.

In 1995, a large volume increase produced incremental gross margin of $6.9
million. Improvements came from a surge of new-product growth in heat-
management materials and air filtration media.

Price Increases in Relation to Cost Increases

Net pricing actions eroded gross margins by $3.5 million. As described under
Sales, a large portion of the impact emanated from pricing issues in the
materials-handling business. While percentage margins declined only modestly in
this business, the competitive environment forced Lydall to absorb some
incremental

21 LYDALL, INC.

ANALYSIS OF RESULTS
continued

vendor-imposed costs without the ability to pass these costs along to customers.
The thermal barrier business was not immune either, and price concessions were
necessary in several of these markets.

In 1996, net pricing actions resulted in a $2.2 million increase in gross
margins as costs declined in relation to relatively stable revenues. A net
surplus of $900 thousand was generated in 1995 when the Company aggressively
raised prices in a period of rapidly increasing raw material prices.

Cost Reductions

Cost-reduction programs were an important element in maintaining a healthy gross
margin ratio in 1997. The net impact on margins was positive $2.4 million. The
Company's Comprehensive Quality Program, also known as Cost of Quality,
continued to produce impressive results in improving production efficiencies and
reducing costs. In addition to process-related improvements at many plants,
initiatives to reformulate certain products to achieve improved quality and
lower costs were very successful. Strategically focused capital spending helped
to produce additional improvements at Manning and Composite Materials. Westex's
automotive thermal barrier operations produced especially positive results. Net
savings in 1996 were $2.9 million, following record savings of $3.7 million in
1995.

Inventory Effects

Gross margins are affected by inventory write-offs, changes in FIFO inventory
levels, as well as increases or decreases in LIFO reserves. In 1997, these
combined effects produced a negligible net effect. This compares with effects
in 1996 of a positive $300 thousand and in 1995 of a negative $500 thousand.

Other Effects

Other effects, including depreciation expense, changes in fixed overhead, and
product-mix changes increased gross margins by $1.1 million. This compares with
a decrease of $2.2 million in 1996 and an increase in 1995 of $500 thousand.

- -----------------------------------------------------------------------
STATEMENTS OF CHANGES IN GROSS MARGIN
- -----------------------------------------------------------------------
$ millions 1997 1996 1995
- -----------------------------------------------------------------------
Prior year's gross margin $82.1 $77.7 $64.9
- -----------------------------------------------------------------------
Acquisitions .7 2.2 1.3

Effects of changes in sales volume (5.2) (1.0) 6.9
Price increases in relation to cost increases (3.5) 2.2 .9
Cost reductions 2.4 2.9 3.7
Inventory effects - .3 (.5)
Other effects 1.1 (2.2) .5
- -----------------------------------------------------------------------
Total change (4.5) 4.4 12.8
- -----------------------------------------------------------------------
Current year's gross margin $77.6 $82.1 $77.7
- -----------------------------------------------------------------------
As a percent of net sales 31.8 32.5 30.8
- -----------------------------------------------------------------------

22 LYDALL, INC.

Pretax Income

Overview

Pretax income declined to $34.5 million in 1997 from $39.9 million in 1996, a
decrease of 14 percent. This compares with increases of 8 percent in 1996 and
39 percent in 1995. In 1997, lower sales volume and a negative cost/price
relationship, which created a drop in gross margin, caused much of the decline
in pretax income. Also, the net impact of the Fort Washington Operation was
modestly negative.

For the years of 1996 and 1995, pretax income rose by $3.0 million and $10.4
million, respectively. Increases were driven by cost-reduction programs and
acquisitions in those two years, while 1995 also benefited from strong internal
sales and margin growth.

Acquisitions

The Fort Washington Operation generated a pretax operating loss of $700 thousand
in 1997. This newly acquired entity is expected to show improving results
during 1998 and later years. The Columbus and Jacksonville operations, which
were no longer classified as acquisitions in 1997, contributed incremental
pretax income of $1.6 million in 1996 and $600 thousand in 1995. Both of those
acquisitions took over a year to begin generating meaningful incremental
profits. This timetable tracks Lydall's experience with other acquired
operations, and management looks forward to achieving similar improvements at
the Fort Washington Operation.

Operations

Pretax earnings from operations other than acquisitions were $5.4 million lower
in 1997 than in 1996. Lower gross margins coupled with increased selling,
product development, and administrative spending resulted in the decreased
profits. Lydall increased its long-term investment in new-product development, a
major component of the spending increase. These expenditures are expected to
provide a solid foundation for future growth.

Existing operations generated a $900 thousand increment to pretax income in
1996. During that year, cost reductions and efficiency improvements were key to
creating a small increase in gross margin. In 1995, operating leverage from
higher sales combined with record savings from Cost of Quality initiatives at
existing operations produced an $8.3 million increase in pretax income.

Other income and expense improved by $400 thousand in 1997. Management assessed
environmental risks at one facility and, based on positive factors that
indicated a declining exposure, reduced reserves sufficiently to create the
positive swing. This was offset by write-offs of fixed assets companywide.
Other expenses declined by $200 thousand in 1996 following a decrease of $600
thousand in 1995.

Investments and Financing

Nonoperating investment income and financing costs combined to increase pretax
income by $700 thousand in 1997 over 1996 levels. Despite investment balances
that declined steadily over the course of the year, investment income increased
due to a greater concentration of investments in strong domestic equity markets.
The Company does not expect to generate this increased level of investment
income in 1998 as cash balances will continue to be drawn down to fund capital
projects, the repurchase of Lydall Common Stock, and acquisitions. Interest
expense declined by $100 thousand as already low debt levels declined further.
In 1996, investment income increased by $300 thousand while interest expense
declined by $200 thousand. In 1995, investment income surged by $900 thousand as
cash balances grew substantially in a year with moderate capital spending and no
stock repurchase activity. Interest expense declined by $600 thousand in 1995.

23 LYDALL, INC.

ANALYSIS OF RESULTS
continued

- ----------------------------------------------------------------
STATEMENTS OF CHANGES IN PRETAX INCOME
- -----------------------------------------------------------------
In millions 1997 1996 1995
- -----------------------------------------------------------------
Prior year's pretax income $39.9 $36.9 $26.5
- -----------------------------------------------------------------
Acquisitions - change in:
Gross margin .7 2.2 1.3
Selling, product development,
and administrative expenses (1.4) (.6) (.7)
- -----------------------------------------------------------------
Total change from acquisitions (.7) 1.6 .6
- -----------------------------------------------------------------
Operations - change in:
Gross margin (5.2) 2.2 11.5
Selling, product development,
and administrative expenses (.6) (1.5) (3.8)
Other income/expense .4 .2 .6
- -----------------------------------------------------------------
Total change from operations (5.4) .9 8.3
- -----------------------------------------------------------------
Nonoperating investments and
financing - change in:
Investment income .6 .3 .9
Interest expense .1 .2 .6
- -----------------------------------------------------------------
Total change from nonoperating
investments and financing .7 .5 1.5
- -----------------------------------------------------------------
Total change (5.4) 3.0 10.4
- -----------------------------------------------------------------
Current year's pretax income $34.5 $39.9 $36.9
- -----------------------------------------------------------------

Accounting Standards

In 1998, the Company will adopt Statement of Financial Accounting Standards No.
130, No. 131, and No. 132, "Reporting Comprehensive Income," ("SFAS 130"),
"Disclosures about Segments of an Enterprise and Related Information," ("SFAS
131"), and "Employers' Disclosures about Pensions and Other Postretirement
Benefits," ("SFAS 132"), all of which are effective for fiscal years beginning
after December 15, 1997.

SFAS 130 requires an enterprise to classify items of other comprehensive income
by their nature in a financial statement and display the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in capital. Lydall will adopt SFAS 130 effective for the first quarter
ending March 31, 1998. There will be no effect on the Company's consolidated
financial position, results of operations, or cash flows.

24 LYDALL, INC.

disclosure requirements. SFAS 131 may require Lydall to disclose more than one
segment. The Company will adopt SFAS 131 effective for the year ending December
31, 1998. There will be no effect on the Company's consolidated financial
position, results of operations, or cash flows.

SFAS 132 revises employers' disclosures about pension and other postretirement
benefit plans. The Company will adopt SFAS 132 effective for the year ending
December 31, 1998. There will be no effect on the Company's consolidated
financial position, results of operations, or cash flows.

