13

---

 

9.	Goodwill & Intangible Assets

The Company has elected to do the annual impairment test of its goodwill, as required by SFAS No. 142, on December 31 of each year or earlier if a potential impairment indicator occurs. For purposes of the test, the Company has identified reporting units, as defined within SFAS No. 142, at a regional level for the Activated Carbon and Service segment and at the technology level for the Equipment segment and has allocated goodwill to these reporting units accordingly. The goodwill associated with the Consumer segment is not material and has not been allocated below the segment level.

The changes in the carrying amounts of goodwill by segment for the nine month period ended September 30, 2008 are as follows:

 

		Activated
		Carbon &
		Service			Equipment			Consumer
		Segment			Segment			Segment			Total
Balance as of December 31, 2007		$	21,112		$	6,673		$	60		$	27,845
Foreign exchange			(445	)		(126	)		-			(571	)
Balance as of September 30, 2008		$	20,667		$	6,547		$	60		$	27,274

The following is a summary of the Company’s identifiable intangible assets as of September 30, 2008 and December 31, 2007 respectively:

  

		September 30, 2008
		Weighted Average			Gross Carrying			Foreign			Accumulated			Net Carrying
		Amortization Period			Amount			Exchange			Amortization			Amount
Amortized Intangible Assets:
Patents			15.4 Years		$	1,369		$	-		$	(940	)	$	429
Customer Relationships			17.0 Years			9,323			(80	)		(5,489	)		3,754
License Agreement			5.0 Years			500			-			(491	)		9
Product Certification			7.9 Years			1,682			-			(831	)		851
Unpatented Technology			20.0 Years			2,875			-			(1,481	)		1,394
Total			16.0 Years		$	15,749		$	(80	)	$	(9,232	)	$	6,437

 

 

		December 31, 2007
		Weighted Average			Gross Carrying			Foreign			Accumulated			Net Carrying
		Amortization Period			Amount			Exchange			Amortization			Amount
Amortized Intangible Assets:
Patents			15.4 Years		$	1,369		$	-		$	(877	)	$	492
Customer Relationships			17.0 Years			9,323			30			(4,743	)		4,610
License Agreement			5.0 Years			500			-			(416	)		84
Product Certification			7.9 Years			1,682			-			(625	)		1,057
Unpatented Technology			20.0 Years			2,875			-			(1,358	)		1,517
Total			16.0 Years		$	15,749		$	30		$	(8,019	)	$	7,760

For the three and nine months ended September 30, 2008, the Company recognized $0.4 million and $1.2 million, respectively, of amortization expense related to intangible assets. For the three and nine months ended September 30, 2007, the Company recognized $0.5 million and $1.4 million, respectively, of amortization expense related to intangible assets. The Company estimates amortization expense to be recognized during the next five years as follows:

(Thousands)
For the year ending December 31:
2008		$	1,571
2009			1,299
2010			1,155
2011			847
2012			257

 

14

---

10.	Borrowing Arrangements

5.00% Convertible Senior Notes due in 2036

On August 18, 2006, the Company issued $75.0 million in aggregate principal amount of 5.00% Notes due in 2036 (the “Notes”). The Notes accrue interest at the rate of 5.00% per annum which is payable in cash semi-annually in arrears on each February 15 and August 15, which commenced February 15, 2007. The Notes will mature on August 15, 2036.

The Notes can be converted under the following circumstances: (1) during any calendar quarter (and only during such calendar quarter) commencing after September 30, 2006, if the last reported sale price of the Company’s common stock is greater than or equal to 120% of the conversion price of the Notes for at least 20 trading days in the period of 30 consecutive trading days ending on the last trading day of the preceding calendar quarter; (2) during the five business day period after any 10 consecutive trading-day period (the “measurement period”) in which the trading price per Note for each day in the measurement period was less than 103% of the product of the last reported sale price of the Company’s common stock and the conversion rate on such day; or (3) upon the occurrence of specified corporate transactions described in the Offering Memorandum. On or after June 15, 2011, holders may convert their Notes at any time prior to the maturity date. Upon conversion, the Company will pay cash and shares of its common stock, if any, based on a daily conversion value (as described herein) calculated on a proportionate basis for each day of the 25 trading-day observation period.

For the period ended December 31, 2007 and for the quarterly periods ended March 31, June 30, and September 30, 2008, respectively, the last reported sale price of the Company’s common stock was greater than 120% of the conversion price of the Notes for at least 20 trading days in the period of 30 consecutive trading days ending on the last trading day of each of the aforementioned quarterly periods. As a result, the holders of the Notes have had the right to convert the Notes into cash and shares of common stock throughout 2008. The following table represents the conversion and exchange activity that has occurred as of the period ended September 30, 2008 and through October 31, 2008:

15

---

Date		Aggregate  Principal  Amount  Outstanding  Prior to  Transaction			Aggregate  Principal  Amount of  Notes  Involved in  Transaction			Shares  Issued			Cash Paid1			Aggregate  Principal  Amount  Outstanding  after  Transaction
August 20,2008		$	75,000,000		$	37,175,000			7,289,215		$	—		$	37,825,000
September 2, 2008			37,825,000			7,000,000			1,372,549			—			30,825,000
October 1, 2008			30,825,000			7,950,000			1,151,750			7,950,014			22,875,000
October 2, 2008			22,875,000			1,300,000			188,320			1,300,011			21,575,000
October 3, 2008			21,575,000			1,750,000			253,673			1,750,007			19,825,000
October 22, 2008			19,825,000			1,000,000			196,078			—			18,825,000
October 23, 2008			18,825,000			10,625,000			2,083,333			—			8,200,000
					$	66,800,000			12,534,9182		$	11,000,032

¹ Excluding any accrued interest paid to an exchanging holder.

² Includes approximately 3 million shares exchanged for principal amount of Notes (in lieu of cash) due to exchanges. These shares were not previously included in the Company’s diluted shares for previous quarters.

 

Due to the conversion rights of the holders of the Notes, the Company has classified the remaining principal amount of outstanding Notes as a current liability for the period ended September 30, 2008.

The initial conversion rate is 196.0784 shares of the Company’s common stock per $1,000 principal amount of Notes, equivalent to an initial conversion price of approximately $5.10 per share of common stock. The conversion rate is subject to adjustment in some events, including the payment of a dividend on the Company’s common stock, but will not be adjusted for accrued interest, including any additional interest. In addition, following certain fundamental changes (principally related to changes in control) that occur prior to August 15, 2011, the Company will increase the conversion rate for holders who elect to convert Notes in connection with such fundamental changes in certain circumstances. The Company considered EITF 00-27 issue 7 which indicates that if a reset of the conversion rate due to a contingent event occurs, the Company would need to calculate if there is a beneficial conversion and record if applicable. Through September 30, 2008, no contingent events have occurred.

The Company may not redeem the Notes before August 20, 2011. On or after that date, the Company may redeem all or a portion of the Notes at any time. Any redemption of the Notes will be for cash at 100% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest, including any additional interest, to, but excluding, the redemption date.

Holders may require the Company to purchase all or a portion of their Notes on each of August 15, 2011, August 15, 2016, and August 15, 2026. In addition, if the Company experiences specified types of fundamental changes, holders may require it to purchase the Notes. Any repurchase of the Notes pursuant to these provisions will be for cash at a price equal to 100% of the principal amount of the Notes to be purchased plus any accrued and unpaid interest, including any additional interest, to, but excluding, the purchase date.

16

---

The Notes are the Company’s senior unsecured obligations, and rank equally in right of payment with all of its other existing and future senior indebtedness. The Notes are guaranteed by certain of the Company’s domestic subsidiaries on a senior unsecured basis. The subsidiary guarantees are general unsecured senior obligations of the subsidiary guarantors and rank equally in right of payment with all of the existing and future senior indebtedness of the subsidiary guarantors. If the Company fails to make payment on the Notes, the subsidiary guarantors must make them instead. The Notes are effectively subordinated to any indebtedness of the Company’s non-guarantor subsidiaries. The Notes are effectively junior to all of the Company’s existing and future secured indebtedness to the extent of the value of the assets securing such indebtedness.

The Company sold the Notes to the original purchaser at a discount of $3.3 million that is being amortized over a period of five years. The Company also incurred original issuance costs of $1.5 million which have been deferred and are being amortized over a five year period. The Company reclassified $1.2 million of the discount and $0.2 million of issuance costs to additional paid in capital as a result of the aforementioned conversions and exchanges of Notes that occurred during the three and nine month periods ended September 30, 2008. The Company will continue to amortize the respective remaining balances over the remaining five year period or the date of conversion/exchange, if sooner. As of the nine month period ended September 30, 2008, the Company recorded interest expense of $3.0 million related to the Notes, of which $0.4 million related to the amortization of the discount.

Credit Facility

On August 14, 2008, the Company entered into a third amendment to its Credit Facility (the “Third Amendment”). The Third Amendment permits borrowings in an amount up to $60.0 million and includes a separate U.K. sub-facility and a separate Belgian sub-facility. The Credit Facility permits the total revolving credit commitment to be increased up to $75.0 million. The facility matures on May 15, 2011. Availability for domestic borrowings under the Credit Facility is based upon the value of eligible inventory, accounts receivable and property, plant and equipment, with separate borrowing bases to be established for foreign borrowings under a separate U.K. sub-facility and a separate Belgian sub-facility. Availability under the Credit Facility is conditioned upon various customary conditions.

The Credit Facility is secured by a first perfected security interest in substantially all of the Company’s assets, with limitations under certain circumstances in the case of capital stock of foreign subsidiaries. Certain of the Company’s domestic subsidiaries unconditionally guarantee all indebtedness and obligations related to domestic borrowings under the Credit Facility. The Company and certain of its domestic subsidiaries also unconditionally guarantee all indebtedness and obligations under the U.K. sub-facility.

