• We experienced increases in product and freight costs approximating $64 million in the third quarter of 2008 over the prior-year period that were significantly offset with price increases of about $50 million.

• The effective tax rate rose to 42.7% for the third quarter of 2008 from 38.4% for the year-ago quarter. The increase was attributable to a gain from a divestiture. Excluding the impacts of that gain, our effective tax rate would have been 32.0%.

• Third quarter 2008 net earnings of $57.4 million were up 57% over year-ago net earnings of $36.5 million, which was mostly attributable to a divestiture gain. Diluted earnings per share (EPS) of 41 cents were up 16 cents over the 25 cents reported in the third quarter of 2007, of which 11 cents resulted from the divestiture gain.

• Adjusted EBITDA, a measure used to determine compliance with our debt covenants, was $192.7 million for the third quarter of 2008, a 2.1% increase over year-ago Adjusted EBITDA of $188.8 million that excludes the waste coal agglomeration (synfuel) business that ended with a December 31, 2007 tax code expiration. With that synfuel business included, Adjusted EBITDA was $195.3 million in the third quarter of 2007.

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
• Free Cash Flow, defined as cash from operating activities less capital expenditures and minority interest charges, was $28.3 million in the third quarter of 2008, a reduction of $71.6 million from Free Cash Flow of $99.9 million in the year-ago period. The decrease primarily resulted from higher net working capital requirements, most notably for inventories due to accelerated cost increases and additions to support business growth in emerging geographies, and a $30 million pension contribution (made possible with proceeds from the divestiture). Net cash provided by operating activities is reconciled to Free Cash Flow as follows:

                                                           Three Months             Three Months
                                                               ended                    ended
(dollars in millions)                                   September 30, 2008       September 30, 2007
Net cash provided by operating activities               $              67.6      $             124.6
Minority interests                                                     (1.4 )                   (2.0 )
Additions to property, plant, and equipment, net                      (37.9 )                  (22.7 )

Free cash flow                                          $              28.3      $              99.9

• We monitor our goodwill for impairment indicators on an ongoing basis in addition to performing an annual goodwill impairment analysis, as required by Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets. While we currently do not see any specific impairment indicators related to the carrying value of our businesses' goodwill or other assets, the current economic environment is impacting our business results everywhere, most notably in our Paper Services segment. Were this seen to be prolonged, either from continued raw material cost escalations or declines in end market demand, the value of the goodwill related to this business could be subject to an impairment charge.

Outlook
Although third quarter hurricane impacts added substantially to the challenge, we continue to strive to achieve our previously communicated target for Adjusted EBITDA growth of about 8% over synfuel-adjusted 2007 results of $707 million. We will need strong demand from our customers to continue in the face of clearly slowing global economic conditions and weakening currencies relative to the U.S. dollar in order to approach our Adjusted EBITDA target for the year, but we will also need raw material and freight cost relief and continued cost savings execution internally. We expect our effective tax rate for the year to average out at about 32%-33%, with an effective tax rate expected to be about 30% on a going-forward basis. Free Cash Flow could exceed $200 million for the year with continued sales performance, aggressive cost control, declines in raw material costs, and working capital improvements, particularly inventories, during the fourth quarter.
Results of Operations - Consolidated
Quarter Ended September 30, 2008 Compared to the Quarter Ended September 30, 2007
Net sales for the three months ended September 30, 2008 were $1,115.5 million, an 11.8% increase over the $998.2 million reported for the quarter ended September 30, 2007. On an organic basis, which excludes the impacts of changes in foreign currency translation rates and acquisitions and divestitures, net sales were up 11.2%. Organic growth was reported in every region, with Latin America, North America, Europe/Africa/Middle East (EAME) and Asia reporting organic increases of 28.2%, 10.8%, 8.1% and 8.0%, respectively.

