GrafTech International (EAF) 10-Q 2006 Q1 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

_______________

FORM 10-Q

_______________

(Mark One)

[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the quarterly period ended March31,2006

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from ___________________ to ___________________

_______________

Commission file number: 1-13888

_______________

GRAFTECH INTERNATIONAL LTD.

(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization) 06-1385548 (I.R.S. Employer Identification Number)

_______________

12900 Snow Road Parma, OH (Address of principal executive offices)   44130 (Zip code)

Registrant’s telephone number, including area code: (216) 676-2000

_______________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes |X| No |_|

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer |X|             Accelerated Filer |_|              Non-Accelerated Filer |_|

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).

Yes |_| No |X|

As of April 30, 2006, 98,444,163 shares of common stock, par value $.01 per share, were outstanding.

TABLE OF CONTENTS

PART I.FINANCIAL INFORMATION:
Item 1.Financial Statements:
Consolidated Balance Sheets at December 31, 2005 and March 31, 2006 (unaudited)	Page 3
Consolidated Statements of Operations for the Three Months ended March 31, 2005 and 2006 (unaudited)	Page 4
Consolidated Statements of Cash Flows for the Three Months ended March 31, 2005 and 2006 (unaudited)	Page 5
Notes to Consolidated Financial Statements (unaudited)	Page 7
Introduction to Part I, Item 2, and Part II, Item 1	Page 29
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	Page 34
Item 3. Quantitative and Qualitative Disclosures About Market Risk	Page 46
Item 4. Controls and Procedures	Page 48
PART II.OTHER INFORMATION:
Item 1.Legal Proceedings	Page 50
Item 6.Exhibits	Page 50
SIGNATURE	Page 51
EXHIBIT INDEX	Page 52

2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share data)

(Unaudited)

	At December 31, 2005			At March 31, 2006
ASSETS
Current assets:
Cash and cash equivalents	$	5,968		$	21,301
Accounts and notes receivable, net of allowance for doubtful accounts of $3,132 at         December 31, 2005 and $3,746 at March 31, 2006		184,580			161,654
Inventories		255,038			291,781
Prepaid expenses and other current assets		14,101			15,729
Total current assets		459,687			490,465
Property, plant and equipment		1,086,393			1,090,677
Less: accumulated depreciation		724,196			735,908
Net property, plant and equipment		362,197			354,769
Deferred income taxes		12,103			11,753
Goodwill		20,319			20,908
Other assets		32,514			34,480
Assets held for sale		—			6,691
Total assets	$	886,820		$	919,066
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable	$	92,192		$	63,739
Short-term debt		405			13,939
Accrued income and other taxes		24,826			24,086
Other accrued liabilities		96,990			102,881
Total current liabilities		214,413			204,645
Long-term debt:
Principal value		694,893			740,623
Fair value adjustments for hedge instruments		7,404			7,165
Unamortized bond premium		1,446			1,403
Total long-term debt		703,743			749,191
Other long-term obligations		107,704			95,399
Deferred income taxes		43,669			45,010
Commitments and contingencies		—			—
Minority stockholders' equity in consolidated entities		26,868			27,730
Stockholders’ deficit:
Preferred stock, par value $.01, 10,000,000 shares authorized, none issued		—			—
Common stock, par value $.01, 150,000,000 shares authorized, 100,821,434 shares         issued at December 31, 2005, and 100,921,653 shares issued at March 31, 2006		1,023			1,021
Additional paid-in capital		944,581			946,060
Accumulated other comprehensive loss		(311,429	)		(301,804	)
Accumulated deficit		(751,487	)		(756,133	)
Less: cost of common stock held in treasury, 2,455,466 shares at December 31, 2005,         and 2,501,201 shares at March 31, 2006		(85,621	)		(85,197	)
Less: common stock held in employee benefit and compensation trusts, 518,301 shares         at December 31, 2005, and 472,566 shares at March 31, 2006		(6,644	)		(6,856	)
Total stockholders’ deficit		(209,577	)		(202,909	)
Total liabilities and stockholders’ deficit	$	886,820		$	919,066

See accompanying Notes to Consolidated Financial Statements

3

PART I (CONT’D)

GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except per share data)

(Unaudited)

	For the Three Months Ended March 31,
	2005			2006
Net sales	$	211,094		$	208,588
Cost of sales		162,440			152,657
Gross profit		48,654			55,931
Research and development		2,357			3,093
Selling, administrative and other expenses		26,183			28,041
Other expense, net		5,864			565
Restructuring charges		363			2,946
Impairment loss on long-lived assets		—			8,151
Interest expense		11,978			14,229
Interest income		(220	)		(139	)
		46,525			56,886
Income (loss) before provision for income taxes and minority stockholders’ share of subsidiaries’
income (loss)		2,129			(955	)
Provision for income taxes		805			3,487
Minority stockholders’ share of subsidiaries’ income		(181	)		204
Net income (loss)	$	1,505		$	(4,646	)
Basic earnings (loss) per common share:
Net income (loss) per share	$	0.02		$	(0.05	)
Weighted average common shares outstanding (in thousands)		97,566			97,912
Diluted earnings (loss) per common share:
Net income (loss) per share	$	0.02		$	(0.05	)
Weighted average common shares outstanding (in thousands)		98,038			97,912

See accompanying Notes to Consolidated Financial Statements

4

PART I (CONT’D)

GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

	For the Three Months Ended March 31,
	2005			2006
Cash flow from operating activities:
Net income (loss)	$	1,505		$	(4,646	)
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
Depreciation and amortization		8,623			9,246
Deferred income taxes		1,755			146
Restructuring charges		363			2,946
Impairment loss on long-lived assets		—			8,151
Other charges, net		7,452			213
Increase in working capital (see * on page 6)		(26,537	)		(40,191	)
Benefit obligation changes		(4,326	)		(2,666	)
Long-term assets and liabilities		(2,625	)		(6,566	)
Net cash used in operating activities		(13,790	)		(33,367	)
Cash flow from investing activities:
Capital expenditures		(10,752	)		(10,942	)
Payments made for patents		(184	)		(124	)
Proceeds from sale of assets		106			128
Sale of interest rate swap		(2,950	)		—
Net cash used in investing activities		(13,780	)		(10,938	)
Cash flow from financing activities:
Short-term debt borrowings (reductions), net		(639	)		15,656
Revolving Facility borrowings		32,145			62,255
Revolving Facility reductions		(7,153	)		(18,347	)
Financing costs		(3,845	)		—
Net cash provided by financing activities		20,508			59,564
Net (decrease) increase in cash and cash equivalents		(7,062	)		15,259
Effect of exchange rate changes on cash and cash equivalents		(924	)		74
Cash and cash equivalents at beginning of period		23,484			5,968
Cash and cash equivalents at end of period	$	15,498		$	21,301

See accompanying Notes to Consolidated Financial Statements

5

PART I (CONT’D)

GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

	For the Three Months Ended March 31,
	2005			2006
*Net change in working capital due to the following components:
(Increase) decrease in current assets:
Accounts and notes receivable	$	25,891		$	23,411
Effect of factoring on accounts receivable		—			2,370
Inventories		(22,391	)		(29,323	)
Prepaid expenses and other current assets		(13	)		6
Payments for antitrust investigations and related lawsuits and claims		(3,400	)		(4,500	)
Restructuring payments		(2,994	)		(921	)
Decrease in accounts payable and accruals		(23,630	)		(31,234	)
Increase in working capital	$	(26,537	)	$	(40,191	)

See accompanying Notes to Consolidated Financial Statements

6

PART I (CONT’D)

GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(1)    Interim Financial Presentation

        These interim Consolidated Financial Statements are unaudited; however, in the opinion of management, they have been prepared in accordance with Rule 10-01 of Regulation S-X adopted by the SEC and reflect all adjustments (all of which are of a normal and recurring nature) which management considers necessary for a fair statement of financial position, results of operations and cash flows for the periods presented. These interim Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements, including the accompanying Notes, contained in our Annual Report on Form 10-K for the year ended December 31, 2005 (the“Annual Report”). The year-end Consolidated Balance Sheet was derived from audited Consolidated Financial Statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. Results of operations for the three months ended March 31, 2006 are not necessarily indicative of the results of operations that may be expected for any other interim period or for the entire year ending December 31, 2006.

        We have revised our consolidated statements of cash flows to attribute payments made in connection with sales of interest rate swap derivatives as cash flows from investing activities. Previously, we reported these cash flows as part of cash flows from financing activities.

(2)     New Accounting Standards

        On November 24, 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 151, “Inventory Costs — an amendment of APB No. 43,” Chapter 4, which is the result of its efforts to converge U.S. accounting standards for inventories with International Accounting Standards. SFAS No. 151 requires abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage) to be recognized as current-period charges. It also requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The adoption of SFAS No. 151 did not have a significant impact on our consolidated results of operations or financial position.

        On December 16, 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment.” SFAS No. 123(R) revises SFAS No. 123, “Accounting for Stock-Based Compensation,” and requires companies to expense the fair value of employee stock options and other forms of stock-based compensation. Under SFAS No. 123(R), companies are to (1) use fair value to measure stock-based compensation awards and (2) cease using the “intrinsic value” method of accounting, which APB Opinion No. 25 allowed and resulted in no expense for many awards of stock options for which the exercise price of the option equaled the price of the underlying stock at the grant date. In addition, SFAS No. 123(R) retains the modified grant date model from SFAS No. 123. Under that model, compensation cost is measured at the grant date and adjusted to reflect actual forfeitures and the outcome of certain conditions. The fair value of an award is not remeasured after its initial estimation on the grant date (except in the case of a liability award or if the award is modified).

7

PART I (CONT’D)

GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

        We have adopted SFAS No. 123(R) in the first quarter of 2006 using the modified prospective transition method. Stock-based compensation recognized in our consolidated results of operations and financial position for the three months ended March 31, 2006 included compensation cost for stock-based awards granted prior to, but not fully vested as of January 1, 2006 and stock-based awards granted subsequent to January 1, 2006. Based on the current stock-based compensation plans in effect and awards issued and outstanding, our expense for the three months ended 2006 for stock-based compensation is $1.1 million of which $1.0 million relates to unvested restricted stock grants and $0.1 million to unvested stock options.

        On November 10, 2005, the FASB Staff issued FSP No. SFAS 123(R)-3, “Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards.” This FSP provides a practical transition election related to accounting for the tax effects of share-based payment awards to employees. SFAS No. 123(R), paragraph 81, indicates that, for purposes of calculating the pool of excess tax benefits available to absorb tax deficiencies recognized subsequent to the adoption of SFAS No. 123(R) (an “APIC pool”), an entity shall include the net excess tax benefits that would have qualified as such had the entity adopted SFAS No. 123for recognition purposes. This FSP provides an elective alternative transition method. An entity may follow either the transition guidance for the APIC pool in paragraph 81 of SFAS No. 123(R) or the alternative transition method described in this FSP. We may take up to one year from the initial adoption of SFAS No. 123(R) to evaluate our available transition alternatives and make our one time election.

        In May 2005, FASB issued SFAS No. 154, “Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3,”whichchanges the requirements for the accounting for and reporting of a change in accounting principle.  This Statement applies to all voluntary changes in accounting principle.  It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. This Statement requires retrospective application to prior periods’ financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change.  This Statement defines retrospective application as the application of a different accounting principle to prior accounting periods as if that principle had always been used or as the adjustment of previously issued financial statements to reflect a change in the reporting entity. This Statement also redefines restatement as the revising of previously issued financial statements to reflect the correction of an error. This Statement shall be effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. We have adopted this Statement effective January 1, 2006. The adoption of SFAS No. 154 did not have a significant impact on our consolidated results of operations or financial position.