Forward-Looking Statements

Lydall, Inc. desires to take advantage of the "Safe Harbor" Provisions of the
Private Securities Litigation Reform Act of 1995. In addition to economic
conditions and market trends, the Company considered the following market
circumstances in determining any forward-looking statements made in its 1997
Annual Report and Form 10-K for the fiscal year ended December 31, 1997.

A Major Downturn of the U. S. Automotive Market. Although Lydall's automotive
sales are not solely contingent on the strength of the automotive market, a
significant downturn of the U. S. automotive industry could have a substantial
impact on Lydall's results. The Company can also be affected when automotive
manufacturers discontinue production of specific models that contain Lydall's
products, as happened at Ford in mid-1997. On the other hand, Lydall benefits
from the introduction of new models. Twenty-six percent of Lydall's total sales
in 1997 were to the U. S. automotive market, excluding aftermarket sales.
Lydall's primary automotive products are thermal barriers and heat shields
employed both inside and outside of vehicles. Most of Lydall's products are
supplied to meet unique, niche applications. There is no direct correlation
between the number of Lydall parts on a vehicle and the number of units built,
as with tires or steering wheels for example. Slight fluctuations in U. S.
automotive production have relatively little effect on Lydall's business;
however, a major downward shift could prevent Lydall from achieving its
projected results.

A Significant Change in the Number of Clean Rooms Being Built. Lydall's high-
efficiency air filtration business is linked to the fabrication of clean rooms
around the world. In 1995 and early 1996, the demand for these air filtration
materials was the strongest the Company had ever seen. Since then the demand
curve has leveled. This slowdown was related primarily to the semiconductor
industry. The Company estimates that about one-third of its total high-
efficiency air filtration sales are to semiconductor related clean rooms.
Various independent industry-published forecasts project excellent long-term
growth for clean-room fabrications in general. Lydall relies on these forecasts,
feedback from its filtration customers, and other market intelligence sources
for forward-looking information. Lydall's outlook is based in part on the
renewed strength of this market; however, if a significant market decline were
to occur, it would have a negative impact on Lydall's results.

Raw-Material Pricing and Supply. Raw-material pricing and supply issues affect
all of Lydall's businesses and can influence results in the short term. Pricing
fluctuations, however, particularly impact the Company's materials-handling
business. These products are made from laminated virgin kraft paperboard, also
known as linerboard. In 1995, costs of linerboard were extremely high, and
Lydall, in turn, raised prices, partially accounting for the higher than average
sales growth in that year. In 1996, as raw-material costs declined, Lydall
reduced prices. Linerboard prices began to rise slightly in mid-1997, and Lydall
instituted a price increase on its products in the third quarter of the year.
The materials-handling business is unique for Lydall because it is the one area
where the market pushes for price reductions that directly track decreases in
raw materials and accepts price increases in the face of higher raw-material
costs. Thus, significant changes in the pricing of linerboard directly affect
this portion of Lydall's business.

25 LYDALL, INC.

ANALYSIS OF RESULTS
continued

Liquidity and Capital Resources

Liquidity Overview

Lydall used a strong beginning balance sheet and free cash flow from operations
to fund an aggressive capital investment plan and to purchase 1.3 million shares
of Lydall stock for $27.4 million in 1997. The Company ended 1997 with $8.9
million in cash and cash equivalents, as well as $3.9 million in short-term
investments. Stockholders' equity decreased by $4.8 million as treasury share
purchases exceeded net income and stock option proceeds. These changes will
have little impact on Lydall's financial capacity to complete future strategic
acquisitions.

In December 1996, Lydall acquired Textile Technologies Industries, Inc., now
part of Lydall Manning as its Fort Washington Operation. The Company paid $2.0
million in cash at closing and issued an $8.0 million note which was paid on
January 2, 1997. A $1.75 million note was also issued payable through 1998.

The Year 2000 Issue

Lydall has proactively addressed the year 2000 issue by evaluating and selecting
enterprisewide software and hardware that will provide the Company with a
competitive information technology platform to last well into the next decade.
This program is referred to as "Lydall 2000." During 1995 and 1996, plans were
developed and put in place to meet the Company's future information needs.
Lydall expects to complete implementation of new systems within the next two
years and to avoid any disruption of operations. In fact, an enhanced
information technology capability is expected to provide the benefits of
improved customer response, lower cost of delivering products and services,
enhanced internal and external communications, and access to real-time
information. Solving the century dating issue will be another benefit of these
extensive efforts. The Company is assessing the impact of Year 2000 compliance
by its suppliers and customers and the potential affect, if any, on the
Company's operations.

Capital expenditures in 1997 for Lydall 2000, including the majority of
necessary software and hardware outlays, amounted to $6.6 million. Including
additional implementation costs to be expended in 1998 and 1999, total capital
outlays for Lydall 2000 are expected to be approximately $9 million. These
additional expenditures in 1998 and 1999 will have a minimal effect on Lydall's
liquidity and capital resources.

Cash Flow Overview

Cash flow from operating activities was $23.8 million in 1997. The major
investing activity was a $17.1 million capital expenditure program in 1997.
Lydall's purchase of $27.4 million worth of its common stock represented the
Company's most significant financing activity. In addition, the $8.0 million
short-term note payable on the Textile Technologies acquisition was repaid early
in 1997.

During 1996, cash flow from operating activities was a record $36.9 million, due
to record net income and better working capital management. Capital
expenditures amounted to $10.9 million, and the Company purchased $10.3 million
of its Common Stock. The net effect was a large increase in liquid assets
during the year.

In 1995, cash flow from operating activities reached $25.8 million. Net income
and non-cash charges were somewhat offset by increased working capital
productivity. Strong sales growth increased receivables at year-end, and
inventory costs were inflated by high commodity costs. Investing activities
included moderate capital spending of $12.0 million. Financing activities
included scheduled payments under the existing long-term note agreement.

Working Capital Productivity

Lydall measures working capital turnover to evaluate the utilization of short-
term operating resources. Working capital productivity is defined as annual
sales divided by the quarterly average of all receivables and inventory, less
accounts payable. Inventory turnover receives particular attention at Lydall
operations. Although inventory turnover had improved steadily moving from 6.6
times in 1991 to 11.8 times and 11.1 times in 1996 and 1995,

26 LYDALL, INC.

respectively, it dropped to 10.6 times in 1997. Much of the decline this past
year came from the Fort Washington Operation which maintains higher working
capital levels than other Lydall plants. Management expects to improve working
capital turnover at the Fort Washington Operation in the future.

The Company has demonstrated improved use of short-term operating resources for
many years. Working capital productivity measured 7.6 times in 1997, 8.2 times
in 1996, and 7.4 times in 1995 compared with 5.2 times in 1991.

- -------------------------------------------------------------
$ millions 1997 1996 1995
- -------------------------------------------------------------
Net Sales $244.3 $252.7 $252.1
Average working capital 32.3 30.7 34.2
Working capital productivity 7.6 8.2 7.4
Percent change from previous year (8) 12 3
- -------------------------------------------------------------

Future Cash Requirements

Cash requirements for 1998 will include the funding of ongoing operations,
capital expenditures, purchase of Lydall Common Stock as conditions permit, and
acquisitions. At January 1, 1998, the Company had remaining authorization to
purchase up to an additional 487,321 shares of its Common Stock.

Early in 1998, a Lydall subsidiary funded the capitalization of Charter Medical,
Ltd. On February 6, 1998, this separate corporate entity acquired CharterMed,
Inc., a privately held company located in Lakewood, New Jersey, for $6.6 million
in cash and a note for $720 thousand, payable through 1999. CharterMed is a
growing and profitable manufacturer of proprietary medical devices serving
applications such as biotech and pharmaceutical packaging, blood bank and
transfusion services, neonatal intensive care, operating room/perfusion, and
stem cell processing and freezing.

The 1998 capital expenditure forecast is $17.2 million. Expenditures will be
concentrated on upgrading existing production capability at all of Lydall's
operations, including a capacity expansion at Technical Papers to produce melt-
blown media. In addition, implementation costs of Lydall 2000 are budgeted for
1998.

Management expects to finance capital expenditures and ongoing operating cash
requirements from cash on hand and cash generated from operations. Acquisitions
of operating companies and Lydall Common Stock may require Lydall to utilize
existing credit facilities or to negotiate additional credit capacity.