 

As of September 30, 2008, the collateral value of assets pledged was $57.6 million. The collateral value as of September 30, 2008 for domestic, U.K., and Belgian borrowers were $48.4 million, $4.8 million, and $4.4 million, respectively. The Credit Facility contains a fixed charge coverage ratio covenant which becomes effective when total domestic availability falls below $11.0 million. As of September 30, 2008, total availability was $41.8 million. Availability as of September 30, 2008 for domestic, U.K., and Belgian borrowers was $38.7 million, $3.1 million, and zero, respectively. The Company can issue letters of credit up to $20 million of the available commitment amount under the Credit Facility. Sub-limits for letters of credit under the U.K. sub-facility and the Belgian sub-facility are $2.0 million and $6.0 million, respectively. Letters of credit outstanding at September 30, 2008 totaled $15.8 million.

The Credit Facility interest rate is based upon Euro-based (“LIBOR”) rates with other interest rate options available. The applicable Euro Dollar margin in effect when the Company is in compliance with the terms of the facility ranges from 1.50% to 2.50% and is based upon the Company’s overall availability under the Credit Facility. The unused commitment fee is equal to 0.375% per annum, which can increase to 0.50%, and is based upon the unused portion of the revolving commitment.

17

---

The negative covenants provide for certain restrictions on possible acts by the Company related to matters such as additional indebtedness, certain liens, fundamental changes in the business, certain investments or loans, asset sales and other customary requirements. The Company was in compliance with all such negative covenants as of September 30, 2008.

Belgian Credit Facility

The Company maintains a Belgian credit facility totaling 4.0 million Euros which is secured by a U.S. letter of credit. There are no financial covenants and the Company had no outstanding borrowings under the Belgian credit facility as of September 30, 2008. Bank guarantees of 0.9 million Euros were issued as of September 30, 2008. The maturity date of this facility is December 15, 2008. Availability under this facility was 3.1 million Euros at September 30, 2008.

United Kingdom Credit Facility

The Company maintains a United Kingdom unsecured bonds, guarantees, and indemnities facility totaling 616,000 British Pound Sterling. The bank, in its sole discretion, may cancel at any time its commitment to provide this facility. Bank guarantees of 611,924 British Pound Sterling were issued as of September 30, 2008.

Chinese Credit Facility

The Company maintains a Chinese credit facility totaling 11.0 million RMB or $1.6 million which is secured by a U.S. letter of credit provided under the Credit Facility. There are no financial covenants. The maturity date of this facility is December 26, 2008. The facility was fully utilized at September 30, 2008.

Fair Value of Debt

At September 30, 2008, the Company had $30.8 million of fixed rate Senior Convertible Notes outstanding. The fair value of these Notes at September 30, 2008 was $123.0 million. The increase in value is mainly due to the increase in the Company’s common stock price and its impact on the conversion features of the Notes. The remaining $2.9 million of current portion of long-term debt is based on the prime rates, and accordingly, the carrying value of this obligation approximates its fair value.

Maturities of Debt

The Company is obligated to make principal payments on debt outstanding at September 30, 2008 of $1.6 million in 2008, $2.9 million in 2009, and $30.8 million in 2011. See also the section entitled 5.00% Convertible Senior Notes due 2036 related to the holders’ optional conversion as of September 30, 2008 and December 31, 2007.

11.

Pensions

U.S. Plans:

For U.S. plans, the following table provides the components of net periodic pension costs of the plans for the three and nine months ended September 30, 2008 and 2007:

 

		Three Months Ended September 30						Nine Months Ended September 30
Pension Benefits (in thousands)		2008			2007			2008			2007
Service cost		$	251		$	247		$	768		$	803
Interest cost			1,146			1,146			3,544			3,498
Expected return on plan assets			(1,345	)		(1,288	)		(4,041	)		(3,746	)
Amortization of prior service cost			13			63			134			186
Net amortization			93			75			285			263
Curtailment gain			(480	)		-			(480	)		(265	)
Net periodic pension cost (benefit)		$	(322	)	$	243		$	210		$	739

18

---

Employer Contributions

In its 2007 financial statements, the Company disclosed that it expected to contribute $3.7 million to its U.S. pension plans in 2008. As of September 30, 2008, the Company has contributed $4.1 million.

Employee Relations

On July 21, 2008, the Company settled its disagreements with bargaining unit employees at its Neville Island facility located in Pittsburgh, Pennsylvania. The new agreement, which expires on July 1, 2011, includes the freezing of the defined benefit pension plan for these employees effective January 1, 2009. As a result, the Company recorded a curtailment gain of $0.5 million for the three and nine months ended September 30, 2008.

European Plans:

For European plans, the following table provides the components of net periodic pension costs of the plans for the three and nine months ended September 30, 2008 and 2007:

  

		Three Months Ended September 30						Nine Months Ended September 30
Pension Benefits (in thousands)		2008			2007			2008			2007
Service cost		$	203		$	185		$	609		$	555
Interest cost			514			434			1,542			1,302
Expected return on plan assets			(387	)		(324	)		(1,161	)		(972	)
Amortization of prior service cost			12			11			36			33
Net amortization			8			25			24			76
Net periodic pension cost		$	350		$	331		$	1,050		$	994

The expected long-term rate of return on plan assets ranges from 5.00% to 6.90% in 2008.

Employer Contributions

In its 2007 financial statements, the Company disclosed that it expected to contribute $2.5 million to its European pension plans in 2008. As of September 30, 2008, the Company contributed $1.5 million. The Company expects to contribute the remaining $0.7 million over the remainder of the year.

Defined Contribution Plans

The Company also sponsors a defined contribution pension plan for certain U.S. employees that permits employee contributions of up to 50% of eligible compensation in accordance with Internal Revenue Service guidance. Under this defined contribution plan, the Company makes a fixed contribution of 2% of eligible employee compensation on a quarterly basis and matches contributions made by each participant in an amount equal to 100% of the employee contribution up to a maximum of 2% of employee compensation. In addition, each of these employees is eligible for an additional discretionary Company contribution of up to 4% of employee compensation based upon annual Company performance at the discretion of the Company’s Board of Directors. Employer matching contributions for non-represented employees vest after two years of service. For bargaining unit employees at the Catlettsburg, Kentucky facility, the Company contributes a maximum of $25.00 per month to the plan. For bargaining unit employees at the Columbus, Ohio facility, the Company began making contributions to the USW 401(k) Plan of $1.15 per actual hour worked for eligible employees when their former Barnebey Sutcliffe Employee USWA Local 23.08 401(k) Plan was discontinued and their defined benefit pension plan was frozen effective April 30, 2007. The Company realized a $0.3 million curtailment gain as a result of freezing the aforementioned plan. For bargaining unit employees at the Neville Island facility, the Company, effective January 1, 2009, will begin making contributions of $1.40 per actual hour worked to the defined contribution pension plan (Thrift/Savings Plan) for eligible employees when their defined benefit pension plan is frozen. Employer matching contributions for bargaining unit employees vest immediately. Total expenses related to the defined contribution plans were $0.5 million and $0.6 million for the three months ended September 30, 2008 and 2007, respectively and $1.6 million and $1.4 million for the nine months ended September 30, 2008 and 2007, respectively.

19

---

12. Earnings Per Share

Computation of basic and diluted net income per common share from continuing operations is performed as follows:

		Three Months Ended September 30,						Nine Months Ended September 30,
(Dollars in thousands, except per share amounts)		2008			2007			2008			2007
Income from continuing operations available to common shareholders		$	6,536		$	5,044		$	27,227		$	11,540
Income (loss) from discontinued operations available to common shareholders			(211	)		(96	)		3,236			(96	)
Net income available to common shareholders		$	6,325		$	4,948		$	30,463		$	11,444
Weighted Average Shares Outstanding
Basic			44,624,502			40,357,325			41,818,152			40,289,260
Effect of Dilutive Securities			9,173,233			10,000,854			10,717,931			7,035,183
Diluted			53,797,735			50,358,179			52,536,083			47,324,443
Net income per common share
Basic:
Income from continuing operations		$	.15		$	.12		$	.65		$	.28
Income (loss) from discontinued operations			-			-			.08			-
Total		$	.15		$	.12		$	.73		$	.28
Diluted:
Income from continuing operations		$	.12		$	.10		$	.52		$	.24
Income (loss) from discontinued operations			-			-			.06			-
Total		$	.12		$	.10		$	.58		$	.24

The stock options that were excluded from the dilutive calculations as the effect would have been antidilutive were zero and 6,100 for the three months ended September 30, 2008 and 2007, respectively, and 80,625 and 6,100 for the nine months ended September 30, 2008 and 2007, respectively.

The Company’s obligation under its Notes is to settle the par value of the Notes in cash and to settle the amount in excess of par value in its common shares. Therefore, the Company is not required to include any shares underlying the Notes in its diluted weighted average shares outstanding until the average stock price per share for the quarter exceeds the $5.10 conversion price. At such time, only the number of shares that would be issuable (under the “treasury stock” method of accounting for share dilution) will be included, which is based upon the amount by which the average stock price exceeds the conversion price. For the first $0.50 per share that the Company’s average stock price exceeds the $5.10 conversion price of the Notes, it will include approximately 1,300,000 additional shares in its diluted share count. For the second $0.50 per share that the Company’s average stock price exceeds the $5.10 conversion price, it will include approximately 1,100,000 additional shares, for a total of approximately 2,400,000 shares in its diluted share count, and so on, with the additional shares’ dilution decreasing for each $1 per share that the Company’s average stock price exceeds $5.10 if the stock price rises further above $5.10 (see table below). As of September 30, 2008, the average stock price for the 90-day trading period was $18.15, which was higher than the conversion price of $5.10, therefore, 7,948,865 shares were included in the dilutive share calculation for the period of time the Notes were outstanding for the period ended September 30, 2008.

