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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-K

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE

ACT OF 1934

For the Fiscal Year Ended December 31, 2003

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to              Commission File Number: 1-7665

Lydall, Inc.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (860) 646-1233

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes x  No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).    Yes x  No ¨

On February 26, 2004, the aggregate market value of the Registrant’s voting stock held by nonaffiliates was $155,819,911. For purposes of this calculation the Registrant has assumed that its directors and executive officers are affiliates.

On February 26, 2004, there were 16,226,443 shares of Common Stock outstanding, exclusive of treasury shares.

DOCUMENTS INCORPORATED BY REFERENCE

Part III incorporates information by reference from the definitive Proxy Statement distributed in connection with the Registrant’s Annual Meeting of Stockholders to be held on April 22, 2004.

The exhibit index is located on pages 24-25.

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INDEX TO ANNUAL REPORT ON FORM 10-K

Year Ended December 31, 2003

The information called for by Items 10, 11, 12, 13 and 14, to the extent not included in this document, is incorporated herein by reference to such information included under the captions “Corporate Governance,” “Equity Compensation Plan Information,” “Board of Directors,” “Stockholder Communications with Directors,” “Director Compensation,” “Compensation and Stock Option Committee Report on Executive Compensation,” “Performance Graph,” “Plan Descriptions,” “Stock Option Tables,” “Summary Compensation Table,” “Securities Ownership of Directors, Certain Officers and 5 Percent Beneficial Owners,” “Compensation Committee Interlocks and Insider Participation,” “Transactions with Management” and “Principal Fees and Services” in the Company’s definitive Proxy Statement filed with the Securities and Exchange Commission and distributed in connection with Lydall Inc.’s 2004 Annual Meeting of Stockholders.

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PART I

Lydall, Inc. and its subsidiaries are hereafter collectively referred to as “Lydall,” the “Company” or the “Registrant.”

Item 1. BUSINESS

Lydall designs and manufactures specialty engineered automotive thermal and acoustical barriers, passive and active industrial thermal and insulating solutions, air and liquid filtration media, medical filtration media and devices and biopharmaceutical processing components for demanding thermal/acoustical and filtration/separation applications.

The Company has defined the Thermal/Acoustical Segment and Filtration/Separation Segment as its core businesses and has developed a long-term strategy to concentrate primarily on these businesses. Lydall has announced certain organizational changes, including the elimination of its previous Group structure and the establishment of two Councils operating across all businesses to focus sales and marketing resources and to advance manufacturing efficiency and profitability. These changes were made to streamline the organization, leverage synergies and manage the Company as a more unified enterprise.

The Company serves a number of market niches. Lydall’s products are primarily sold directly to customers through an internal sales force and distributed via common carrier or the Company’s distribution operation. The majority of the Company’s products are sold to original equipment manufacturers and tier-one suppliers. The Company competes through high-quality, specialty engineered innovative products and exceptional customer service. Lydall has a number of domestic and foreign competitors for its products, most of whom are either privately owned or divisions of larger companies, making it difficult to determine the Company’s share of the markets served.

Sales to the automotive market represented 48 percent of Lydall’s net sales in 2003 and 47 percent in both 2002 and 2001. Lydall’s thermal and acoustical products are used on a variety of automotive platforms and in various other applications. Sales to Ford Motor Company and DaimlerChrysler AG were $45.1 million and $29.1 million, or 17 percent and 11 percent of Lydall’s net sales in 2003, respectively. No other single customer accounted for more than 10 percent of the Company’s net sales in 2003.

Foreign and export sales were 37 percent of the Company’s net sales in 2003, 34 percent in 2002 and 30 percent in 2001. Export sales are concentrated primarily to Europe, Asia, Mexico and Canada and were $33.0 million, $32.2 million and $25.6 million in 2003, 2002 and 2001, respectively. Foreign sales were $67.6 million, $53.0 million and $40.7 million for the years ended December 31, 2003, 2002 and 2001, respectively. Foreign operations generated operating income of $5.4 million, $4.6 million and $3.3 million for the years ended December 31, 2003, 2002 and 2001, respectively. Total foreign assets were $73.6 million at December 31, 2003 compared with $44.3 million at December 31, 2002 and $32.3 million at December 31, 2001.

