Overview
Although overall economic conditions declined throughout the world in 2008, demand for the Company's activated carbon products and services continued to remain strong. Going forward, this is an area of uncertainty for the Company. The Company will continue to monitor the markets it serves and take appropriate actions in order to attempt to minimize the effect of any slowdown.

The Company reported net income of $38.4 million or $0.72 per diluted share, as compared to a net income of $15.3 million, or $0.31 per diluted share for 2007. Net sales increased 14.0% to $400.3 million for 2008 from $351.1 million for 2007. Selling, general and administrative expenses increased 4.6% as compared to 2007, 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. Also in 2008, the Company successfully concluded the AST litigation which began in 1998 and settled for the receipt of $9.3 million, pre-tax, which was recorded as a gain from operations in 2008. The Company was also able to reduce debt by $66.6 million to its lowest level since 1995, primarily as a result of the conversion, into common stock, of a substantial portion of the Company's Senior Convertible Notes ("Notes").

The Company also recorded income of $2.8 million, net of tax, for the final adjustment related to the 2006 sale of its Charcoal/Liquid business and has presented it as income from discontinued operations within its financial statements for the year ended December 31, 2008.

Results of Operations

2008 Versus 2007

Continuing Operations:
Consolidated net sales increased in 2008 compared to 2007 by $49.1 million or 14.0%. Sales increased in the Activated Carbon and Service segment by $46.7 million or 15.8%. The increase was primarily due to higher pricing in all markets as well as increased demand in the food, environmental air treatment, and potable water markets. Foreign currency translation had a positive impact of $2.2 million. Sales in the Equipment segment increased approximately $6.0 million or 14.4%. The increase was principally due to higher demand for ultraviolet light systems used for the disinfection of drinking water and carbon adsorption systems of approximately $6.3 million collectively. Partially offsetting this increase was a decrease in demand for ISEP® systems of $0.7 million. Foreign currency translation had a positive impact of $0.2 million. Sales for the Consumer segment decreased by $3.5 million or 24.9% due to shipment delays related to performance issues with new production equipment that limited the output of activated carbon cloth, decreased demand for activated carbon cloth and PreZerve® products, and the negative impact of foreign currency translation of $0.5 million. The total sales increase for all segments attributable to the effect of foreign currency translation was $1.9 million.

Net sales less cost of products sold, as a percent of net sales, was 33.3% in 2008 compared to 31.0% in 2007, an increase of 2.3%. The increase was primarily from the Activated Carbon and Service segment which was 33.8% in 2008 versus 31.0% in 2007, an increase of 2.8%. The increase was principally due to higher selling prices of certain activated carbon products and service. The Equipment segment was 30.6% in 2008 versus 27.7% in 2007, an increase of 2.9%. The increase was primarily due to the Company's movement to standardized product offerings and a more selective bid process. The Consumer segment reported 30.1% in 2008 versus 39.8% in 2007, a decline of 9.7% primarily due to competitive pricing pressure and manufacturing inefficiencies at its activated carbon cloth facility. The Company's cost of products sold excludes depreciation; therefore it may not be comparable to that of other companies.

Depreciation and amortization decreased by $0.5 million or 3.3% in 2008 as compared to 2007 primarily due to an increase in fully depreciated fixed assets.

Selling, general and administrative expenses increased by $2.8 million or 4.6% in 2008. The increase was principally due to higher legal expenses which were primarily related to the administrative review of the Department of Commerce's April 2007 anti-dumping order on certain activated carbon products from China as well as increased employee related expense. On a segment basis, selling, general and administrative expenses increased in 2008 by approximately $3.8 million in the Activated Carbon and Service segment which was primarily related to the aforementioned legal expenses and employee related expenses. Selling, general and administrative expenses for the Equipment segment decreased by approximately $0.9 million primarily due to decreased litigation expense related to the completion of the AST litigation and such expenses were comparable for the Consumer segment year over year.

Research and development expenses increased by $0.4 million or 11.6%. The increase was primarily due to an increase in both employee related expenses and laboratory testing services related to mercury removal from flue gas.

The $9.3 million gain on AST settlement for 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 17).

Other expense - net increased in 2008 versus 2007 by $1.3 million or 87.6% primarily due to non-recurring costs associated with the conversion of a portion of the Notes as well as the negative impact of foreign exchange.

Interest income was comparable in 2008 versus 2007.

Interest expense decreased $1.8 million or 33.3% as a result of the conversion of a substantial portion of the aforementioned Notes and the effect of capitalized interest due to increased capital spending in 2008.

Income tax expense from continuing operations for 2008 was $18.1 million as compared to $7.8 million in 2007. The effective tax rate for 2008 was 34.3% compared to 36.7% in 2007. In 2008, the Company was able to use a portion of its 2008 foreign tax credits which eliminated the need for a corresponding valuation allowance; as compared to 2007, in which all foreign tax credits were subject to a valuation allowance of 65%. This caused the Company's effective tax rate to be 4.4% lower than the 2007 effective tax rate. The 2008 effective tax rate also decreased 3.3% versus 2007 due to increased income in foreign jurisdictions where the tax rate was lower than the U.S. rate. In 2007, the Company benefited from deferred tax related adjustments for changes in tax rates which lowered the 2007 effective tax rate 5.2%. The 2008 effective tax rate also increased compared to 2007 by 0.4% due to a change in the mix of states in which the Company operated.