Credit Arrangements

Lydall maintains domestic and foreign credit arrangements totaling over $25
million, the majority of which are renewed annually. Lydall primarily pays
interest at the lower of prime or money market rates and compensates its banks
for services on a fee basis. At December 31, 1997 and 1996, no amounts were
outstanding on domestic or foreign lines of credit.

Capital Structure

Lydall continued to produce cash flow from operating activities well in excess
of capital spending needs. The Company has reduced its long- and short-term
indebtedness to $5.1 million and concluded 1997 with cash and investments of
$12.8 million. Since 1991, Lydall has acquired five operating companies, in
effect, for cash. In the past two years, Lydall has also acquired approximately
$38 million of Lydall Common Stock without needing to borrow funds.

Acquisition searches are underway in Lydall's core markets of filtration and
heat management. Lydall's resources to complete strategic acquisitions are
considerable. Borrowing capacity can be measured in various ways. Using a
debt-to-capitalization target of 40 percent or a reasonable debt-to-cash-flow
ratio that would maintain investment quality ratings, Lydall could borrow
between $75 million and $125 million to finance corporate development. This
range is based on Lydall's current cash flow. Depending on the acquisition, the
addition of an acquired company's cash flow could provide additional debt
capacity. Management is willing to stretch these targets in the short-term to
finance a compelling business combination.

27 LYDALL, INC.

KEY FINANCIAL ITEMS

Cash and Cash Equivalents Cash and cash equivalents decreased to $8.9 million
in 1997 from $38.2 million in 1996.

Short-term Investments Lydall invests in equities and other highly liquid
investments with maturities greater than three months at the time the
investments are made. The Company had short-term investments of $3.9 million and
$4.9 million at December 31, 1997 and 1996, respectively.

Receivables Receivables were $32.2 million in 1997 and $34.0 million in 1996,
of which trade receivables were $31.9 million and $32.7 million for 1997 and
1996, respectively. Days of sales outstanding in trade receivables were 51 in
1997 and 50 in 1996. Foreign and export sales were approximately 19 percent of
total sales in 1997, 21 percent in 1996, and 22 percent in 1995. These sales
are concentrated primarily in Europe, the Far East, Mexico, and Canada.

Inventories Inventories were $15.5 million at December 31, 1997 and $14.7
million at December 31, 1996, net of LIFO reserves of $1.2 million and $1.7
million at the end of 1997 and 1996, respectively.

Working Capital Working capital decreased to $39.2 million on December 31,
1997 from $53.4 million on December 31, 1996. The ratio of current assets to
current liabilities increased to 2.39 from 2.24.

Capital Asset Expenditures Capital asset expenditures were $17.1 million in
1997, $10.9 million in 1996, and $12.0 million in 1995. Depreciation was $8.0
million in 1997, $7.8 million in 1996, and $7.1 million in 1995. The Company's
1998 Capital Plan calls for commitments of $17.2 million with spending focused
on the following areas: process improvements that lower the Company's Cost of
Quality; capacity to produce melt-blown media; and Lydall 2000, a companywide
upgrade of information technology. Expenditures in 1998 are expected to be
financed from existing cash balances or cash generated from operations.

Debt to Total Capitalization Debt to total capitalization decreased to .04 in
1997 from .13 in 1996.

Common Stockholders' Equity Common stockholders' equity decreased to $113.0
million at December 31, 1997, a decrease of 4 percent from $117.8 million at
December 31, 1996. On a per-share basis, common stockholders' equity increased
to $7.04 at December 31, 1997 from $6.89 at December 31, 1996.

Dividend Policy The Company does not pay a cash dividend on its Common Stock
and does not anticipate doing so for the foreseeable future. Cash will be
reinvested into core businesses which should continue to earn Lydall
stockholders an excellent overall long-term return on their investment.

Research and Development Research and development investments were $8.7
million in 1997, $6.8 million in 1996, and $6.2 million in 1995.

28 LYDALL, INC.

INCOME STATEMENTS

- ---------------------------------------------------------------------
In thousands except per-share data
For the years ended December 31, 1997 1996 1995
- ---------------------------------------------------------------------
Net sales $244,289 $252,652 $252,128

Cost of sales 166,648 170,597 174,430
- ---------------------------------------------------------------------
Gross margin 77,641 82,055 77,698

Selling, product development,
and administrative expenses 44,888 42,778 40,668
- ---------------------------------------------------------------------
Operating income 32,753 39,277 37,030
- ---------------------------------------------------------------------
Other (income) expense:
Investment income (1,986) (1,389) (1,113)
Interest expense 368 518 778
Other (82) 294 490
- ---------------------------------------------------------------------
(1,700) (577) 155
- ---------------------------------------------------------------------
Income before income taxes 34,453 39,854 36,875

Income tax expense 12,542 15,118 14,437
- ---------------------------------------------------------------------
Net income $ 21,911 $ 24,736 $ 22,438
- ---------------------------------------------------------------------
Basic earnings per common share $ 1.31 $ 1.44 $ 1.30

Weighted average common stock
outstanding 16,692 17,140 17,263
- ---------------------------------------------------------------------
Diluted earnings per common share $ 1.27 $ 1.38 $ 1.23

Weighted average common stock and
equivalents outstanding 17,319 17,988 18,197
- ---------------------------------------------------------------------

The accompanying notes are an integral part of these consolidated financial
statements.

29 LYDALL, INC.

BALANCE SHEETS

- -------------------------------------------------------------------
In thousands except share data December 31, 1997 1996
- -------------------------------------------------------------------
Assets

Current assets:

Cash and cash equivalents $ 8,891 $ 38,226

Short-term investments 3,873 4,941

Accounts receivable (less allowance for
doubtful receivables of $1,381 in 1997
and $1,727 in 1996) 32,203 33,953

Inventories:
Finished goods 6,243 5,965
Work in process 2,867 3,712
Raw materials and supplies 7,600 6,743
LIFO reserve (1,172) (1,740)
- -------------------------------------------------------------------
Total inventories 15,538 14,680
- -------------------------------------------------------------------
Taxes receivable 2,032 -

Prepaid expenses 1,314 959

Deferred tax assets 3,586 3,612
- -------------------------------------------------------------------
Total current assets 67,437 96,371
- -------------------------------------------------------------------
Property, plant, and equipment, at cost:

Land 983 957

Buildings and improvements 21,178 20,868

Machinery and equipment 81,496 78,171

Office equipment 10,447 8,504

Vehicles 1,178 1,228

Assets in progress 10,340 3,619
- -------------------------------------------------------------------
125,622 113,347
Less accumulated depreciation (56,762) (51,309)
- -------------------------------------------------------------------
68,860 62,038

Other noncurrent assets:

Goodwill, at cost (net of accumulated
amortization of $2,807 in 1997 and
$1,688 in 1996) 19,155 20,259

Other assets, at cost (net of accumulated
amortization of $7,526 in 1997 and $7,741
in 1996) 4,672 3,451
- -------------------------------------------------------------------
23,827 23,710
- -------------------------------------------------------------------
Total assets $160,124 $182,119
- -------------------------------------------------------------------

The accompanying notes are an integral part of these consolidated financial
statements.

30 LYDALL, INC.

- --------------------------------------------------------------------
In thousands except share data December 31, 1997 1996
- --------------------------------------------------------------------
Liabilities and stockholders' equity

Current liabilities:

Current portion of long-term debt $ 2,950 $ 4,450

Notes payable - 8,000

Accounts payable 13,342 15,758

Accrued taxes 1,030 1,322

Accrued payroll and other compensation 4,856 6,014

Other accrued liabilities 6,056 7,469
- --------------------------------------------------------------------
Total current liabilities 28,234 43,013
- --------------------------------------------------------------------

Long-term debt 2,100 5,050

Deferred tax liabilities 12,979 12,667

Other long-term liabilities 3,781 3,545

Contingencies

Stockholders' equity:

Preferred stock - -

Common stock, par value $.10 per share,
authorized 30,000,000 shares, issued
21,432,346 shares in 1997 and
21,122,913 shares in 1996. 2,143 2,112

Capital in excess of par value 36,510 34,235

Foreign currency translation adjustment 76 1,425

Equity adjustments (240) 39

Retained earnings 125,108 103,197
- --------------------------------------------------------------------
163,597 141,008

Less cost of 5,366,873 shares of common
stock in treasury in 1997 and 4,030,902
shares in 1996 (50,567) (23,164)
- --------------------------------------------------------------------
Total stockholders' equity 113,030 117,844
- --------------------------------------------------------------------
Total liabilities and stockholders' equity $160,124 $182,119
- --------------------------------------------------------------------

The accompanying notes are an integral part of these consolidated financial
statements.