The Company’s Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Reports on Form 8-K are made available free of charge through the Investor Relations section of the Company’s Internet website at www.lydall.com after such material is electronically filed with, or furnished to, the Securities and Exchange Commission (the Commission) and are also available on the Commission’s website at www.sec.gov.

The Company’s Code of Ethics and Business Conduct for all employees and its Code of Ethics for the Chief Executive Officer, Senior Financial Officers and All Accounting and Financial Personnel are available through the Corporate Governance section of the Company’s website. Additionally, a copy of the Company’s Code of Ethics for the Chief Executive Officer, Senior Financial Officers and All Accounting and Financial Personnel is being filed with the Commission as Exhibit 14.1 to this report and can be obtained free of charge on the Company’s website or by contacting the Office of the General Counsel, P.O. Box 151, One Colonial Road, Manchester, CT 06045-0151.

SEGMENTS

Lydall has organized its business into two primary reportable segments – Thermal/Acoustical and Filtration/Separation. All other businesses are aggregated in Other Products and Services. Segments are defined by the grouping of similar products and services.

Thermal/Acoustical

Lydall’s thermal and acoustical barriers, temperature-control units and insulating products protect, control and insulate within temperature environments ranging from -459°F (-237°C) to +3000°F (+1649°C).

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Lydall’s automotive thermal and acoustical barriers, including ZeroClearance^®, AMS^®, dBLyte^®, dBCore^® and Lytherm^® products, are comprised of organic and inorganic fiber composites, fiber and metal combinations and all metal components that are used in cars, trucks, sport utility vehicles and vans. The Company holds patents on several of these products, which can be employed on both the interior and exterior of vehicle passenger cabins and within the engine compartment and around such components as exhaust systems, fuel systems, heat and air-conditioning ducts, power trains, batteries and electronic components.

The Company’s passive thermal business features products such as Lytherm^® and Manniglas^® that are employed as linings for ovens, kilns and furnaces, in glass and metal manufacturing, and in consumer appliances, as well as heating, ventilating and air-conditioning systems. At the very coldest temperatures (approaching absolute-zero), Cryotherm^® cryogenic materials, composed of inorganic fibers, are used for super-insulating applications. These applications include tanker trucks that transport liquid gases, stationary and portable cryogenic storage vessels and fuel systems for vehicles powered by liquid natural gas.

Lydall’s active thermal business designs and manufactures high precision, specialty engineered temperature-control equipment for demanding semiconductor, pharmaceutical, life sciences and industrial applications.

Thermal/Acoustical Segment net sales, before elimination of intersegment sales, represented 62.1 percent of the Company’s net sales in 2003, 59.3 percent in 2002 and 56.2 percent in 2001. Additionally, total net sales generated by international operations of the Thermal/Acoustical Segment accounted for 27.5 percent, 23.5 percent and 20.2 percent of segment net sales in 2003, 2002 and 2001, respectively.

Filtration/Separation

The Filtration/Separation Segment includes air and liquid filtration products for industrial and consumer applications, as well as vital fluids management systems for medical and biopharmaceutical applications.

Lydair^® high-efficiency air filtration media range in filtering efficiencies from 45 percent ASHRAE through all HEPA grades to the highest ULPA grade and filter particles as small as 0.1 micron. Uses for these products include industrial and commercial heating, ventilating and air-conditioning systems, clean space applications and consumer products.

Lydall also produces liquid filtration media, sold under the Actipure^® and Lypore^® trademarks, used for industrial and residential water purification and in high-efficiency hydraulic oil and lubrication filters for off-road vehicles, trucks and heavy equipment.

The Company’s Vital Fluids business designs and manufactures specialty blood transfusion and cell therapy products and Bio-Pak^® sterilized disposable bioprocessing containers, which provide for containment of media such as cell tissue cultures, saline solutions and diagnostic fluids for bioprocessing applications. In addition, its medical filter materials are employed in traditional blood filtration devices such as cardiotomy reservoirs and autotransfusion filters.

Net sales from the Filtration/Separation Segment, before elimination of intersegment sales, represented 27.6 percent of the Company’s net sales in 2003 compared with 28.7 percent in 2002 and 29.8 percent in 2001. In addition, total net sales generated by the international operation of the Filtration/Separation Segment accounted for 28.5 percent, 24.2 percent and 23.0 percent of segment net sales in 2003, 2002 and 2001, respectively.