        In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments—an amendment of FASB Statement Nos. 133 and 140.” This Statement (1) permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, (2) clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS No. 133; (3) establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an

8

PART I (CONT’D)

GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

embedded derivative requiring bifurcation; and (4) clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives. SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of our first fiscal year that begins after September 15, 2006. The fair value election of SFAS No. 155 may also be applied upon adoption of SFAS No. 155 for hybrid financial instruments that had been bifurcated under paragraph 12 of SFAS No. 133, prior to the adoption of this Statement. We will be required to adopt SFAS No. 155 in the first quarter of 2007. We are currently in the process of assessing the impact of the adoption of SFAS No. 155 on our consolidated results of operations and financial position.

(3)    Stock-Based Compensation

        We have historically maintained several stock incentive plans. The plans permitted options, restricted stock and other awards to be granted to employees and, in certain cases, also to non-employee directors. The aggregate number of shares authorized under the plans since their initial adoption was 19,300,000 at December 31, 2005.

        Effective January 1, 2006, we adopted SFAS No. 123(R), which establishes accounting for stock-based awards exchanged for employee services, using the modified prospective application transition method. Accordingly, stock-based compensation cost is measured at the grant date, based on the fair market value of the award, over the requisite service period. Also, in accordance with the modified prospective transition method, our condensed consolidated financial statements for the periods prior to the first quarter of 2006 have not been restated to reflect this adoption.

Stock based compensation under SFAS 123(R)

        In the first quarter of 2006, we recognized $1.1 million in stock-based compensation expense. A majority of the expense, $1.0 million, was recorded as selling, administrative, and other expenses in the Consolidated Statement of Operations, with the remaining expenses incurred as cost of sales and research and development.

        As of March 31, 2006, the total compensation cost related to the non-vested restricted stock and stock options not yet recognized was $4.6 million and will be recognized over the weighted average life of 3.4 years.

Accounting for stock-based compensation

        Restricted Stock.The fair value of restricted stock is based on the trading price of our common stock on the date of grant, less required adjustments to reflect dividends paid and expected forfeitures or cancellations of awards throughout the vesting period, which ranges between one and three years. The weighted average grant date fair value of restricted stock granted for the three months ended March 31, 2005 and 2006 was approximately $8.49 and $6.52, respectively.

9

PART I (CONT’D)

GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

        Restricted stock activity under the plans for the three months ended March 31, 2006 was as follows:

	Number of Shares			Weighted-Average Grant Date Fair Value
Outstanding at January 1, 2006		1,315,229		$	5.29
Granted		72,000			6.52
Vested		(35,000	)		8.49
Forfeited		(120,164	)		5.83
Outstanding at March 31, 2006		1,232,065		$	5.21

        In the three months ended March 31, 2006, we granted 72,000 shares of restricted stock to certain directors, officers and employees at prices ranging from $4.71 to $7.82.  Of these shares, 35,000 shares vest one year from the date of grant and 37,000 shares vest over a three-year period, with one-third of the shares vesting on the anniversary date of the grant in each of the next three years. 

        Stock Options.Our stock option compensation cost calculated under the fair value method is recognized over the vesting period of 5.0 years. The weighted-average fair value of options granted per share was $8.12 and $7.31 for the three months ended March 31, 2005 and 2006, respectively. The fair values of options granted are estimated on the date of grant using the Black-Scholes option-pricing model. We did not issue stock option awards in the first quarter of 2006. The weighted-average assumptions used in our Black-Scholes option-pricing model for awards issued during the three months ended March 31, 2005 are as follows:

	For the Three Months Ended March 31, 2005
Dividend yield		0.0%
Expected volatility		72.0%
Risk-free interest rate		4.0%
Expected term in years		7.5 years

Dividend Yield. We do not anticipate paying any cash dividends in the foreseeable future. Consequently, we use an expected dividend yield of zero.

Expected Volatility. We estimate the volatility of our common stock at the date of grant based on the historical volatility of our common stock. The volatility factor we use is based on our historical stock prices over the most recent period commensurate with the estimated expected life of the award.

Risk-Free Interest Rate.We base the risk-free interest rate used on the implied yield currently available on U.S. Treasury zero-coupon issues with an equivalent remaining term equal to the expected life of the award.

10

PART I (CONT’D)

GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Expected Term In Years.The expected life of awards granted represents the period of time that they are expected to be outstanding. We determine the expected life based on historical experience with similar awards, giving consideration to the contractual terms, vesting schedules and pre-vesting and post-vesting forfeitures.

        Stock options outstanding under the plans at March 31, 2006 are as follows:

	Options Outstanding						Options Exercisable
	(Options in thousands)						(Options in thousands)
Range of Exercise Prices	Number Outstanding		Weighted-Average Remaining Contractual Life	Weighted-Average Exercise Prices			Number Exercisable		Weighted-Average Exercise Prices
Time vesting options:
$ 2.83 to $11.10		6,298	4 years	$	7	.51		5,394	$	7	.48
$11.60 to $19.06		2,232	3 years	$	16	.63		2,231	$	16	.63
$22.82 to $29.22		95	2 years	$	24	.72		95	$	24	.72
$30.59 to $40.44		774	1 year	$	33	.51		774	$	33	.51
		9,399		$	12	.39		8,494	$	12	.45
Performance vesting options:
$ 7.60		242	1 year	$	7	.60		242	$	7	.60

        Options granted, exercised, canceled and expired under our plans are summarized as follows:

	Shares			Weighted-Average Exercise Prices			Weighted Average Remaining Contractual Life		Aggregate Intrinsic Value
	(Shares in thousands)
Time vesting options:
Outstanding at January 1, 2006		10,583		$	13	.28
Granted at market price		--			--
Exercised		--			--
Forfeited/canceled		(596	)		11	.23
Expired		(588	)		35	.35
Outstanding at March 31, 2006		9,399			12	.39		3.4 years		196
Options exercisable at March 31, 2006		8,494			12	.45		3.4 years		122
Weighted-average fair value of options   granted during three months ended   March 31, 2006:
At market		—

11

PART I (CONT’D)

GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

	Shares		Weighted-Average Exercise Prices			Weighted Average Remaining Contractual Life		Aggregate Intrinsic Value
	(Shares in thousands)
Performance vesting options:
Outstanding at January 1, 2006		242	$	7	.60
Granted		—		—
Exercised		—		—
Forfeited/canceled		—		—
Outstanding at March 31, 2006		242		7	.60		1 year		—
Exercisable at March 31, 2006		242		7	.60		1 year		—

Pro Forma Information

        Previously, we applied APB Opinion No. 25 and related Interpretations, as permitted by SFAS 123. Compensation expense associated with our restricted stock and stock options granted to non-employees was recorded in the Consolidated Statements of Operation and in the stockholders’ deficit section of the Consolidated Balance Sheets based on the fair market value. However, no compensation expense was recognized for our time vesting options granted. If compensation expense for each of our stock-based compensation plans was determined by the fair value method prescribed by SFAS No. 123, our net income (loss) and net income (loss) per share would have been reduced to the pro forma amounts indicated below:

	For the Three Months Ended March 31, 2005
	(Dollars in thousands, except per share data)
Net income as reported	$	1,505
Add:       Total stock-based employee compensation                     expense, net of related tax effects included in                     the determination of net income as reported		74
Deduct:  Total stock-based employee compensation                     expense determined under fair value based                     method for all awards, net of related tax effects		(498	)
Pro forma net income	$	1,081
Earnings per share:
Basic-- as reported		0.02
Basic-- pro forma		0.01
Diluted-- as reported		0.02
Diluted-- pro forma		0.01

(4)   Earnings Per Share

        Basic and diluted EPS are calculated based upon the provisions of SFAS No. 128,“Earnings Per Share”, and EITF No. 04-08,“Accounting Issues Related to Certain Features of

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Contingently Convertible Debt and the Effects on Diluted Earnings Per Share”, using the following share data:

	For the Three Months Ended March 31,
	2005		2006
	(Dollars in thousands, except option data)
Net income (loss), as reported	$	1,505	$	(4,646	)
Add: Interest on Debentures, net of tax benefit		—		—
Add: Amortization of Debentures issuance costs,                net of tax benefit		—		—
Net income (loss), as adjusted	$	1,505	$	(4,646	)
Weighted average common shares      outstanding for basic calculation		97,566,396		97,912,499
Add: Effect of stock options and restricted stock		471,869		—
Add: Effect of Debentures		—		—
Weighted average common shares      outstanding for diluted calculation		98,038,265		97,912,499

        Basic earnings (loss) per common share are calculated by dividing net income (loss) by the weighted average number of common shares outstanding. Diluted earnings (loss) per share are calculated by dividing net income (loss), as adjusted, by the sum of the weighted average number of common shares outstanding plus the additional common shares that would have been outstanding if potentially dilutive securities, including those underlying the Debentures, had been issued.

        The calculation of weighted average common shares outstanding for the diluted calculation excludes consideration of stock options covering 6,805,784 and 9,451,763 shares in the 2005 first quarter and 2006 first quarter, respectively, because the exercise of these options would not have been dilutive for those periods due to the fact that the exercise prices were greater than the weighted average market price of our common stock for each of those periods.

        The calculation of weighted average common shares outstanding for the diluted calculation also excludes the 13,570,560 shares underlying the Debentures for the three months ended March 31, 2005 and 2006, and the effect of 428,743 stock options and restricted shares at March 31, 2006, as the effect would have been anti-dilutive.

(5)     Segment Reporting

        Our businesses are reported in the following reportable segments: synthetic graphite, which consists of graphite electrodes, cathodes and advanced graphite materials and related services, and other, which consists of natural graphite, carbon electrodes and refractories and related services.

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GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

        We evaluate the performance of our segments based on gross profit. Intersegment sales and transfers are not material. The accounting policies of the reportable segments are the same as those for our Consolidated Financial Statements as a whole.

        The following tables summarize financial information concerning our reportable segments.

		Three Months Ended March 31,
		2005			2006
		(Dollars in thousands)
Net sales to external customers:
Synthetic Graphite		$	185,056		$	188,245
Other			26,038			20,343
Net sales		$	211,094		$	208,588
Gross profit:	��
Synthetic Graphite		$	43,810		$	53,660
Other			4,844			2,271
Gross profit		$	48,654		$	55,931
Reconciliation of gross profit to income (loss) before provision       for income taxes and minority stockholders' share of income       (loss):
Gross profit		$	48,654		$	55,931
Research and development			2,357			3,093
Selling, administrative and other expenses			26,183			28,041
Other expense, net			5,864			565
Restructuring charges			363			2,946
Impairment loss on long-lived and other assets			—			8,151
Interest expense			11,978			14,229
Interest (income)			(220	)		(139	)
Income (loss) before provision for income taxes and minority          stockholders' share of income (loss)		$	2,129		$	(955	)

(6)    Restructuring Charges and Impairment Losses

        At March 31, 2006, the outstanding balance of our restructuring reserve was $13.8 million. We expect the majority of the remaining payments to be paid by the end of 2007. The balance at March 31, 2006 consisted primarily of the following:

Synthetic Graphite Segment:

o $7.5 million related to the rationalization of our synthetic graphite facilities, including those in Brazil and France, and the closure of our facility in Russia.

o $3.9 million related to the closure of our graphite electrode manufacturing operations in Caserta, Italy.

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PART I (CONT’D)

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

o $0.7 million related to the phase-out of our graphite electrode machining operations in Clarksville, Tennessee.

Other Segment and Corporate:

o $1.5 million related primarily to remaining lease payments and severance and related costs associated with our former corporate headquarters.

o $0.2 million related to the shutdown of our carbon electrode production operations at our Columbia, Tennessee facility.

In the first quarter of 2006, we recorded a net restructuring charge of $2.9 million. A majority of the net charge was comprised of the following:

o $1.2 million for severance and related costs related to rationalization at our synthetic graphite facility in France.

o $0.9 million for severance and related costs associated with our former corporate headquarters.

o $0.2 million for severance and related costs related to rationalization at our synthetic graphite facility in Clarksville, Tennessee.

o $0.2 million for severance and costs related to the shutdown of our carbon electrode production operations at our Columbia, Tennessee facility.