31 LYDALL, INC.

STATEMENTS OF CASH FLOWS

- --------------------------------------------------------------------------------
In thousands For the years ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
Cash flows from operating activities:
Net Income $ 21,911 $ 24,736 $ 22,438
- --------------------------------------------------------------------------------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 7,993 7,824 7,122
Amortization 1,569 1,357 1,510
Changes in operating assets and liabilities,
excluding effects from acquisitions:
Accounts receivable 1,281 2,128 (2,015)
Taxes receivable (2,032) - -
Inventories (1,140) 860 (376)
Other assets (1,708) (579) 170
Accounts payable (2,049) (196) (2,503)
Accrued taxes (249) 1,087 (1,986)
Accrued payroll and other accrued liabilities (2,452) 263 594
Deferred income taxes 818 (620) 1,068
Other long-term liabilities (158) - (263)
- --------------------------------------------------------------------------------
Total adjustments 1,873 12,124 3,321
- --------------------------------------------------------------------------------
Net cash provided by operating activities 23,784 36,860 25,759
- --------------------------------------------------------------------------------
Cash flows from investing activities:
Acquisitions (78) (2,030) -
Additions of property, plant and equipment (17,104) (10,893) (12,006)
Disposals of property, plant and equipment,
net 685 894 632
Sale (purchase) of investments, net 1,013 (2,940) 2,451
- --------------------------------------------------------------------------------
Net cash used for investing activities (15,484) (14,969) (8,923)
- --------------------------------------------------------------------------------
Cash flows from financing activities:
Long-term debt payments (4,450) (2,863) (2,856)
Notes payable (8,000) - -
Issuance of common stock 2,306 1,810 2,105
Acquisition of common stock (27,403) (10,345) -
- --------------------------------------------------------------------------------
Net cash used for financing activities (37,547) (11,398) (751)
- --------------------------------------------------------------------------------
Effect of exchange rate changes on cash (88) (87) 51
- --------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (29,335) 10,406 16,136
Cash and cash equivalents at beginning of year 38,226 27,820 11,684
- --------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 8,891 $ 38,226 $ 27,820
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
Supplemental Schedule of Cash Flow Information
Cash paid during the year for:
Interest $ 687 $ 897 $ 875
Income taxes 14,678 13,985 14,959
Noncash transactions:
Amounts payable for acquired operations 16 10,527 -
Additional minimum pension liability 591 930 40
Unrealized gains/losses on available-for-sale
securities 55 82 13
Stock split effected in the form of a stock
dividend - - 1,041
Reclassification between short-term
and long-term investments, net - - 447
- --------------------------------------------------------------------------------

The accompanying notes are an integral part of these consolidated financial
statements.

32 LYDALL, INC.

STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

- ------------------------------------------------------------------------------------------------------------------------------------

Foreign
Capital in Currency Cost of Total
Preferred Common Excess of Translation Equity Retained Stock in Stockholders'
In thousands Stock Stock Par Value Adjustment Adjustments Earnings Treasury Equity
- ------------------------------------------------------------------------------------------------------------------------------------

Balance at January 1, 1995 $ - $ 1,013 $31,419 $ 1,138 $ (547) $ 56,023 $(12,819) $ 76,227

Two-for-one stock split in the
form of a stock dividend 1,041 (1,041) -
Stock options exercised 35 2,070 2,105
Foreign currency translation
adjustment 953 953
Equity adjustments 88 88
Net income 22,438 22,438
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 - 2,089 32,448 2,091 (459) 78,461 (12,819) 101,811

Stock options exercised 23 1,787 1,810
Purchase of treasury shares (10,345) (10,345)
Foreign currency translation
adjustment (666) (666)
Equity adjustments 498 498
Net income 24,736 24,736
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 - 2,112 34,235 1,425 39 103,197 (23,164) 117,844

Stock options exercised 31 2,275 2,306
Purchase of treasury shares (27,403) (27,403)
Foreign currency translation
adjustment (1,349) (1,349)
Equity adjustments (279) (279)
Net income 21,911 21,911
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 $ - $ 2,143 $36,510 $ 76 $ (240) $125,108 $(50,567) $113,030
- ------------------------------------------------------------------------------------------------------------------------------------

The accompanying notes are an integral part of these consolidated financial
statements.

33 LYDALL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Significant Accounting Policies

Principles of consolidation. The consolidated financial statements include the
accounts of Lydall, Inc. and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.

Use of estimates. The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles, requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from estimates.

Cash and cash equivalents. Cash and cash equivalents include cash on hand and
highly liquid investments with a maturity of three months or less at the date of
purchase. The investments are stated at cost plus accrued interest which
approximates market value.

Short-term investments. Lydall invests in highly liquid investments with
maturities greater than three months at the time the investments are made. The
investments are recorded at the lower of cost or market, plus accrued interest.

Concentration of risk. Financial instruments which potentially subject the
Company to concentrations of credit risk consist principally of cash, cash
equivalents, short-term investments, and trade receivables. The Company places
its cash, cash equivalents and short-term investments in high-quality financial
institutions and instruments. Concentrations of credit risk with respect to
trade receivables are limited by the large number of customers comprising the
Company's customer base and their dispersion across many different industries
and geographies. The Company performs ongoing credit evaluations of its
customers' financial conditions and generally does not require collateral. Sales
to the automotive market were 26.3 percent of the Company's 1997 total sales
compared with 32.3 percent in 1996 and 32.9 percent in 1995. Sales to the Ford
Motor Co. represented 18.4 percent, 16.6 percent, and 13.7 percent of Lydall's
total sales in 1997, 1996, and 1995, respectively. No other single customer
accounted for more than 10 percent of total sales in 1997, 1996, or 1995. As of
December 31, 1997, the Company had no other significant concentrations of risk.

Inventories. Approximately 54 percent in 1997 and 59 percent in 1996 of the
inventories have been valued on a last-in, first-out (LIFO) method and the
balance on a first-in, first-out (FIFO) method at the lower of cost or market.

Depreciation and amortization. Property, plant, and equipment are depreciated
over their estimated useful lives on the straight-line method for financial
statement purposes. Leasehold improvements are depreciated on a straight-line
basis over the term of the lease or the life of the asset, whichever is shorter.
Intangibles. Goodwill and other intangibles are being amortized on a straight-
line basis over periods not exceeding 25 years. The Company evaluates the
recoverability of goodwill by analyzing the associated estimated undiscounted
cash flows. At the time such evaluations indicate that the future undiscounted
cash flows are not sufficient to recover the carrying value of the goodwill, the
asset would be adjusted to fair value. Based on these evaluations, there were
no adjustments to the carrying value of goodwill in 1997 or 1996.

Research and development. Costs are charged to expense as incurred.
Revenue recognition. Lydall recognizes revenues when the product is shipped.

Earnings per share ("EPS"). Basic earnings per common share are based on net
income divided by the weighted average number of common shares outstanding
during the period. Diluted earnings per common share are based on net income
divided by the weighted average number of common shares outstanding during the
period, including the effect of stock options, stock awards and warrants where
such effect is dilutive.

Income taxes. The provision for income taxes is based upon income reported in
the accompanying financial statements. Deferred income taxes reflect the impact
of temporary differences between the amounts of assets and liabilities
recognized for financial reporting purposes and such amounts recognized for tax
purposes. In accordance with SFAS 109, these deferred taxes are measured by
applying currently enacted tax laws.

34 LYDALL, INC.

Foreign operations. The Company operates a manufacturing plant in Saint-
Rivalain, France. Foreign sales were $14.3 million, $17.6 million, and $17.0
million, for the years ended December 31, 1997, 1996, and 1995, respectively.
The French operation incurred losses of $348 thousand, $796 thousand, and $165
thousand for the years ended December 31, 1997, 1996, and 1995, respectively.
Total foreign assets were $16.4 million and $18.5 million at December 31, 1997
and 1996, respectively.

Translation of foreign currencies. Assets and liabilities of the foreign
subsidiary are translated at exchange rates prevailing on the balance sheet
date; revenues and expenses are translated at average exchange rates prevailing
during the period; and elements of stockholders' equity are translated at
historical rates. Any resulting translation gains and losses are reported
separately in Stockholders' Equity.