20

---

"Treasury Stock" Method of Accounting for Share Dilution

Conversion Price:		$	5.10
Number of underlying shares:			6,044,117
Principal Amount:		$	30,825,000

Formula:	Number of extra dilutive shares created
	=((Stock Price * Underlying Shares) - Principal)/Stock Price
Condition:	Only applies when share price exceeds $5.10

											Share Dilution
								Included  in			Per $1.00  Share
Stock Price		Conversion Price			Price Difference			Share Count			Price  Difference
$      5.10		$	5.10		$	0.00			-			-
$      5.60		$	5.10		$	0.50			539,653			1,079,306
$      6.10		$	5.10		$	1.00			990,838			990,838
$      7.10		$	5.10		$	2.00			1,702,568			851,284
$      8.10		$	5.10		$	3.00			2,238,561			746,187
$      9.10		$	5.10		$	4.00			2,656,754			664,189
$    10.10		$	5.10		$	5.00			2,992,137			598,427
$    11.10		$	5.10		$	6.00			3,267,090			544,515
$    12.10		$	5.10		$	7.00			3,496,596			499,514
$    13.10		$	5.10		$	8.00			3,691,064			461,383
$    14.10		$	5.10		$	9.00			3,857,947			428,661
$    15.10		$	5.10		$	10.00			4,002,726			400,273
$    16.10		$	5.10		$	11.00			4,129,521			375,411
$    17.10		$	5.10		$	12.00			4,241,485			353,457
$    18.10		$	5.10		$	13.00			4,341,078			333,929
$    19.10		$	5.10		$	14.00			4,430,243			316,446
$    20.10		$	5.10		$	15.00			4,510,535			300,702

21

---

13.	Other Financial Information

As described in Note 10, the Company had issued $75.0 million in aggregate principal amount of 5.00% Convertible Senior Notes due in 2036. The Notes are fully and unconditionally guaranteed by certain of our domestic subsidiaries on a senior unsecured basis. All of the subsidiary guarantors are 100% owned by the parent company and the guarantees are joint and several. The Subsidiary Guarantees are general unsecured senior obligations of the Subsidiary Guarantors and rank equally in right of payment with all of the existing and future senior indebtedness of the Subsidiary Guarantors. If the Company fails to make payment on the Notes, the Subsidiary Guarantors must make them instead. The Notes are effectively subordinated to any indebtedness of the Company’s non-guarantor subsidiaries. The Notes are effectively junior to all of the Company’s existing and future secured indebtedness to the extent of the value of the assets securing such indebtedness.

Condensed consolidating unaudited financial information for Calgon Carbon Corporation (issuer); Calgon Carbon Investments Inc., Chemviron Carbon Ltd., Waterlink (UK) Holdings Ltd., Sutcliffe Speakman Ltd., Lakeland Processing Ltd., Charcoal Cloth (International) Ltd., BSC Columbus LLC, and CCC Columbus LLC (guarantor subsidiaries); and the non-guarantor subsidiaries are as follows:

		Condensed Consolidating Statements of Operations Three months ended September 30, 2008
		Issuer			Guarantor  Subsidiaries			Non-Guarantor  Subsidiaries			Consolidating  and Eliminating  Entries			Consolidated
Net sales		$	94,802		$	11,686		$	15,483		$	(22,902	)	$	99,069
Cost of products sold			66,681			9,834			11,848			(22,902	)		65,641
Depreciation and amortization			3,455			400			181			-			4,036
Selling, general and administrative expenses			14,010			1,255			1,021			-			16,286
Research and development expense			940			85			-			-			1,025
Interest (income) expense – net			4,133			(3,333	)		(218	)		-			582
Other expense – net			860			(19	)		316			-			1,157
Provision for income taxes			3,386			10			628			-			4,024
Results of affiliates’ operations			4,988			(543	)		-			(4,445	)		-
Equity in income from equity investments			-			-			38			-			38
Income (loss) from continuing operations			6,325			2,911			1,745			(4,445	)		6,536
Loss from discontinued operations			-			-			(211	)		-			(211	)
Net income (loss)		$	6,325		$	2,911		$	1,534		$	(4,445	)	$	6,325

		Condensed Consolidating Statements of Operations Nine months ended September 30, 2008
		Issuer			Guarantor  Subsidiaries			Non-Guarantor  Subsidiaries			Consolidating  and Eliminating  Entries			Consolidated
Net sales		$	278,257		$	35,575		$	40,471		$	(56,717	)	$	297,876
Cost of products sold			194,365			27,681			32,918			(56,717	)		198,247
Depreciation and amortization			10,378			1,232			551			-			12,161
Selling, general and administrative expenses			40,639			3,865			3,133			-			47,637
Research and development expense			2,815			304			-			-			3,119
Gain on AST Settlement			(9,250	)		-			-			-			(9,250	)
Interest (income) expense – net			13,021			(10,171	)		(650	)		-			2,200
Other expense – net			787			424			516			-			1,727
Provision for income taxes			13,593			475			1,077			-			15,145
Results of affiliates’ operations			18,554			921			-			(19,475	)		-
Equity in income from equity investments			-			-			337			-			337
Income (loss) from continuing operations			30,463			12,686			3,553			(19,475	)		30,463
Income from discontinued operations			-			-			3,236			-			3,236
Net income (loss)		$	30,463		$	12,686		$	6,789		$	(19,475	)	$	30,463

22

---

 

		Condensed Consolidating Statements of Operations Three months ended September 30, 2007
		Issuer			Guarantor  Subsidiaries			Non-Guarantor  Subsidiaries			Consolidating and  Eliminating  Entries			Consolidated
Net sales		$	73,534		$	11,731		$	8,805		$	(9,209	)	$	84,861
Cost of products sold			52,776			8,486			5,589			(9,209	)		57,642
Depreciation and amortization			3,561			276			590			-			4,427
Selling, general and administrative expenses			12,839			1,388			1,079			-			15,306
Research and development expense			873			92			1			-			966
Interest (income) expense – net			5,277			(4,052	)		(317	)		-			908
Other expense – net			161			515			(194	)		-			482
Provision (benefit) for income taxes			(1,075	)		211			1,260			-			396
Results of affiliates’ operations			5,781			(163	)		-			(5,618	)		-
Equity income (loss) from equity investments			-			-			311			(1	)		310
Income (loss) from continuing operations			4,903			4,652			1,108			(5,619	)		5,044
Income (loss) from discontinued operations			45			(141	)		-			-			(96	)
Net income (loss)		$	4,948		$	4,511		$	1,108		$	(5,619	)	$	4,948

		Condensed Consolidating Statements of Operations Nine months ended September 30, 2007
		Issuer			Guarantor  Subsidiaries			Non-Guarantor  Subsidiaries			Consolidating and  Eliminating  Entries			Consolidated
Net sales		$	220,765		$	34,822		$	36,576		$	(35,844	)	$	256,319
Cost of products sold			158,338			26,330			26,798			(35,844	)		175,622
Depreciation and amortization			10,475			821			1,723			-			13,019
Selling, general and administrative expenses			38,046			4,012			2,863			-			44,921
Research and development expense			2,424			277			-			-			2,701
Interest (income) expense – net			15,783			(11,932	)		(785	)		-			3,066
Other expense – net			859			1,008			(574	)		-			1,293
Provision for income taxes			3,300			889			1,734			-			5,923
Results of affiliates’ operations			19,859			2,017			-			(21,876	)		-
Equity in income from equity investments			-			-			1,766			-			1,766
Income (loss) from continuing operations			11,399			15,434			6,583			(21,876	)		11,540
Income from (loss) discontinued operations			45			(141	)		-			-			(96	)
Net income (loss)		$	11,444		$	15,293		$	6,583		$	(21,876	)	$	11,444

23

---

Condensed Consolidating Balance Sheets

September 30, 2008

		Issuer			Guarantor  Subsidiaries			Non-Guarantor  Subsidiaries			Consolidating and  Eliminating  Entries			Consolidated
Cash and cash equivalents		$	23,774		$	3,059		$	21,570		$	(11,140	)	$	37,263
Receivables			52,732			13,227			4,706			(7,529	)		63,136
Inventories			72,909			7,778			7,636			61			88,384
Other current assets			19,564			1,721			3,796			-			25,081
Total current assets			168,979			25,785			37,708			(18,608	)		213,864
Intercompany accounts receivable			55,580			189,122			4,732			(249,434	)		-
Property, plant, and equipment, net			99,398			6,920			8,022			-			114,340
Intangibles			3,742			2,695			-			-			6,437
Goodwill			16,674			7,892			2,708			-			27,274
Equity investments			262,957			101,975			9,845			(365,889	)		8,888
Other assets			3,650			1,125			4,618			-			9,393
Total assets		$	610,980		$	335,514		$	67,633		$	(633,931	)	$	380,196
Short-term debt		$	-		$	-		$	1,606		$	-		$	1,606
Current portion of long-term debt			32,919			-			-			-			32,919
Accounts payable			35,023			17,434			3,072			(12,116	)		43,413
Other current liabilities			21,886			690			1,154			(12,834	)		10,896
Total current liabilities			89,828			18,124			5,832			(24,950	)		88,834
Intercompany accounts payable			179,575			50,317			13,247			(243,139	)		-
Other non-current liabilities			89,640			7,989			10,017			(68,221	)		39,425
Shareholders' equity			251,937			259,084			38,537			(297,621	)		251,937
Total liabilities and shareholders' equity		$	610,980		$	335,514		$	67,633		$	(633,931	)	$	380,196

