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

Overview

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

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

Albany Door Systems (ADS) designs, manufactures, sells, and services high-speed, high-performance industrial doors worldwide, for a wide range of interior, exterior, and machine protection industrial applications. Already a high performance door leader, ADS further expanded its market position in North America with the second-quarter 2007 acquisition of the assets and business of R-Bac Industries, the fastest-growing high-performance door company in North America, whose product lines were complementary to Albany's. The business segment also derives revenue from aftermarket sales and service.

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

The Company's primary segment, Paper Machine Clothing, accounted for approximately 67% of consolidated revenues during 2008. Paper machine clothing is purchased primarily by manufacturers of paper and paperboard. According to data published by RISI, Inc., world paper and paperboard production volumes have grown at an annual rate of approximately 2. 7 % over the last ten years. Recent economic changes could significantly impact world paper and paperboard demand, and it is likely that total production will be lower in the next five years.

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

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

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

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

The factors described above result in a steady decline in the number of pieces of paper machine clothing, while the average fabric size is increasing. The net effect of these trends is that the specific volume of paper machine clothing consumption (measured in kilograms or square meters) has been increasing at a rate of approximately 1% per year over the past several years. Management believes that the short term effects of a global recession could accelerate or alter the trends described above. Effects of the recession, which were apparent in sales data for the fourth quarter of 2008, especially for Europe and Asia, are likely to continue and could result in PMC sales being lower in 2009.

During 2006, the Company reported that price competition in Western Europe had an adverse impact on the Company's operating results in this segment. In the third and fourth quarters of 2006, and in the first two quarters of 2007, sales of paper machine clothing to customers in Western Europe were significantly lower than the same quarter of the previous year. This also contributed to reduced operating income within this segment, as well as overall operating income, during those quarters.

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

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

The Albany Door Systems segment derives most of its revenue from the sale of high-performance doors, particularly to customers in Europe. The purchase of these doors is normally a capital expenditure item for customers and, as such, market opportunities tend to fluctuate with industrial capital spending. If economic conditions weaken, customers may reduce levels of capital expenditures, which could have a negative effect on sales and earnings in the Albany Door Systems segment. The Company's response to this trend includes expansion of its aftermarket business which tends to be less sensitive to economic changes than sales of new doors. The large amount of revenue derived from sales and manufacturing outside the United States could cause the reported financial results for the Albany Door Systems segment to be more sensitive than the other segments of the Company to changes in currency rates. Orders for new doors began to drop off at the end of 2008 and into January, and the Company is preparing for a substantial decline in product sales, which will be only partially offset by continued growth in the aftermarket sales. Accordingly, the Company has been taking steps, across the business, to accelerate structural changes that permanently reduce costs.

The Engineered Fabrics segment derives its revenue from various industries that use fabrics and belts for industrial applications other than the manufacture of paper and paperboard. Approximately 40% of revenue in this segment is derived from sales to the nonwovens industry, which includes the manufacture of diapers, personal care and household wipes, and fiberglass-reinforced roofing shingles. Approximately 30% of segment revenue is derived from sales to markets that are adjacent to the paper industry, and 20% of revenue is derived from the building products market. Segment sales in the European and Pacific regions combined are almost at the same level as sales within the Americas. Sales in the fourth quarter of 2008 were 13% lower than the same quarter of 2007, and management expects the top line weakness to continue into 2009, reflecting the effects of the global recession.

The PrimaLoft® Products segment includes sales of insulation for outdoor clothing, gloves, footwear, sleeping bags, and home furnishings. The segment has manufacturing and sales operations in the United States, Europe, and Asia. The economic weakness in retail markets is likely to have a negative effect on 2009 sales in this segment.

Foreign Currency

Albany International operates in many geographic regions of the world and has more than half of its business in countries outside the United States. A substantial portion of the Company's sales are denominated in euros or other currencies. In some locations, the profitability of transactions is affected by the fact that sales are denominated in a currency different from the currency in which the costs to manufacture and distribute the products are denominated. As a result, changes in the relative values of U.S. dollars, euros and other currencies affect revenues and profits as the results are translated into U.S. dollars in the consolidated financial statements.

From time to time, the Company enters into foreign currency or other derivative contracts in order to enhance cash flows or to mitigate volatility in the financial statements that can be caused by changes in currency exchange rates.

Review of Operations
2008 vs. 2007

Net sales increased to $1,086.5 million in 2008, as compared to $1,051.9 million for 2007. Changes in currency translation rates had the effect of increasing net sales by $30.3 million. Excluding the effect of changes in currency translation rates, 2008 net sales increased 0.4% as compared to 2007.