The following table summarizes activity relating to the restructuring liability at March 31, 2006:

	Severance and Related Costs			Plant Shutdown and Related Costs			Total
	(Dollars in thousands)
Balance at January 1, 2006	$	10,733		$	794		$	11,527
Restructuring charges		2,528			383			2,911
Change in estimates		35			—			35
Payments and settlements		(637	)		(284	)		(921	)
Effect of change in currency exchange rates		217			—			217
Balance at March 31, 2006	$	12,876		$	893		$	13,769

        In the first quarter of 2006, we abandoned long-lived fixed assets associated with costs capitalized for our enterprise resource planning system implementations due to an indefinite delay in the implementation of the remaining facilities. As a result, we recorded a $6.6 million loss, including the write off of capitalized interest, in accordance with SFAS No. 144,“Accounting For the Impairment and Disposal of Long-Lived Assets”.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

        Also, in the first quarter of 2006, management announced its intention to sell certain long-lived assets from our Etoy, Switzerland and Caserta, Italy facilities. As a result, we have classified these assets as held for sale in the Consolidated Balance Sheet in accordance with SFAS No. 144. In addition, we have recorded a $1.4 million impairment loss that adjusts the carrying value of the assets in Switzerland to the estimated fair value less estimated selling costs.

(7)     Other Expense, Net

        The following table presents an analysis of other (income) expense, net:

	For the Three Months Ended March 31,
	2005			2006
	(Dollars in thousands)
Currency (gains) losses	$	6,631		$	(2,558	)
Fair value adjustments on Debenture redemption
make-whole option		(2,820	)		—
Write-off of capitalized bank fees		1,514			—
Fair value adjustments on derivative instruments		(319	)		—
Legal, environmental and other related costs		—			974
Loss on the disposal of fixed assets		—			408
Bank and other financing fees		594			479
Relocation costs		229			841
Loss on the sale of accounts receivable		4			175
Other		31			246
Total other expense, net	$	5,864		$	565

        We have non-dollar-denominated intercompany loans between GrafTech Finance and some of our foreign subsidiaries. At December 31, 2005 and March 31, 2006, the aggregate principal amount of these loans was $414.6 million and $425.6 million, respectively (based on currency exchange rates in effect at such date). These loans are subject to remeasurement gains and losses due to changes in currency exchange rates. A portion of these loans are deemed to be essentially permanent and, as a result, remeasurement gains and losses on these loans are recorded as a component of accumulated other comprehensive loss in the stockholders’ deficit section of the Consolidated Balance Sheets. The balance of these loans is deemed to be temporary and, as a result, remeasurement gains and losses on these loans are recorded as currency (gains) losses in other expense, net, on the Consolidated Statements of Operations. In the 2005 first quarter, we had a net total of $6.6 million of currency losses, including $6.2 million of exchange losses due to the remeasurement of intercompany loans and translation of financial statements of foreign subsidiaries which use the dollar as their functional currency. In the 2006 first quarter, we had a net total of $2.6 million of currency gains, including $4.2 million of exchange gains due to the remeasurement of intercompany loans and translation of financial statements of foreign subsidiaries that use the dollar as their functional currency.

16

PART I (CONT’D)

GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(8)     Benefit Plans

        The components of our consolidated net pension and postretirement cost (benefit) are set forth in the following table:

	Pension Benefits						Postretirement Benefits
	For the Three Months Ended March 31,						For the Three Months Ended March 31,
	2005			2006			2005			2006
	(Dollars in thousands)
Service cost	$	296		$	294		$	74		$	103
Interest cost		2,982			3,038			514			505
Expected return on plan assets		(3,358	)		(3,168	)		—			—
Amortization of transition obligation		(26	)		(24	)		—			—
Amortization of prior service cost (benefit)		(4	)		18			(5,450	)		(5,280	)
Amortization of unrecognized loss		330			729			1,282			1,333
Employee contributions		(23	)		—			—			—
Net cost (benefit)	$	197		$	887		$	(3,580	)	$	(3,339	)

(9)     Long-Term Debt and Liquidity

        The following table presents our long-term debt:

	At December 31, 2005		At March 31, 2006
	(Dollars in thousands)
Revolving Facility	$	39,000	$	83,102
Senior Notes:
Senior Notes due 2012		434,631		434,631
Fair value adjustments for terminated hedge instruments*		7,404		7,165
Unamortized bond premium		1,446		1,403
Total Senior Notes		443,481		443,199
Debentures**		220,291		221,738
Other European debt		971		1,152
Total	$	703,743	$	749,191

* Fair value adjustments for terminated hedge instruments will be amortized as a credit to interest expense over the remaining term of the Senior Notes.

** At December 31, 2005, the balance excludes the derivative liability relating to our redemption feature with a make-whole provision, which amounts to $1.3 million. As of January 1, 2006, this derivative liability no longer requires separate accounting from the convertible debenture under Derivative Implementation Group Issue No. B39,“Embedded Derivatives: Application of Paragraph 13(b) to Call Optionsthat are Exercisable Only by the Debtor”.

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PART I (CONT’D)

GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(10)     Inventories

         Inventories are comprised of the following:

	At December 31, 2005		At March 31, 2006
	(Dollars in thousands)
Raw material and supplies	$	74,650	$	75,368
Work in process		150,816		168,705
Finished goods		29,572		47,708
Total inventories	$	255,038	$	291,781

(11)     Interest Expense

        The following table presents an analysis of interest expense:

	For the Three Months Ended March 31,
	2005			2006
	(Dollars in thousands)
Interest incurred on debt	$	12,191		$	13,241
Interest rate swap benefit		(1,043	)		—
Amortization of fair value adjustments     for terminated hedge instruments		(553	)		(239	)
Amortization of debt issuance costs		937			912
Interest on DOJ antitrust fine		149			84
Amortization of premium on Senior Notes		(40	)		(43	)
Amortization of discount on Debentures		220			161
Interest incurred on other items		117			113
Total interest expense	$	11,978		$	14,229

(12)    Comprehensive Income (Loss)

        Comprehensive loss consisted of the following:

	For the Three Months Ended March 31,
	2005			2006
	(Dollars in thousands)
Net income (loss)	$	1,505		$	(4,646	)
Other comprehensive income (loss):
Foreign currency translation adjustments		(13,817	)		9,622
Total comprehensive income (loss)	$	(12,312	)	$	4,976

18

PART I (CONT’D)

GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(13)     Contingencies

      Antitrust Matters

        In 1997, the DOJ and the EU Competition Authority commenced investigations into alleged violations of the antitrust laws in connection with the sale of graphite electrodes. The antitrust authorities in Canada, Japan and Korea subsequently began similar investigations. The EU Competition Authority also commenced an investigation into alleged antitrust violations in connection with the sale of specialty graphite. These antitrust investigations have been resolved. Several of the investigations resulted in the imposition of fines against us. These fines, or payments in accordance with a payment schedule in the case of the DOJ antitrust fine, have been timely paid. At December 31, 2005 and March 31, 2006, $26.0 million and $21.5 million remained in the reserve for liabilities and expenses in connection with antitrust investigations and related lawsuits and claims, respectively. The reserve is unfunded and represents the remaining DOJ antitrust fine obligation, with quarterly payments scheduled through January 2007.

        Through March 31, 2006, except for certainforeign customer lawsuits discussed in Note 14 of the Annual Report, we have settled or obtained dismissal of all of the civil antitrust lawsuits (including class action lawsuits) previously pending against us, certain civil antitrust lawsuits threatened against us and certain possible civil antitrust claims against us arising out of alleged antitrust violations occurring prior to the date of the relevant settlements in connection with the sale of graphite electrodes, carbon electrodes and bulk graphite products. All payments due have been timely paid.

        We have been vigorously defending, and intend to continue to vigorously defend, against the foreign customer lawsuits. We may at any time, however, settle these lawsuits. It is possible that additional antitrust investigations, lawsuits or claims could be commenced or asserted against us in the U.S. and in other jurisdictions. We are currently not reserved for such matters.

      Other Proceedings Against Us

        We are involved in various other investigations, lawsuits, claims and other legal proceedings incidental to the conduct of our business. While it is not possible to determine the ultimate disposition of each of them, we do not believe that their ultimate disposition will have a material adverse effect on our financial position, results of operations or cash flows.

        On March 1, 2006, we were served with a complaint commencing a securities class action in the United States District Court for the District of Delaware (Civil Action No. 06-133). The complaint alleged that GTI and certain officers violated federal securities law by making false statements or failing to disclose adverse facts, in or in relation to press releases issued by us on November 3, 2005, about our graphite electrode pricing power, our cost-cutting measures, the market for our non-graphite product lines, our forecasting ability, our internal controls and corporate compliance, and our restructuring activities and charges. The proposed class consists of all persons who purchased our securities during the period from November 3, 2005 until February 8, 2006. The complaint seeks, among other things, to recover damages resulting from

19

PART I (CONT’D)

GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

such alleged violations. On March 21, 2006, the complaint was voluntarily withdrawn by the plaintiffs.

      Product Warranties

        We generally sell products with a limited warranty. We accrue for known warranty claims if a loss is probable and can be reasonably estimated. The following table presents the activity in this accrual for the 2006 first quarter (dollars in thousands):

Balance at January 1, 2006	$	610
Product warranty charges		379
Payments and settlements		(328	)
Balance at March 31, 2006	$	661

(14) Financial Information About the Issuers and Guarantors of Our Debt Securities and Subsidiaries Whose Securities Secure the Senior Notes and Related Guarantees

        On February 15, 2002, GrafTech Finance (“Finco”), a direct subsidiary of GTI (the “Parent”), issued $400 million aggregate principal amount of Senior Notes and, on May 6, 2002, $150 million aggregate principal amount of additional Senior Notes. All of the Senior Notes have been issued under a single Indenture and constitute a single class of debt securities. The Senior Notes mature on February 15, 2012. The Senior Notes have been guaranteed on a senior basis by the Parent and the following wholly-owned direct and indirect subsidiaries of the Parent: GrafTech Global, UCAR Carbon, UCAR International Trading Inc., UCAR Carbon Technology LLC, and UCAR Holdings V Inc. (“Holdings V”). The Parent, Finco and these subsidiaries together hold a substantial majority of our U.S. assets. Holdings V has no material assets or operations, and has been dissolved.

        On January 22, 2004, the Parent issued $225 million aggregate principal amount of Debentures. The guarantors of the Debentures are the same as the guarantors of the Senior Notes, except for Parent (which is the issuer of the Debentures but a guarantor of the Senior Notes) and Finco (which is a guarantor of the Debentures but the issuer of the Senior Notes). The Parent and Finco are both obligors on the Senior Notes and the Debentures, although in different capacities.

        The guarantors of the Senior Notes and the Debentures, solely in their respective capacities as such, are collectively called the “U.S. Guarantors.” Our other subsidiaries, which are not guarantors of either the Senior Notes or the Debentures, are called the “Non-Guarantors.”

        All of the guarantees are unsecured, except that the guarantee of the Senior Notes by UCAR Carbon has been secured by a junior pledge of all of the shares of capital stock (constituting 97.5% of the outstanding shares of capital stock) of AET held by UCAR Carbon

20

PART I (CONT’D)

GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(called the “AET Pledged Stock”), subject to the limitation that in no event will the value of the pledged portion of the AET Pledged Stock exceed 19.99% of the principal amount of the then outstanding Senior Notes. All of the guarantees are full, unconditional and joint and several. Finco and each of the other U.S. Guarantors (other than the Parent) are 100% owned, directly or indirectly, by the Parent. All of the guarantees of the Senior Notes continue until the Senior Notes have been paid in full, and payment under such guarantees could be required immediately upon the occurrence of an event of default under the Senior Notes. All of the guarantees of the Debentures continue until the Debentures have been paid in full, and payment under such guarantees could be required immediately upon the occurrence of an event of default under the Debentures. If a guarantor makes a payment under its guarantee of the Senior Notes or the Debentures, it would have the right under certain circumstances to seek contribution from the other guarantors of the Senior Notes or the Debentures, respectively.