Equity in income of equity investments decreased in 2008 versus 2007 by $1.1 million. The decrease was principally due to higher product costs realized in 2008 by the Company's joint venture with Calgon Mitsubishi Chemical Corporation in Japan.

Discontinued Operations:
Income from discontinued operations was $2.8 million as compared to a loss from discontinued operations of $0.2 million in 2007. The 2008 results include the final adjustment to the contingent consideration received from the sale of the Company's Charcoal/Liquid business that was sold in the first quarter of 2006 (See Note 3).

2007 Versus 2006

Consolidated net sales increased in 2007 compared to 2006 by $35.0 million or 11.1%. Sales increased in the Activated Carbon and Service segment by $30.3 million or 11.4%. The increase was primarily due to higher pricing for certain activated carbon products and services. Increased demand as well as higher pricing in the industrial process and environmental air treatment markets of $3.9 million and $15.5 million, respectively, also contributed to the increase. Foreign currency translation had a positive impact of $8.3 million. Sales in the Equipment segment increased approximately $3.4 million or 9.1%. The increase was principally due to higher demand for the Company's UV and municipal odor equipment of approximately $5.0 million collectively. Partially offsetting this increase was a decrease in demand for traditional carbon adsorption equipment of $1.2 million. Foreign currency translation had a positive impact of $0.2 million. Sales for the Consumer segment increased by $1.2 million or 9.5% due to higher demand for activated carbon cloth and the positive impact of foreign currency translation of $0.8 million. The total sales increase for all segments attributable to the effect of foreign currency translation was $9.3 million.

Net sales less cost of products sold, as a percent of net sales, was 31.0% in 2007 compared to 25.1% in 2006, an increase of 5.9%. The increase was primarily from the Activated Carbon and Service segment which was 31.0% in 2007 versus 23.8% in 2006, an increase of 7.2%. The increase was principally due to higher pricing of certain activated carbon products and service. The Equipment segment was 27.7% in 2007 versus 29.9% in 2006, a 2.2% decline which was primarily related to an increase in manufacturing related costs. The Consumer segment reported 39.8% in 2007 versus 38.0% in 2006, an increase of 1.8% primarily due to volume for higher value activated carbon cloth. The Company's cost of products sold excludes depreciation; therefore it may not be comparable to that of other companies.

Depreciation and amortization decreased by $1.7 million or 8.9% in 2007 as compared to 2006 primarily due to an increase in fully depreciated fixed assets.

Selling, general and administrative expenses decreased by $0.7 million or 1.1% in 2007. The decline was primarily due to a decrease in litigation expense of $6.9 million which was principally related to the substantial completion of the Company's UV patent cases and anti-dumping petition for steam activated carbon imports from China. Partially offsetting this decrease was an increase in employee related expenses of $1.1 million, $0.6 million of bad debt expense, and $3.3 million of professional service fees principally related to accounting, tax, and Sarbanes-Oxley compliance and planning projects. The 2006 period included a $1.3 million reduction related to the change in estimate of the Company's environmental liabilities assumed in the 2004 Waterlink acquisition. On a segment basis, selling, general and administrative expenses increased in 2007 by approximately $2.9 million in the Activated Carbon and Service segment which was primarily related to higher employee related expenses. The 2006 period included the aforementioned $1.3 million reduction in the Company's environmental liabilities. Selling, general and administrative expenses for the Equipment segment decreased by approximately $3.6 million primarily due to decreased litigation expense related to the substantial completion of the UV patent cases and were comparable for the Consumer segment year over year.

Research and development expenses decreased by $0.5 million or 12.9%. The decrease was primarily due to a reduction in employee related expenses.

The gain from insurance settlement of $8.1 million in 2006 related to the claim for damage to the Company's Pearlington, Mississippi plant which was caused by Hurricane Katrina in 2005.

The Company recorded a $6.9 million impairment charge in 2006 related to the goodwill associated with the Company's UV reporting unit of its Equipment segment which is more fully described in Note 6 to the financial statements.

Interest income increased in 2007 versus 2006 by $0.9 million or 106.2% primarily as a result of the Company's higher cash balance carried throughout 2007.

Interest expense decreased in 2007 versus 2006 by $0.5 million or 7.8% as a result of lower average borrowing levels and lower average interest rates paid on the Company's borrowings in 2007 versus 2006.

Other expense - net decreased in 2007 versus 2006 by $0.8 million or 34.8% primarily due to the write-off of deferred financing fees associated with the Company's former credit facility that occurred in 2006.