Following is a table of net sales for each business segment and the effect of changes in currency translation rates:

Table 1




                                                                                                   Percent
                                                                                                   change
                              Net sales as reported                       Impact of changes       excluding
                                   December 31,             Percent          in currency          currency
(in thousands)                 2008            2007          change       translation rates     rate effects

Paper Machine Clothing         $727,967        $747,279      -2.6 %                  $16,657             -4.8 %
Albany Door Systems             189,348         152,951      23.8 %                    9,824             17.4 %
Engineered Fabrics              101,118         101,506      -0.4 %                    3,533             -3.9 %
Engineered Composites            46,666          32,955      41.6 %                        -             41.6 %
PrimaLoft® Products              21,418          17,212      24.4 %                      308             22.6 %

Total                        $1,086,517      $1,051,903       3.3 %                  $30,322              0.4 %

Gross profit was 33.3% in 2008, compared to 35.4% in 2007. The lower percentage in 2008 is principally due to an increase of $14.9 million for performance improvement initiatives. The performance improvement costs principally relate to equipment relocation, idle capacity at plants that are being closed, and underutilized capacity at the Company's new plant in Hangzhou, China.

STG&R expenses increased to $318.0 million or 29.3% of net sales in 2008, as compared to $311.5 million or 29.6% of net sales in 2007. Costs related to performance improvement initiatives were $20.5 million in 2008 and $15.6 million in 2007. The performance improvement costs are principally costs related to the implementation of the SAP enterprise resource planning software and employee terminations. Compared to 2007, provisions for bad debts increased $14.5 million, including a provision of $7.4 million related to the Eclipse Aviation bankruptcy filing in the fourth quarter of 2008. Changes in currency translation rates had the effect of increasing 2008 STG&R expenses by $8.6 million compared to 2007.

Following is a table of operating income by segment:

Table 2

                                              Year ended                                   Year ended
                                          December 31, 2008                             December 31, 2007
                                                                        Operating
                                                                      income/(loss)
                                         Total          Goodwill        excluding             Total
                                       Operating       impairment       goodwill            Operating
(in thousands)                       income/(loss)       charge          charge           income/(loss)

Operating income/(loss)
Paper Machine Clothing                      $20,468        $48,590           $69,058               $87,973
Albany Door Systems                          14,912              -            14,912                 4,933
Engineered Fabrics                           (4,797 )       17,753            12,956                16,234
Engineered Composites                       (25,955 )        5,962           (19,993 )              (6,283 )
PrimaLoft® Products                           2,977              -             2,977                 2,679
Research expense                            (22,783 )            -           (22,783 )             (23,337 )
Unallocated expenses                        (51,739 )            -           (51,739 )             (49,003 )

Operating (loss)/income                    ($66,917 )      $72,305            $5,388               $33,196

In the third quarter of 2006, the Company announced the initial steps in its restructuring and performance improvement plan. The actions are part of a three-year restructuring and performance improvement plan and have affected each of the Company's reportable segments. The actions taken to reduce manufacturing capacity are driven by the need to balance the Company's manufacturing capacity with anticipated demand.

Paper Machine Clothing (PMC) restructuring activities include closure or significant reductions of manufacturing at Järvenpää and Konala, Finland, at Göppingen, German, at Gosford, Australia, and in the United States at plants in Montgomery, Alabama, East Greenbush, New York, and Menands, New York. Additionally, the Company has incurred restructuring charges related to the centralization of European administrative functions. These activities contributed to restructuring expense in the PMC segment of $34.2 million in 2008, $24.4 million in 2007 and $4.9 million in 2006.

In April 2008, the Company announced its plan to shut down its Mansfield, Massachusetts, facility and consolidate its technical and manufacturing operations located there into other facilities in Europe and North America. The actions taken resulted in net restructuring charges of $1.8 million in 2008.

In May 2007, the Company announced its plan to discontinue operations at its door manufacturing facility in Halmstad, Sweden as part of a plan to match installed capacity with business demands. That action contributed to restructuring expense in the Albany Door Systems segment of $0.9 million in 2008, and $2.2 million in 2007.

The Company has also taken actions to reduce its Corporate overhead expenses that have resulted in net restructuring charges of $0.4 million in 2008, $0.7 million in 2007, and $1.1 million in 2006. Those restructuring charges are net of curtailment gains $2.5 million in 2008 and $1.9 million in 2007 which are related to changes to the Company's pension and postretirement benefit plans.