        Provisions in the Revolving Facility restrict the payment of dividends by our subsidiaries to the Parent. At March 31, 2006, retained earnings of our subsidiaries subject to such restrictions were approximately $749.4 million. Investments in subsidiaries are recorded on the equity basis.

        The following table sets forth condensed consolidating balance sheets at December 31, 2005 and March 31, 2006, condensed consolidating statements of operations for the 2005 and 2006 first quarters, and condensed consolidating statements of cash flows for the 2005 and 2006 first quarters of the Parent, Finco, all other U.S. Guarantors and the Non-Guarantors.

21

PART I (CONT’D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Condensed Consolidating Balance Sheet
at December 31, 2005

	Parent (Issuer of Debentures and Guarantor of Senior Notes)			Finco (Issuer of Senior Notes and Guarantor of Debentures)		All Other U.S Guarantors			Non-Guarantors		Consolidation/ Eliminations			Consolidated
	(Dollars in thousands)
ASSETS
Current assets:
Cash and cash equivalents	$	143		$	—	$	36		$	5,877	$	(88	)	$	5,968
Intercompany loans		51,315			166,292		—			108,716		(326,323	)		—
Intercompany accounts receivable		—			2,676		27,689			31,079		(61,444	)		—
Accounts receivable - third party		—			—		36,569			148,011		—			184,580
Accounts and notes receivable, net		51,315			168,968		64,258			287,806		(387,767	)		184,580
Inventories		—			—		59,975			195,108		(45	)		255,038
Prepaid expenses and other current
assets		7			16,431		1,793			12,287		(16,417	)		14,101
Total current assets		51,465			185,399		126,062			501,078		(404,317	)		459,687
Property, plant and equipment, net		—			—		46,586			320,096		(4,485	)		362,197
Deferred income taxes		—			—		8,980			4,067		(944	)		12,103
Intercompany loans		—			506,887		—			—		(506,887	)		—
Goodwill		—			—		—			20,319		—			20,319
Other assets		5,359			16,860		3,426			6,869		—			32,514
Total assets	$	56,824		$	709,146	$	185,054		$	852,429	$	(916,633	)	$	886,820
LIABILITIES AND STOCKHOLDERS’
EQUITY (DEFICIT)
Current liabilities:
Accounts payable	$	1,836		$	17,242	$	12,392		$	60,810	$	(88	)	$	92,192
Intercompany loans		—			109,284		217,009			61,655		(387,948	)		—
Third party loans		—			—		—			405		—			405
Short-term debt		—			109,284		217,009			62,060		(387,948	)		405
Accrued income and other taxes		1,939			—		20,963			18,341		(16,417	)		24,826
Other accrued liabilities		—			—		34,644			62,346		—			96,990
Total current liabilities		3,775			126,526		285,008			203,557		(404,453	)		214,413
Long-term debt		220,290			482,481		—			972		—			703,743
Intercompany loans		—			—		—			506,903		(506,903	)		—
Other long-term obligations		1,284			37		59,051			47,332		—			107,704
Payable to equity of investees		41,045			—		(526,601	)		—		485,556			—
Deferred income taxes		7			—		—			44,606		(944	)		43,669
Commitments and contingencies		—			—		—			—		—			—
Minority stockholders’ equity in
consolidated entities		—			—		—			26,868		—			26,868
Stockholders’ equity (deficit)		(209,577	)		100,102		367,596			22,191		(489,889	)		(209,577	)
Total liabilities and
stockholders' deficit	$	56,824		$	709,146	$	185,054		$	852,429	$	(916,633	)	$	886,820

22

PART I (CONT’D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Condensed Consolidating Balance Sheet
at March 31, 2006

	Parent (Issuer of Debentures and Guarantor of Senior Notes)			Finco (Issuer of Senior Notes and Guarantor of Debentures)		All Other U.S Guarantors			Non-Guarantors		Consolidation/ Eliminations			Consolidated
	(Dollars in thousands)
ASSETS
Current assets:
Cash and cash equivalents	$	222		$	1,736	$	—		$	19,521	$	(178	)	$	21,301
Intercompany loans		50,777			181,107		—			101,516		(333,400	)		—
Intercompany accounts receivable		—			4,146		29,134			28,330		(61,610	)		—
Accounts receivable - third party		—			—		26,513			135,141		—			161,654
Accounts and notes receivable, net		50,777			185,253		55,647			264,987		(395,010	)		161,654
Inventories		—			—		69,391			222,390		—			291,781
Prepaid expenses and other current          assets		—			16,543		755			14,849		(16,418	)		15,729
Total current assets		50,999			203,532		125,793			521,747		(411,606	)		490,465
Property, plant and equipment, net		—			—		39,957			319,549		(4,737	)		354,769
Deferred income taxes		—			—		15,693			5,128		(9,068	)		11,753
Intercompany loans		—			517,879		—			—		(517,879	)		—
Goodwill		—			—		—			20,908		—			20,908
Other assets		5,092			16,215		3,767			9,406		—			34,480
Assets held for sale		—			—		—			6,691		—			6,691
Total assets	$	56,091		$	737,626	$	185,210		$	883,429	$	(943,290	)	$	919,066
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Accounts payable	$	922		$	6,271	$	8,483		$	48,241	$	(178	)	$	63,739
Intercompany loans		—			102,216		236,273			56,784		(395,273	)		—
Third party loans		—			—		—			13,939		—			13,939
Short-term debt		—			102,216		236,273			70,723		(395,273	)		13,939
Accrued income and other taxes		1,944			—		19,587			18,973		(16,418	)		24,086
Other accrued liabilities		—			772		40,120			61,989		—			102,881
Total current liabilities		2,866			109,259		304,463			199,926		(411,869	)		204,645
Long-term debt		221,737			526,301		—			1,153		—			749,191
Intercompany loans		—			—		—			517,878		(517,878	)		—
Other long-term obligations		—			—		48,752			46,647		—			95,399
Payable to equity of investees		34,397			—		(536,125	)		—		501,728			—
Deferred income taxes		—			—		—			54,078		(9,068	)		45,010
Commitments and contingencies		—			—		—			—		—			—
Minority stockholders' equity in      consolidated entities		—			—		—			27,730		—			27,730
Stockholders’ equity (deficit)		(202,909	)		102,066		368,120			36,017		(506,203	)		(202,909	)
Total liabilities and              stockholders’ deficit	$	56,091		$	737,626	$	185,210		$	883,429	$	(943,290	)	$	919,066

23

PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Condensed Consolidating Statements of Operations
for the Three Months Ended March 31, 2005

	Parent (Issuer of Debentures and Guarantor of Senior Notes)			Finco (Issuer of Senior Notes and Guarantor of Debentures)			All Other U.S. Guarantors			Non-Guarantors			Consolidation/ Eliminations			Consolidated
	(Dollars in thousands)
Net sales	$	—		$	—		$	64,000		$	193,000		$	(46,000	)	$	211,000
Cost of sales		—			—			49,000			149,000			(36,000	)		162,000
Gross profit		—			—			15,000			44,000			(10,000	)		49,000
Research and development								1,000			2,000			(1,000	)		2,000
Selling, administrative and other expenses								12,000			21,000			(7,000	)		26,000
Other (income) expense, net		(3,000	)		3,000			3,000			(3,000	)		6,000			6,000
Interest expense		1,000			11,000			—			(1,000	)		1,000			12,000
Interest income		—			—			—			—
Income (loss) before provision for         (benefit from) income taxes and         minority stockholders’ share of income		2,000			(14,000	)		(1,000	)		25,000			(9,000	)		3,000
Provision for (benefit from) income taxes		1,000			(5,000	)		3,000			4,000			(2,000	)		1,000
Minority stockholders’ share of income		—			—			—			—			—			—
Deficit (equity) in earnings of
subsidiaries		(8,000	)		—			(21,000	)		—			29,000			—
Net income (loss)	$	9,000		$	(9,000	)	$	17,000		$	21,000		$	(36,000	)	$	2,000

24

PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Condensed Consolidating Statements of Operations
for the Three Months Ended March 31, 2006

	Parent (Issuer of Debentures and Guarantor of Senior Notes)			Finco (Issuer of Senior Notes and Guarantor of Debentures)			All Other U.S. Guarantors			Non-Guarantors			Consolidation/ Eliminations			Consolidated
	(Dollars in thousands)
Net sales	$	—		$	—		$	59,321		$	194,909		$	(45,642	)	$	208,588
Cost of sales		—			773			47,469			145,158			(40,743	)		152,657
Gross profit		—			(773	)		11,852			49,751			(4,899	)		55,931
Research and development		—			—			1,497			1,596			—			3,093
Selling, administrative and other expenses		—			84			13,387			21,583			(7,013	)		28,041
Restructuring charges		19			—			1,623			1,304			—			2,946
Impairment loss on long-lived and other assets		—			—			6,768			1,383			—			8,151
Other (income) expense, net		—			(11,049	)		3,164			(68	)		8,518			565
Interest expense		1,239			13,448			1,806			6,250			(8,514	)		14,229
Interest income		—			—			—			(139	)		—			(139	)
Income (loss) before provision for
(benefit from) income taxes and
minority stockholders' share of
income		(1,258	)		(3,256	)		(16,393	)		17,842			2,110			(955	)
Provision for (benefit from) income taxes		—			193			36			3,382			(124	)		3,487
Minority stockholders' share of income		—			—			—			204			—			204
Deficit (equity) in earnings of subsidiaries		5,622			—			(14,256	)		—			8,634			—
Net income (loss)	$	(6,880	)	$	(3,449	)	$	(2,173	)	$	14,256		$	(6,400	)	$	(4,646	)

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PART I (CONT'D)
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Condensed Consolidating Statements of Cash Flows
for the Three Months Ended March 31, 2005

	Parent (Issuer of Debentures and Guarantor of Senior Notes)			Finco (Issuer of Senior Notes and Guarantor of Debentures)			All Other U.S. Guarantors			Non- Guarantors			Consolidation/ Eliminations			Consolidated
	(Dollars in thousands)
Cash flow from operating activities:
Net income (loss)	$	9,000		$	(9,000	)	$	17,000		$	21,000		$	(36,000	)	$	2,000
Adjustment to reconcile net income (loss) to
net cash (used in) provided by operations:
Depreciation and amortization		—			—			1,000			8,000			—			9,000
Deferred income taxes		—			(1,000	)		3,000			—			—			2,000
Adjustment from cost to equity		(8,000	)		—			(21,000	)		—			29,000			—
Antitrust investigations and related
lawsuits and claims		—			—			—			—			—			—
Interest expense		—			—			—			—			—			—
Restructuring charges		—			—			—			—			—			—
Impairment loss on long-lived and other          assets		—			—			—			—			—			—
Gain on sale of assets		—			—			—			—			—			—
Fair value adjustment on Debenture          redemption make whole option		—			—			—			—			—			—
Fair value adjustments on interest rate
caps		—			—			—			—			—			—
Post retirement plan changes		—			—			(4,000	)		—			—			(4,000	)
Other (credits) charges, net		(2,000	)		(17,000	)		(7,000	)		60,000			(27,000	)		7,000
(Increase) decrease in working capital		—			(13,000	)		(6,000	)		(23,000	)		16,000			(26,000	)
Long term assets and liabilities		—			—			(1,000	)		(2,000	)		—			(3,000	)
Net cash used in operating activities		(1,000	)		(40,000	)		(18,000	)		64,000			(18,000	)		(13,000	)
Cash flow from investing activities:
Intercompany loans receivable/payable		3,000			—			45,000			15,000			(63,000	)		—
Intercompany debt, net		(2,000	)		12,000			(23,000	)		(68,000	)		81,000			—
Capital expenditures		—			—			(2,000	)		(9,000	)		—			(11,000	)
Sale of interest rate swap		—			(3,000	)		—			—			—			(3,000	)
Proceeds from sale of assets		—			—			—			—			—			—
Patent capitalization		—			—			—			—			—			—
Sale (purchase) of derivative investments		—			—			—			—			—			—
Net cash used in investing activities		1,000			9,000			20,000			(62,000	)		18,000			(14,000	)
Cash flow from financing activities:
Short-term debt borrowings (reductions), net		—			—			—			(1,000	)		—			(1,000	)
Revolving Facility borrowings		—			24,000			—			—			—			24,000
Revolving Facility reductions		—			—			—			—			—			—
Long-term debt borrowings		—			—			—			1,000			—			1,000
Financing costs		—			(4,000	)		—			—			—			(4,000	)
Net cash provided by financing activities		—			20,000			—			—			—			20,000
Net increase (decrease) in cash and cash
equivalents		—			(11,000	)		2,000			2,000			—			(7,000	)
Effect of exchange rate changes on cash and    cash equivalents		—			—			—			(1,000	)		—			(1,000	)
Cash and cash equivalents at beginning of period		—			12,000			1,000			11,000			—			24,000
Cash and cash equivalents at end of period	$	—		$	1,000		$	3,000		$	12,000		$	—		$	16,000

