Global Economic Conditions

We are impacted in varying degrees, both positively and negatively, by fluctuations in global, regional and country economic conditions.

Global and regional economic conditions remained relatively stable in the first half of 2008. In September 2008 it became apparent that the global economy was entering into difficult times due to the financial industry crisis, which have continued into 2009. Credit markets became frozen, liquidity diminished, and business activity slowed at an extreme pace leading the global economy into its worst crisis in 60 years.

Due to the negative global economic situation and falling steel demand from key steel end-markets, such as automotive, construction, and appliances, we continue to see low global steel utilization rates in the second quarter of 2009. Based on company market information and published reports, the year to date global capacity utilization is approximately 69% compared to 88% for the same period last year. The year-to-date global capacity utilization, excluding China, is approximately 60% compared to 93% for the same period last year. According to published reports, the United States steel industry is currently operating at approximately 45% and 44% capacity utilization for the three and six months ended June 30, 2009 compared to 89% utilization for both the three and six months ended June 30, 2008.

Industrial materials demand is primarily linked with the global production of steel in an electric arc furnace and, to a lesser extent, with the total production of steel and certain other metals. During the three and six months ended June 30, 2009, global steel production, excluding China, has decreased by 34% and 35% compared to the same periods last year. China's steel production increased by 1% during the three and six months ended June 30, 2009. Global steel production decreased by 20% and 21% for the three and six months ended June 30, 2009 compared to the three and six months ended June 30, 2008.

EAF steel production has followed a similar trend as overall steel production. During the three and six months ended June 30, 2009, we estimate that EAF steel production, excluding China, decreased by 31% and 32% compared to the same periods last year. China's estimated EAF steel production increased by 1% during the three and six months ended June 30, 2009. Global EAF steel production decreased by 27% and 28% for the three and six months ended June 30, 2009 compared to the three and six months ended June 30, 2008.

Generally, changes in graphite electrode demand have tracked changes in EAF steel production. Because there has been significant inventory destocking by EAF steel manufacturers, the recent reduction in graphite electrode demand has generally preceded the EAF steel production cuts. As a result, we believe that graphite electrode industry operating rates will be significantly lower than EAF steel industry operating rates during periods of inventory destocking. During the first half of 2009, many EAF steel customers delayed making new purchases in an effort to work down existing graphite electrode inventory levels. Based on recent market indicators, there are emerging signs that graphite electrode inventory destocking will be completed by the end of the year.

Outlook

Consensus among economists is that the rate of global economic decline may be slowing. However, the financial markets remain vulnerable. A contraction in growth rates is expected for advanced economies such as the United States and Europe. While in emerging countries such as China, India, and Brazil, economists expect very low growth compared with recent historical trends.

The challenging environment of the first half of 2009 for our Industrial Materials business segment continues and we expect a similar scenario for at least the second half of 2009. However, based on company market information and published reports, it appears that steel inventory destocking may be completed by the end of the year for most major regions.

It is expected that due to the financial crisis and global economic slowdown, much of the new EAF capacity projected to be started or completed in the 2009-2011 timeframe will be postponed. However, due to economic stimulus plans and infrastructure spending announcements around the world, we believe that there may be some benefit to the steel industry.

Because our engineered solutions business crosses many markets, the negative global economy impacts each market in varying degrees. We believe our engineered solutions products will be faced with reduced demand throughout 2009.

Economic conditions and the market environment continue to be extremely volatile and uncertain. As a result, we are not able to predict at this time an outlook for the full year 2009. However, we do expect:

• Capital expenditures to be approximately $50 - $55 million; and

• Depreciation expense of approximately $35 million

Our outlook could be significantly impacted by, among other things, factors described under "Preliminary Notes - Forward Looking Statements and Risk Factors" in this Report. For a more complete discussion of these and other factors, see "Risk Factors" in the Annual Report.

Results of Operations

Three Months Ended June 30, 2009 as Compared to Three Months Ended June 30, 2008.

Consolidated. Net sales of $157.8 million in the three months ended June 30, 2009 represented a $161.7 million, or 50.6%, decrease from net sales of $319.5 million in the three months ended June 30, 2008. Net sales for both of our operating segments decreased significantly, primarily due to lower demand resulting in lower volumes across all of our product lines. Volume decreases for our industrial materials segment accounted for $162.6 million of this decrease, caused by the drastic declines in demand for steel in the second quarter of 2009 compared to the second quarter of 2008, due in part to inventory destocking by our steel customers. Our engineered solutions segment also had significant volume decreases, which totaled $17.5 million. The strengthening of the US dollar compared to the Euro caused a further decrease in sales of $3.2 million across both segments. These decreases were slightly offset by favorable price/mix and other increases of $21.6 million in the second quarter of 2009 compared to the second quarter of 2008.