Equity adjustments. Equity adjustments consist of a pension liability
adjustment and an adjustment for unrealized gains and losses on securities held
as available-for-sale.

Restatement. Where appropriate, earnings per share have been restated to
conform with the requirements of Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings Per Share." Prior-year share amounts and per-share
figures have been restated to reflect a two-for-one stock split distributed in
1995.

Recently issued accounting standards. The Company will adopt Statement of
Financial Accounting Standards No. 130, No. 131, and No. 132, "Reporting
Comprehensive Income," ("SFAS 130"), and "Disclosures about Segments of an
Enterprise and Related Information," ("SFAS 131"), and "Employers' Disclosures
about Pensions and Other Postretirement Benefits," ("SFAS 132"), all of which
are effective for fiscal years beginning after December 15, 1997.

SFAS 131 requires that a public business enterprise report financial and
descriptive information about its reportable operating segments. SFAS 131 is
based on the management approach to segment reporting and includes requirements
to report selected segment information quarterly and to include entitywide
disclosures about products and services, major customers, and the countries in
which the entity holds material assets and reports revenues. The Company
currently reports under one segment and is evaluating the impact of the
disclosure requirements. SFAS 131 may require Lydall to disclose more than one
segment. The Company will adopt SFAS 131 effective for the year ending December
31, 1998. There will be no effect on the Company's consolidated financial
position, results of operations, or cash flows.

Investments

The Company's investments are categorized as available-for-sale debt and equity
securities, as defined by the Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity Securities." The
carrying value of these securities was $13.5 million in 1997 and $42.5 million
in 1996, both of which approximated fair market value. In 1997, $9.6 million was
classified in cash equivalents and $3.9 million, in short-term investments. For
1996, $37.6 million was classified in cash equivalents and $4.9 million, in
short-term investments.

35 LYDALL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
continued

The amortized costs of investments in debt securities by contractual maturity
are shown below.

- --------------------------------------------------------------------------------
Available-for-Sale Securities
-------------------------------
In thousands December 31, 1997 1996
- --------------------------------------------------------------------------------
Due in one year or less $6,400 $6,350

Due after one year through five years - 309

Due after five years through ten years - 210

Due after ten years 220 2,033
- --------------------------------------------------------------------------------
$6,620 $8,902
- --------------------------------------------------------------------------------

The net unrealized gains and losses are included as a component of stockholders'
equity. Gross unrealized gains were $318 thousand and $195 thousand, and gross
unrealized losses were $296 thousand and $118 thousand as of December 31, 1997
and 1996, respectively. Gains of $1.1 million and losses of $136 thousand were
realized on these sales during 1997. The gross realized gains and losses were
immaterial to the consolidated financial statements during 1996 and 1995. For
the purpose of computing realized gains and losses, cost is identified on a
specific identification basis.

Long-term Debt

- --------------------------------------------------------------------------------
In thousands December 31, 1997 1996
- --------------------------------------------------------------------------------
7.25% Note Purchase Agreement, payable annually to 1999 $ 4,300 $ 6,500

5% Promissory Note - 1,250

5.48% Indemnification Note, balance due in full in 1998 750 1,750
- --------------------------------------------------------------------------------
5,050 9,500

Less portion due within one year (2,950) (4,450)
- --------------------------------------------------------------------------------
$2,100 $ 5,050
- --------------------------------------------------------------------------------

The Note Purchase Agreement is restricted by a debt covenant, among others, that
requires a debt-to-capital ratio of no more than .45 in order to borrow under
long-term debt agreements in the future. While by commonly used methods
Lydall's current debt-to-capital ratio is .04, it is .09 as defined by the terms
of this agreement as of December 31, 1997.

As of December 31, 1997, long-term debt payment requirements totaled $5.1
million, $3.0 million payable in 1998 and $2.1 million payable in 1999.

Credit Arrangements

Lydall maintains domestic and foreign bank credit arrangements totaling over $25
million, the majority of which are renewed annually. Lydall primarily pays
interest at the lower of prime or money market rates and compensates its banks
for services on a fee basis. At December 31, 1997, and 1996, no amounts were
outstanding on the domestic or foreign lines of credit.

Financial Instruments

The Company utilizes letters of credit to satisfy self-insurance security
deposit requirements and in the ordinary course of business. Outstanding
letters of credit were $1.8 million and $1.6 million as of December 31, 1997 and
1996, respectively. The Company does not expect any material losses to result
from these off-balance-sheet instruments as performance is not expected to be
required, and therefore, believes that the fair value of these instruments is
zero.

36 LYDALL, INC.

Long-term Operating Leases

Lydall has operating leases which cost the Company $1.9 million in 1997, $1.7
million in 1996, and $1.8 million in 1995. These contracts range from vehicle
leases to building leases which require payment of property taxes, insurance,
repairs and other operating costs.

Future net lease commitments under noncancelable operating leases are:

- --------------------------------------------------------------------------------
In thousands 1998 1999 2000 2001 2002 Thereafter Total
- --------------------------------------------------------------------------------
Net lease payments $1,581 $1,520 $1,309 $1,212 $983 $3,084 $9,689
- --------------------------------------------------------------------------------

Acquisitions and Other Investments

Early in 1998, a Lydall subsidiary funded the capitalization of Charter Medical,
Ltd. On February 6, 1998, this separate corporate entity acquired CharterMed,
Inc., a privately held company located in Lakewood, New Jersey, for $6.6 million
in cash and a $720 thousand note, payable through 1999. CharterMed is a growing
and profitable manufacturer of proprietary medical devices serving applications
such as biotech and pharmaceutical packaging, blood bank and transfusion
services, neonatal intensive care, operating room/perfusion, and stem cell
processing and freezing.

On December 20, 1996, the Company acquired certain assets and assumed certain
liabilities of Textile Technologies Industries, Inc. ("Fort Washington
Operation"). The Fort Washington Operation is a manufacturer of components
utilized in highly specialized, advanced structural materials which are sold to
the aerospace, marine, medical device, automotive and sporting goods industries.
The Company paid $2.0 million in cash at closing and issued a $8.0 million note,
which was paid on January 2, 1997, and a $1.75 million note, which is payable
through 1998. As a result of this purchase, the Company recorded goodwill and
other intangible assets of $10.4 million. The results of the Fort Washington
Operation since the date of acquisition have been included in the Company's
consolidated results. The pro forma effect on the Company's results of
operations for the years ended December 31, 1996 and 1995, had the acquisition
occurred at the beginning of each respective period, is not material.

Capital Stock

Preferred Stock -- The Company has a class of Serial Preferred Stock with a par
value of $1. None of the 500,000 authorized shares has been issued.

Common Stock -- At the end of 1997, 1,653 Lydall stockholders of record held
16,065,473 shares of Common Stock. Approximately 8 percent of the Company's
Common Stock was owned by Lydall's officers and directors and their immediate
families. Other Lydall employees, their families, and Lydall associates owned
an additional 9 percent either directly or through participation in the
Company's Employee Stock Ownership Trust.

On May 10, 1995, the Company increased its authorized shares to 30,000,000 from
15,000,000. Also on that date, Lydall's Board of Directors declared a two-for-
one stock split in the form of a stock dividend which resulted in the issuance
of 10,413,216 shares of previously unissued Common Stock. Balances at December
31, 1995 reflect the split with an increase in Common Stock and a reduction in
Capital in Excess of Par Value of $1.0 million. The distribution was made on
June 21, 1995 to stockholders of record on May 24, 1995. All earnings-per-share
information in this report prior to the distribution date has been adjusted to
reflect the 1995 stock split.

- -----------------------------------------------------------------------------------------------------------------------------
For the Year Ended 1997 For the Year Ended 1996 For the Year Ended 1995
- -----------------------------------------------------------------------------------------------------------------------------
Net Per-Share Net Per-Share Net Per-Share
Income Shares Amount Income Shares Amount Income Shares Amount
- -----------------------------------------------------------------------------------------------------------------------------

Basic earnings per share $21,911 16,692 $1.31 $24,736 17,140 $1.44 $22,438 17,263 $1.30
Effect of dilutive securities
Stock Options 627 848 934
Diluted earnings per share $21,911 17,319 $1.27 $24,736 17,988 $1.38 $22,438 18,197 $1.23
- -----------------------------------------------------------------------------------------------------------------------------

37 LYDALL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

continued

Options to purchase 297,946 shares, 317,446 shares, and 130,750 shares of Lydall
Common Stock were outstanding at December 31, 1997, 1996, and 1995,
respectively, which were not included in the computation of diluted earnings per
share. These options were excluded because the average exercise price was
greater than the average market price of the Common Stock for each respective
year.