Table 3



                            Year ended December 31, 2008
                                              Performance
                                              improvement
(in thousands)            Restructuring          costs          Total


Paper Machine Clothing           $34,173            $28,282     $62,455
Albany Door Systems                  945                215       1,160
Engineered Fabrics                   156                  -         156
Engineered Composites                972                  -         972
PrimaLoft® Products                  182                  -         182
Research expense                   1,779                  -       1,779
Unallocated expenses                 446             17,509      17,955

Consolidated total               $38,653            $46,006     $84,659

                            Year ended December 31, 2007
                                              Performance
                                              improvement
(in thousands)            Restructuring          costs          Total


Paper Machine Clothing           $24,434            $14,409     $38,843
Albany Door Systems                2,164              1,168       3,332
Engineered Fabrics                     -                742         742
Research expense                     308                  -         308
Unallocated expenses                 719              9,921      10,640

Consolidated total               $27,625            $26,240     $53,865

                            Year ended December 31, 2006
                                                Performance
                                                improvement
(in thousands)             Restructuring           costs        Total


Paper Machine Clothing              $4,862              $164     $5,026
Unallocated expenses                 1,074               323      1,397

Consolidated total                  $5,936              $487     $6,423

Operating income before the goodwill impairment charges decreased to $5.4 million in 2008, compared to $33.2 million in 2007. The lower income in 2008 was principally due to an increase of $30.8 million for costs associated with restructuring and performance improvement initiatives.

Research expense decreased $0.6 million or 2.4% in 2008, principally due to a gain of $2.2 million from the sale of a building, which offset additional costs related to restructuring initiatives. Unallocated expenses increased $2.7 million to $51.7 million in 2008 principally due to an increase of $8.1 million related to performance improvement initiatives, including the Company's implementation of the SAP

Interest expense increased to $20.8 million for 2008, compared to $16.6 million for 2007. The increase reflects higher average levels of debt outstanding in 2008.

Other expense, net, was $0.5 million for 2008 compared to $0.4 million for 2007. The increase in expense is primarily due to lower income resulting from currency hedging activities and the remeasurement of short-term intercompany balances at operations that held amounts denominated in currencies other than their local currencies. The Company's currency hedging strategy is aimed at mitigating volatility in the income statement that can be caused by sharp changes in currency exchange rates. The Company uses various derivative instruments, primarily currency forward contracts, in its currency hedging activities. Changes in fair value of derivative instruments that are designated and qualify for hedge accounting in accordance with FAS No. 133 are reported in Other comprehensive income, and not Other expense, net.

Income tax benefit/expense from continuing operations was a benefit of $3.9 million in 2008 compared to expense of $1.8 million in 2007. Discrete tax adjustments in 2008 were a net expense of $13.0 million ($0.44 per share) and resulted principally from changes in benefit programs and the recording of valuation allowances. Discrete tax adjustments in 2007 were a net benefit of $2.7 million ($0.09 per share) and resulted principally from impairment provisions recorded for statutory purposes. Income tax expense in 2008 includes an out-of-period adjustment to correct an equivalent favorable discrete tax adjustment of $1.7 million recorded in the second quarter of 2007. The corrected item has no impact on cash flows for any period presented. The company recognizes interest and penalties related to unrecognized tax benefits within its global operations as a component of income tax expense. The C ompany recognized interest and penalties of $3.1 million and $1.1 million in the statement of operations in 2008 and 2007, respectively. As of December 31, 2008 and December 31, 2007, the Company had approximately $6.2 million and $4.8 million of accrued interest and penalties related to uncertain tax positions, respectively.

In July 2008, the Company closed on the sale of its Filtration Technologies business, the principal operations of which were in Gosford, Australia, and Zhangjiagang, China. The Company recognized a gain of $5.4 million on the sale. The activities of this business are reported as a discontinued operation in the accompanying financial statements and, accordingly, are excluded from Tables 1, 2, 3, 4 and 5.

Net loss/income was a loss of $75.7 million for 2008, compared to income of $17.8 million for 2007. Basic earnings per share was a loss of $2.54 for 2008, compared to income of $0.60 for 2007. The difference reflects the 2008 goodwill impairment charge ($2.19 per share), higher costs in 2008 for restructuring and performance improvement initiatives ($0.93 per share) and the unfavorable change in discrete tax adjustments ($0.53 per share).

Paper Machine Clothing Segment

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