Income tax expense from continuing operations for 2007 was $7.8 million as compared to a tax benefit of $2.7 million for 2006. The effective tax rate for 2007 was 36.7% compared to a rate of 22.4% for 2006. The overall increase in tax expense was caused by pre-tax earnings in 2007 compared to the pre-tax loss incurred in 2006. The effective tax rate in 2006 was significantly impacted by a non-deductible goodwill charge which caused the Company's 2006 effective tax rate to differ from the U.S. Federal statutory rate of 35% by 17.1%. During 2007, the overall tax rate did not differ significantly from the Federal statutory rate.

In part due to an overall foreign loss, the Company was unable to use its foreign tax credits and has recorded a valuation allowance related to them which, on a net basis, caused the overall tax rate to increase by 4.9% in 2007. In addition, the Company received a dividend from its Japanese joint venture which increased the tax rate by 3.5%. The Company's 2007 rate was favorably impacted by lower statutory tax rates in its foreign jurisdictions as well as other deferred tax rate adjustments.

Equity in income of equity investments increased in 2007 versus 2006 by $1.7 million. The increase was principally due to lower cost of products sold and a favorable mix for products sold by the Company's joint venture with Calgon Mitsubishi Chemical Corporation in Japan.

Discontinued Operations:
Loss from discontinued operations was $0.2 million as compared to income from discontinued operations of $1.2 million in 2006. The 2006 results include a $1.7 million gain, net of tax, related to the 2006 sales of the Company's Charcoal/Liquid and Solvent Recovery businesses.

Working Capital and Liquidity
Cash flows provided by operating activities were $25.6 million for the year ended December 31, 2008 as compared to $29.4 million for the year ended December 31, 2007. The $3.8 million decrease was primarily due to unfavorable working capital changes of $24.4 million (exclusive of debt) partially offset by improved operating results of $23.1 million, including the net $5.7 million impact of the AST settlement (See Note 17).
Total debt at December 31, 2008 was $10.4 million, a decrease of $66.6 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 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 all of the quarterly periods during the years ended December 31, 2008 and 2007, 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. During the period of August 20, 2008 through November 10, 2008, the Company converted and exchanged $69.0 million of the Notes for cash of $11.0 million and approximately 13.0 million shares of its common stock. Three million of the shares exchanged for principal amount of the Notes (in lieu of cash) were not previously included in the Company's diluted shares.

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 as of December 31, 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 December 31, 2008, no contingent events 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.

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 $0.5 million which have been deferred and are being amortized over a five year period. The Company reclassified $1.9 million of the discount and $0.3 million of issuance costs to additional paid in capital as a result of the aforementioned conversions and exchanges of Notes that occurred during the year ended December 31, 2008. The Company will continue to amortize the respective remaining balances over the remainder of the five year period or the date of conversion/exchange, if sooner. For the year ended December 31, 2008, the Company recorded interest expense of $3.2 million related to the Notes, of which $0.5 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 December 31, 2008, the collateral value of assets pledged was $57.2 million. The collateral value as of December 31, 2008 for domestic, U.K., and Belgian borrowers were $46.9 million, $4.8 million, and $5.5 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 December 31, 2008, total availability was $45.6 million. Availability as of December 31, 2008 for domestic, U.K., and Belgian borrowers was $38.3 million, $3.7 million, and $3.6 million, 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 December 31, 2008 totaled $11.6 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.

The Credit Facility contains a number of affirmative and negative covenants. As of December 31, 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 December 31, 2008. As a result, as of December 31, 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 the outstanding amount of the Company's Notes. The Credit Facility also includes a provision for up to $3.0 million of letters of credit in aggregate 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 December 31, 2008.

Contractual Obligations

The Company is obligated to make future payments under various contracts such as debt agreements, lease agreements, and unconditional purchase obligations. The Company is contractually obligated to make monthly, quarterly, and semi-annual interest payments on its outstanding debt agreements. At December 31, 2008, the weighted average effective interest rate was 4.48% and current portion of long-term borrowings totaled $8.8 million. The Company is also required to make minimum funding contributions to its pension plans which are estimated at $2.8 million for the year ended December 31, 2009. The following table represents the significant contractual cash obligations and other commercial commitments of the Company as of December 31, 2008.

                                             Due in
(Thousands)       2009          2010          2011          2012          2013         Thereafter        Total
Short-term
debt            $   1,605     $       -     $       -     $      -      $       -     $          -     $   1,605
Current
portion of
long-term
debt*               2,925             -         5,851             -             -                -         8,776
Interest on
Notes                 325           325           190             -             -                -           840
Operating
leases              5,727         5,097         4,515         4,247         3,765            7,783        31,134
Unconditional
purchase
obligations**      26,175        25,600        23,318         1,575         1,575              263        78,506
Total
contractual
cash

*The 2011 maturity excludes debt discount of $149. This amount is classified as currently payable at December 31, 2008. See Note 8.
**Primarily for the purchase of raw materials, transportation, and information systems services.

The long-term tax payable of $13.1 million, pertaining to the tax liability related to FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109" ("FIN No. 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 Company does not have any special-purpose entities or off-balance sheet financing arrangements except for the operating leases disclosed above as well as the indemnities and guarantees disclosed in Note 17.

The Company maintains qualified defined benefit pension plans (the "Qualified Plans"), which cover substantially all non-union and certain union employees in . . .