Stock Option Plans

At December 31, 1997, the Company had two stock option plans under which
employees and directors had options to purchase Lydall Common Stock. Under
these plans -- the 1982 Stock Incentive Compensation Plan and the 1992 Stock
Incentive Compensation Plan -- options are granted at fair market value on the
grant date and expire ten years after the grant date. In most cases, options
vest at a rate of 25 percent per year starting with the first anniversary of the
award. A few incentive stock option (ISO) awards have an extended vesting
period because IRS regulations, with regard to ISO awards, cap the total dollar
amount that can vest in one year for an individual at $100,000. The 1982 Plan
has expired; therefore, no further options can be granted under this plan. The
1992 Plan provides for automatic acceleration of vesting in the event of a
change in control of the Company. The Plan also provides for the use of shares
of Lydall Common Stock in lieu of cash to exercise options if the shares are
held for more than six months and if the Compensation and Stock Option Committee
of the Board of Directors approves this form of exercise.

At December 31, 1996 and December 31, 1995, the Company had three stock option
plans under which employees and directors had options or warrants to purchase
Lydall Common Stock. The 1984 Outside Directors' Warrant Plan was terminated in
1992. At the end of 1996 and 1995, there were warrants for 30,330 shares
outstanding under the Plan. All of these warrants were exercised during 1997.

The Company applies APB Opinion 25 and related Interpretations in accounting for
its plans. Accordingly, no compensation cost has been recognized. Had
compensation cost for the Company's three stock option plans been determined
based on the fair value at the grant dates for awards under those plans
consistent with the method of SFAS 123, the Company's net income and earnings
per share would have been reduced to the pro forma amounts indicated below:

- -----------------------------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------
Net income As reported $21,911 $24,736 $22,438
Pro forma 21,170 24,363 22,412

Basic earnings per share As reported $ 1.31 $ 1.44 $ 1.30
Pro forma 1.27 1.42 1.30

Diluted earnings per share As reported $ 1.27 $ 1.38 $ 1.23
Pro forma 1.22 1.35 1.23
- -----------------------------------------------------------------------------

The fair value of each option grant is estimated for the above disclosure on the
date of grant using a Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1997, 1996, and 1995,
respectively: zero dividend yield for all years; expected volatility of 27
percent, 31 percent, and 28 percent; risk-free interest rates of 5.8 percent,
6.1 percent, and 5.6 percent; and an expected six-year life for all years.

38 LYDALL, INC.

A summary of the status of the Company's stock option plans as of December 31,
1997, 1996, and 1995, and changes during the years ended on those dates is
presented below:

- --------------------------------------------------------------------------------------------------------------------
In thousands except per-share data 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
Weighted-Average Weighted-Average
Fixed Options Shares Exercise Price Shares Exercise Price Shares
- --------------------------------------------------------------------------------------------------------------------

Outstanding at beginning of year 1,772 $11.51 1,822 $ 9.63 2,323
Granted 156 19.80 191 23.41 142
Exercised (303) 6.20 (229) 6.21 (643)
Forfeited (33) 20.80 (12) 16.85 -
...................................................................................................................
Outstanding at end of year 1,592 13.14 1,772 11.51 1,822
...................................................................................................................
Options exercisable at year-end 1,156 1,176 1,115
Shares reserved for grants 301 424 603
Weighted-average fair value
per option granted during the year $7.85 $10.07 $10.12
- --------------------------------------------------------------------------------------------------------------------

In 1995, the option price of outstanding shares ranged from $1.76 to $26.00 per
share. Option exercises in 1995 ranged from $1.55 to $10.38.

The following table summarizes information about stock options outstanding at
December 31, 1997:

- --------------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
-----------------------------------------------------------------------------------------
Number Number
Range of Outstanding Remaining Weighted-Average Exercisable Weighted-Average
Exercise Prices at 12/31/97 Contractual Life Exercise Price at 12/31/97 Exercise Price
- --------------------------------------------------------------------------------------------------------------

$ 1.85 to 2.83 138,566 0.06 years $ 2.40 138,566 $ 2.40
4.21 to 5.85 195,893 2.7 4.58 195,893 4.58
8.21 to 10.67 579,661 5.2 9.67 551,979 9.65
13.81 to 19.81 379,897 8.1 17.90 165,424 16.55
22.63 to 26.00 297,946 8.4 24.42 103,908 24.86
..............................................................................................................
$ 1.85 to 26.00 1,591,963 5.8 $13.14 1,155,770 $10.28
- --------------------------------------------------------------------------------------------------------------

Employer-Sponsored Benefit Plans

The Company contributes to four defined benefit pension plans which cover
substantially all domestic Lydall employees. The pension plans are
noncontributory, and benefits are based on either years of service or eligible
compensation paid while a participant is in a plan. The Company's funding
policy is to fund not less than the ERISA minimum funding standard nor more than
the maximum amount which can be deducted for federal income tax purposes.

The following items are the components of net pension cost:

- ------------------------------------------------------------------------------
In thousands For the years ended December 31, 1997 1996 1995
- ------------------------------------------------------------------------------
Service cost - benefits earned during the year $ 1,065 $ 1,048 $ 850
Interest cost on projected benefit obligations 1,392 1,262 1,125
Actual return on plan assets (1,813) (1,703) (2,081)
Net amortization and deferral 362 451 1,083
..............................................................................
Net pension cost $ 1,006 $ 1,058 $ 977
- ------------------------------------------------------------------------------

39 LYDALL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

continued

Plan assets include investments in bonds and equity securities. Actuarial
computations, which used the "projected unit credit" method, and the "unit
credit" method, assumed the following: discount rates on benefit obligations of
7.25 percent for 1997, 7.50 percent for 1996, and 7.25 percent for 1995;
expected long-term rates of return on plan assets of 9.25 percent for 1997,
1996, and 1995; and annual compensation increases of 5.0 percent for 1997, 1996,
and 1995. The Company determines the assumed discount rate, long-term rate, and
annual compensation increase rate for each year. The following table presents a
reconciliation of the funded status of the plans:

- -----------------------------------------------------------------------------------------------------------------
1997 1996
Plans in Which Plans in Which Plans in Which Plans in Which
Assets Exceed Accumulated Assets Exceed Accumulated
Accumulated Benefits Exceed Accumulated Benefits Exceed
In thousands December 31, Benefits Assets Total Benefits Assets Total
- -----------------------------------------------------------------------------------------------------------------

Actuarial present value of
benefit obligations:
Vested $12,540 $ 3,358 $15,898 $13,464 $ 322 $13,786
Nonvested 738 115 853 686 23 709
................................................................................................................
Accumulated benefit
obligations 13,278 3,473 16,751 14,150 345 14,495
Additional benefits related
to assumed future
compensation levels 3,499 - 3,499 2,932 - 2,932
................................................................................................................
Projected benefit obligations 16,777 3,473 20,250 17,082 345 17,427
Plan assets at fair
market value 13,643 3,286 16,929 15,279 322 15,601
................................................................................................................
Projected benefit
obligations in excess of the
plan assets (3,134) (187) (3,321) (1,803) (23) (1,826)
Unrecognized net assets (410) (118) (528) (614) (17) (631)
Unrecognized prior service
cost (101) 295 194 117 50 167
Unrecognized net losses 2,663 523 3,186 2,184 76 2,260
Additional minimum liability - (700) (700) - (109) (109)
................................................................................................................
Accrued pension cost
included in liabilities $ (982) $ (187) $(1,169) $ (116) $ (23) $ (139)
- -----------------------------------------------------------------------------------------------------------------

The Company also sponsors a Stock Purchase Plan, Profit Sharing Plan, and 401(k)
Plan. Contributions are determined under various formulas. Employer
contributions to these plans amounted to $2.1 million in 1997, $1.9 million in
1996, and $1.7 million in 1995.

Postemployment, Postretirement and Deferred Compensation

While it is not Lydall's practice to provide health care or life insurance for
retired employees, it does so for some retired employees of certain units
acquired before 1990. These benefits are unfunded. The plan participants are
primarily retirees; therefore, the postretirement benefit transition obligation
of $691 thousand is being amortized over the actuarially determined average
remaining future lifetime of the plan participants.