Other Products and Services

The largest component of Other Products and Services is Lydall’s transport, distribution and warehousing businesses. These businesses specialize in time-sensitive shipments and warehouse management services and possess an in-depth understanding of the special nature and requirements of the paper and printing industries. Other Products and Services also include assorted specialty products.

Other Products and Services net sales, before elimination of intersegment sales, were 11.0 percent of the Company’s net sales in 2003 compared with 12.7 percent in 2002 and 14.9 percent in 2001. There were no significant sales generated outside of the United States for the Other Products and Services Segment.

Discontinued Operations

In February 2001, the Company discontinued the Paperboard Segment, which consisted primarily of the Southern Products and Lydall & Foulds operations. The results of the Paperboard Segment have been excluded from continuing operations for all years presented. See Note 8 in “Notes to Consolidated Financial Statements.”

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In the fourth quarter of 2002, the Company recorded an after-tax charge of approximately $.2 million, or $.01 per diluted share, for additional costs incurred during the phase-out period of the Paperboard Segment.

In the third quarter of 2003, the Company recorded an after-tax charge of approximately $.8 million, or $.05 per diluted share, for additional shut down costs and the write off of the remaining assets of the Paperboard Segment.

GENERAL BUSINESS INFORMATION

Lydall holds a number of patents, trademarks and licenses. While no single patent, trademark or license is critical to the success of Lydall, together these intangible assets are of considerable value to the Company.

The Company’s business is generally not seasonal; however, results of operations are impacted by shutdowns at the Company’s European operations and at automotive customers that typically occur in the third quarter of each year. Lydall maintains levels of inventory and grants credit terms that are normal within the industries it serves. The Company uses a wide range of raw materials in the manufacturing of its products. The majority of raw materials used are available from a variety of suppliers that could be substituted as necessary.

The Company invested $7.3 million in 2003, $6.5 million in 2002 and $6.9 million in 2001, or approximately 3 percent of net sales for each year, to develop new products and to improve existing products. Most of the Company’s investment in research and development is application specific; very little is pure research. There were no significant customer-sponsored research and development activities during the past three years.

Lydall’s backlog was $37.4 million at December 31, 2003, $26.8 million at December 31, 2002 and $21.1 million at December 31, 2001. Backlog at January 31, 2004 was $38.9 million. The increase in backlog at December 31, 2003 compared with December 31, 2002 was primarily the result of increased backlog for the German automotive business related to delayed production at a customer, as well as the strengthening of the Euro in 2003 compared with 2002. The increase in backlog at December 31, 2002 compared with December 31, 2001 was primarily the result of increased orders from automotive customers, additional Ossipee operation backlog in 2002 and the strengthening of the Euro in 2002 versus 2001. There are minimal seasonal aspects to Lydall’s backlog as of the end of the Company’s fiscal years.

No material portion of Lydall’s business is subject to renegotiation of profits or termination of contracts or subcontracts at the election of any governmental body.

Lydall believes that its plants and equipment are in substantial compliance with applicable federal, state and local provisions that have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment. Additional measures to maintain compliance with presently enacted laws and regulations are not expected to have a substantially adverse effect on the capital expenditures, earnings or competitive position of the Company.

As of December 31, 2003, Lydall employed approximately 1,250 people. Four unions with contracts expiring on March 31, 2005 represent approximately 60 of the Company’s employees in the United States. All employees at the Company’s facilities in France are covered under a National Collective Bargaining Agreement. Certain salaried and all hourly employees at the operation in Germany are also covered under a National Collective Bargaining Agreement. Lydall considers its employee relationships to be satisfactory and did not have any actual or threatened work stoppages due to union-related activities in 2003.

There are no significant anticipated operating risks related to foreign investment law, expropriation, inflation effects or availability of material, labor or energy. The Company’s foreign and domestic operations limit foreign currency exchange transaction risk by completing transactions in functional currencies whenever practical or through the use of foreign currency forward exchange contracts when deemed appropriate.

CAUTIONARY NOTE CONCERNING FACTORS THAT MAY AFFECT FUTURE RESULTS

This report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. In general, any statements contained in this report that are not statements of historical fact may be deemed to be forward-

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looking statements within the meaning of Section 21E. Without limiting the generality of the foregoing, the words “believes,” “anticipates,” “plans,” “projects,” “expects,” “estimates,” and other similar expressions are intended to identify forward-looking statements. Investors should be aware that such forward-looking statements are intended to provide management’s current expectations for the future operating and financial performance of the Company based on assumptions believed to be valid at the time. Thus, such expectations are inherently subject to a number of risks and uncertainties that could cause the actual results of the Company to differ materially from those reflected in forward-looking statements. In addition to general economic conditions and market trends, some of the important factors that could cause actual results to differ materially from those anticipated include: a major downturn of the United States or European automotive markets, raw-material pricing and supply and new-product introductions (see Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Cautionary Note Concerning Factors That May Affect Future Results” for a more detailed discussion of these factors).

Item 2. PROPERTIES

The principal properties of the Company as of December 31, 2003 are situated at the following locations and have the following characteristics:

Properties numbered 2, 3, 9, 10, 11 and 12 are leased; all others are owned. For information regarding lease obligations, see Note 16 in “Notes to Consolidated Financial Statements.” Lydall considers its properties to be in good operating condition and are suitable and adequate for its present needs. All properties are being appropriately utilized consistent with experience and demand for the Company’s products. As of December 31, 2003, the Company’s new manufacturing facility in Saint Nazaire, France was in the process of being constructed. This operation is expected to come on-line during the second quarter of 2004 to supplement the Thermal/Acoustical automotive business in Europe and will be a leased facility. In addition to the properties listed above, the Company had several additional leases for sales offices and warehouses in the United States, Europe, Japan, Singapore and Taiwan.

Item 3. LEGAL PROCEEDINGS

No significant legal proceedings were instituted or settled in the fourth quarter of 2003. See Note 16 in “Notes to Consolidated Financial Statements” for additional information on legal proceedings.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted to a vote of security holders during the fourth quarter of 2003.

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EXECUTIVE OFFICERS OF THE REGISTRANT

The executive officers of Lydall, Inc., together with the offices presently held by them, their business experience since January 1, 1999, and their age as of February 26, 2004, the record date of the Company’s 2004 Annual Meeting, are as follows:

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PART II

Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

PRICE RANGE OF COMMON STOCK AND DIVIDEND HISTORY

The Company’s Common Stock is traded on the New York Stock Exchange (NYSE) under the symbol LDL. Shares totaling 6,413,600 and 5,346,200 were traded on the NYSE during 2003 and 2002, respectively. The table below shows the range of reported sale prices on the NYSE Composite Tape for the Company’s Common Stock for the periods indicated. As of February 26, 2004, the record date for the Company’s 2004 Annual Meeting, 1,586 stockholders of record held 16,226,443 shares of Lydall’s Common Stock, $.10 par value. As of the record date, there were no shares outstanding of the Company’s Preferred Stock, $1.00 par value.

The Company’s domestic revolving credit facility contains restrictions that limit the amount of dividends (whether in cash, securities or other property, unless payable solely in additional shares of the Company’s capital stock) that can be paid to external shareholders of its capital stock each fiscal year. Currently, the Company does not pay a cash dividend on its Common Stock and does not anticipate doing so in the foreseeable future. Cash will be reinvested in operations.

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Item 6. SELECTED FINANCIAL DATA

FIVE-YEAR SUMMARY

The results of operations of the discontinued Paperboard and Wovens Segments have been excluded from the Selected Financial Data table for all applicable periods. The Paperboard and Wovens Segments’ balance sheet items have been excluded from calculations of the “Performance and other ratios” section for all periods presented, except for the current ratio. See additional discussion under Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CAUTIONARY NOTE CONCERNING FACTORS THAT MAY AFFECT FUTURE RESULTS

This report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. In general, any statements contained in this report that are not statements of historical fact may be deemed to be forward-looking statements within the meaning of Section 21E. Without limiting the generality of the foregoing, the words “believes,” “anticipates,” “plans,” “projects,” “expects,” “estimates,” and other similar expressions are intended to identify forward-looking statements. Investors should be aware that such forward-looking statements are intended to provide management’s current expectations for the future operating and financial performance of the Company based on assumptions believed to be valid at the time. Thus, such expectations are inherently subject to a number of risks and uncertainties that could cause the actual results of the Company to differ materially from those reflected in forward-looking statements. In addition to general economic conditions and market trends, some of the important factors that could cause actual results to differ materially from those anticipated include, but are not limited to, the following:

A Major Downturn of the United States or European Automotive Markets – Although Lydall’s automotive sales are not solely contingent on the strength of the automotive market, a significant downturn of the United States or European automotive industries or a major decline in production of specific vehicles on which Lydall has significant content 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. Conversely, Lydall benefits from the introduction of new models that contain the Company’s products. Approximately 48 percent of Lydall’s total net sales in 2003 were to the automotive market. Lydall’s automotive products are thermal and acoustical barriers employed both inside and under the body of vehicles. Most of Lydall’s products are supplied to meet unique, niche applications. Lydall may have a number of components on a particular automotive platform and applications can range across all types of vehicles from sport-utility models to trucks, vans and cars. Thus, there is not necessarily a direct correlation between the number of Lydall products sold and the number of vehicles being built by automotive manufacturers.

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. The Thermal/Acoustical Segment uses aluminum to manufacture most automotive heat shields. Volatility in aluminum prices could impact the Thermal/Acoustical Segment’s profitability where the Company is selling its products under long-term agreements with fixed sales prices.

New Product Introductions – Improved performance and growth is partially linked to new product introductions planned for the future. The timing and degree of success of new product programs could impact Lydall’s anticipated results.

Lydall does not undertake to update any forward-looking statement made in this report or that may from time to time be made by or on behalf of the Company.

OVERVIEW

During 2003, the Company experienced sales growth of 7.0 percent and selling, product development and administrative expenses remained constant as a percentage of sales. However, profitability from higher sales was significantly offset by manufacturing inefficiencies at several locations. In addition, increased overhead costs related to capital investment depreciation and leasing expense for new machinery negatively impacted profitability as production and sales volumes associated with such costs were lower than planned levels in the second half of the year. As part of the process to address these issues, the Company took the following actions:

In the second quarter of 2003 the Company consolidated its Vital Fluids operation from two locations to one.

In December 2003, Lydall announced major changes to the Company’s organizational structure. The Company streamlined the organization and eliminated the Group structure in order to move closer to its customers and markets and to leverage

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manufacturing knowledge throughout the Company. As part of this change, the Company formed Marketing and Sales and Manufacturing Councils comprised of key marketing and operating managers. These Councils will focus on current issues, as well as the long-term strategic plans of the Company.

In January 2004, the Company announced that it will consolidate its Columbus, Ohio operation into other Lydall automotive facilities and close the Columbus plant.

The Company believes that these changes will help it towards its goal of improving gross margins, and correspondingly increasing profitability, by reducing costs, leveraging overall capacity of existing facilities more effectively, allocating resources more efficiently and allowing it to better serve its customers and markets.

CONSOLIDATED RESULTS OF OPERATIONS

Net Sales

For the year ended December 31, 2003, Lydall recorded net sales of $271.4 million compared with $253.5 million for the year ended December 31, 2002, an increase of $17.9 million, or 7.0 percent. Foreign currency translation, which was primarily related to the strengthening of the Euro during 2003, increased net sales by approximately 4.4 percent. After adjusting for foreign currency translation, net sales growth was attributable to increased sales in the Thermal/Acoustical Segment, primarily related to the automotive business during the first three quarters of 2003 and continued improvement in sales of active thermal products from the Ossipee operation. Additionally, sales of building material and appliance thermal products, liquid filtration products, Vital Fluids’ blood transfusion and cell therapy products and products for bioprocessing applications, as well as improved revenues from the warehouse distribution operations of the transport business contributed to the overall sales improvement. These increases were partially offset by lower sales of air filtration products, Vital Fluids’ sales of traditional blood filtration materials, sales of specialty products and a reduction in revenues from the trucking operations of the transport business.

In 2002, the Company generated $253.5 million in net sales compared with $223.6 million for the year ended December 31, 2001, an increase of $29.9 million or 13.4 percent. The improvement in net sales was attributable to increased sales volumes across all core businesses. These increases were driven by new platform and product awards in the automotive business and new business gains in filtration and bioprocessing coupled with the incremental sales added by the Ossipee operation, acquired in October 2001, and the favorable impact of foreign currency translation of approximately 1.3 percent.

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