24

---

Condensed Consolidating Balance Sheets

December 31, 2007

		Issuer			Guarantor  Subsidiaries			Non-Guarantor Subsidiaries			Consolidating and  Eliminating  Entries			Consolidated
Cash and cash equivalents		$	20,802		$	3,683		$	25,930		$	(20,111	)	$	30,304
Receivables			47,184			15,259			5,004			(9,899	)		57,548
Inventories			67,501			8,221			5,525			33			81,280
Other current assets			18,015			1,334			1,197			-			20,546
Total current assets			153,502			28,497			37,656			(29,977	)		189,678
Intercompany accounts receivable			57,071			175,462			2,138			(234,671	)		-
Property, plant, and equipment, net			90,435			7,263			7,814			-			105,512
Intangibles			4,586			3,174			-			-			7,760
Goodwill			16,674			8,337			2,834			-			27,845
Equity investments			246,633			102,187			9,151			(349,378	)		8,593
Other assets			4,908			1,313			2,531			-			8,752
Total assets		$	573,809		$	326,233		$	62,124		$	(614,026	)	$	348,140
Short-term debt		$	-		$	-		$	1,504		$	-		$	1,504
Current portion of long-term debt			62,507			-			-			-			62,507
Accounts payable			33,424			19,914			3,417			(13,592	)		43,163
Other current liabilities			33,219			299			2,592			(23,523	)		12,587
Total current liabilities			129,150			20,213			7,513			(37,115	)		119,761
Intercompany accounts payable			168,342			48,144			11,079			(227,565	)		-
Long-term debt			12,925			-			-			-			12,925
Other non-current liabilities			91,143			8,782			11,350			(68,070	)		43,205
Shareholders' equity			172,249			249,094			32,182			(281,276	)		172,249
Total liabilities and shareholders' equity		$	573,809		$	326,233		$	62,124		$	(614,026	)	$	348,140

25

---

Condensed Consolidating Statements of Cash Flows

Nine months ended September 30, 2008

		Issuer			Guarantor  Subsidiaries			Non-Guarantor Subsidiaries			Consolidating and  Eliminating  Entries			Consolidated
Net cash provided by (used in) operating activities		$	11,203		$	13,177		$	(2,004	)	$	1,528		$	23,904
Investing activities:
Property, plant and equipment expenditures			(19,248	)		(1,036	)		(357	)		-			(20,641	)
Investment (in) from affiliates			-			1,092			(1,092	)		-			-
Other			404			176			-			-			580
Net cash (used in) provided by investing activities			(18,844	)		232			(1,449	)		-			(20,061	)
Financing activities:
Net borrowings (repayments)			(8,971	)		-			-			8,971			-
Intercompany and equity transactions			12,705			(11,484	)		(1,221	)		-			-
Other			3,842			-			-			-			3,842
Excess tax benefit for stock-based compensation			1,958			-			-			-			1,958
Net cash provided by (used in) financing activities			9,534			(11,484	)		(1,221	)		8,971			5,800
Effect of exchange rate changes on cash and cash equivalents			1,079			(2,549	)		314			(1,528	)		(2,684	)
Increase (decrease) in cash and cash equivalents			2,972			(624	)		(4,360	)		8,971			6,959
Cash and cash equivalents, beginning of period			20,802			3,683			25,930			(20,111	)		30,304
Cash and cash equivalents, end of period		$	23,774		$	3,059		$	21,570		$	(11,140	)	$	37,263

Condensed Consolidating Statements of Cash Flows

Nine months ended September 30, 2007

		Issuer			Guarantor  Subsidiaries			Non-Guarantor  Subsidiaries			Consolidating and  Eliminating  Entries			Consolidated
Net cash (used in) provided by operating activities		$	(6,724	)	$	14,754		$	7,632		$	1,227		$	16,889
Investing activities:
Property, plant and equipment expenditures			(6,584	)		(750	)		(305	)		-			(7,639	)
Investment (in) from affiliates			-			(450	)		450			-			-
Other			187			-			-			-			187
Net cash (used in) provided by investing activities			(6,397	)		(1,200	)		145			-			(7,452	)
Financing activities:
Net borrowings (repayments)			5,576			-			1,458			(5,127	)		1,907
Intercompany and equity transactions			18,191			(13,573	)		(5,512	)		894			-
Other			1,056			-			-			-			1,056
Net cash provided by (used in) financing activities			24,823			(13,573	)		(4,054	)		(4,233	)		2,963
Effect of exchange rate changes on cash and cash equivalents			1,281			372			914			(1,227	)		1,340
Increase (decrease) in cash and cash equivalents			12,982			354			4,637			(4,233	)		13,740
Cash and cash equivalents, beginning of period			-			2,507			19,556			(16,432	)		5,631
Cash and cash equivalents, end of period		$	12,982		$	2,861		$	24,193		$	(20,665	)	$	19,371

26

---

14.	Related Party Transactions

Net sales to related parties and receivables from related parties primarily reflect sales of activated carbon products to equity investees. Generally, transactions are conducted under long-term contractual arrangements. Related party sales transactions were $2.3 million and $2.9 million for the three months ended September 30, 2008 and 2007, respectively, and $7.4 million and $6.7 million for the nine months ended September 30, 2008 and 2007, respectively. Receivables from equity investees amounted to $1.8 million and $2.4 million at September 30, 2008 and December 31, 2007, respectively. The Company’s equity investees are included in the Activated Carbon and Service segment.

15.	Income Taxes

On January 1, 2007, the Company adopted the provisions of Financial Accounting Standards Board ("FASB") Interpretation No. 48 ("FIN 48"), "Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, Accounting for Income Taxes". FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. As a result of the adoption of FIN 48 and recognition of the cumulative effect of adoption of a new accounting principle, the Company recorded a $5.7 million increase in the gross unrecognized income tax benefits and a decrease in retained earnings of $4.3 million. In conjunction with the adoption of FIN 48, the Company has classified uncertain tax positions as non-current income tax liabilities unless the amount is expected to be paid within one year.

As of September 30, 2008 and December 31, 2007, the Company’s gross unrecognized income tax benefits were $11.0 million and $12.0 million, respectively. If recognized, $10.0 million of the gross unrecognized tax benefits would have affected the effective tax rate at September 30, 2008 and December 31, 2007, respectively.

The Company estimates that approximately $4.3 million of unrecognized tax benefits will be realized in the next twelve months. The reversals would result from the lapse of the statute of limitations in various tax jurisdictions in which the Company operates.

27

---

16.	Fair Value Measurements

Effective January 1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements,” for all financial instruments accounted for at fair value on a recurring and non-recurring basis. In February 2008, the FASB issued FASB Staff Position No. 157-2 providing for a one year deferral of the provisions of SFAS No. 157 for non-financial assets and liabilities which are recognized or disclosed at fair value in the consolidated financial statements on a non-recurring basis. The Company is currently evaluating the impact of the provisions of SFAS No. 157 on its non-financial assets and liabilities. SFAS No.157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The fair value hierarchy for disclosure of fair value measurements under SFAS No. 157 is as follows:

·

Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities;

·

Level 2 - Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and

·

Level 3 - Unobservable inputs that reflect the reporting entity’s own assumptions.

The following table summarizes assets and liabilities measured at fair value on a recurring basis at September 30, 2008, as required by SFAS No. 157:

(Thousands)		Level 1			Level 2			Level 3
Assets
Natural gas derivatives		$	-		$	33		$	-
Financial derivatives			-			993			-
Liabilities
Natural gas derivatives		$	-		$	430		$	-
Financial derivatives			-			167			-

The Company’s corporate and foreign subsidiaries use foreign currency forward exchange contracts, foreign currency option contracts, and a foreign currency swap to limit the exposure of exchange rate fluctuations on certain foreign currency receivables, payables, and other known and forecasted transactional exposures for periods consistent with the expected cash flow of the underlying transactions. The contracts generally mature within eighteen months and are designed to limit exposure to exchange rate fluctuations. The Company uses cash flow hedges to limit the exposure to changes in natural gas prices. The contracts generally mature within one to thirty-six months.

17.	New Accounting Pronouncements

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS No.141(R)”), which replaces SFAS No. 141, “Business Combinations.” SFAS No. 141(R) retains the underlying concepts of SFAS No. 141 in that all business combinations are still required to be accounted for at fair value under the acquisition method of accounting, but SFAS No. 141(R) changes the method of applying the acquisition method in a number of significant aspects. Acquisition costs will generally be expensed as incurred; noncontrolling interests will be valued at fair value at the acquisition date; in-process research and development will be recorded at fair value as an indefinite-lived intangible asset at the acquisition date; restructuring costs associated with a business combination will generally be expensed subsequent to the acquisition date; and changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally will affect income tax expense. SFAS No. 141(R) is effective on a prospective basis for all business combinations for which the acquisition date is on or after the beginning of the first annual period subsequent to December 15, 2008, with an exception related to the accounting for valuation allowances on deferred taxes and acquired tax contingencies related to acquisitions completed before the effective date. SFAS No. 141(R) amends SFAS No. 109 to require adjustments, made after the effective date of this statement, to valuation allowances for acquired deferred tax assets and income tax positions to be recognized as income tax expense. Beginning January 1, 2009, the Company will apply the provisions of SFAS No. 141(R) to its accounting for applicable business combinations.