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PART I (CONT'D)
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Condensed Consolidating Statements of Cash Flows
for the Three Months Ended March 31, 2006

	Parent (Issuer of Debentures and Guarantor of Senior Notes)			Finco (Issuer of Senior Notes and Guarantor of Debentures)			All Other U.S. Guarantors			Non- Guarantors			Consolidation/ Eliminations			Consolidated
	(Dollars in thousands)
Cash flow from operating activities:
Net income (loss)	$	(6,880	)	$	(3,449	)	$	(2,173	)	$	14,256		$	(6,400	)	$	(4,646	)
Adjustment to reconcile net income (loss) to
net cash (used in) provided by operations:
Depreciation and amortization		—			—			988			6,795			1,463			9,246
Deferred income taxes		—			193			823			(872	)		2			146
Restructuring charges		—			—			1,642			1,304			—			2,946
Impairment loss on long-lived assets		—			—			6,768			1,383			—			8,151
Post retirement plan changes		—			—			(3,692	)		1,026			—			(2,666	)
Other (credits) charges, net		7,542			6,231			(8,841	)		(9,120	)		4,401			213
(Increase) decrease in working capital		(909	)		(10,996	)		(6,196	)		(22,207	)		117			(40,191	)
Long-term assets and liabilities		—			—			(5,315	)		(1,251	)		—			(6,566	)
Net cash used in operating activities		(247	)		(8,021	)		(15,996	)		(8,686	)		(417	)		(33,367	)
Cash flow from investing activities:
Intercompany receivable/payable		—			(1,331	)		(3,279	)		5,758			(1,148	)		—
Intercompany debt, net		538			(33,014	)		21,098			10,295			1,083			—
Capital expenditures		—			—			(1,795	)		(9,539	)		392			(10,942	)
Payments made for patents		—			—			(74	)		(50	)		—			(124	)
Proceeds from sale of assets		—			—			10			118			—			128
Sale of interest rate swap		—			—			—			—			—			—
Net cash used in investing activities		538			(34,345	)		15,960			6,582			327			(10,938	)
Cash flow from financing activities:
Short-term debt borrowings (reductions), net		(212	)		—			—			15,868			—			15,656
Revolving Facility borrowings		—			62,255			—			—			—			62,255
Revolving Facility reductions		—			(18,153	)		—			(194	)		—			(18,347	)
Financing costs		—			—			—			—			—			—
Net cash provided by financing activities		(212	)		44,102			—			15,674			—			59,564
Net increase (decrease) in cash and cash
equivalents		79			1,736			(36	)		13,570			(90	)		15,259
Effect of exchange rate changes on cash and    cash equivalents		—			—			—			74			—			74
Cash and cash equivalents at beginning of period		143			—			36			5,877			(88	)		5,968
Cash and cash equivalents at end of period	$	222		$	1,736		$	—		$	19,521		$	(178	)	$	21,301

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GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(15) Natural Gas Contracts

        In the fourth quarter of 2005, we entered into natural gas derivative contracts to mitigate the impact of changes in natural gas prices. The contracts are not being accounted for as hedges under SFAS No. 133,“Accounting for Derivative Instruments and Hedging Activities” and, therefore, are recorded at fair value on the consolidated balance sheet. Changes in fair value are recorded in the consolidated statement of operations in cost of goods sold. During the first quarter of 2006, losses for these contracts were $0.7 million.

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Introduction to Part I, Item 2, and Part II, Item 1

Preliminary Notes

        Important Terms.We use various terms to simplify the presentation of information in this Report. These terms are defined in the Annual Report, which are incorporated herein by reference.

        Presentation of Financial, Market and Legal Data.We present our financial information on a consolidated basis. As a result, the financial information for Carbone Savoie and AET is consolidated on each line of the Consolidated Financial Statements and the equity of the other owners in those subsidiaries is reflected on the lines entitled “minority stockholders’ equity in consolidated entities” and “minority stockholders’ share of income.” We use the equity method to account for 50% or less owned interests.

        Unless otherwise noted, when we refer to dollars, we mean U.S. dollars.

        Unless otherwise specifically noted, market and market share data in this Report are our own estimates or derived from sources described in “Part I – Preliminary Notes – Presentation of Financial, Market and Legal Data” in the Annual Report, which description is incorporated herein by reference. Our estimates involve risks and uncertainties and are subject to change based on various factors, including those discussed under “Forward Looking Statements and Risks” in this Report and “Forward Looking Statements” and “Risk Factors” in the Annual Report. We cannot guarantee the accuracy or completeness of this market and market share data and have not independently verified it. None of the sources has consented to the disclosure or use of data in this Report.

        The GRAFTECH logo, GRAFCELL®, EGRAF®, GRAFOIL®, and SpreaderShield™ are our trademarks and trade names used in this Report. This Report also contains trademarks and trade names belonging to other parties.

        We make available, free of charge, on or through our web site, copies of our proxy statements, our annual reports on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file them with, or furnish them to, the SEC. We maintain our website athttp://www.graftech.com. The information contained on our web site is not part of this Report.

        We have a code of ethics (which we call our Code of Conduct and Ethics) that applies to our principal executive officer, principal financial officer, principal accounting officers and controller, and persons performing similar functions, as well as our other employees, and which is intended to comply, at a minimum, with the listing standards of the NYSE as well as the Sarbanes-Oxley Act of 2002 and the SEC rules adopted thereunder. A copy of our Code of Conduct and Ethics is available on our web site.

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        We also have corporate governance guidelines (which we call the Charter of the Board of Directors) which is available on our website athttp://www.graftech.com/GrafTech/About+Our+Company/Corporate+Governance/Corporate+Governance+Guidelines.htmas required by the NYSE. You may request a copy of the Charter of the Board of Directors, at no cost, by oral or written request to:GrafTech International Ltd., 12900 Snow Road, Parma, Ohio, 44130, Attention: Michael A. Carr, Manager of Investor Relations, Telephone (216) 676-2345.

        Reference is made to the Annual Report for background information on various risks and contingencies and other matters related to circumstances affecting us and our industry.

        Neither any statement made in this Report nor any charge taken by us relating to any legal proceedings constitutes an admission as to any wrongdoing.

        Forward Looking Statements and Risk Factors. This Report contains forward looking statements. In addition, we or our representatives have made or may make forward looking statements on telephone or conference calls, by webcasts or emails, in person, in presentations or written materials, or otherwise. These include statements about such matters as: future production and sales of steel, aluminum, electronic devices, fuel cells and other products that incorporate or that are produced using our products; future prices and sales of and demand for such products; future operational and financial performance of our businesses; strategic plans and business projects; impacts of regional and global economic conditions; interest rate management activities; deleveraging activities; rationalization, restructuring, realignment, strategic alliance, raw material and supply chain, technology development and collaboration, investment, acquisition, venture, operational, tax, financial and capital projects; legal and litigation matters; consulting projects; potential offerings, sales and other actions regarding debt or equity securities of us or our subsidiaries; and future asset sales, costs, working capital, revenues, business opportunities, debt levels, cash flows, cost savings and reductions, margins, earnings and growth. The words “will,” “may,” “plan,” “estimate,” “project,” “believe,” “anticipate,” “expect,” “intend,” “should,” “would,” “could,” “target,” “goal” and similar expressions identify some of these statements.

        Actual future events and circumstances (including future results and trends) could differ materially from those set forth in these statements due to various factors. These factors include:

o the possibility that additions to capacity for producing steel in electric arc furnaces may not occur or that increases in graphite electrode manufacturing capacity may occur, which may impact demand for or prices or sales volume of graphite electrodes;

o the possibility that continued global consolidation of the world’s largest steel producers could impact our business or industry;

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o the possibility that average graphite electrode revenue per metric ton in the future may be different than current spot prices due to changes in product mix, changes in currency exchange rates, changes in competitive market conditions or other factors;

o the possibility that price increases, adjustments or surcharges may not be realized;

o the possibility that economic or technological developments may adversely affect growth in the use of graphite cathodes, in lieu of carbon cathodes, in the aluminum smelting process;

o the possibility that additions to aluminum smelting capacity may not occur or that increases in production of cathodes by competitors may occur, which may impact demand for or prices or sales volume of cathodes;

o the possibility of delays in or failure to achieve successful development and commercialization of new or improved electronic thermal management or other products or that they could be subsequently displaced by other products or technologies;

o the possibility of delays in or failure to achieve widespread commercialization of fuel cells which use our natural graphite-based products or that manufacturers of PEM fuel cells may obtain those products from other sources;

o the possibility of delays in expanding or failure to expand our manufacturing capacity to meet growth in demand for existing, new or improved products, if any;

o the possibility that we may be unable to protect our intellectual property or may infringe the intellectual property rights of others;

o the occurrence of unanticipated events or circumstances relating to antitrust investigations, lawsuits or claims, a securities class action lawsuit or other litigation;

o the possibility that our provision for income taxes and effective income tax rate or cash tax rate may fluctuate significantly due to changes in tax planning, profitability, estimates of future ability to use foreign tax credits, tax laws, and other factors;

o the occurrence of unanticipated events or circumstances relating to health, safety or environmental compliance or remediation obligations or liabilities to third parties or relating to labor relations;

o the possibility of changes in interest or currency exchange rates, in competitive conditions, or in inflation;

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o the possibility that our high leverage, substantial debt and other obligations could limit our financial resources and ability to compete and may make us more vulnerable to adverse economic events;

o the possibility that our outlook could be significantly impacted by, among other things, changes in interest rates by the U.S. Federal Reserve Board or other central banks, changes in fiscal policies by the U.S. and other governments, developments in the Middle East, the occurrence of further terrorist acts and developments (including increases in security, insurance, data back-up, energy and transportation and other costs, transportation delays and continuing or increased economic uncertainty and weakness) resulting from terrorist acts and the war on terrorism;

o the possibility that interruption in our major raw material, energy or utility supplies due to, among other things, natural disasters, process interruptions, actions by producers, and capacity limitations, may adversely affect our ability to manufacture and supply our products or result in higher costs;

o the possibility of interruptions in production at our facilities due to, among other things, critical equipment failure, which may adversely affect our ability to manufacture and supply our products or result in higher costs;

o the possibility that we may not complete planned asset sales for amounts or at times anticipated or at all, or that we may not achieve the earnings or other financial metrics that we provide as guidance from time to time;

o the possibility that the anticipated benefits from organizational and work process redesign or other system changes, including operating efficiencies, production cost savings and improved operational performance, including leveraging infrastructure for greater productivity and contributions to our continued growth, may be delayed or may not occur;

o the possibility that our disclosure or internal controls may become inadequate because of changes in conditions, that the degree of compliance with our policies and procedures related to those controls may deteriorate or that those controls may not operate effectively and may not prevent or detect misstatements or errors;

o the possibility that delays may occur in the financial statement closing process due to a change in our internal control environment; and

o other risks and uncertainties, including those described elsewhere in this Report or our other SEC filings, as well as future decisions by us.