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Gross profit, defined as the difference between net sales and cost of product sold, of $472.7 million for the quarter ended September 30, 2008 increased by $23.7 million, or 5.3%, over the $449.0 million for the year-ago period. On an organic basis, gross profit increased by 3.7%. The improvement was mainly attributable to higher sales volumes and cost savings, partly offset by unfavorable changes in product mix and higher product and freight costs. Price increases to our customers largely offset the higher costs, but accelerated cost increases during the latter portion of the quarter contributed to a gross profit margin for the three months ended September 30, 2008 of 42.4% compared to 45.0% for the three months ended September 30, 2007.
Selling, administrative, and research expenses for the three months ended September 30, 2008 of $317.2 million rose $21.8 million, or 7.4%, from $295.4 million for the year-ago period. On an organic basis, selling, administrative, and research expenses increased 3.3%. This was mostly attributable to higher salaries and travel expenses. Lower bad debt expense partly offset these increases.
Amortization of intangible assets was $14.0 million and $15.6 million for the three months ended September 30, 2008 and 2007, respectively. Lower amortization of customer relationships, which are amortized using an accelerated method, more than offset amortization resulting from the December 2007 acquisition of Nalco Mobotec.
Business optimization expenses, representing mostly employee severance and related costs associated with the continuing redesign and optimization of business and work processes, were $10.4 million and $7.2 million for the three months ended September 30, 2008 and September 30, 2007, respectively. Gain on divestiture of $38.1 million resulted from the September 2008 sale of our Finishing Technologies unit. Proceeds from the sale were $74.1 million, net of selling and other cash expenses of $0.9 million.
Other income (expense), net was a net expense of $5.1 million and $1.9 million for the three months ended September 30, 2008 and 2007, respectively. An unfavorable change in foreign currency transaction gains and losses of $1.8 million accounted for more than half of the variation.
Net interest expense, defined as the combination of interest income and interest expense, of $61.4 million for the three months ended September 30, 2008 decreased by $5.0 million from the $66.4 million reported for the three months ended September 30, 2007. Translation rate changes due to the weaker U.S. dollar versus the euro increased interest expense by $1.1 million, and accretion of our senior discount notes was $0.8 million higher than a year ago. However, these increases were more than offset by the impact of lower interest rates on our variable rate debt.

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
The income tax provision of $43.9 million for the three months ended September 30, 2008 was favorably impacted by an increase in the recognition of benefits related to U.S. foreign income tax credits, and unfavorably impacted by an increase in the valuation allowance related to the realization of deductible temporary differences and net operating loss carryforwards in the U.K. These items are discussed in more detail in Note 10 to the condensed consolidated financial statements, included in Part I, Item 1. The income tax provision also varies from the U.S. federal statutory income tax rate of 35% primarily due to the impact of nondeductible goodwill that was a component of a divestiture gain, foreign taxes provided at other than the 35% U.S. statutory rate, U.S. state income taxes, nondeductible expenses and other permanent differences. Incremental tax on dividends received from non-U.S. subsidiaries, foreign taxes provided at other than the 35% U.S. statutory rate, U.S. state income taxes, nondeductible expenses and other permanent differences contributed to the variation between the U.S. federal statutory income tax rate and our income tax provision of $24.0 million for the three months ended September 30, 2007. Minority interest expense of $1.4 million for the three months ended September 30, 2008 was $0.6 million lower than the $2.0 million reported in the year-ago period. The impact of lower earnings by our Katayama Nalco joint venture in Japan compared to the year-ago period accounted for most of the change.
Nine Months Ended September 30, 2008 Compared to the Nine Months Ended September 30, 2007
Net sales for the nine months ended September 30, 2008 were $3,181.5 million, a 10.5% increase from the $2,878.4 million reported for the nine months ended September 30, 2007. On an organic basis, which excludes the impacts of changes in foreign currency translation rates and acquisitions and divestitures, net sales were up 7.5%. On a geographic basis, Latin America, North America, Asia and EAME reported organic growth of 13.7%, 10.2%, 7.7% and 1.0%, respectively. Gross profit, defined as the difference between net sales and cost of product sold, of $1,379.4 million for the nine months ended September 30, 2008 increased by $92.1 million, or 7.2%, over the $1,287.3 million for the nine months ended September 30,
2007. On an organic basis, gross profit increased by 3.3%. Most of the organic improvement was attributable to higher sales volumes and cost savings, partly offset by unfavorable changes in product mix and increases in product and freight costs, which exceeded price increases to our customers by $25.6 million. Gross profit margin for the nine months ended September 30, 2008 was 43.4% compared to 44.7% for the year-ago period.