28

---

In December 2007, the FASB issued SFAS No. 160 (“SFAS No. 160”), “Noncontrolling Interests in Consolidated Financial Statements.” SFAS No. 160 changes the classification of noncontrolling (minority) interests on the balance sheet and the accounting for and reporting of transactions between the reporting entity and holders of such noncontrolling interests. Under the new standard, noncontrolling interests are considered equity and are to be reported as an element of stockholders’ equity rather than outside of equity in the balance sheet. In addition, the current practice of reporting minority interest expense or benefit also will change. Under the new standard, net income will encompass the total income before minority interest expense. The statement of operations will include separate disclosure of the attribution of income between the controlling and noncontrolling interests. Increases and decreases in the noncontrolling ownership interest amount are accounted for as equity transactions. SFAS No. 160 is effective for fiscal years beginning after December 15, 2008 and earlier application is prohibited. Upon adoption, the balance sheet and the statement of operations should be recast retrospectively for the presentation of noncontrolling interests. The other accounting provisions of the statement are required to be adopted prospectively. The Company will adopt SFAS No. 160 as required and expects that the adoption will not have a material impact on its financial position or results of operations.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities,” which changes the disclosure requirements for derivative instruments and hedging activities. SFAS No. 161 requires enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedging items are accounted for under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. This statement’s disclosure requirements are effective for fiscal years and interim periods beginning after November 15, 2008. The Company is currently evaluating the effects that SFAS No. 161 may have on its consolidated financial statement disclosures.

In May 2008, the FASB issued Financial Accounting Standard SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (SFAS No. 162). Under SFAS No. 162, the GAAP hierarchy will now reside in the accounting literature established by the FASB. SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements in conformity with GAAP. SFAS No. 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board Auditing amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.” The adoption of SFAS No. 162 is not expected to have a material impact on the Company’s consolidated financial position and results of operations.

In May 2008, the FASB issued FASB Staff Position APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement).” APB 14-1 requires the issuer to separately account for the liability and equity components of convertible debt instruments in a manner that reflects the issuer’s nonconvertible debt borrowing rate. The guidance will result in companies recognizing higher interest expense in the statement of operations due to amortization of the discount that results from separating the liability and equity components. APB 14-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The Company is currently evaluating the impact of adopting APB 14-1 on its consolidated financial statements.

29

---

Item 2.  Management’s Discussion and Analysis of Results of Operations and Financial Condition

This discussion should be read in connection with the information contained in the Unaudited Condensed Consolidated Financial Statements and Notes to the Unaudited Condensed Financial Statements.

Results of Operations

Continuing Operations

Consolidated net sales increased by $14.2 million or 16.7% and $41.6 million or 16.2% for the quarter and year-to-date periods ended September 30, 2008, respectively, versus the quarter and year-to-date periods ended September 30, 2007. Net sales for the Activated Carbon and Service segment for the quarter and year-to-date periods ended September 30, 2008 increased $12.9 million or 17.8% and $41.7 million or 19.3%, respectively, versus the comparable 2007 periods. The increase for the quarter and year-to-date periods ended September 30, 2008 was primarily due to higher demand and higher average pricing in the environmental water treatment, potable water treatment, and food markets. Also contributing to the year-to-date September 30, 2008 increase was higher average pricing in the environmental air treatment, specialty carbon, and industrial process markets. Foreign currency translation also had a positive impact of $0.9 million and $6.7 million, respectively, for the quarter and year-to-date periods ended September 30, 2008. Net sales for the Equipment segment for the quarter and year-to-date periods ended September 30, 2008 increased $2.4 million or 26.0% and $1.2 million or 4.0%, respectively, versus the similar 2007 periods. The increase for both periods ended September 30, 2008 resulted from higher demand for carbon adsorption systems and ultraviolet light systems that used ultraviolet light for disinfection of drinking water. The increase for the year-to-date period ended September 30, 2008 was partially offset by decline in demand for ion exchange systems as well as a decline for odor control equipment during the first half of 2008. Foreign currency translation also had a positive impact of $0.1 million and $0.4 million, respectively, for the quarter and year-to-date periods ended September 30, 2008. Net sales for the Consumer segment decreased $1.1 million or 33.4% and $1.3 million or 13.8%, respectively, for the quarter and year-date periods ended September 30, 2008 versus the comparable 2007 periods. The decrease for both periods was primarily due to delays in shipments for activated carbon cloth products as a result of performance issues with production equipment that was replaced during the quarter ended September 30, 2008. Also contributing to the decrease for both periods was lower demand for PreZerve® products. Foreign currency translation was comparable for the quarter and year-to-date periods ended September 30, 2008. The total positive impact of foreign currency translation on consolidated net sales for the quarter and year-to-date periods ended September 30, 2008 was $1.0 million and $7.1 million, respectively.

Net sales less cost of products sold, as a percentage of net sales, was 33.9% for the quarter ended September 30, 2008 compared to 32.1% for the similar 2007 period, a 1.8% increase or $6.4 million, and 33.4% for the year-to-date period ended September 30, 2008 compared to 31.5% for the similar 2007 period, a 1.9% increase or $18.9 million. The increase for both periods was primarily in the Activated Carbon and Service segment which was principally driven by  higher prices as well as volume for certain carbon and service products. The increase for the quarter ended September 30, 2008 also included a $0.5 million curtailment benefit associated with the freezing of the Company’s Neville Island defined benefit pension plan and an approximate $1.0 million benefit for the reduction of an accrual related to costs for Company imports related to a favorable ruling by U.S. Customs in September 2008. The Equipment segment also contributed to the increase for the quarter ended September 30, 2008 versus the similar 2007 period due to higher volume for both carbon adsorption and ultraviolet light systems. The Equipment segment was comparable for the year-to-date period ended September 30, 2008 versus the similar 2007 period. The Consumer segment declined in both the quarter and year-to-date periods ended September 30, 2008 primarily due to the lower demand for activated carbon cloth as compared to the similar 2007 periods. The Company’s cost of products sold excludes depreciation and amortization; therefore it may not be comparable to that of other companies.

The depreciation and amortization decrease of $0.4 million and $0.9 million during the quarter and year-to-date periods ended September 30, 2008 versus the comparable 2007 periods was primarily due to an increase in fully depreciated fixed assets.

30

---

Selling, general and administrative expenses for the quarter and year-to-date periods ended September 30, 2008 increased by $1.0 million and $2.7 million, respectively, versus the comparable 2007 periods. The increase for the quarter and year-to-date periods ended September 30, 2008 was primarily due to higher legal expenses related to the administrative review of the Department of Commerce’s April 2007 anti-dumping order on certain activated carbon products from China. The year-to-date period ended September 30, 2008 also increased due to an increase in employee related expenses partially offset by a recovery of receivables previously considered uncollectible. The year-to-date 2007 period included the positive effect of the settlement with Trojan Technologies regarding the Company’s Canadian UV patent.

 

Research and development expense was comparable for the quarter ended September 30, 2008 and increased $0.4 million for the year-to-date period ended September 30, 2008 versus the comparable 2007 period primarily due to increased employee related expenses and laboratory testing services.

The $9.3 million gain on AST settlement for the year-to-date period ended September 30, 2008 relates to the resolution of a lawsuit involving the Company’s purchase of the common stock of Advanced Separation Technologies Inc. (“AST”) in 1996 (See Note 8).

Other expense for the quarter and year-to-date periods ended September 30, 2008 increased $0.7 million and $0.4 million, respectively, compared to the similar 2007 periods primarily due to non-recurring costs associated with the conversion of a portion of the Company’s Senior Convertible Notes (“Notes”) as well as the negative impact of foreign exchange on the quarter.

 

Interest expense, net of interest income, for the quarter and year-to-date periods ended September 30, 2008 decreased $0.3 million and $0.9 million, respectively, versus the comparable 2007 periods. The decrease for both periods is primarily a result of the effect of capitalized interest due to increased capital spending in 2008 as well as the aforementioned conversions of Notes that occurred during the quarter ended September 30, 2008. Also contributing to the year-to-date decline is the penalty interest related to the Notes that occurred in the 2007 similar period.

The income tax provision increased $3.6 million for the quarter ended September 30, 2008 versus the quarter ended September 30, 2007. The increase was primarily due to an increase in income from continuing operations before income tax and equity in income from equity investments of $5.4 million. In addition, during the quarter ended September 30, 2007, the Company recognized $1.4 million of uncertain tax positions for which expiration of the statute of limitations occurred.

The effective tax rate for the year-to-date period ended September 30, 2008 was 36.0% compared to 37.7% for the similar 2007 period. The year-to-date period ended September 30, 2008 tax rate was higher than the statutory Federal income tax rate mainly due to permanent items and state income taxes partially offset by various tax credits. The effective tax rate for the year-to-date period ended September 30, 2007 was adversely impacted by several factors including income in certain foreign jurisdictions whose statutory tax rates exceeded the United States statutory rate, the absence of a full benefit from foreign tax credits in the United States due to an overall foreign loss, and permanent non-deductible expenses. The year-to-date September 30, 2007 tax rate was reduced by FIN 48 reserves reversed due to the expiration of the statute of limitations in taxing jurisdictions.

During the preparation of its effective tax rate, the Company uses an annualized estimate of pre-tax earnings. Throughout the year, this annualized estimate may change based on actual results and annual earnings estimate revisions. Because the Company’s permanent tax differences are relatively constant, changes in the annualized estimate may have a significant impact on the effective tax rate in future periods.

The Company provides an estimate for income taxes based on an evaluation of the underlying accounts, its tax filing positions and interpretations of existing law. Changes in estimates are reflected in the year of settlement or expiration of the statute of limitations. Under FIN 48, the Company must recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution.