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        Occurrence of any of the events or circumstances described above could also have a material adverse effect on our business, financial condition, results of operations, cash flows or the market price of our common stock, the Senior Notes or the Debentures.

        No assurance can be given that any future transaction about which forward looking statements may be made will be completed or as to the timing or terms of any such transaction.

        All subsequent written and oral forward looking statements by or attributable to us or persons acting on our behalf are expressly qualified in their entirety by these factors. Except as otherwise required to be disclosed in periodic reports required to be filed by public companies with the SEC pursuant to the SEC’s rules, we have no duty to update these statements.

        For a more complete discussion of these and other factors, see “Risk Factors” in the Annual Report.

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

Global Economic Conditions and Outlook

        We are impacted in varying degrees, both positively and negatively, as global, regional or country conditions fluctuate.

        Synthetic Graphite.Graphite electrode 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 first quarter of 2006, global steel production and operating rates, excluding China, were comparable to the same period last year. However, due to China’s steel production growth of 17.6% during the 2006 first quarter as compared to the same period in 2005, global steel production increased by about 5.4%. Overall, EAF steel production capacity continues to expand, with estimates that production will increase by 3% during 2006.

        We expect graphite electrode sales volume to be approximately 210,000 to 215,000 metric tons in 2006, depending on market conditions. We expect graphite electrode revenue to increase 15% in 2006 as compared to 2005, with a majority of the increase projected in the second half of the year.

        The global graphite electrode pricing environment continues to improve as global demand for high quality, reliable graphite electrodes continues to grow. 2006 is expected to be one of the strongest years in over a decade for EAF new start-ups. These new furnaces are projected to add over 5% of EAF steel capacity over the course of 2006, primarily in China and Russia.

        We have secured 100% of our anticipated 2006 premium needle coke requirements, our most significant and critical raw material. Premium needle coke represents the largest single component of graphite electrode production costs. Although raw material pricing pressures remain persistently high, we have identified productivity initiatives to help mitigate these rising 2006 production costs. These initiatives include the implementation of rationalization and productivity opportunities in our synthetic graphite facilities and continued streamlining, centralization and consolidation of our administrative activities. We believe these productivity and consolidation initiatives will contain our 2006 graphite electrode production cost increases to a range of 10% to 12%.

        Our venture with Alcan, which is a 30% owner of our cathode business and which purchases cathodes from us under requirements contracts that remain in effect through 2006, continues to position us as the leading supplier of cathodes to the aluminum industry. We believe that, over the long term, demand for graphite cathodes will increase relative to other cathodes as new smelting furnaces are built, thereby reducing the current excess supply of graphite cathodes.

        Other Segment.We expect increased blast furnace construction and refurbishment to lead to continuing strong demand for our carbon refractories in the various geographic markets

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through 2006. We believe that overall long-term demand for our refractories continues to increase with strong global economic growth. We continue to seek to drive productivity and cost improvements in these product lines.

        We expect continued growth of net sales of our ETM products and services. We have hired and are continuing to hire additional personnel in sales, marketing and research and development to support our growth. These resources will focus on the continued growth of our ETM business as we continue to leverage our successes to penetrate new customers and applications and identify new market opportunities including recent approvals for ETM solutions in liquid crystal display (LCD) panels. We believe the LCD flat panel display segment, when coupled with the plasma display television segment, is expected to grow from about eight million units in 2004 to sixty million units by 2008. Net sales for ETM products were $5.0 million as compared to $4.5 million in the 2005 first quarter. We expect ETM sales of approximately $30 million in 2006, representing an almost 60% increase over 2005.

        Overall. The 2006 effective tax rate is expected to be in the range of 37% to 40%. Capital expenditures are estimated to be approximately $45 million and depreciation expense is estimated to be about $40 million in 2006.

        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 March 31, 2006 as Compared to Three Months Ended March 31, 2005.Net sales of $208.6 million in the 2006 first quarter represented a $2.5 million, or 1.2%, decrease from net sales of $211.1 million in the 2005 first quarter, primarily due to lower net sales of $5.7 million in our other segment that were partially offset by an increase of $3.2 million in the synthetic graphite segment. Cost of sales of $152.7 million in the 2006 first quarter represented a $9.7 million, or 6.0%, decrease from cost of sales of $162.4 million in the 2005 first quarter, primarily due to lower sales volumes, partially offset by increases in raw material and energy costs. Gross profit of $55.9 million in the 2006 first quarter represented a $7.2 million, or 14.8% increase from gross profit of $48.7 million in the 2005 first quarter. Gross margin was 26.8% in the 2006 first quarter as compared to gross margin of 23.0% in the 2005 first quarter. See below for further details regarding such changes.

        Synthetic Graphite Segment. Net sales of $188.2 million in the 2006 first quarter represented a $3.2 million, or 1.7%, increase from net sales of $185.0 million in the 2005 first quarter. The increase was primarily due to a $7.3 million increase in cathodes and a $2.5 million increase in advanced synthetic graphite materials. The net sales increases in cathodes and advanced synthetic graphite materials were due primarily to increases in volumes and to a lesser extent pricing increases that were partially offset by net unfavorable currency impacts. The increases in net sales of cathodes and advanced synthetic graphite material were partially offset by a $6.7 million decrease in graphite electrode net sales due primarily to lower sales volumes of $13.8 million, net unfavorable currency impact of $3.5 million, unfavorable product mix of

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$3.0 million offset by $13.6 million due to higher realized pricing per metric ton. Volume of graphite electrodes sold was 42,400 metric tons in the 2006 first quarter as compared to 47,300 metric tons in the 2005 first quarter.

        Cost of sales of $134.6 million in the 2006 first quarter represented a $6.6 million, or 4.7%, decrease from cost of sales of $141.2 million in the 2005 first quarter. Cost of sales decreased throughout the synthetic graphite segment primarily due to lower volumes sold in graphite electrodes. As a result, gross profit in the 2006 first quarter was $53.7 million, 22.5% more than the 2005 first quarter. Gross margin was 28.5% of net sales in the 2006 first quarter as compared to the 23.7% of net sales in the 2005 first quarter.

        Other Segment. Net sales of $20.3 million in the 2006 first quarter represented a $5.7 million, or 21.9%, decrease from net sales of $26.0 million in the 2005 first quarter. This decrease was primarily due to a $3.8 million decrease in sales of carbon refractories due to the timing of product shipments that will occur in the second quarter of 2006 as a result of customer scheduling and a decrease of $1.7 million in carbon electrodes related to lower volumes. Cost of sales of $18.1 million in the 2006 first quarter represented a $3.1 million, or 14.6% decrease from cost of sales of $21.2 million in the 2005 first quarter. The decrease in cost of sales was primarily related to lower sales volumes. Gross profit in the 2006 first quarter was $2.3 million (a gross margin of 11.2% of net sales) as compared to gross profit in the 2005 first quarter of $4.8 million (a gross margin of 18.6% of net sales). The decrease in the gross margin percentage was due to the decrease in net sales.

        Items Affecting Us as a Whole. Selling, administrative and other expenses of $28.0 million in the 2006 first quarter represented a $1.8 million, or 6.9%, increase from $26.2 million in the 2005 first quarter. This increase in the 2006 first quarter consisted of $0.7 million of non-recurring costs related to the transition and overlap of certain accounting and finance functions, $0.3 million of external consulting fees and $0.8 million of other corporate administration costs.

        Other expense, net, was $0.6 million in the 2006 first quarter and consisted primarily of $0.5 million of bank and other financing fees, $0.8 million of relocation costs, $1.0 million of legal, environmental and other related costs, and $0.8 million of other costs. These expenses were partially offset by $2.5 million of currency exchange gains, primarily associated with Euro-denominated intercompany loans.

        Other expense, net, was $5.9 million in the 2005 first quarter and consisted primarily of $6.6 million of currency exchange losses, primarily associated with Euro-denominated intercompany loans, a $1.5 million write-off of capitalized bank fees and $0.6 million of bank and other financing fees. These costs were partially offset by the favorable fair value adjustments on the Debenture redemption make-whole provision of $2.8 million.

        In the 2006 first quarter, restructuring charges were $2.9 million. In the 2005 first quarter, restructuring charges were nominal. The following table summarizes activity relating to the accrued expense in connection with the restructuring charges. The restructuring accrual is

36

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included in other accrued liabilities and other long-term obligations on the Consolidated Balance Sheets.

	Severance and Related Costs			Plant Shutdown and Related Costs			Total
	(Dollars in thousands)
Balance at January 1, 2006	$	10,733		$	794		$	11,527
Restructuring charges		2,528			383			2,911
Change in estimates		35			—			35
Payments and settlements, majority of which are cash       payments		(637	)		(284	)		(921	)
Effect of change in currency exchange rates		217			—			217
Balance at March 31, 2006	$	12,876		$	893		$	13,769

        At March 31, 2006, the outstanding balance of our restructuring reserve was $13.8 million. We expect to make $13 million of these payments by the end of 2006, with the majority of the remaining payments to be paid by the end of 2007. The components of the balance at March 31, 2006 consisted primarily of:

        Synthetic Graphite Segment:

o $7.5 million related to the rationalization of our synthetic graphite facilities, including those in Brazil, France, and the closure of our facility in Russia.

o $3.9 million related to the closure of our graphite electrode manufacturing operations in Caserta, Italy.

o $0.7 million related to the phase-out of our graphite electrode machining operations in Clarksville, Tennessee.

        Other Segment and Corporate:

o $1.5 related primarily to remaining lease payments and severance and related costs associated with our former corporate headquarters.

o $0.2 related to the shutdown of our carbon electrode production operations at our Columbia, Tennessee facility.

        In the first quarter of 2006, we abandoned long-lived fixed assets associated with costs capitalized for our enterprise resource planning system implementations due to projected resource constraints. As a result, we recorded a $6.6 million loss, including the write-off of

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capitalized interest, in accordance with SFAS No. 144,“Accounting For the Impairment and Disposal of Long-Lived Assets”.

        Also, in the first quarter of 2006, management announced its intention to sell certain long-lived assets from the Etoy, Switzerland and Caserta, Italy locations. As a result, we have classified these assets as held for sale in the consolidated balance sheet in accordance with SFAS No. 144. In addition, we have recorded a $1.4 million impairment loss that adjusts the carrying value of the assets in Switzerland to the estimated fair value less selling costs.

        The following table presents an analysis of interest expense:

	For the Three Months Ended March 31,
	2005			2006
	(Dollars in thousands)
Interest incurred on debt	$	12,191		$	13,241
Interest rate swap benefit		(1,043	)		—
Amortization of fair value adjustments for terminated hedge instruments		(553	)		(239	)
Amortization of debt issuance costs		937			912
Interest on DOJ antitrust fine		149			84
Amortization of premium on Senior Notes		(40	)		(43	)
Amortization of discount on Debentures		220			161
Interest incurred on other items		117			113
Total interest expense	$	11,978		$	14,229

        Average total debt outstanding was $741.9 million in the 2006 first quarter as compared to $678.5 million in the 2005 first quarter. The average annual interest rate was 7.2% in the 2006 first quarter as compared to 6.5% in the 2005 first quarter. For the first quarter of 2005, the average annual rate includes the benefits of our interest rate swaps.

        Provision for income taxes was a charge of $3.5 million in the 2006 first quarter and $0.8 million in the 2005 first quarter. The effective income tax rate was approximately (365)% in the 2006 first quarter as compared to approximately 38% in the 2005 first quarter. The effective income tax rate in the 2006 first quarter is negative due to jurisdictional profitability mix. We estimate that we will have an effective income tax rate between 37% to 40% for 2006, excluding the effects of nondeductible restructuring expenses and other items of income and expense.

        As a result of the matters described above, net loss was $4.6 million in the 2006 first quarter as compared to net income of $1.5 million in the 2005 first quarter.

Effects of Changes in Currency Exchange Rates

        We incur costs in dollars and the currency of each of the six non-U.S. countries in which we have a manufacturing facility, and we sell our products in multiple currencies. In general, our results of operations, cash flows and financial condition are affected by changes in currency

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exchange rates affecting these currencies relative to the dollar and, to a limited extent, each other.