Cost of sales of $112.1 million in the three months ended June 30, 2009 represented a $93.1 million, or 45.4%, decrease from cost of sales of $205.2 million in the three months ended June 30, 2008. Lower sales volumes drove $95.6 million of this decrease across both of our segments in the three months ended June 30, 2009 compared to the three months ended June 30, 2008. Higher raw material and other production costs, including utilities, coupled with changes in product mix, increased operating expenses $2.5 million for the second quarter of 2009 compared to the second quarter of 2008.

Gross profit of $45.7 million in the three months ended June 30, 2009 represented a $68.7 million, or 60%, decrease from gross profit of $114.4 million in the three months ended June 30, 2008. Gross margin decreased to 29.0% of net sales, from 35.8% in the three months ended June 30, 2008.

Research and development expenses increased $1.3 million, from $1.8 million in the three months ended June 30, 2008 to $3.1 million in the three months ended June 30, 2009. This increase was primarily due to the write off of costs incurred on projects that we determined could not be billed or collected.

Selling and administrative expenses decreased slightly to $23.1 million for the three months ended June 30, 2009 compared to $23.7 million for the three months ended June 30, 2008. This decrease was caused by lower sales commissions as a result of lower sales and the impact of cost-saving measures enacted by the company.

During the three months ended June 30, 2009, we recorded a $54.6 million charge, which included an impairment charge of $52.8 million, and our equity in losses, related to our investment in a non-consolidated affiliate.

Other expense was $3.3 million in the three months ended June 30, 2009 compared to $2.9 million in three months ended June 30, 2008. In the three months ended June 30, 2008 we incurred a $9.0 million charge for the Debenture make-whole payment that was made in conjunction with the conversion of the Debentures, offset slightly by a gain of $4.0 million on conversion. During the three months ended June 30, 2008, we had currency gains of $2.8 million, compared to currency losses of $3.0 million during the three months ended June 30, 2009. These currency gains and losses are primarily the result of our euro-denominated inter-company loans between GrafTech Finance and some of our foreign subsidiaries.

The following table presents an analysis of interest expense:

                                                                 For the Three Months
                                                                    Ended June 30,
                                                                 2008              2009
                                                                (Dollars in thousands)
Interest incurred on debt                                    $      2,999         $ 1,038
Amortization of fair value adjustments for terminated
hedge instruments                                                     (45 )           (13 )
Amortization of premium on Senior Notes                                (9 )            (3 )
Amortization of discount on Debentures                              2,204               -
Amortization of debt issuance costs                                   566             345
Interest incurred on other items                                       67              54

Total interest expense                                       $      5,782         $ 1,421

Average debt outstanding (long-term debt and the outstanding Revolver) was $75.5 million in the three months ended June 30, 2009 as compared to $282.1 million in the three months ended June 30, 2008. The average annual interest rate for these instruments, excluding amortization of issuance costs and other similar non-cash charges, was 4.3% for both the three months ended June 30, 2008 and 2009. The average debt outstanding decreased in the three months ended June 30, 2009 compared to the three months ended June 30, 2008 due primarily to the conversion of the $225.0 million Debentures which occurred during the second quarter of 2008, partially offset by higher average Revolver Facility balances during the three months ended June 30, 2009.

The provision for income taxes for the three months ended June 30, 2009 and 2008 was a tax benefit of $2.5 million on pretax loss of $39.6 million, and a tax expense of $34.3 million on pretax income of $80.1 million. The effective tax rates were 6.4% and 42.8% for the three months ended June 30, 2009 and 2008, respectively. The effective tax rate for the three months ended June 30, 2009 results from not fully realizing the benefit of the $52.8 million Seadrift impairment charge referenced above, due to the reestablishment of valuation allowances against tax attributes in the U.S.

As a result of the matters described above, net loss was $37.1 million in the three months ended June 30, 2009 as compared to income of $45.9 million in the three months ended June 30, 2008.

Segment net sales. The following table represents our net sales by segment for the three months ended June 30, 2008 and 2009:

                                            For the Three Months
                                               Ended June 30,
                                              2008          2009
                                           (Dollars in thousands)
                  Industrial materials   $      275,121   $ 129,834
                  Engineered solutions           44,417      27,940

                  Total net sales        $      319,538   $ 157,744

Our analysis of the percentage change in net sales for industrial materials and engineered solutions is set forth in the following table:

                           Volume       Price/Mix      Currency               Net Change
    Industrial materials      (59 %)            7 %          (1 %)                   (53 %)
    Engineered solutions      (39 %)            4 %          (2 %)                   (37 %)

Net sales for the industrial materials segment decreased significantly in the three months ended June 30, 2009 compared to the three months ended June 30, 2008, due to the sharp fall in demand for steel resulting from the global economic crisis and destocking of inventories by our steel customers. Currency rate fluctuations also had a negative impact on sales, driven by the strengthening of the US dollar compared to the Euro. These decreases were offset slightly by an increase in price/mix. The weighted average selling price of our melter and non-melter graphite electrodes has increased by approximately 12% in the three months ended June 30, 2009 compared to the three months ended June 30, 2008.