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Selling, administrative, and research expenses for the nine months ended September 30, 2008 of $958.2 million increased $83.1 million, or 9.5%, from $875.1 million for the nine months ended September 30, 2007. On an organic basis, selling, administrative, and research expenses were up 3.7%. Higher salaries and travel were partly offset by lower outside consulting for work process redesign initiatives and the rationalization of our legal entity structure.
Amortization of intangible assets was $43.5 million and $46.2 million for the nine months ended September 30, 2008 and 2007, respectively. Lower amortization of customer relationships, which are amortized using an accelerated method, more than offset amortization of intangibles of Nalco Mobotec, which was acquired in December 2007.
Business optimization expenses, representing mostly employee severance and related costs associated with the continuing redesign and optimization of business and work processes, were $12.8 million and $9.5 million for the nine months ended September 30, 2008 and 2007, respectively.
Gain on divestiture of $38.1 million resulted from the September 2008 sale of our Finishing Technologies unit. Proceeds from the sale were $74.1 million, net of selling and other cash expenses of $0.9 million.
Other income (expense), net was a net expense of $12.4 million and $2.2 million for the nine months ended September 30, 2008 and 2007, respectively. The increase of $10.2 million was mostly attributable to an unfavorable change in foreign currency transaction gains and losses of $7.7 million.
Net interest expense, defined as the combination of interest income and interest expense, of $188.9 million for the nine months ended September 30, 2008 decreased by $9.5 million from the $198.4 million reported for the nine months ended September 30, 2007. Translation rate changes due to the weaker U.S. dollar versus the euro increased interest expense by $4.8 million, and accretion of our senior discount notes was $2.4 million higher than a year ago. However, lower interest rates on our variable rate debt and a slightly lower average debt level compared to the first nine months of 2007 more than offset those increases. The income tax provision of $66.4 million for the nine months ended September 30, 2008 was favorably impacted by the recognition of benefits related to certain U.S. foreign income tax credits, and unfavorably impacted by the proposed settlement of the U.S. federal tax audit of years 2003 and 2004, as well as the creation of valuation allowances related to the realization of deductible temporary differences and net operating loss carryforwards in the U.K. These items are discussed in more detail in Note 10 to the condensed consolidated financial statements, included in Part I, Item 1. The income tax provision also varies from the U.S. federal statutory income tax rate of 35% primarily due to the impact of nondeductible goodwill that was a component of a divestiture gain, the reversal of prior year state valuation allowances, the incremental tax on dividends received from non-U.S. subsidiaries, foreign taxes provided at other than the 35% U.S. statutory rate, U.S. state income taxes, nondeductible expenses and other permanent differences.