        Many of the non-U.S. countries in which we have a manufacturing facility have been subject to significant economic changes, which have significantly impacted currency exchange rates. We cannot predict changes in currency exchange rates in the future or whether those changes will have net positive or negative impacts on our net sales, cost of sales or net income. We cannot assure you that we would be able to mitigate any adverse effects of such changes.

        During the 2006 first quarter, the average exchange rate of the Brazilian Real and Mexican Peso increased about 19% and 6%, respectively, when compared to the average exchange rate for the 2005 first quarter. During the 2006 first quarter, the average exchange rate for the Euro and South African Rand decreased 10% and 7%, respectively, when compared to the average exchange rate for the 2005 first quarter.

        In the case of net sales of synthetic graphite, the impact of these events was a decrease of about $6.3 million in the 2006 first quarter as compared to the 2005 first quarter. In the case of cost of sales of synthetic graphite, the impact of these events was a decrease of about $3.7 million in the 2006 first quarter as compared to the 2005 first quarter.

        We have non-dollar denominated intercompany loans between GrafTech Finance and some of our foreign subsidiaries. At March 31, 2006, the aggregate principal amount of these loans was $425.6 million. These loans are subject to remeasurement gains and losses due to changes in currency exchange rates. A portion of these loans are deemed to be essentially permanent and, as a result, remeasurement gains and losses on these loans are recorded as a component of accumulated other comprehensive loss in the stockholders’ deficit section of the Consolidated Balance Sheets. The balance of these loans is deemed to be temporary and, as a result, remeasurement gains and losses on these loans are recorded as currency (gains) losses in other expense, net, on the Consolidated Statements of Operations. In the 2005 first quarter, we had a net total of $6.6 million in currency losses, including $6.2 million of exchange losses due to the remeasurement of intercompany loans and translation of financial statements of foreign subsidiaries that use the dollar as their functional currency. In the 2006 first quarter, we had a net total of $2.6 million in currency gains, including $4.2 million of exchange gains due to the remeasurement of intercompany loans and translation of financial statements of foreign subsidiaries which use the dollar as their functional currency. To manage certain exposures to specific financial market risks caused by changes in currency exchange rates, we use various financial instruments as described under “Item 3–Quantitative and Qualitative Disclosures about Market Risk.”

Liquidity and Capital Resources

        Our sources of funds have consisted principally of invested capital, cash flow from operations and debt and equity financings. Our uses of those funds (other than for operations) have consisted principally of capital expenditures, payment of fines, liabilities and expenses in

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connection with antitrust investigations, lawsuits and claims, payment of restructuring costs, pension and post-retirement contributions, debt reduction payments and other obligations.

        We are highly leveraged and have other substantial obligations. At March 31, 2006, we had total debt of $763.1 million, cash and cash equivalents of $21.3 million and a stockholders’ deficit of $202.9 million.

        As part of our cash management activities, we periodically factor or discount (by selling) certain accounts receivable to third parties. In the 2006 first quarter, certain subsidiaries sold receivables at a cost lower than the cost to borrow a comparable amount for a comparable period under the Revolving Facility. Proceeds of the sale of receivables were used to reduce debt. If we had not sold receivables, our accounts receivable and our debt would have been about $13.1 million higher at December 31, 2005 and about $15.3 million higher at March 31, 2006. All receivables sold during 2005 and the 2006 first quarter were sold without recourse, and no amount of accounts receivable sold remained on the Consolidated Balance Sheet at December 31, 2005 and March 31, 2006.

        We use cash and cash equivalents, funds available under the Revolving Facility (subject to continued compliance with the financial covenants and representations under the Revolving Facility), as well as cash flow from operations as our primary sources of liquidity. The Revolving Facility provides for maximum borrowings of up to $215 million. At March 31, 2006, $124.1 million was available (after consideration of outstanding revolving and swingline loans of $83.1 million and outstanding letters of credit of $7.8 million). It is possible that our future ability to borrow under the Revolving Facility may effectively be less because of the impact of additional borrowings upon our compliance with the maximum net senior secured debt leverage ratio permitted or minimum interest coverage ratio required under the Revolving Facility.

        At March 31, 2006, we were in compliance with all financial and other covenants contained in the Senior Notes, the Debentures and the Revolving Facility, as applicable. Based on expected operating results and expected cash flows, we expect to be in compliance with these covenants for the next twelve months. If we were to believe that we would not continue to comply with these covenants, we would seek an appropriate waiver or amendment from the lenders thereunder. We cannot assure you that we would be able to obtain such waiver or amendment on acceptable terms or at all.

        At March 31, 2006, 13% (or $98.2 million) of our total debt consists of variable rate obligations. As of March 31, 2006, there were no outstanding interest rate swaps or caps.

        At March 31, 2006, the Revolving Facility had an effective interest rate of 7.3%, our $434.6 million principal amount of Senior Notes had a fixed rate of 10.25% and our $225 million principal amount of Debentures had a fixed coupon rate of 1.625%. We estimate that we will have interest expense of approximately $58.3 million for 2006.

40

        We expect to continue to implement interest rate management initiatives in the future to seek to minimize interest expense and optimize the risk in our portfolio of fixed and variable interest rate obligations as described under “Item 3–Quantitative and Qualitative Disclosures about Market Risk” in this Report.

        Cash Flow and Plans to Manage Liquidity. As a result of our significant leverage and other substantial obligations, our business strategies include efforts to enhance our capital structure by further reducing our gross obligations. Accordingly, we have placed the highest priority on accelerating the amount and speed of cash generated every day. Our efforts include leveraging our unique global manufacturing network by driving higher utilization rates and more productivity from our existing assets, accelerating commercialization initiatives across all of our businesses and realizing other global efficiencies. We also continue to evaluate other opportunities to reduce our obligations, including the obligations associated with our U.S. defined benefit plan, which was frozen in 2003.

        Typically, the first quarter of each year results in neutral or negative cash flow from operations due to various factors. These factors include customer order patterns, fluctuations in working capital requirements and other factors. The third quarter tends to produce relatively less positive cash flow from operations primarily as a result of scheduled plant shutdowns by our customers for vacations.Our cash flow from operations in the first and third quarters typically is adversely impacted by the semi-annual interest payments on the Senior Notes and the Debentures. The second and fourth quarters correspondingly benefit from the absence of such interest payments.

        As part of our cash management activities, we seek to manage accounts receivable credit risk and collections, and accounts payable and payment thereof to maximize our free cash at any given time and minimize accounts receivable losses. In order to seek to minimize our credit risks, we periodically reduce our sales of, or refuse to sell (except for cash on delivery), graphite electrodes to some customers and potential customers in the U.S. and, to a limited extent, elsewhere. Our unrecovered trade receivables worldwide were only 0.1% of global net sales during the last 3 years. We cannot assure you that we will not be materially adversely affected by accounts receivable losses in the future.

        We use cash and cash equivalents, funds available under the Revolving Facility and cash flow from operations as our primary sources of liquidity. We believe that our business strategies will continue to improve the amount and speed of cash generated from operations under current economic conditions. Improvements in cash flow from operations resulting from these strategies are being partially offset by associated cash implementation costs while they are being implemented. We also believe that our planned asset sales together with these improvements in cash flow from operations should allow us to reduce our debt and other obligations over the long term.

        We may from time to time and at any time repurchase Senior Notes or Debentures in open market or privately negotiated transactions, opportunistically on terms that we believe to be

41

favorable. These purchases may be effected for cash (from cash and cash equivalents, borrowings under the Revolving Facility or new credit facilities, or proceeds from sale of debt or equity securities or assets), in exchange for common stock or other equity or debt securities, or a combination thereof. We will evaluate any such transaction in light of then prevailing market conditions and our then current and prospective liquidity and capital resources, including projected and potential needs and prospects for access to capital markets. Any such transactions may, individually or in the aggregate, be material.

        We have in the past entered into, and may in the future enter into, natural gas derivative contracts and short duration fixed rate purchase contracts to effectively fix some or all of our natural gas cost exposure, as described under “Quantitative and Qualitative Disclosure about Market Risks” in this Report.

        We are required to provide cash collateral to certain counterparties to the extent that the fair market value of the natural gas derivative contracts exceeds a specific threshold. At March 31, 2006, we were not required to provide any cash collateral.

        Our high leverage and other substantial obligations could have a material impact on our liquidity. Cash flow from operations services payment of our debt and other obligations thereby reducing funds available to us for other purposes. Our leverage and these obligations make us more vulnerable to economic downturns in the event that these obligations are greater or timing of payment is sooner than expected.

        We believe that the long-term fundamentals of our business continue to be sound. Accordingly, although we cannot assure you that such will be the case, we believe that, based on our expected cash flow from operations, our existing capital resources, and taking into account our working capital needs and our efforts to reduce costs, improve efficiencies and product quality, and accelerate commercialization of new products and cash flow, we will be able to manage our liquidity to permit us to service our debt and meet our obligations when due.

        Cash Flow Provided by Operating Activities. Cash flow used in operating activities was $33.4 million in the 2006 first quarter as compared to $13.8 million in the 2005 first quarter, an increase of $19.6 million. The primary uses consisted of $40.2 million for working capital and $6.6 million for other long-term assets and liabilities offset by $13.4 million from the net loss, after adding back the net effect from non-cash items. Working capital uses related primarily to a $29.3 million increase in inventories to allow for transition of facilities and to position us to meet expected customer demand, a $4.5 million payment against the DOJ antitrust fine, $0.9 million of restructuring payments, and decreases in payables and accruals due to timing of payment patterns (including our semi-annual interest payment on the Senior Notes) of $31.2 million, offset by a $25.8 million decrease in accounts and notes receivable (including $2.4 million related to the factoring of accounts receivable). Other long-term assets and liabilities uses were primarily for pension and postretirement benefits. Other items that affected operating cash flow consisted primarily of $8.2 million related to impairments of long-term assets, $2.9 million

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related to restructuring charges, $9.2 million of depreciation, amortization and $2.3 million of other net uses of cash.

        Cash used in operating activities was $13.8 million in the 2005 first quarter. The primary uses consisted of $26.5 million for working capital and $2.6 million for other long-term assets and liabilities, offset by $15.4 million of cash from net income, after adding back the net effect from non-cash items. Working capital uses related primarily to a $22.4 million increase in inventories to allow for transition of facilities and position to meet expected customer demand, a $23.6 million decrease in payables and accruals (due to timing of payment patterns, including our semi-annual interest payment on the Senior Notes), $3 million of restructuring payments and $3.4 million of payments in connection with antitrust investigations and related lawsuits and claims, offset by a $25.9 million decrease in accounts and notes receivable. Other long-term assets and liabilities uses were primarily for pension, postretirement and other employee benefits. Non-cash items consisted primarily of $8.6 million of depreciation and amortization and $5.2 million of other net charges.

        Cash Flow Used in Investing Activities.Cash flow used in investing activities was $10.9 million in the 2006 first quarter and $13.8 million in the 2005 first quarter. Capital expenditures amounted to $10.9 million for the 2006 first quarter and $10.8 million of the 2005 first quarter and related primarily to graphite electrode productivity and production stability initiatives and other essential capital maintenance.

        Cash Flow Provided by Financing Activities. Cash flow provided by financing activities was $59.6 million in the 2006 first quarter and $20.5 million during 2005 first quarter.

        During the 2006 first quarter, we borrowed $44.1 million under the Revolving Facility. We used these borrowings primarily to pay our semi-annual interest payment on the Senior Notes, our scheduled payments to the DOJ, and to fund increases in working capital and capital expenditures. We also made contributions to certain pension plans.

        During the 2005 first quarter, we borrowed $25 million under the Revolving Facility. We used these borrowings primarily to pay our semi-annual interest payment on the Senior Notes. In the 2005 first quarter, we also paid $3.8 million of financing costs in conjunction with the refinancing of the Revolving Facility.