31

---

Equity in income from equity investments for the quarter and year-to-date periods ended September 30, 2008 decreased $0.3 million and $1.4 million, respectively, versus the similar 2007 periods. The decrease was primarily due to higher product costs realized in 2008.

Discontinued Operations

Income (loss) from discontinued operations was $(0.2) million and $3.2 million, respectively, for the quarter and year-to-date periods ended September 30, 2008 and was primarily due to the final adjustment to the sale price of the Company’s Charcoal/Liquid business that was sold in the first quarter of 2006.

Financial Condition

Working Capital and Liquidity

Cash flows provided by operating activities were $23.9 million for the period ended September 30, 2008 compared to $16.9 million for the similar 2007 period. The $7.0 million increase is primarily due to improved earnings. The 2008 earnings include $3.2 million of non-cash earnings resulting from the determination of the final sale price of the Company’s Charcoal/Liquid business as discussed in Note 1. Partially offsetting the cash effects of increased earnings were unfavorable working capital changes of $7.5 million.

Common stock dividends were not declared or paid during the periods ended September 30, 2008 and 2007, respectively.

Total debt at September 30, 2008 was $34.5 million, a decrease of $42.4 million from December 31, 2007. The decrease was primarily the result of the conversion of a substantial portion of the Company’s Senior Convertible Notes as described below.

5.00% Convertible Senior Notes due in 2036

On August 18, 2006, the Company issued $75.0 million in aggregate principal amount of 5.00% Notes due in 2036 (the “Notes”). The Notes accrue interest at the rate of 5.00% per annum which is payable in cash semi-annually in arrears on each February 15 and August 15, which commenced February 15, 2007. The Notes will mature on August 15, 2036.

The Notes can be converted under the following circumstances: (1) during any calendar quarter (and only during such calendar quarter) commencing after September 30, 2006, if the last reported sale price of the Company’s common stock is greater than or equal to 120% of the conversion price of the Notes for at least 20 trading days in the period of 30 consecutive trading days ending on the last trading day of the preceding calendar quarter; (2) during the five business day period after any 10 consecutive trading-day period (the “measurement period”) in which the trading price per Note for each day in the measurement period was less than 103% of the product of the last reported sale price of the Company’s common stock and the conversion rate on such day; or (3) upon the occurrence of specified corporate transactions described in the Offering Memorandum. On or after June 15, 2011, holders may convert their Notes at any time prior to the maturity date. Upon conversion, the Company will pay cash and shares of its common stock, if any, based on a daily conversion value (as described herein) calculated on a proportionate basis for each day of the 25 trading-day observation period.

For the period ended December 31, 2007 and for the quarterly periods ended March 31, June 30, and September 30, 2008, respectively, the last reported sale price of the Company’s common stock was greater than 120% of the conversion price of the Notes for at least 20 trading days in the period of 30 consecutive trading days ending on the last trading day of each of the aforementioned quarterly periods. As a result, the holders of the Notes have had the right to convert the Notes into cash and shares of common stock throughout 2008. The following table represents the conversion and exchange activity that has occurred as of the period ended September 30, 2008 and through October 31, 2008:

32

---

Date		Aggregate  Principal  Amount  Outstanding  Prior to  Transaction			Aggregate  Principal  Amount of  Notes  Involved in  Transaction			Shares  Issued			Cash Paid1			Aggregate  Principal  Amount  Outstanding  after  Transaction
August 20, 2008		$	75,000,000		$	37,175,000			7,289,215		$	—		$	37,825,000
September 2, 2008			37,825,000			7,000,000			1,372,549			—			30,825,000
October 1, 2008			30,825,000			7,950,000			1,151,750			7,950,014			22,875,000
October 2, 2008			22,875,000			1,300,000			188,320			1,300,011			21,575,000
October 3, 2008			21,575,000			1,750,000			253,673			1,750,007			19,825,000
October 22, 2008			19,825,000			1,000,000			196,078			—			18,825,000
October 23, 2008			18,825,000			10,625,000			2,083,333			—			8,200,000
					$	66,800,000			12,534,9182		$	11,000,032

¹ Excluding any accrued interest paid to an exchanging holder.

² Includes approximately 3 million shares exchanged for principal amount of Notes (in lieu of cash) due to exchanges. These shares were not previously included in the Company’s diluted shares for previous quarters.

Due to the conversion rights of the holders of the Notes, the Company has classified the remaining principal amount of outstanding Notes as a current liability for the period ended September 30, 2008.

The initial conversion rate is 196.0784 shares of the Company’s common stock per $1,000 principal amount of Notes, equivalent to an initial conversion price of approximately $5.10 per share of common stock. The conversion rate is subject to adjustment in some events, including the payment of a dividend on the Company’s common stock, but will not be adjusted for accrued interest, including any additional interest. In addition, following certain fundamental changes (principally related to changes in control) that occur prior to August 15, 2011, the Company will increase the conversion rate for holders who elect to convert Notes in connection with such fundamental changes in certain circumstances. The Company considered EITF 00-27 issue 7 which indicates that if a reset of the conversion rate due to a contingent event occurs, the Company would need to calculate if there is a beneficial conversion and record if applicable. Through September 30, 2008, no contingent events have occurred.

33

---

The Company may not redeem the Notes before August 20, 2011. On or after that date, the Company may redeem all or a portion of the Notes at any time. Any redemption of the Notes will be for cash at 100% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest, including any additional interest, to, but excluding, the redemption date.

Holders may require the Company to purchase all or a portion of their Notes on each of August 15, 2011, August 15, 2016, and August 15, 2026. In addition, if the Company experiences specified types of fundamental changes, holders may require it to purchase the Notes. Any repurchase of the Notes pursuant to these provisions will be for cash at a price equal to 100% of the principal amount of the Notes to be purchased plus any accrued and unpaid interest, including any additional interest, to, but excluding, the purchase date.

The Notes are the Company’s senior unsecured obligations, and rank equally in right of payment with all of its other existing and future senior indebtedness. The Notes are guaranteed by certain of the Company’s domestic subsidiaries on a senior unsecured basis. The subsidiary guarantees are general unsecured senior obligations of the subsidiary guarantors and rank equally in right of payment with all of the existing and future senior indebtedness of the subsidiary guarantors. If the Company fails to make payment on the Notes, the subsidiary guarantors must make them instead. The Notes are effectively subordinated to any indebtedness of the Company’s non-guarantor subsidiaries. The Notes are effectively junior to all of the Company’s existing and future secured indebtedness to the extent of the value of the assets securing such indebtedness.

The Company sold the Notes to the original purchaser at a discount of $3.3 million that is being amortized over a period of five years. The Company incurred original issuance costs of $1.5 million which have been deferred and are being amortized over a five year period. The Company reclassified $1.2 million of the discount and $0.2 million of issuance costs to additional paid in capital as a result of the aforementioned conversions and exchanges of Notes that occurred during the three and nine month periods ended September 30, 2008. The Company will continue to amortize the respective remaining balances over the remaining five year period or the date of conversion/exchange, if sooner. As of the nine month period ended September 30, 2008, the Company recorded interest expense of $3.0 million related to the Notes, of which $0.4 million related to the amortization of the discount.

Credit Facility

On August 14, 2008, the Company entered into a third amendment to its Credit Facility (the “Third Amendment”). The Third Amendment permits borrowings in an amount up to $60.0 million and includes a separate U.K. sub-facility and a separate Belgian sub-facility. The Credit Facility permits the total revolving credit commitment to be increased up to $75.0 million. The facility matures on May 15, 2011. Availability for domestic borrowings under the Credit Facility is based upon the value of eligible inventory, accounts receivable and property, plant and equipment, with separate borrowing bases to be established for foreign borrowings under a separate U.K. sub-facility and a separate Belgian sub-facility. Availability under the Credit Facility is conditioned upon various customary conditions.

The Credit Facility is secured by a first perfected security interest in substantially all of the Company’s assets, with limitations under certain circumstances in the case of capital stock of foreign subsidiaries. Certain of the Company’s domestic subsidiaries unconditionally guarantee all indebtedness and obligations related to domestic borrowings under the Credit Facility. The Company and certain of its domestic subsidiaries also unconditionally guarantee all indebtedness and obligations under the U.K. sub-facility.

As of September 30, 2008, the collateral value of assets pledged was $57.6 million. The collateral value as of September 30, 2008 for domestic, U.K., and Belgian borrowers were $48.4 million, $4.8 million, and $4.4 million, respectively. The Credit Facility contains a fixed charge coverage ratio covenant which becomes effective when total domestic availability falls below $11.0 million. As of September 30, 2008, total availability was $41.8 million. Availability as of September 30, 2008 for domestic, U.K., and Belgian borrowers was $38.7 million, $3.1 million, and zero, respectively. The Company can issue letters of credit up to $20 million of the available commitment amount under the Credit Facility. Sub-limits for letters of credit under the U.K. sub-facility and the Belgian sub-facility are $2.0 million and $6.0 million, respectively. Letters of credit outstanding at September 30, 2008 totaled $15.8 million.

34

---

The Credit Facility interest rate is based upon Euro-based (“LIBOR”) rates with other interest rate options available. The applicable Euro Dollar margin in effect when the Company is in compliance with the terms of the facility ranges from 1.50% to 2.50% and is based upon the Company’s overall availability under the Credit Facility. The unused commitment fee is equal to 0.375% per annum, which can increase to 0.50%, and is based upon the unused portion of the revolving commitment.