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Incremental tax on dividends received from non-U.S. subsidiaries, foreign taxes provided at other than the 35% U.S. statutory rate, U.S. state income taxes, nondeductible expenses and other permanent differences contributed to the variation between the U.S. federal statutory income tax rate and our income tax provision of $52.4 million for the nine months ended September 30, 2007. In addition, the 2007 provision included the recognition of net benefits related to settling tax positions in The Netherlands.
Minority interest expense was $4.5 million and $5.6 million for the nine months ended September 30, 2008 and 2007, respectively. The impact of lower earnings by our Katayama Nalco joint venture and our subsidiary in Saudi Arabia accounted for most of the change.
Results of Operations - Segment Reporting Quarter Ended September 30, 2008 Compared to the Quarter Ended September 30, 2007
Net sales by reportable segment for the three months ended September 30, 2008 and September 30, 2007 may be compared as follows:

                                                                                                                                Attributable to Changes
                                                                                                                               in the Following Factors
                                                      Three Months Ended                                          Currency             Acquisitions/
(dollars in millions)                    September 30, 2008        September 30, 2007         % Change           Translation           Divestitures            Organic
Industrial & Institutional Services     $              488.1       $             449.0               8.7 %                 3.6 %                 (3.5 )%             8.6 %
Energy Services                                        395.1                     326.8              20.9 %                 1.6 %                 (2.1 )%            21.4 %
Paper Services                                         203.3                     195.9               3.7 %                 3.0 %                    -                0.7 %
Other                                                   29.0                      26.5               9.5 %                 4.0 %                    -                5.5 %

Net sales                               $            1,115.5       $             998.2              11.8 %                 2.9 %                 (2.3 )%            11.2 %

The Industrial and Institutional Services division reported sales of $488.1 million for the quarter ended September 30, 2008, an 8.7% increase over the $449.0 million for the year-ago-period. Sales rose 8.6% organically, with strong double-digit growth posted in Latin America. Overall, EAME grew 9.7% organically, while North America and Asia posted 5.2% and 5.0% increases, respectively. The 3.5% decrease in sales from acquisitions/divestitures was attributable to our waste coal agglomeration (synfuel) business, which ceased with the expiration of customer tax incentives at the end of 2007, partly offset by sales of Nalco Mobotec, which was acquired in December 2007.

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
The Energy Services division reported sales of $395.1 million for the three months ended September 30, 2008, a 20.9% gain over the $326.8 million for the quarter ended September 30, 2007. Organically, sales rose 21.4%, as solid double-digit gains were posted by our Oilfield and Adomite businesses and a more modest double-digit increase was reported by Downstream, despite hurricane impacts that reduced revenues an estimated $10.0 million in the quarter. The 2.1% decrease in sales from acquisitions/divestitures primarily relates to business that has been transferred to a joint venture.
The Paper Services division reported sales of $203.3 million for the three months ended September 30, 2008, a 3.7% increase over the $195.9 million reported for the third quarter of 2007. Sales grew 0.7% organically, reflecting growth in North America, Latin America and Asia, offset by continued weakness in Western Europe.
The 5.5% organic increase in sales in our Other segment was mostly attributable to our Integrated Channels business.
Direct contribution by reportable segment for the three months ended September 30, 2008 and September 30, 2007 may be compared as follows:

                                                                                                                                 Attributable to Changes
                                                                                                                                in the Following Factors
                                                      Three Months Ended                                           Currency             Acquisitions/
(dollars in millions)                   September 30, 2008         September 30, 2007         % Change            Translation           Divestitures            Organic
Industrial & Institutional Services     $             103.6        $              98.2               5.5 %                  4.3 %                 (7.9 )%             9.1 %
Energy Services                                        74.1                       71.1               4.3 %                  1.7 %                 (2.6 )%             5.2 %
Paper Services                                         22.9                       31.6             (27.5 )%                 1.5 %                    -              (29.0 )%
Other                                                 (18.0 )                    (18.3 )             1.7 %                 (0.1 )%                (0.3 )%             2.1 %

Direct contribution of the Industrial and Institutional Services division was $103.6 million for the three months ended September 30, 2008, an increase of 5.5% over the $98.2 million reported for the three months ended September 30, 2007. Organically, higher gross profit accounted for the 9.1% increase in direct contribution, as operating expenses were up only 2.9%. The 7.9% decrease in direct contribution from acquisitions/divestitures was mostly attributable to the expiration of our synfuel business at the end of 2007.
The Energy Services division reported direct contribution of $74.1 million for the three months ended September 30, 2008, a 4.3% increase over the $71.1 million reported for the year-ago period. On an organic basis, direct contribution only grew 5.2%, as selling and service costs to support lost hurricane sales were incurred, but the sales did not materialize.