Net sales for engineered solutions decreased in the three months ended June 30, 2009 compared to the three months ended June 30, 2008, due to lower volumes across virtually all of our engineered solutions products. Currency rate fluctuations also had a negative impact on sales, driven by the strengthening of the US dollar compared to the Euro. These decreases were offset slightly by an increase in price/mix, primarily related to our advanced graphite materials products.

Segment operating net income. The following table represents our operating income by segment for the three months ended June 30, 2008 and 2009:

                                             For the Three Months
                                                Ended June 30,
                                              2008           2009
                                            (Dollars in thousands)
                 Industrial materials     $      79,646    $  16,369
                 Engineered solutions             8,991        3,115

                 Total operating income   $      88,637    $  19,484

Our analysis of the percentage change in segment operating costs and expenses for industrial materials and engineered solutions is set forth in the following table:

                                        Operating Costs and Expenses
                                         For the Three Months Ended
                                                  June 30,
                                           (Percentage of sales)
                                      2008          2009         Change
              Industrial materials       71 %          87 %          16 %
              Engineered solutions       80 %          89 %           9 %

Segment operating costs and expenses as a percentage of sales for industrial materials increased 16% points in the three months ended June 30, 2009. However, in total, segment operating costs and expenses decreased $82.0 million for the three months ended June 30, 2009 compared to the three months ended June 30, 2008. Operating expenses for this segment declined primarily due to lower sales volumes, which decreased costs by $84.8 million for the entire segment. The strengthening of the US Dollar across certain currencies, decreased costs an additional $1.2 million. These cost decreases were partially offset by an increase in allocated corporate expenses of $2.2 million due primarily to increased research and development costs. Increased raw material and production costs, coupled with product mix changes, resulted in an additional $1.8 million increase to operating expenses in the three months ended June 30, 2009 compared to the three months ended June 30, 2008.

Segment operating costs and expenses as a percentage of sales for engineered solutions increased by 9% points to 89%. However, total segment operating costs and expenses decreased by $10.6 million. This decline was primarily the result of lower sales volumes, which decreased operating costs by $10.8 million in the three months ended June 30, 2009 compared to the three months ended June 30, 2008. The strengthening of the US Dollar across certain currencies, primarily the Euro, decreased costs by an additional $0.7 million. These decreases in costs were partially offset by raw material and production costs increases, coupled with product mix changes, which resulted in a $0.7 million increase to operating expenses.

Six Months Ended June 30, 2009 as Compared to Six Months Ended June 30, 2008.

Consolidated. Net sales of $291.8 million in the six months ended June 30, 2009 represented a $317.7 million, or 52.1%, decrease from net sales of $609.5 million in the six months ended June 30, 2008. Net sales for both of our operating segments decreased significantly, primarily due to lower demand resulting in lower volumes across all of our product lines. Volume decreases for our industrial materials segment accounted for $316.6 million of this decrease, caused by the drastic declines in demand for steel in the first half of 2009 compared to the first half of 2008, due in part to inventory destocking by our steel customers. Our engineered solutions segment also had significant volume decreases, which totaled $30.7 million. The strengthening of the US dollar compared to the Euro caused a further decrease in sales of $9.5 million across both segments. These decreases were offset slightly by a favorable price/mix and other increases of $39.1 million in the six months ended June 30, 2009 compared to the six months ended June 30, 2008.

Cost of sales of $214.0 million in the six months ended June 30, 2009 represented a $173.1 million, or 44.7%, decrease from cost of sales of $387.1 million in the six months ended June 30, 2008. Lower sales volumes drove $175.4 million of this decrease across both of our segments, while currency impacts decreased cost of sales by $16.4 million in the six months ended June 30, 2009 compared to the six months ended June 30, 2008. These cost of sales decreases were offset by a $9.3 million charge recorded under the provisions of SFAS No. 151, which was attributable to adjustments of fixed production overheads to the costs of conversion based on normal capacity versus actual levels, due to production levels well below normal capacity in the six months ended June 30, 2009. Further, higher raw material and production costs, including utilities, coupled with changes in product mix, increased operating expenses $9.4 million for the six months ended June 30, 2009 compared to the six months ended June 30, 2008.

Gross profit of $77.8 million in the six months ended June 30, 2009 represented a $144.7 million, or 65.0%, decrease from gross profit of $222.5 million in the six months ended June 30, 2008. Gross margin decreased to 26.7% of net sales, from 36.5% in the six months ended June 30, 2008.