Restrictions on Dividends and Stock Repurchases

        A description of the restrictions on our ability to pay dividends and our ability to repurchase common stock is set forth under “Item 5 – Dividend Policies and Restrictions” in the Annual Report and such description is incorporated herein by reference. Such description contains all of the information required with respect thereto.

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PART I (CONT’D)
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Recent Accounting Pronouncements

        A description of recent accounting pronouncements is set forth under “New Accounting Standards” in Note 2 to the Notes to the Consolidated Financial Statements contained in this Report, and such description is incorporated herein by reference. Such description contains all of the information required with respect thereto.

Description of Our Financing Structure

        A description of the Revolving Facility, the Senior Notes and the Debentures is set forth under “Long-Term Debt and Liquidity” in the Annual Report, and such description is incorporated herein by reference.

Antitrust Proceedings Against Us

        In 1997, the DOJ and the EU Competition Authority commenced investigations into alleged violations of the antitrust laws in connection with the sale of graphite electrodes. The antitrust authorities in Canada, Japan and Korea subsequently began similar investigations. The EU Competition Authority also commenced an investigation into alleged antitrust violations in connection with the sale of specialty graphite. These antitrust investigations have been finally resolved. Several of the investigations resulted in the imposition of fines against us. These fines, or payments in accordance with a payment schedule, in the case of the DOJ antitrust fine, have been timely paid.

        Through March 31, 2006, except for certain foreign customer lawsuits discussed in Note 14 of the Annual Report, we have settled or obtained dismissal of all of the civil antitrust lawsuits (including class action lawsuits) previously pending against us, certain civil antitrust lawsuits threatened against us and certain possible civil antitrust claims against us arising out of alleged antitrust violations occurring prior to the date of the relevant settlement in connection with the sale of graphite electrodes, carbon electrodes and bulk graphite products. All payments due have been timely paid.

        We have been vigorously defending, and intend to continue to vigorously defend, against the foreign customer lawsuits. We may at any time, however, settle these lawsuits. It is possible that additional antitrust investigations, lawsuits and claims could be commenced or asserted in the U.S. or other jurisdictions. We are currently not reserved for such matters.

Other Proceedings Against Us

        We are involved in various other investigations, lawsuits, claims and other legal proceedings incidental to the conduct of our business. While it is not possible to determine the ultimate disposition of each of them, we do not believe that their ultimate disposition will have a material adverse effect on our financial position, results of operations or cash flows.

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PART I (CONT’D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES

        On March 1, 2006, we were served with a complaint commencing a securities class action in the United States District Court for the District of Delaware (Civil Action No. 06-133). The complaint alleged that GTI and certain officers violated federal securities law by making false statements or failing to disclose adverse facts, in or in relation to press releases issued by us on November 3, 2005, about our graphite electrode pricing power, our cost-cutting measures, the market for our non-graphite product lines, our forecasting ability, our internal controls and corporate compliance, and our restructuring activities and charges. The proposed class consists of all persons who purchased our securities during the period from November 3, 2005 until February 8, 2006. The complaint seeks, among other things, to recover damages resulting from such alleged violations. On March 21, 2006, the complaint was voluntarily withdrawn by the plaintiffs.

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PART I (CONT’D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES

Item 3. Quantitative and Qualitative Disclosures about Market Risk

        We are exposed to market risks primarily from changes in interest rates, currency exchange rates, and commercial energy rates. We routinely enter into various transactions that have been authorized according to documented policies and procedures to manage these well-defined risks. These transactions relate primarily to financial instruments described below. Since the counterparties to these financial instruments are large commercial banks and similar financial institutions, we do not believe that we are exposed to material counterparty credit risk. We do not use financial instruments for trading purposes.

        Our exposure to changes in interest rates results primarily from floating rate long-term debt tied to LIBOR or euro LIBOR. Our exposure to changes in currency exchange rates results primarily from:

o sales made by our subsidiaries in currencies other than local currencies;

o raw material purchases made by our foreign subsidiaries in currencies other than local currencies; and

o investments in and intercompany loans to our foreign subsidiaries and our share of the earnings of those subsidiaries, to the extent denominated in currencies other than the dollar.

        Our exposure to changes in energy costs results primarily from the purchase of natural gas and electricity for use in our manufacturing operations. Our exposure to changes in the fair value of the redemption make-whole option results primarily from changes in the closing price of our common stock during each quarterly period.

        Interest Rate Risk Management.We implement interest rate management initiatives to seek to minimize our interest expense and optimize the risk in our portfolio of fixed and variable interest rate obligations. At December 31, 2005 and March 31, 2006, we had no interest rate swaps outstanding.

        When we sell a fair value hedge swap, the gain or loss is amortized as a credit or charge to interest expense over the remaining term of the Senior Notes. When we effectively reduce the outstanding principal amount of the Senior Notes (through debt-for-equity exchanges, repurchases or otherwise), the related portion of such credit or charge is accelerated and recorded in the period in which such reduction occurs.

        We enter into agreements with financial institutions that are intended to limit, or cap, our exposure to incurrence of additional interest expense due to increases in variable interest rates. These instruments effectively cap our interest rate exposure. At December 31, 2005 and March 31, 2006, we had no outstanding interest rate caps. Our interest rate caps are marked-to-market monthly. Gains and losses are recorded in other (income) expense, net, on the Consolidated Statements of Operations. The mark-to-market adjustment on caps resulted in a nominal gain for the 2005 first quarter.

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        Currency Rate Management. We enter into foreign currency instruments to attempt to manage exposure to changes in currency exchange rates. These foreign currency instruments, which include, but are not limited to, forward exchange contracts and purchased currency options, attempt to hedge global currency exposures, net, relating to euro-denominated debt and identifiable foreign currency receivables, payables and commitments held by our foreign and domestic subsidiaries. Forward exchange contracts are agreements to exchange different currencies at a specified future date and at a specified rate. Purchased foreign currency options are instruments which give the holder the right, but not the obligation, to exchange different currencies at a specified rate at a specified date or over a range of specified dates. The result is the creation of a range in which a best and worst price is defined, while minimizing option cost. Forward exchange contracts and purchased currency options are carried at market value. As of December 31, 2005 and March 31, 2006, there were no outstanding contracts. In the 2005 first quarter, we recorded a nominal gain with respect to contracts held during the quarter.

        Commercial Energy Rate Management. We have in the past entered into, and may in the future enter into, natural gas derivative contracts and short duration fixed rate purchase contracts to effectively fix some or all of our natural gas cost exposure. As of March 31, 2006, we had fixed about 35% of our worldwide natural gas exposure through such contracts. The outstanding contracts at December 31, 2005 were a nominal receivable. The loss and associated liability on outstanding contracts at March 31, 2006 amounted to $0.7 million.

        We are required to provide cash collateral to certain counterparties to the extent that the fair market value of the natural gas derivative contracts exceeds a specific threshold. At March 31, 2006, we were not required to provide any cash collateral.

        Sensitivity Analysis. We used a sensitivity analysis to assess the potential effect of changes in currency exchange rates, interest rates, and commercial energy rates on results of operations for the 2006 first quarter. Based on this analysis, a hypothetical 10% weakening or strengthening in the dollar across all other currencies would have changed our reported gross margin for the 2006 first quarter by $2.1 million. Based on this analysis, a hypothetical increase in interest rates of 100 basis points would have increased our interest expense by about $0.2 million for the 2006 first quarter.

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Item 4. Controls and Procedures

        Evaluation of Disclosure Controls and Procedures. Management is responsible for establishing and maintaining adequate disclosure controls and procedures at the reasonable assurance level. Disclosure controls and procedures are designed to ensure that information required to be disclosed by a reporting company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by it in the reports that it files under the Exchange Act is accumulated and communicated to management, including the chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

        Under the supervision and with the participation of our management, including our Chief Executive Officer and interim Chief Financial Officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2006. Based on that evaluation, our Chief Executive Officer and interim Chief Financial Officer has concluded that these controls and procedures are effective at the reasonable assurance level as of March 31, 2006.

        Changes in Internal Controls over Financial Reporting. In our 2005 Annual Report on Form 10-K, we announced the relocation of our principal executive office from Wilmington, Delaware to Parma, Ohio, the relocation of various business transaction processing and accounting functions from our offices in Clarkesville, Tennessee to Parma, and the relocation of certain management, accounting and treasury functions from our offices in Etoy, Switzerland to Parma. During the first quarter of 2006, a significant number of our corporate employees (including employees involved in our control environment) have elected not to relocate and have left employment with us following a period during which their functions were transitioned to other employees hired in Parma.

        In 2005, we also announced the termination of our business process services (“BPS”) agreement with CGI. Under this agreement, CGI managed certain of our accounting and finance functions and played a role in performing certain internal control functions. We no longer rely on the provider to perform these functions. The agreement’s effective termination date was February 28, 2006.

        During the 2005 fourth quarter, we also announced the resignation of our Chief Financial Officer. Our Chief Financial Officer was also our principal accounting officer and was a key component of our overall control environment. In conjunction with his resignation, we named our Chief Executive Officer as our interim Chief Financial Officer. We have hired a new Chief Financial Officer who is also our principal accounting officer who began employment with us on May 8, 2006. Our Chief Executive Officer nonetheless continued to be responsible for the functions of the Chief Financial Officer through the filing of this Report with the SEC.

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PART I (CONT’D)
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        Beginning in the 2005 fourth quarter and continuing in the 2006 first quarter, we have engaged in activities designed to ensure a smooth transition in connection with, and mitigate any material disruption to our business or our internal control over financial reporting resulting from these events. Among other things, as of March 31, 2006:

o We had hired about 85% of our projected headcount for the accounting and finance function.

o We were using outside consultants and other internal resources during the transition to facilitate the completion of key internal control and disclosure activities.

        Except as described above, there has been no change in our internal controls over financial reporting that occurred during the 2006 first quarter that materially affected or is reasonably likely to materially affect our internal controls over financial reporting.

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PART II. OTHER INFORMATION
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES

Item 1. Legal Proceedings

        This information required in response to this Item is set forth under “Contingencies” in Note 13 to the Notes to Consolidated Financial Statements contained in this Report, and such description is incorporated herein by reference.

Item 6. Exhibits

        The exhibits listed in the following table have been filed as part of this Report.

Exhibit
Number
Description of Exhibit

10.1 Separation Agreement between GrafTech International Ltd. and Karen G. Narwold, effective March 30, 2006.

10.2 GrafTech International Ltd. Incentive Compensation Plan, effective January 1, 2003.

31.1 Certification pursuant to Rule 13a-14(a) under the Exchange Act by Craig S. Shular, Chief Executive Officer & President.

31.2 Certification pursuant to Rule 13a-14(a) under the Exchange Act by Craig S. Shular, Interim Chief Financial Officer (Principal Accounting Officer).

32.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Craig S. Shular, Chief Executive Officer & President.

32.2 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Craig S. Shular, Interim Chief Financial Officer (Principal Accounting Officer).

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SIGNATURE

        Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

GRAFTECH INTERNATIONAL LTD.

Date: May 9, 2006 By:/s/ Craig S. Shular                                                
       Craig S. Shular
       Chief Executive Officer, President,
       and Interim Chief Financial Officer and
       Director (Principal Executive Officer
       and Principal Accounting Officer)

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EXHIBIT INDEX

Exhibit
Number Description of Exhibit

10.1 Separation Agreement between GrafTech International Ltd. and Karen G. Narwold, effective March 30, 2006.

10.2 GrafTech International Ltd. Incentive Compensation Plan, effective January 1, 2003.

31.1 Certification pursuant to Rule 13a-14(a) under the Exchange Act by Craig S. Shular, Chief Executive Officer & President.

31.2 Certification pursuant to Rule 13a-14(a) under the Exchange Act by Craig S. Shular, Interim Chief Financial Officer (Principal Accounting Officer).

32.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Craig S. Shular, Chief Executive Officer & President.

32.2 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Craig S. Shular, Interim Chief Financial Officer (Principal Accounting Officer).

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