40 LYDALL, INC.

The discount rates used in determining the accumulated postretirement benefit
obligations were 7.50 percent and 7.75 percent at December 31, 1997 and 1996,
respectively. The health-care cost trend rate was 8 percent, gradually declining
to 5.5 percent over a four-year period in 1997 and 10 percent declining to 5.5
percent over a five-year period in 1996. An increase of 1 percent in the health-
care cost trend rates would cause the accumulated benefit obligation to increase
by $11 thousand. The increase in the service and interest components of the 1997
postretirement benefit cost is immaterial. The total expense was $83 thousand
for 1997, $110 thousand for 1996, and $111 thousand for 1995.

The Company provides deferred compensation to a small number of former
employees, and has a deferred compensation plan which was frozen as of December
31, 1996, that provides the Company's outside directors and Chairman with
compensation upon their retirement from service with the Board. In addition,
the Company provides a Supplemental Executive Retirement Plan ("SERP") which
provides supplemental income payments after retirement for senior executives.
The total net deferred compensation expense related to these three plans was
$234 thousand in 1997, $246 thousand in 1996, and $203 thousand in 1995.

Quarterly Financial Information (Unaudited)

The following table summarizes quarterly financial information for 1997 and
1996. In management's opinion, all adjustments (which include only normal
recurring adjustments) necessary to present fairly the information for such
quarters have been reflected below:

- ------------------------------------------------------------------------------------------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
In thousands except --------------------------------------------------------------------------------------------------
per-share data 1997 1996 1997 1996 1997 1996 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------

Net sales $61,971 $65,794 $64,019 $67,669 $59,377 $59,707 $58,922 $59,482
....................................................................................................................................
Gross margin $19,263 $20,791 $20,036 $21,522 $18,873 $19,399 $19,469 $20,343
....................................................................................................................................
Net income $ 5,625 $ 5,965 $ 5,716 $ 6,871 $ 5,515 $ 5,780 $ 5,055 $ 6,120
....................................................................................................................................
Basic EPS $.33 $.34 $.34 $ .40 $ .33 $ .34 $ .31 $ .36
....................................................................................................................................
Diluted EPS $.32 $.33 $.33 $ .39 $ .32 $ .32 $ .30 $ .34
- ------------------------------------------------------------------------------------------------------------------------------------

Income Taxes

The provision (benefit) for income taxes consists of the following:

Current
Federal $ 9,827 $13,662 $11,278
State 1,915 2,072 1,893
Foreign 341 171 (45)
................................................................................
Total current 12,083 15,905 13,126
Deferred
Federal 347 (385) 926
State 127 194 (47)
Foreign (15) (596) 432
................................................................................
Total deferred 459 (787) 1,311
................................................................................
Provision for income taxes $12,542 $15,118 $14,437
- -------------------------------------------------------------------------------

41 LYDALL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
continued

The statutory tax rate in France increased from 36.6 percent to 41.7 percent
retroactive to January 1, 1997. The provision for income taxes for 1997
includes $127 thousand for the impact of the higher tax rate on the deferred tax
liability balance.

The provision for income taxes for 1995 includes $292 thousand for the impact of
the higher tax rate on the deferred tax liability balance. The statutory tax
rate in France increased for 1995 from 33.3 percent to 36.6 percent retroactive
to January 1, 1995.

The following is a reconciliation of the difference between the actual provision
for income taxes and the provision computed by applying the federal statutory
tax rate on earnings.

- --------------------------------------------------------------------
For the years ended December 31, 1997 1996 1995
- --------------------------------------------------------------------
Statutory federal income tax rates 35% 35% 35%
State income taxes, net of federal
tax deduction 3.9 3.7 3.3
Exempt FSC foreign trade income (1.0) (.9) (1.5)
Tax exempt income (.8) (.9) -
Other (.7) 1.0 2.4
- --------------------------------------------------------------------
Effective income tax rates 36.4% 37.9% 39.2%
- --------------------------------------------------------------------
The following is a schedule of the net current deferred tax assets and long-term
deferred tax liability accounts by tax jurisdiction as of December 31:

- --------------------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------------------
Current Long-term Current Long-term
Deferred Deferred Deferred Deferred Tax
In thousands Tax Assets Liabilities Tax Assets Liabilities
- --------------------------------------------------------------------------------------------

Federal $2,215 $ 7,353 $2,344 $ 7,256
State 1,015 2,739 960 2,556
Foreign 356 2,887 308 2,855
- --------------------------------------------------------------------------------------------
Total $3,586 $12,979 $3,612 $12,667
- --------------------------------------------------------------------------------------------

- --------------------------------------------------------------------------------------------
1997 1996
------------------------------------------------------------------
Deferred Tax Deferred Tax Deferred Tax Deferred Tax
In thousands Assets Liabilities Tax Assets Liabilities
- --------------------------------------------------------------------------------------------

Accounts receivable $ 568 $ - $ 709 $ -
Inventory 434 - 599 -
Plant and equipment - 10,655 - 10,258
Other accrued expenses 1,640 - 1,799 -
Retirement accounts 804 - 529 -
Other, net - 2,184 - 2,433
- --------------------------------------------------------------------------------------------
Total $3,446 $12,839 $3,636 $12,691
- --------------------------------------------------------------------------------------------

42 LYDALL, INC.

The Internal Revenue Service conducted its examination of the Company's federal
income tax returns for the years 1990 through 1992 and proposed various
adjustments which increased federal taxable income in those years. During
January 1997, Lydall settled all issues raised during the examination and paid
approximately $353 thousand in taxes and $141 thousand in interest. The Company
had previously provided sufficient deferred tax accruals to cover the assessment
of the above taxes and interest.

Unremitted earnings of foreign subsidiaries which are deemed to be permanently
invested amounted to $585 thousand at December 31, 1997. The unrecognized
deferred tax liability on those earnings is not practical to calculate.

Contingencies

In the mid-1980's, the United States Environmental Protection Agency ("EPA")
notified a former subsidiary of the Company that it and other entities may be
potentially responsible in connection with the release of hazardous substances
at a landfill and property located adjacent to a landfill in Michigan City,
Indiana. The preliminary indication, based on the Site Steering Committee's
volumetric analysis, is that the alleged contribution to the waste volume at the
site of the plant once owned by a former subsidiary is approximately 0.434
percent of the total volume. The portion of the 0.434 percent specifically
attributable to the former subsidiary by the current operator of the plant is
approximately 0.286 percent. The EPA has completed its Record of Decision for
the site and has estimated the total cost of remediation to be between $17
million and $22 million. Based on the alleged volumetric contribution of its
former subsidiary to the site, and on the EPA's estimated remediation costs,
Lydall's alleged total exposure would be less than $100 thousand, which has been
accrued.

There are over 800 potentially responsible parties ("prp") which have been
identified by the Site Steering Committee. Of these, 38, not including the
Company's former subsidiary, are estimated to have contributed over 80 percent
of the total waste volume at the site. These prp's include Fortune 500
companies, public utilities, and the State of Indiana. The Company believes
that, in general, these parties are financially solvent and should be able to
meet their obligations at the site. The Company has reviewed Dun & Bradstreet
reports on several of these prp's, and based on these financial reports, does
not believe Lydall will have any material additional volume attributed to it for
reparation of this site due to insolvency of other prp's.

In June 1995, the Company and its former subsidiary were sued in the Northern
District of Indiana by the insurer of the current operator of the former
subsidiary's plant seeking contribution. In October 1997, the insurer made a
settlement demand of $150,591 to the Company in exchange for a release of the
Company's liability at the site and indemnification from the current operator
against site-related claims. The Company executed a settlement agreement with
the insurer and current operator for a full site release; however, the current
operator subsequently backed out of the agreement. The Company is now
evaluating its options.

Management believes the ultimate disposition of this matter will not have a
material adverse effect upon the Company's consolidated financial position,
results of operations, or cash flows.

On March 19, 1996, patent litigation brought by ATD Corporation (ATD) against
Lydall in the U.S. District Court for the Eastern District of Michigan was
concluded with the jury finding in favor of Lydall and with all of ATD's claims
for damages being denied. A notice of appeal to the U.S. Court of Appeals for
the Federal Circuit regarding this litigation was filed by ATD on March 28,
1997. The appeal issues were fully briefed and argued in January of 1998. No
decision has been rendered. Management believes the ultimate disposition of
this matter will not have a material adverse effect upon the Company's
consolidated financial position, results of operations, or cash flows.