Research and development expenses increased $1.1 million to $5.2 million in the six months ended June 30, 2009 from $4.1 million in the six months ended June 30, 2008. This increase was primarily due to the write off of costs incurred on projects that we determined could not be billed or collected.

Selling and administrative expenses decreased slightly to $44.7 million for the six months ended June 30, 2009 compared to $46.3 million for the six months ended June 30, 2008. This decrease was caused by lower sales commissions as a result of lower sales and the impact of cost-saving measures enacted by the company, offset slightly by higher bad debt costs.

During the six months ended June 30, 2009, we recorded a $53.4 million charge, which included an impairment charge of $52.8 million, and our equity in losses, related to our investment in a non-consolidated affiliate.

We recorded other income of $2.3 million in the six months ended June 30, 2009 compared to expense of $24.0 million in six months ended June 30, 2008. During the six months ended June 30, 2008, we incurred a $9.0 million charge for the Debenture make-whole payment, which was offset slightly by a $4.0 million gain at conversion. During the six months ended June 30, 2008, we redeemed $125 million of the outstanding principal of our Senior Notes, which resulted in a $4.7 million loss on the extinguishment

of debt. We incurred currency losses of $12.7 million in the six months ended June 30, 2008, compared to currency gains of $3.4 million in the six months ended June 30, 2009, resulting in a $15.6 million improvement to other expense (income), net.

The following table presents an analysis of interest expense:

                                                                  For the Six Months
                                                                    Ended June 30,
                                                                 2008               2009
                                                                (Dollars in thousands)
Interest incurred on debt                                    $       7,831         $ 2,302
Amortization of fair value adjustments for terminated
hedge instruments                                                     (116 )           (26 )
Amortization of premium on Senior Notes                                (23 )            (6 )
Amortization of discount on Debentures                               4,409              -
Amortization of debt issuance costs                                  1,191             690
Interest incurred on other items                                       140             109

Total interest expense                                       $      13,432         $ 3,069

Average debt outstanding (long-term debt and the outstanding Revolver) was $70.3 million in the six months ended June 30, 2009 as compared to $331.3 million in the six months ended June 30, 2008. The average annual interest rate for these instruments, excluding amortization of issuance costs and other similar non-cash charges, was 4.4% for the six months ended June 30, 2009 and 4.6% for the six months ended June 30, 2008. The average debt outstanding decreased in the six months ended June 30, 2009 compared to the six months ended June 30, 2008 due primarily to the conversion of the $225 million Debentures and $125 million of Senior Notes which occurred during the six months ended June 30, 2008, partially offset by higher average Revolver Facility balances.

Provision for income taxes was a charge of $2.6 million on pretax loss of $26.0 million for the six months ended June 30, 2009 and $52.4 million on pretax income of $134.9 million for the six months ended June 30, 2008. The effective tax rates were 10.1% and 38.8% for the six months ended June 30, 2009 and 2008 respectively. The effective tax rate for the three months ended June 30, 2009 results from not fully realizing the benefit of the $52.8 million Seadrift impairment charge referenced above, due to the reestablishment of valuation allowances against tax attributes in the U.S.

As a result of the matters described above, net loss was $28.6 million in the six months ended June 30, 2009 as compared to income of $82.5 million in the six months ended June 30, 2008.

Segment net sales. The following table represents our net sales by segment for the six months ended June 30, 2008 and 2009:

                                PART I (CONT'D)

                  GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                  (Unaudited)





                                             For the Six Months
                                               Ended June 30,
                                             2008           2009
                                           (Dollars in thousands)
                  Industrial materials   $     523,410    $ 234,355
                  Engineered solutions          86,130       57,445

                  Total net sales        $     609,540    $ 291,800

Our analysis of the percentage change in net sales for industrial materials and engineered solutions is set forth in the following table:

                             Volume       Price/Mix      Currency       Net Change
      Industrial materials      (61 %)            7 %          (1 %)           (55 %)
      Engineered solutions      (35 %)            5 %          (3 %)           (33 %)

Net sales for the industrial materials segment decreased significantly in the six months ended June 30, 2009 compared to the six months ended June 30, 2008, due to the sharp fall in demand for steel resulting from the global economic crisis and destocking of inventories by our steel customers. Currency rate fluctuations also had a negative impact on sales, driven by the strengthening of the US dollar compared to the Euro. These decreases were offset slightly by an increase in price/mix. The weighted average selling price of our melter and non-melter graphite electrodes has increased by approximately 11% in the six months ended June 30, 2009 compared to the six months ended June 30, 2008.

Net sales for engineered solutions decreased in the six months ended June 30, . . .