The Credit Facility contains a number of affirmative and negative covenants. For the period ended September 30, 2008, the last reported sale price of the Company’s common stock was greater than 120% of the conversion price of the Notes for at least 20 trading days in the period of 30 consecutive trading days ended September 30, 2008. As a result, as of September 30, 2008, the holders of the Notes have the right to convert the Notes into cash and shares of common stock. Included in the Credit Facility, is a provision which permits the conversion of all $75.0 million of the Company’s Notes. The Credit Facility also includes a provision for up to $3.0 million of letters of credit under the Company’s U.S., Belgium, and UK sub-limits that can be issued having expiration dates that are more than one year but not more than three years after the date of issuance.

The negative covenants provide for certain restrictions on possible acts by the Company related to matters such as additional indebtedness, certain liens, fundamental changes in the business, certain investments or loans, asset sales and other customary requirements. The Company was in compliance with all such negative covenants as of September 30, 2008.

Contractual Obligations

The Company is obligated to make future payments under various contracts such as debt agreements, lease agreements, and unconditional purchase obligations. At September 30, 2008, the changes in the Company’s contractual obligations that occurred since December 31, 2007 include a change in one of its purchase obligations, a reclassification of long-term debt to current portion of long-term debt, conversion of a portion of the Notes, and the related change in interest. There have been no other changes in the Company’s contractual obligations since December 31, 2007. The following table represents the significant cash contractual obligations and other commercial commitments as of September 30, 2008.

					Due in
(Thousands)		2008			2009			2010			2011			2012			Thereafter			Total
Short-term debt		$	1,606		$	-		$	-		$	-		$	-		$	-		$	1,606
Current portion of Long-term debt*			-			2,925			-			29,994			-			-			32,919
Interest on Notes			2,825			991			991			626			-			-			5,433
Operating leases			3,733			3,009			2,409			1,921			1,798			4,711			17,581
Unconditional purchase obligations**			24,112			23,776			22,253			19,710			1,575			1,838			93,264
Total contractual cash Obligations		$	32,276		$	30,701		$	25,653		$	52,251		$	3,373		$	6,549		$	150,803

*The 2011 maturity excludes debt discount of $0.8 million. During October 2008, the Company completed exchanges and conversions for approximately $22.6 million of the notes-see additional discussion in Note 10.

**Primarily for the purchase of raw materials, transportation, and information systems services.

 

The long-term tax payable of $11.9 million related to FIN 48 has been excluded from the above table due to the fact that the Company is unable to determine the period in which the liability will be resolved.

The cash needs of each of the Company’s reporting segments are principally covered by the segment’s operating cash flow on a stand alone basis. Any additional needs will be funded by cash on hand or borrowings under the Company’s credit facility. Specifically, the Equipment and Consumer segments historically have not required extensive capital expenditures; therefore, the Company believes that cash on hand and borrowings will adequately support each of the segments cash needs.

35

---

Capital Expenditures and Investments

The Company currently estimates that it will spend approximately $130 million on capital expenditures for property, plant and equipment during the period 2009 through 2011. Capital expenditures for property, plant and equipment totaled $20.6 million for the nine months ended September 30, 2008 compared to expenditures of $7.6 million for the same period in 2007. The expenditures for the period ended September 30, 2008 consisted primarily of improvements to the Company’s manufacturing facilities of $16.7 million, of which $8.8 million was directly related to the planned re-start of a previously idled production line at the Company’s Catlettsburg, Kentucky facility, $1.5 million related to improvements to information systems, and customer capital of $1.9 million. The expenditures for the period ended September 30, 2007 consisted primarily of improvements to the Company’s manufacturing facilities of $6.5 million and customer capital of $0.3 million. Capital expenditures for 2008 are projected to be approximately $34.5 million. The Company expects to fund capital expenditures from operating cash flows, cash on hand, and borrowings.

In January 2006, the Company announced the temporary idling of its reactivation facility in Blue Lake, California in an effort to reduce operating costs and to more efficiently utilize the capacity at its other existing locations. It is management’s intention to resume operation of the plant in November 2008.

Regulatory and Legal Matters

Each of the Company’s U.S. production facilities has permits and licenses regulating air emissions and water discharges. All of the Company’s U.S. production facilities are controlled under permits issued by local, state and federal air pollution control entities. The Company is presently in compliance with these permits. Continued compliance will require administrative control and will be subject to any new or additional standards. In May 2003, the Company partially discontinued operation of one of its three activated carbon lines at its Catlettsburg, Kentucky facility known as B-line. The Company will need to install pollution abatement equipment in order to remain in compliance with state requirements regulating air emissions before resuming full operation of this line. On January 25, 2008, the Company announced its intention to re-start B-line. The Company estimates it will invest approximately $20.2 million in this line and that the project is estimated to be completed in early 2009.

In conjunction with the February 2004 purchase of substantially all of Waterlink’s operating assets and the stock of Waterlink’s U.K. subsidiary, several environmental studies were performed on the Columbus, Ohio property by environmental consulting firms which identified and characterized areas of contamination. In addition, these firms identified alternative methods of remediating the property, identified feasible alternatives and prepared cost evaluations of the various alternatives. The Company concluded from the information in the studies that a loss at this property is probable and recorded the liability as a component of noncurrent other liabilities in the Company’s consolidated balance sheet. At December 31, 2007, the balance recorded was $4.0 million. Liability estimates are based on an evaluation of, among other factors, currently available facts, existing technology, presently enacted laws and regulations, and the remediation experience of other companies. The Company has not incurred any environmental remediation expense during the periods ended September 30, 2008 and 2007. It is reasonably possible that a change in the estimate of this obligation will occur as remediation preparation and remediation activity commences. The ultimate remediation costs are dependent upon among other things, the requirements of any state or federal environmental agencies, the remediation methods employed, the final scope of work being determined, and the extent and types of contamination which will not be fully determined until experience is gained through remediation and related activities. The accrued amounts are expected to be paid out over the course of several years once work has commenced. The Company has yet to make a determination as to when it will proceed with remediation efforts.

36

---

In January 2007, the Company received a Notice of Violation (“NOV”) from the United States Environmental Protection Agency, Region 4 (“EPA”) alleging multiple violations of the Federal Resource Conservation and Recovery Act (“RCRA’) and corresponding EPA and Kentucky Department of Environmental Protection (“KYDEP”) hazardous waste management rules and regulations. The alleged violations are based on findings and information provided by the Company during and after a Multi Media Compliance Evaluation inspection of the Company’s Big Sandy Plant, located in Catlettsburg, Kentucky, conducted by the EPA and the KYDEP in September 2005, and concern the hazardous waste spent activated carbon regeneration facility located at the Big Sandy Plant. The Company submitted its initial written response to the NOV in June 2007. In August 2007, the EPA notified the Company that it believes there were significant RCRA violations that are unresolved by the information in the Company’s submittals. The Company met with EPA in December 2007 to discuss the alleged violations. Since that time it has had numerous telephone conferences and exchanges of correspondence in an attempt to resolve the issues as to alleged continuing violations raised by the January 2007 NOV. The Company has also taken action to remediate certain of the alleged violations and believes that the number of unresolved issues as to alleged continuing violations has been reduced substantially. The EPA can take formal enforcement action to require the Company to remediate any or all of the unresolved alleged continuing violations which could require the Company to incur substantial additional costs. The EPA can also take formal enforcement action to impose substantial civil penalties with respect to violations cited in the NOV, including those which have been resolved. The Company is awaiting further response from the EPA and cannot predict with any certainty the probable outcome of this matter or range of potential loss, if any.

On July 3, 2008, the EPA verbally informed the Company that there are a number of unresolved RCRA violations at the Big Sandy Plant which may render the facility unacceptable to receive spent carbon for reactivation from sites regulated under the Comprehensive Environmental Response, Compensation and Liability ACT (“CERCLA”) pursuant to the CERCLA Off-Site Rule. The CERCLA Off-Site Rule unacceptability determination applies only to materials from CERCLA regulated response actions, and if it goes into effect, it would not prohibit the Big Sandy Plant from receiving hazardous waste spent carbons from other sources. The Company received written notice of the unacceptability determination on July 14, 2008 (the “Notice”). The Notice alleges multiple violations of RCRA and four releases of hazardous waste. The alleged violations and releases stem from the September 2005 multi-media compliance inspections, and are the same as alleged in the January 2007 NOV described in the preceding paragraph. The Company originally had until September 1, 2008 to demonstrate to the EPA that the alleged violations and releases were not continuing, or else the Big Sandy Plant would not have been able to receive spent carbon from CERCLA sites until the EPA determines that the facility is again acceptable to receive such CERCLA wastes. The Company met with the EPA on August 25, 2008 and the Company submitted a written response to the Notice prior to the meeting. Following this meeting, the EPA extended the September 1 deadline to November 3, 2008 and then extended the deadline to January 9, 2009 before the unacceptability determination goes into effect, due to the late delivery of the Notice and the late date of the conference with the EPA. The Company believes that the indefinite suspension or termination of its ability to receive and reactivate spent carbon from CERCLA sites would not have a material adverse effect on its financial position or results of operations.

The August 25, 2008 EPA meeting was attended by representatives of the EPA’s Suspension and Debarment Division (“SDD”). On August 28, 2008, the Company received a letter from the SDD requesting additional information from the Company in connection with the SDD’s evaluation of the Company’s potential “business risk to the Federal Government,” noting that the Company engages in procurement transactions with the Federal Government, with respect to activities authorized pursuant to, or funded by, CERCLA. The Company has provided the SDD with all information requested by the letter. The SDD can suspend or debar a company from sales to the Federal Government directly or indirectly through government contractors or with respect to projects funded by the Federal Government. The SDD has not indicated whether or not it intends to take further action in this matter. The Company believes that there is no basis for suspension or debarment on the basis of the matters asserted by the EPA in the Notice or otherwise.