43 LYDALL, INC.

Report of Independent Accountants

To the Board of Directors and Stockholders of Lydall, Inc.

We have audited the accompanying consolidated balance sheets of Lydall, Inc. and
Subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of income, changes in stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Lydall, Inc. and
Subsidiaries as of December 31, 1997 and 1996, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.

Hartford, Connecticut

February 18, 1998
Coopers & Lybrand L.L.P.

Management's Report

While Lydall's financial statements and the related financial data contained in
this Annual Report have been prepared in conformity with generally accepted
accounting principles and such financial statements have been audited by Coopers
& Lybrand L.L.P., the ultimate accuracy and validity of this information is the
responsibility of the Company's management. To carry out this responsibility,
Lydall maintains comprehensive financial policies, procedures, accounting
systems and internal controls which management believes provide reasonable
assurance that accurate financial records are maintained and corporate assets
are safeguarded.

The Audit Committee of the Board of Directors, consisting of three outside
directors, meets regularly with Company management and the internal auditor to
review corporate financial policies and internal controls. The Audit Committee
also meets with the independent auditors to review the scope of the annual audit
and any comments they may have regarding the Company's internal accounting
controls.

In management's opinion, Lydall's system of internal accounting control is
adequate to ensure that the financial information in this report presents fairly
the Company's operations and financial condition.

John E. Hanley
Vice President-Finance and Treasurer

44 LYDALL, INC.

FIVE-YEAR STATISTICAL REVIEW

- -------------------------------------------------------------------------------------------------------------------------------
$ thousands except per-share amounts 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------------------

Financial results

Net sales $ 244,289 $ 252,652 $ 252,128 $ 213,072 $ 157,431
Income before cumulative effect of
accounting change 21,911 24,736 22,438 15,503 10,013
Net income 21,911 24,736 22,438 15,503 10,248
- -------------------------------------------------------------------------------------------------------------------------------
Common stock per-share data (diluted)
Income before cumulative effect of
accounting change $ 1.27 $ 1.38 $ 1.23 $ .87 $ .57
Net income 1.27 1.38 1.23 .87 .58
Common stockholders' equity 7.04 6.89 5.88 4.57 3.63
- -------------------------------------------------------------------------------------------------------------------------------
Financial position
Total assets $ 160,124 $ 182,119 $ 158,072 $ 136,613 $ 107,842
Working capital 39,203 53,358 52,730 30,823 31,791
Current ratio 2.39 2.24 2.77 1.93 2.48
Long-term debt, net of current maturities 2,100 5,050 7,750 10,607 11,171
Total stockholders' equity 113,030 117,844 101,811 76,227 60,057
Debt to total capitalization 4.3% 12.9% 9.4% 15.0% 18.7%
- -------------------------------------------------------------------------------------------------------------------------------
Property, plant, and equipment
Net property, plant, and equipment $ 68,860 $ 62,038 $ 60,074 $ 54,771 $ 49,364
Capital additions from acquisitions - 500 - 3,077 -
Other capital additions 17,104 10,893 12,006 7,979 6,253
Capital divestments, net 685 894 632 687 356
Depreciation 7,993 7,824 7,122 6,101 4,997
- -------------------------------------------------------------------------------------------------------------------------------
Performance ratios and other items
Return on average assets 12.8% 14.5% 15.2% 12.7% 9.9%
Return on average common stockholders' equity 19.0% 22.5% 25.2% 22.8% 18.6%
Return on sales 9.0% 9.8% 8.9% 7.3% 6.5%
Days of inventory on hand (LIFO) 33 31 33 36 41
Days of receivables outstanding 51 50 49 47 52
Number of employees at year-end 1,225 1,268 1,227 1,306 944
- -------------------------------------------------------------------------------------------------------------------------------
Shares and stockholders
Weighted average common stock and equivalents 17,319,000 17,988,000 18,197,000 17,864,000 17,520,000
Common stock outstanding at year-end 16,065,473 17,092,011 17,320,252 16,677,524 16,538,126
Stockholders at year-end 1,653 1,855 1,918 1,900 1,904
Market price per share of common stock -
Highest close $ 25.75 $ 25.87 $ 28.50 $ 18.63 $ 10.69
Lowest close $ 18.50 $ 19.75 $ 14.75 $ 10.13 $ 9.50
- -------------------------------------------------------------------------------------------------------------------------------

Share figures adjusted to reflect a two-for-one stock split in 1995, and a
three-for-two stock split in 1993.

45 LYDALL, INC.

OFFICERS, DIRECTORS AND STOCKHOLDER INFORMATION

Officers

Leonard R. Jaskol
Chairman and Chief Executive Officer

John E. Hanley
Vice President-Finance and Treasurer

Carole F. Butenas
Vice President-Investor Relations

Mary Adamowicz Tremblay
General Counsel and Secretary

Geoffrey W. Nelson
Assistant Secretary

Directors

Lee A. Asseo/2,6/
Retired Chairman and Chief Executive Officer
The Whiting Company

Paul S. Buddenhagen/1,6/
Partner
Carlisle Fagan Gaskins & Wise, Inc.

James P. Carolan/3/
President
Lydall Technical Papers

Samuel P. Cooley/3,4/
Retired Executive Vice President
and Senior Credit Approval Officer
Fleet Bank Connecticut

W. Leslie Duffy/3,5/
Partner
Cahill Gordon & Reindel

Leonard R. Jaskol/1,5,6/
Chairman and Chief Executive Officer
Lydall, Inc.

William P. Lyons/3,4/
Managing Partner
Madison Partners L.L.C.

Joel Schiavone/1/
President and Chief Executive Officer
The Schiavone Corporation

Elliott F. Whitely/5/
Former President
Lydall Technical Papers

Roger M. Widmann/2,5/
Principal
Tanner & Co. Inc.

Albert E. Wolf/2,4/
Chairman
Checkpoint Systems, Inc.

/1/ Executive Committee
/2/ Compensation and Stock Option Committee
/3/ Pension Committee
/4/ Audit Committee
/5/ Development Committee
/6/ Nominating Committee

Annual Meeting

Lydall's annual meeting will be held on Wednesday, May 13, 1998 at 11:00 a.m.
at The Hartford Club located at 46 Prospect Street in Hartford, Connecticut.
Stockholders who are unable to attend the meeting are invited to mail any
questions they might have about the Company to any of Lydall's Officers.
Questions may also be directed to the Audit Committee of Lydall's Board of
Directors. Such inquiries may be sent to Samuel P. Cooley, Chairman of the
Audit Committee,
in care of Lydall, Inc.

Transfer Agent
American Stock Transfer & Trust Company
New York, New York

Auditors
Coopers & Lybrand L.L.P.
Hartford, Connecticut

Stockholder Information

Lydall Common Stock is traded on the New York Stock Exchange under the symbol
LDL. During 1997 and 1996, 7,103,800 and 6,578,300 shares, respectively, were
traded. The closing price on December 31, 1997 was $19.50.

As of March 16, 1998, the record date of Lydall's 1998 Annual Meeting,
stockholders of record held 16,068,885 shares of Common Stock.

The following are the high, low and closing prices of Lydall Common Stock for
each quarter during the past two years.

- ----------------------------------------------------
Quarters 1 2 3 4
- ----------------------------------------------------
1997 High $24.0000 $23.6250 $25.7500 $23.9375
Low 20.0000 18.7500 20.8750 18.5000
Close 20.2500 21.1250 23.4375 19.5000

1996 High $25.1250 $25.8750 $25.7500 $24.5000
Low 19.7500 21.8750 21.0000 20.2500
Close 25.0000 22.0000 24.3750 22.5000
- ----------------------------------------------------

Any stockholder correspondence regarding change of address or other
recordkeeping matters may be addressed to:

Isaac Kagan
American Stock Transfer & Trust Company
40 Wall Street
New York, New York 10005
Telephone: 800-937-5449

All other stockholder correspondence -- questions about the Company and requests
for Lydall's Annual Report and Form 10-K -- may be directed to:

Carole F. Butenas
Vice President-Investor Relations
Lydall, Inc.
P. O. Box 151
Manchester, Connecticut 06045-0151
www.lydall.com
investor@lydall.com

Lydall hires and promotes qualified employees in accordance with the law without
regard to race, color, religion, sex, national origin, age, sexual preference,
marital status, or physical or mental disabilities, except where, in
management's view, a disability interferes with job performance or cannot be
reasonably accommodated.

46 LYDALL, INC.