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
The Paper Services division reported direct contribution of $22.9 million for the three months ended September 30, 2008, a 27.5% decrease from the direct contribution of $31.6 million reported for the third quarter of 2007. Organically, direct contribution was down 29.0%, due to marginal sales volume growth, higher product costs, and an 8.4% organic increase in operating expenses, over half of which was attributable to bad debts.
The direct contribution loss of $18.0 million reported in Other for the three months ended September 30, 2008 represented a $0.3 million decrease from the $18.3 million direct contribution loss reported in the third quarter 2007. Nine Months Ended September 30, 2008 Compared to the Nine Months Ended September 30, 2007
Net sales by reportable segment for the nine months ended September 30, 2008 and September 30, 2007 may be compared as follows:

                                                                                                                                 Attributable to Changes
                                                                                                                                in the Following Factors
                                                       Nine Months Ended                                           Currency             Acquisitions/
(dollars in millions)                    September 30, 2008         September 30, 2007         % Change           Translation           Divestitures            Organic
Industrial & Institutional Services     $            1,391.0       $            1,285.9               8.2 %                 5.6 %                 (3.2 )%             5.8 %
Energy Services                                      1,104.8                      938.1              17.8 %                 3.1 %                 (0.7 )%            15.4 %
Paper Services                                         607.3                      577.4               5.2 %                 5.1 %                    -                0.1 %
Other                                                   78.4                       77.0               1.9 %                 5.9 %                    -               (4.0 )%

Net sales                               $            3,181.5       $            2,878.4              10.5 %                 4.6 %                 (1.6 )%             7.5 %

The Industrial and Institutional Services division reported sales of $1,391.0 million for the nine months ended September 30, 2008, an 8.2% increase over the $1,285.9 million for the nine months ended September 30, 2007. Organically, sales grew 5.8%, with double-digit growth in Latin America and more modest growth in Asia, EAME and North America at 8.2%, 5.1% and 4.0%, respectively. The growth in EAME was mostly attributable to a double-digit improvement in Emerging Markets. The 3.2% decrease in sales from acquisitions/divestitures was attributable to our now-ended waste coal agglomeration (synfuel) business, partly offset by sales of Nalco Mobotec, which was acquired in December 2007.
The Energy Services division reported sales of $1,104.8 million for the nine months ended September 30, 2008, a 17.8% gain over the $938.1 million for the year-ago period. Organically, sales rose 15.4%, with double-digit gains reported by our Oilfield and Adomite businesses, and near double-digit growth posted by our Downstream business.
The Paper Services division reported sales of $607.3 million for the nine months ended September 30, 2008, a 5.2% increase over the $577.4 million reported for the first nine months of 2007. Sales were flat on an organic basis, as declines in EAME were marginally offset by a 4.5% organic increase in Latin America and more modest improvements in Asia and North America.

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
The 4.0% organic decrease in sales in our Other segment was mostly attributable to quarter-over-quarter variations in revenue recognition. We have historically applied our corporate revenue recognition adjustments to our Other segment. These adjustments are primarily made for shipments reflected in Division results, but which were shipped late enough in the quarter that they would not have been received by customers and properly recognized as revenue in the period.
Direct contribution by reportable segment for the nine months ended September 30, 2008 and September 30, 2007 may be compared as follows:

                                                                                                                                Attributable to Changes
                                                                                                                               in the Following Factors
                                                      Nine Months Ended                                           Currency             Acquisitions/
(dollars in millions)                   September 30, 2008        September 30, 2007         % Change            Translation           Divestitures            Organic
. . .