In June 2007, the Company received a Notice Letter from the New York State Department of Environmental Conservation (“NYSDEC”) stating that the NYSDEC has determined that the Company is a Potentially Responsible Party (“PRP”) at the Frontier Chemical Processing Royal Avenue Site in Niagara Falls, New York (the “Site”). The Notice Letter requests that the Company and other PRPs develop, implement and finance a remedial program for Operable Unit #1 at the Site. Operable Unit #1 consists of overburden soils and overburden and upper bedrock groundwater. The selected remedy is removal of above grade structures and contaminated soil source areas, installation of a cover system, and ground water control and treatment, estimated to cost between approximately $11 million and $14 million, which would be shared among the PRPs. The Company has not determined what portion of the costs associated with the remedial program it would be obligated to bear and the Company cannot predict with any certainty the outcome of this matter or range of potential loss. The Company has joined a PRP group formed to address this issue and the group is currently seeking a Consent Order with the NYSDEC on the clean up activity and approach. The Notice Letter also demands payment of all monies that the NYSDEC has already expended for investigation and remediation of the Site, but does not specify the amount that the NYSDEC has expended. The Company, as part of the PRP group, is negotiating a consent order with the NYSDEC for a supplemental investigation at the Site to collect data for the design of the soil remediation and to further characterize ground water conditions at the Site.

37

---

In July 2007, the Company received an NOV from the KYDEP alleging that the Company has violated the KYDEP’s hazardous waste management regulations in connection with the Company’s hazardous waste spent activated carbon regeneration facility located at the Big Sandy Plant in Catlettsburg, Kentucky. The NOV alleges that the Company has failed to correct deficiencies identified by the KYDEP in the Company’s Part B hazardous waste management facility permit application and related documents and directs the Company to submit a complete and accurate Part B application and related documents and to respond to the KYDEP’s comments which are appended to the NOV. The Company submitted a response to the NOV and the KYDEP’s comments in December 2007. The KYDEP has not indicated whether or not it will take formal enforcement action, and has not specified a monetary amount of civil penalties it might pursue in any such action, if any. On October 18, 2007, the Company received an NOV from the EPA related to this permit application and submitted a revised application to both the KYDEP and the EPA within the mandated timeframe. At this time the Company cannot predict with any certainty the outcome of this matter or range of loss, if any.

The Company is also subject to various environmental health and safety laws and regulations at its facilities in Belgium, China, and the United Kingdom. These laws and regulations address substantially the same issues as those applicable to the Company in the United States. The Company believes it is presently in substantial compliance with these laws and regulations.

On March 20, 2007, the Company and ADA-ES entered into a Memorandum of Understanding ("MOU") providing for cooperation between the companies to attempt to jointly market powdered activated carbon (“PAC”) to the electric power industry for the removal of mercury from coal fired power plant flue gas. The MOU provided for commissions to be paid to ADA-ES in respect of product sales. The Company terminated the MOU effective as of August 24, 2007 for convenience. Neither party had entered into sales or supply agreements with prospective customers as of that date. On March 3, 2008, the Company entered into a supply agreement with a major U.S. power generator for the sale of powdered activated carbon products with a minimum purchase obligation of approximately $55 million over a 5 year period. ADA-ES claimed that it is entitled to commissions of all product sales under this contract, which the Company denies. On September 29, 2008, the Company filed suit in the United States District Court for the Western District of Pennsylvania for a declaratory judgment from the Court that the Company has no obligation to pay ADA-ES commissions related to the aforementioned contract or for any future sales made after August 24, 2007. On November 4, 2008, ADA-ES filed its answer and counterclaim denying the Company’s entitlement to a declaratory judgment and claiming a commission of $8.25 million.

New Accounting Pronouncements

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS No.141(R)”), which replaces SFAS No. 141, “Business Combinations.” SFAS No. 141(R) retains the underlying concepts of SFAS No. 141 in that all business combinations are still required to be accounted for at fair value under the acquisition method of accounting, but SFAS No. 141(R) changes the method of applying the acquisition method in a number of significant aspects. Acquisition costs will generally be expensed as incurred; noncontrolling interests will be valued at fair value at the acquisition date; in-process research and development will be recorded at fair value as an indefinite-lived intangible asset at the acquisition date; restructuring costs associated with a business combination will generally be expensed subsequent to the acquisition date; and changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally will affect income tax expense. SFAS No. 141(R) is effective on a prospective basis for all business combinations for which the acquisition date is on or after the beginning of the first annual period subsequent to December 15, 2008, with an exception related to the accounting for valuation allowances on deferred taxes and acquired tax contingencies related to acquisitions completed before the effective date. SFAS No. 141(R) amends SFAS No. 109 to require adjustments, made after the effective date of this statement, to valuation allowances for acquired deferred tax assets and income tax positions to be recognized as income tax expense. Beginning January 1, 2009, the Company will apply the provisions of SFAS No. 141(R) to its accounting for applicable business combinations.

38

---

In December 2007, the FASB issued SFAS No. 160 (“SFAS No. 160”), “Noncontrolling Interests in Consolidated Financial Statements.” SFAS No. 160 changes the classification of noncontrolling (minority) interests on the balance sheet and the accounting for and reporting of transactions between the reporting entity and holders of such noncontrolling interests. Under the new standard, noncontrolling interests are considered equity and are to be reported as an element of stockholders’ equity rather than outside of equity in the balance sheet. In addition, the current practice of reporting minority interest expense or benefit also will change. Under the new standard, net income will encompass the total income before minority interest expense. The statement of operations will include separate disclosure of the attribution of income between the controlling and noncontrolling interests. Increases and decreases in the noncontrolling ownership interest amount are accounted for as equity transactions. SFAS No. 160 is effective for fiscal years beginning after December 15, 2008 and earlier application is prohibited. Upon adoption, the balance sheet and the statement of operations should be recast retrospectively for the presentation of noncontrolling interests. The other accounting provisions of the statement are required to be adopted prospectively. The Company will adopt SFAS No. 160 as required and expects that the adoption will not have a material impact on its financial position or results of operations.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities,” which changes the disclosure requirements for derivative instruments and hedging activities. SFAS No. 161 requires enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedging items are accounted for under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. This statement’s disclosure requirements are effective for fiscal years and interim periods beginning after November 15, 2008. The Company is currently evaluating the effects that SFAS No. 161 may have on its consolidated financial statement disclosures.

In May 2008, the FASB issued Financial Accounting Standard SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (SFAS No. 162). Under SFAS No. 162, the GAAP hierarchy will now reside in the accounting literature established by the FASB. SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements in conformity with GAAP. SFAS No. 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board Auditing amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.” The adoption of SFAS No. 162 is not expected to have a material impact on the Company’s consolidated financial position and results of operations.

In May 2008, the FASB issued FASB Staff Position APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement).” APB 14-1 requires the issuer to separately account for the liability and equity components of convertible debt instruments in a manner that reflects the issuer’s nonconvertible debt borrowing rate. The guidance will result in companies recognizing higher interest expense in the statement of operations due to amortization of the discount that results from separating the liability and equity components. APB 14-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The Company is currently evaluating the impact of adopting APB 14-1 on its consolidated financial statements.

39

---

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Commodity Price Risk

In the normal course of its business, the Company is exposed to market risk or price fluctuations related to the production of activated carbon products. Coal and natural gas, which are significant to the manufacturing of activated carbon, have market prices that fluctuate regularly. Based on the estimated 2008 usage of coal and natural gas, a hypothetical 10% increase (or decrease) in the price of coal and natural gas, would result in an incremental pre-tax loss (or gain) of $1.9 million and $0.7 million, respectively.

To mitigate the risk of fluctuating prices, the Company has entered into long-term contracts to hedge the purchase of a percentage of the estimated need of coal and natural gas at fixed prices.

Interest Rate Risk

The Company’s current and long-term debt is based on fixed rates, rates that float with the Euro Dollar, or prime, and the carrying value approximates fair value. The Company’s senior convertible notes, which represent the majority of the Company’s outstanding debt balance at September 30, 2008 and December 31, 2007, are based on a fixed rate and therefore would not be subject to interest rate risk. A hypothetical change of 10% in the Company’s effective interest rate from September 30, 2008 and December 31, 2007 would not result in a material change to interest expense.

Foreign Currency Exchange Risk

The Company is subject to risk of price fluctuations related to anticipated revenues and operating costs, firm commitments for capital expenditures, and existing assets and liabilities denominated in currencies other than U.S. dollars. The Company enters into foreign currency forward exchange contracts and purchases options to manage these exposures. At September 30, 2008, the Company had seventy-eight derivative instruments outstanding of which sixty-one were hedges utilizing foreign currency forward exchange contracts and sixteen were cash flow hedges utilizing foreign currency option contracts for forecasted inventory purchases. A hypothetical 10% strengthening (or weakening) of the U.S. dollar against the British Pound Sterling, Canadian Dollar, and Euro at September 30, 2008 would result in an incremental pre-tax loss (or gain) of approximately $3.5 million. The foreign currency forward exchange contracts purchased during 2008 have been accounted for according to SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”).

The Company had also entered into a ten-year foreign currency swap agreement to fix the foreign exchange rate on a $6.5 million intercompany loan between the Company and its subsidiary, Chemviron Carbon Ltd. The swap agreement provides the offset for the foreign currency fluctuation and neutralizes its effect on loan payments and valuation. This swap transaction has been accounted for in accordance with SFAS No. 133.

40

---

Item 4. Controls and Procedures

Disclosure Controls and Procedures: