WATERLINK INC - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

(X) Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Fiscal Year Ended September 30, 2002

( ) 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 1-13041

WATERLINK, INC.
(Exact name of registrant as specified in its charter)

DELAWARE 34-1788678
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

835 NORTH CASSADY AVENUE
COLUMBUS, OHIO 43219
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(Address of principal executive offices) (Zip Code)

Registrant's Telephone Number, Including Area Code: (614) 258-9501

Securities registered pursuant to Section 12(b) of the Act:

TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
Common Stock, $.001 par value None

Securities registered pursuant to Section 12(g) of the Act:

NONE

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 and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2) Yes [ ] No [X]

As of November 30, 2002 the aggregate market value of Waterlink's voting Common
Stock held by non-affiliates of Waterlink was approximately $344,000.

As of November 30, 2002 there were 19,659,694 shares of the registrant's Common
Stock, $.001 par value outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on February 13, 2003 are deemed to be incorporated by
reference in Part III of this Form 10-K.
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PART I

ITEM 1. BUSINESS

GENERAL

Waterlink is an international provider of integrated water and air
purification solutions for both industrial and municipal customers. Our
principal executive offices are located at 835 North Cassady Avenue, Columbus,
Ohio 43219 and our telephone number is (614) 258-9501.

Waterlink was incorporated in Delaware on December 7, 1994 to participate
in the consolidation of the highly fragmented water purification and wastewater
treatment industry. Waterlink grew rapidly through acquisitions from 1995
through 1998, having made 13 acquisitions. In May 2000 Waterlink announced that
its board of directors had instructed management to explore various strategic
alternatives, including the sale of all or part of Waterlink that could maximize
our shareholders' investment in Waterlink. To date, Waterlink has sold four of
its five operating divisions: the biological division in two separate
transactions in September and December 2000, the separations division in
February 2001, the European water and wastewater division in a series of
transactions during the fourth quarter of our fiscal year ended September 30,
2001, and the pure water division in May 2002.

As of September 30, 2002 the remaining operations of Waterlink are the
entities that comprised what had previously been reported as the specialty
products division. Accordingly, the operations of all divisions except for the
specialty products operations are reported as discontinued operations for each
period presented. A brief description of the operations that comprise
Waterlink's continuing operations follows.

The specialty products operations and their predecessors have specialized
in the development and production of highly sophisticated activated carbons for
more than 80 years. The worldwide and domestic headquarters are located in
Columbus, Ohio. Approximately two-thirds of Waterlink's net sales are generated
from the United States. The remaining one-third of net sales are generated from
our facility in Lancashire, England. Activated carbon is used to purify air,
water and gases by retaining impurities in carbon granules. Waterlink is a
worldwide supplier of activated carbon for liquid, air and gas filtration
systems and is a leading manufacturer of specialty-impregnated carbons used in
applications where the capacity of activated carbons can be significantly
increased. A full range of activated carbons manufactured from coconut shell,
coal, wood, along with other adsorbents such as modified clay media, bone char,
and anthracite are offered for use in:

- adsorption equipment, both standard and custom configurations,
primarily for separation of solvents from air

- bioreactors and bioscrubbers in which contaminants are destroyed using
biological microbes

- corrosive gas control systems to protect expensive electronic operated
controls

- distillation equipment for separation applications

- systems that control emissions from volatile organic compounds

- area filtration systems for the removal of both vapor phase and
particulate contaminants

- indoor air quality systems

- odor control systems

- soil vapor extraction systems

- solvent recovery systems engineered and installed on a turn-key basis,
to recover valuable solvents

The products and systems are sold using a combination of direct sales and
sales representatives.

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OPERATING AND SALES STRATEGY

The corporate headquarters for Waterlink were relocated to Columbus, Ohio
in November 2001 and are located within the main facility of Barnebey Sutcliffe
Corporation. We sell our consumable products, equipment, services and engineered
systems primarily through approximately 17 direct sales personnel. In the United
States, Waterlink strives to have locations close to our customers and centers
of business by means of our eleven locations throughout the country. In England
the sales force is centralized and reaches its customers through travel.

Approximately two-thirds of Waterlink's revenue is recurring in nature in
the form of carbons and related services. The other one-third of the business is
engineered systems. While we have received contract awards for engineered
systems in excess of $3 million, Waterlink is primarily focusing its marketing
efforts with regard to engineered systems on contract awards approximating $2
million. We believe that competition is fiercer for larger contract awards and
the timing of these awards is more unpredictable.

COMPETITION

Despite some large competitors, the market for activated carbons remains
fragmented and highly competitive due to the large number of competitors within
each product and geographic area. Waterlink has a significant number of
competitors, the majority of which are specific to certain products and regions,
but some competitors are larger and have greater resources than Waterlink. We
believe that success in our market is based on the ability to offer appropriate
products, services and technical support for our recurring revenue products; and
by providing cost-effective, reliable engineered systems that meet customer
specifications. Approximately 98% of our business is with industrial customers.
In the municipal arena, the ability to meet bid specifications and the ability
to set pricing are often primary considerations. In addition, our highly
leveraged financial condition has hurt our competitive position to finance and
bond large projects, especially with municipalities.

Waterlink's primary competitors include operating subsidiaries of
Vivendi, including Compagnie Generale des Eaux and U.S. Filter Corporation,
Calgon Carbon Corporation and Norit America.

CUSTOMERS

Waterlink markets its products and services primarily to industrial
customers. Waterlink's industrial customers include many "Fortune 500" companies
and their counterparts outside of the United States. Industries served include
the point-of-use/point-of-entry consumer business, chemical processing,
remediation, electronic and microelectronic, food, beverage, printing, and other
manufacturing industries. For the year ended September 30, 2002, approximately
97.9% of Waterlink's net sales from continuing operations were derived from
industrial sales. The percentage of net sales to industrial customers was
approximately 96.6% in 2001 and 97.9% in 2000.

The municipal market is highly competitive, and municipal markets in the
United States are more regulatory driven than municipal markets in other
regions. Although Waterlink has products and services that could address this
market, our financial condition and the ability to obtain performance bonds for
projects has precluded us from obtaining large municipal contracts. For the year
ended September 30, 2002, approximately 2.1% of Waterlink's net sales from
continuing operations were derived from municipal sales. The percentage of net
sales to municipal customers was approximately 3.4% in 2001 and 2.1% in 2000.

BACKLOG FROM CONTINUING OPERATIONS

Total backlog from continuing operations as of September 30, 2002 was
$15.2 million as compared to total backlog from continuing operations of $19.4
million at September 30, 2001. At September 30, 2002, Waterlink had $13.0
million of firm commitments to purchase recurring revenue

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products, as compared to $12.9 million as of September 30, 2001. In addition,
Waterlink had a backlog, consisting of written purchase orders for capital goods
equipment of $2.2 million as of September 30, 2002 as compared to $6.5 million
as of September 30, 2001. Waterlink expects that a significant portion of our
backlog at the beginning of a fiscal year will be filled during that year.
Backlog, and therefore sales, may vary from quarter to quarter as a result of
large projects being booked during any quarter and varying project delivery
schedules. In addition, the orders have varying delivery schedules and
Waterlink's backlog as of any particular date may not be representative of
actual net sales for any succeeding period.

PROCESS AND PRODUCT WARRANTY AND PERFORMANCE GUARANTEES

Consistent with industry practices, we generally offer a warranty on
engineered systems for one year or in some cases 18 months from sale and 12
months from installation for product and workmanship. No process or performance
guarantees are made. In addition, we warrant that carbons and other consumable
products meet customer specifications. The costs associated with warranty
expense have not been material.

RAW MATERIAL AND SUPPLIES

Waterlink is dependent on the importation of coconut shell carbon from
Asia and the supply of coal based carbon from domestic and Asian sources.
Waterlink is not dependent upon any single supplier, and if any supplier were to
become unable to perform, Waterlink believes a substitute source could readily
be found. Waterlink attempts to pass on price increases for raw materials and
components to its customers as market conditions allow. Waterlink is not a party
to any material long-term fixed price supply contracts. The raw materials and
components used in Waterlink's engineered systems are commonly available
commodities such as stainless steel, carbon steel, plastic, tubing, wiring,
electrical components, pumps, valves, compressors, and pressure vessels.
Waterlink's systems are fabricated from these materials and assembled together
with products bought from other companies to form an integrated system.

GOVERNMENT REGULATION

Federal, state, local and foreign environmental laws and regulations
necessitate substantial expenditures and compliance with water quality standards
by generators of wastewater and wastewater by-products and impose liabilities on
such entities for noncompliance. Environmental laws and regulations and their
enforcement are, and will continue to be, a significant factor affecting the
marketability of the products and equipment provided by Waterlink.

The countries in which Waterlink operates or in which our customers are
located, including the United States, countries in western Europe, Latin
America, and the Asia-Pacific region, have adopted requirements that govern
water quality. These requirements and their enforcement vary by country, but in
general establish water quality, use and disposal standards, set wastewater
effluent discharge limits, and prescribe standards for the protection of human
health and safety and the environment.

Any changes in applicable environmental standards and requirements or
their enforcement may affect the operations of Waterlink by imposing additional
regulatory compliance costs on Waterlink's customers, requiring the modification
of and/or affecting the market for Waterlink's products and equipment. To the
extent that demand for Waterlink's products and equipment is created by the need
to comply with these enhanced standards and requirements or their enforcement,
any modification of the standards and requirements or their enforcement may
reduce demand, thereby adversely affecting Waterlink's business prospects.
Conversely, changes in applicable environmental laws imposing additional
regulatory compliance standards and requirements or causing stricter enforcement
of these laws or regulations could increase the demand for Waterlink's products
and equipment.

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PATENTS, TRADEMARKS AND LICENSES

We currently own a number of registrations for United States service
marks and trademarks and two patents in England. While each is of value,
Waterlink generally does not consider any of them to be material to our
business.

EMPLOYEES

At September 30, 2002, Waterlink had approximately 243 employees at our
various locations. Approximately 56 employees are covered under collective
bargaining agreements in the United States, which expires at midnight on October
31, 2003. We believe that our relationship with our employees is good.

ITEM 2. PROPERTIES

The corporate office of Waterlink is located within the Columbus, Ohio
facility of Barnebey Sutcliffe Corporation. We also lease approximately 1,000
square feet located in Canton, Ohio. Our subsidiaries own or lease facilities
for office space and manufacturing as follows:

- Barnebey Sutcliffe Corporation -- United States

- Columbus, Ohio (own)

- Napa and Santa Fe Springs, California (lease)

- Addison, Illinois (lease)

- Sulphur, Louisiana (lease)

- Worcester, Massachusetts (lease)

- Sparks, Nevada (lease)

- Downington, Pennsylvania (lease)

- Morgantown, West Virginia (lease)

- Prineville, Oregon (lease)

- Sutcliffe Speakman Limited -- England

- Lancashire, England (lease)

The expiration dates for these leased properties range from one-month
notice to August 2005 in the United States, with the lease for the facility in
England expiring in September 2011. We believe that each of our facilities is in
adequate condition and will continue to remain suitable for its current purpose.
We may add improvements to the properties listed above. We anticipate using our
properties for purposes consistent with their present use. In the event any of
the facilities becomes unavailable upon termination of the existing lease, we
believe we would be able to find a suitable alternative facility without any
significant adverse impact to our operations. We believe our properties are
adequately covered by insurance.

ITEM 3. LEGAL PROCEEDINGS

From time to time in the normal course of our business, we become a party
to litigation. Most of this litigation involves claims for personal or
employment related injury or property damage incurred in connection with our
operations. We are not a party to any material litigation and believe that none
of our litigation will have a material adverse effect on our business or
financial results.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

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PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

MARKET INFORMATION

Our common stock is listed on the OTC Bulletin Board under the symbol
"WLKN". The following table sets forth the high and low composite sales prices
for the fiscal quarters indicated. Until April 25, 2001 our common stock was
listed on The New York Stock Exchange under the symbol "WLK". With regard to
information subsequent to April 25, 2001 the quotations may reflect inter-
dealer prices, without retail mark-up, mark-down or commission, and may not
represent actual transactions.

The number of holders of record of our common stock as of November 30,
2002 was approximately 241.

DIVIDENDS

We have not paid or declared any dividends on our common stock since our
inception. We anticipate that any earnings will be retained to support the
growth of our business and will not be distributed to stockholders as dividends.
The declaration and payment of any future dividends and the amount of any
dividend will be determined by our board of directors and will depend upon our
results of operations, financial condition, cash requirements, future prospects,
limitations imposed by bank credit and debt agreements and other factors deemed
relevant by our board of directors. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."

Pursuant to our bank credit agreement, we may not declare or make, or
agree to declare or make, directly or indirectly, any dividends, except that we
may declare and pay dividends with respect to our capital stock payable solely
in additional shares of our common stock or options, warrants or other rights to
purchase our common stock.

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EQUITY COMPENSATION PLAN INFORMATION

With regard to the 203,000 securities issued without the approval of
security holders, all are warrants to purchase shares of common stock. Specific
information with regard to each issuance is presented below:

- On January 20, 2000, 3,000 warrants to purchase common stock were
issued to CID Equity Partners V, LP in lieu of an equal amount of stock
options which would have been issued pursuant to Waterlink's 1997
Non-Employee Director Stock Option Plan to John T. Hackett, then a
Managing General Partner of CID Equity Partners, L.P., upon Mr.
Hackett's election to Waterlink's board of directors.

- On May 2, 2000, 100,000 warrants to purchase shares of common stock
were issued to Bank of America, N.A., in connection with the eighth
amendment to Waterlink's senior credit facility.

- On January 18, 2001, 50,000 warrants to purchase shares of common stock
were issued to each of Brantley Venture Partners III, LP and CID Equity
Partners V, LP, in connection with subordinated indebtedness issued to
each of them on the amount of $500,000.

In each case, the warrants expire five years after issuance.

RECENT SALES OF UNREGISTERED SECURITIES

There were no sales of unregistered securities during the fiscal year
ended September 30, 2002.

ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth selected historical consolidated financial
data of Waterlink over the last five fiscal years. The financial data presented
for the five fiscal years ended September 30, 2002 have been derived from
Waterlink's audited financial statements with reclassifications made to reflect
discontinued operations as presented below. The financial data includes the
operating results of each acquired business from the date of acquisition in
accordance with the purchase method of accounting.

You should read the selected historical consolidated financial data in
conjunction with, and they are qualified by, our historical consolidated
financial statements and the related notes and

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"Management's Discussion and Analysis of Financial Condition and Results of
Operations," contained elsewhere in this report.

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(1) For the year ended September 30, 1999, selling, general and administrative
expenses included $255,000, or $0.02 per share, relating to the write off of
costs associated with acquisition activity that ceased during the year.

(2) Waterlink incurred special charges relating to continuing operations as
follows:

- During the fiscal year ended September 30, 1998, Waterlink incurred
special charges of $3,058,000, or $0.25 per share. These special charges
are comprised of the following two components:

- Waterlink recorded a charge of $1,564,000, or $0.13 per share, primarily
related to termination benefits and costs associated with the exiting of
certain facilities to implement our 1999 plan.

- Waterlink incurred special charges of $1,494,000, or $0.12 per share,
primarily attributable to contractual obligations to a former chief
executive officer, who resigned in June 1998, and costs necessary to
recruit executives to Waterlink.

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- During the year ended September 30, 1999, Waterlink incurred special
charges of $456,000, or $0.04 per share, for continuing costs associated
with the implementation of Waterlink's 1999 plan, primarily related to
termination benefits.
- During the year ended September 30, 2001, Waterlink incurred special
charges of $2,560,000, or $0.13 per share, related to the closing of its
corporate office, primarily related to termination benefits.

(3) Interest expense for the years ended September 30, 1999, 2000 and 2001
include financing charges of $870,000, or $0.07 per share, $217,000, or
$0.01 per share, and $87,000, or $0.00 per share, respectively, related to
the amortization of the value assigned to warrants issued to purchase up to
283,637 shares of common stock at an exercise price of $0.01 per share in
1999 and 100,000 shares of common stock at an exercise price of $0.01 in
2000.

(4) At September 30, 2000 Waterlink was in violation of certain of its financial
covenants with respect to its senior credit facility. Accordingly, the
entire balance of the senior credit facility was classified as current at
September 30, 2000. Based on certain conditions of Waterlink's senior credit
facility and other indebtedness that could accelerate the maturity date of
such indebtedness, all debt was classified as current at September 30, 2002
and 2001.

(5) Total assets exclude net assets of discontinued operations for all periods
presented.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

OVERVIEW

Waterlink is an international provider of integrated water and air
purification solutions for both industrial and municipal customers. Waterlink
was incorporated in Delaware on December 7, 1994 to participate in the
consolidation of the highly fragmented water purification and wastewater
treatment industry. Waterlink grew rapidly through acquisitions from 1995
through 1998, having made 13 acquisitions. In May 2000 Waterlink announced that
its board of directors had instructed management to explore various strategic
alternatives, including the sale of all or part of Waterlink that could maximize
our shareholders' investment in Waterlink. To date, Waterlink has sold four of
its five operating divisions: the biological division in two separate
transactions in September and December 2000, the separations division in
February 2001, the European water and wastewater division in a series of
transactions during the fourth quarter of our fiscal year ended September 30,
2001, and the pure water division in May 2002. Waterlink's continuing operations
are comprised of what was formerly referred to as the specialty products
division.

CRITICAL ACCOUNTING POLICIES

Revenue Recognition

Waterlink considers its accounting policy regarding revenue recognition
on long-term contracts to be a critical accounting policy. The majority of
revenue relates to carbon sales and services and is recognized when title passes
upon shipment. The systems and equipment produced by Waterlink are custom
designed and can take a number of months to produce. Revenues from systems and
equipment contracts are recognized using the percentage of completion method of
accounting in the proportion that costs incurred bear to total estimated costs
at completion. Waterlink believes that this method of accounting best measures
revenue earned as progress is made toward completion of the contract. Revisions
of estimated costs are recognized in the period in which they are determined.
Provisions are made currently for all known or anticipated losses. Variations
from estimated contract performance could result in a material adjustment to
operating results for any fiscal quarter or year. Claims for extra work or
changes in scope of work are included in revenues when collection is probable.

Retirement Plans

Waterlink sponsors two defined benefit pension plans that cover
substantially all of our employees. The accounting for pensions is determined by
standardized accounting and actuarial methods that include critical assumptions;
which include discount rates, expected return on plan

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assets and future compensation increases. Waterlink considers these assumptions
to be critical as they can impact periodic pension expense as well as the
minimum pension liability. As shown in the consolidated statements of
shareholders' equity and discussed in note 12 to the consolidated financial
statements, during fiscal 2002 Waterlink increased the additional minimum
pension liability by $2,219,000 and reduced equity by the corresponding amount.
At September 30, 2002, Waterlink's pension liabilities totaled $3,787,000.

BACKLOG

In the past Waterlink has experienced quarterly fluctuations in operating
results due to the contractual nature of its business and the consequent timing
of these orders. In addition, certain of the contracts will be subject to the
customer's ability to finance, or fund from government sources, the actual costs
of completing the project as well as the ability to receive any necessary
permits to commence the project. Therefore, Waterlink expects that its future
operating results could fluctuate significantly, especially on a quarterly
basis, due to the timing of the awarding of such contracts, the ability to fund
project costs, and the recognition by Waterlink of revenues and profits. In
addition, Waterlink has historically operated with a moderate backlog. As of
September 30, 2002, Waterlink's total backlog from continuing operations was
approximately $15.2 million, consisting of $13.0 million of firm commitments to
purchase carbon and related service products, and $2.2 million of written
purchase orders for capital goods equipment. Quarterly sales and operating
results will be affected by the volume and timing of contracts received and
performed within the quarter, which are difficult to forecast. Any significant
deferral or cancellation of a contract could have a material adverse effect on
Waterlink's operating results in any particular period. Because of these
factors, Waterlink believes that period-to-period comparisons of its operating
results are not necessarily indicative of future performances.

RESULTS OF CONTINUING OPERATIONS

The following table sets forth for the periods indicated, statements of
operations data as a percentage of net sales:

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Year Ended September 30, 2002 Compared to Year Ended September 30, 2001

Net Sales: Net sales for the year ended September 30, 2002 were
$64,054,000, a decrease of $1,499,000, or 2.3%, from the prior year. Net sales
of carbons and related services increased by 4.4% in 2002 as compared to the
prior year, principally in England. This increase was more than offset by a
19.0% decrease in sales of systems and related equipment. The decrease in sales
of systems and related equipment during fiscal 2002 occurred in both the United
States and England.

Gross Profit: Gross profit for the year ended September 30, 2002 was
$15,353,000, an increase of $950,000 from the prior year despite the decrease in
sales. The gross margin for 2002 was 24.0% as compared to 22.0% in the prior
year. The increase in gross margin in 2002 resulted from sales of carbon and
related services in fiscal 2002 being weighted more toward specialized carbons
as compared to the prior year.

Selling, General and Administrative Expenses: Selling, general and
administrative expenses for the year ended September 30, 2002 were $10,051,000,
a decrease of $404,000, or 3.9%, from the prior year. This decrease is primarily
due to cost reductions in the corporate office. Selling, general and
administrative expenses as a percentage of net sales were 15.7% in 2002 as
compared to 16.0% for the prior year, which reflects the decrease in expense.

Interest Expense: Interest expense for the year ended September 30, 2002
was $3,712,000, as compared to $3,992,000 in the prior year. This decrease
reflects lower interest rates in the current year as well as $1,425,000 of term
payments made during fiscal 2002. In addition, interest expense for 2001
included non-cash charges related to amortization of expense recognized in
connection with the issuance of common stock warrants of $87,000.

Amortization of Financing Costs: Amortization of financing costs for the
year ended September 30, 2002 was $642,000 as compared to $1,386,000 for the
prior year. The amount in 2001 reflects the accelerated amortization of deferred
financing costs resulting from the maturity date of our senior credit facility
being moved from May 23, 2003 to October 1, 2001. By subsequent amendments, the
senior credit facility has been extended to October 1, 2003.

Income Taxes: Waterlink recorded income taxes of $94,000 on pre-tax
income of $243,000 for the year ended September 30, 2002, which represented
state income taxes on domestic earnings. For the year ended September 30, 2001,
state income taxes of $12,000 were recorded on a pre-tax loss of $4,898,000.

Year Ended September 30, 2001 Compared to Year Ended September 30, 2000

Net Sales: Net sales for the year ended September 30, 2001 were
$65,553,000, an increase of $778,000 or 1.2%, from the prior year. Net sales of
carbons and related services decreased by 4.5% in 2001 as compared to the prior
year, principally in England. This decrease was more than offset by a 19.0%
increase in sales of systems and related equipment. The increase in sales of
systems and related equipment during fiscal 2001 occurred in both the United
States and England.

Gross Profit: Gross profit for the year ended September 30, 2001 was
$14,403,000, a decrease of $1,402,000 from the prior year. The gross margin for
2001 was 22.0% as compared to 24.4% in the prior year. The decrease in gross
margin in 2001 was principally due to product mix within the carbons side of the
business during the first half of the current year.

Selling, General and Administrative Expenses: Selling, general and
administrative expenses for the year ended September 30, 2001 were $10,455,000,
a decrease of $1,402,000, or 11.8%, from the prior year, primarily due to cost
reductions in the corporate office. Selling, general and administrative expenses
as a percentage of net sales were 16.0% in 2001 as compared to 18.3% for the
prior year, which reflects the decrease in expense.

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Special Charges: Special charges of $2,560,000 were recorded during the
year ended September 30, 2001 in connection with the closing of the corporate
office, relating primarily to severance obligations.

Interest Expense: Interest expense for the year ended September 30, 2001
was $3,992,000, as compared to $3,997,000 in the prior year. Interest expense
for 2001 and 2000 includes non-cash charges related to amortization of expense
recognized in connection with the issuance of common stock warrants of $87,000
and $217,000, respectively.

Amortization of Financing Costs: Amortization of financing costs for the
year ended September 30, 2001 was $1,386,000 as compared to $401,000 for the
prior year. The increase in 2001 reflects the accelerated amortization of
deferred financing costs resulting from the maturity date of our senior credit
facility being moved from May 23, 2003 to October 1, 2001. By subsequent
amendments, the senior credit facility has been extended to October 1, 2003.

Income Taxes: Waterlink recorded income taxes of $12,000 on a pre-tax
loss of $4,898,000 for the year ended September 30, 2001, which represented
state income taxes on domestic earnings. For the year ended September 30, 2000,
income taxes of $386,000 were recorded on a pre-tax loss of $1,046,000. The
income taxes in 2000 were recorded on earnings outside the United States and in
certain states domestically.

LIQUIDITY AND CAPITAL RESOURCES

Since its inception, Waterlink's primary sources of liquidity have been:

- borrowings available under credit facilities

- net proceeds from the sale of Waterlink's common and preferred stock

- net proceeds from the sale of businesses in connection with the
strategic alternative process

- issuance of common stock and seller financing incurred in connection
with Waterlink's completed acquisitions

- cash flow from certain profitable operations

Historically, Waterlink's primary uses of capital have been:

- the funding of its acquisition program

- working capital requirements including the funding for growth at
certain operations

- the funding required for certain under-performing acquisitions

- the funding of interest on borrowings and the repayment of borrowings

In May 2000 Waterlink announced that its board of directors had
instructed management to explore various strategic alternatives, including the
sale of all or part of Waterlink, that could maximize our shareholders'
investment in Waterlink. To date, Waterlink has sold four of its five operating
divisions: the biological division in two separate transactions in September and
December 2000; the separations division in February 2001; the European water and
wastewater division in a series of transactions during the fourth quarter of our
fiscal year ended September 30, 2001, and the pure water division in May 2002.
At September 30, 2002, Waterlink has recorded $2,810,000 of net assets of
discontinued operations. These amounts represent amounts either placed in escrow
or held back by the purchaser, of which $2,560,000 relates to the sale of the
pure water division. These assets are subject to reduction for indemnification
claims made on or before May 30, 2004.

In September 2001 the Board of Directors of Waterlink determined the
corporate office should be relocated to its Columbus, Ohio facility. This
consolidation resulted in personnel reductions and the disposal of certain fixed
assets. Accordingly, Waterlink recorded a special charge of $2,560,000 in

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2001 relating to severance obligations to eight individuals and the write off of
certain fixed assets. During fiscal 2002 Waterlink paid approximately $924,000
relating to these severance obligations. At September 30, 2002, approximately
$1,443,000 remains accrued for severance obligations relating to two of these
individuals and is currently being paid at a rate of approximately $24,000 per
month.

Waterlink does not currently anticipate making significant capital
investments in plant and equipment because we believe our current businesses do
not require such investments as well as our current financial position.

For the year ended September 30, 2002, net cash provided by operating
activities was $1,869,000 and purchases of equipment totaled $621,000. During
fiscal 2002 Waterlink realized net proceeds totaling $12,780,000 from the sale
of the pure water division and the collection of amounts held in escrow from
other asset sales. These net proceeds were used to repay senior indebtedness as
required by our senior credit facility.

Credit Availability

As of September 30, 2002, Waterlink's credit facilities were comprised of
(1) a $36,424,000 domestic facility with Bank of America, NA, as agent, which
expires on October 1, 2003 and (2) a $200,000 facility for our operating
subsidiary in England. The credit facilities will be utilized to primarily fund
operating activities of Waterlink.

Effective October 1, 2002 Waterlink entered into an amendment to our
senior credit facility that extended the maturity date of the senior credit
facility from October 1, 2002 to October 1, 2003, assuming Waterlink maintains a
certain level of earnings before interest and taxes and maintains certain
balance sheet ratios through September 30, 2003. The amendment also required
that on or before January 1, 2003 Waterlink secure a financing arrangement to
borrow against accounts receivable in England and remit $1 million to the senior
lenders. This financing arrangement was entered into by our operating subsidiary
in England on December 5, 2002. In addition, Waterlink is required under the
terms of the amendment to present to the senior lenders on or before June 30,
2003 a plan to repay the senior debt obligations. Without an amendment to our
senior credit facility that would further extend the maturity date, an infusion
of additional capital, or the sale of significant assets, Waterlink will not be
able to meet its scheduled payment obligations under the senior credit facility.
At this time, Waterlink can give no level of assurance that we will be
successful in developing and executing a plan to repay the senior credit
facility on or prior to the maturity date. If we are unable to successfully
satisfy requisite conditions and to repay the senior credit facility, then
Waterlink would be in default at that time under the terms of the credit
agreement. If there is such an event of default the senior lenders could declare
that all borrowings under the credit agreement are then immediately due and
payable. In such event, Waterlink would need to examine all alternatives,
including, without limitation, possible protection under the bankruptcy laws.

At September 30, 2002 there were no additional borrowings available under
the senior credit facility.

On December 5, 2002, Sutcliffe Speakman Limited, Waterlink's wholly owned
operating subsidiary in England, entered into a credit facility, with
availability based on a percentage of eligible accounts receivable, with a
maximum borrowing amount of 1,250,000 pounds sterling, with The Royal Bank of
Scotland, and pledged certain accounts receivable as collateral. In connection
with entering into this credit facility, Waterlink is obligated to remit $1
million of the proceeds to our senior bank group as required by the October 1,
2002 amendment to the senior credit agreement.

The credit facilities restrict or prohibit Waterlink from taking many
actions, including paying dividends and incurring or assuming other indebtedness
or liens. The banks that participate in the credit facilities also must approve
acquisitions and dispositions. Waterlink's obligations under the credit
facilities are secured by liens on substantially all of Waterlink's domestic
assets, including

- 13 -

equipment, inventory, accounts receivable and general intangibles and the pledge
of most of the stock of Waterlink's subsidiaries. Waterlink has guaranteed the
payment by our operating subsidiary in England of its obligations under the
$200,000 facility.

Market Risk

Waterlink's earnings are affected by changes in interest rates charged on
our domestic facility. If the market rates for borrowings increased by 1% on our
domestic facility, the impact would be an increase to interest expense of
$364,000 with a corresponding decrease to income before income taxes. This
amount was determined by considering the impact of hypothetical interest rates
on the balance of Waterlink's domestic facility at September 30, 2002. This
analysis does not consider the effects of the overall economic environment
associated with such a change nor does it assume any change to Waterlink's
current financial structure.

Waterlink occasionally has exposure to currency rate fluctuations related
primarily to the purchases of inventory and the collection of accounts
receivable. In these situations Waterlink utilizes a limited number of foreign
exchange instruments, primarily forward contracts, to manage this exposure.
Waterlink had no significant hedging contracts outstanding at September 30,
2002.

Impact of Recently Issued Accounting Standards

In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other
Intangible Assets" effective for fiscal years beginning after December 15, 2001.
Under the new rules, goodwill and intangible assets deemed to have indefinite
lives will no longer be amortized but will be subject to annual impairment tests
in accordance with SFAS No. 142. Other intangible assets will continue to be
amortized over their useful lives.

Waterlink is required to apply the new rules on accounting for goodwill
and other intangible assets beginning in the first quarter of fiscal 2003, or as
of October 1, 2002. Application of the nonamortization provisions of SFAS No.
142 is expected to result in an increase in income from continuing operations
and net income of approximately $639,000, or $0.03 per share, in fiscal 2003.
Waterlink will test goodwill for impairment using a two-step process prescribed
in SFAS No. 142. The first step is a screening for potential impairment, while
the second step measures the amount of impairment. Waterlink expects to perform
the first of the required impairment tests of goodwill and indefinite-lived
intangible assets as of October 1, 2002 during the first quarter of fiscal 2003.
Impairment charges resulting from these transitional impairment tests will be
reflected as a cumulative effect of a change in accounting principle in the
first quarter of fiscal 2003. Although Waterlink has not completed its
transitional impairment test, a preliminary analysis indicates a pre-tax
impairment charge in the range of $12 million up to the entire balance of
unamortized goodwill.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" (SFAS No. 144), which addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets and supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of", and the accounting and
reporting provisions of APB Opinion No. 30, Reporting the Results of Operations
for a disposal of a segment of a business. SFAS No. 144 is effective for fiscal
years beginning after December 15, 2001, with earlier application encouraged.
Waterlink will adopt SFAS No. 144 as of October 1, 2002 and it does not expect
that the adoption of SFAS No. 144 will have a significant impact.

In July 2002, FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan and nullifies
Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain
Employee

- 14 -

Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." SFAS No. 146 is to be applied prospectively
to exit or disposal activities initiated after December 31, 2002 and
accordingly, Waterlink can only determine prospectively the impact, if any, SFAS
No. 146 would have on Waterlink's financial position and results of operations.

FORWARD-LOOKING STATEMENTS

With the exception of historical information, the matters discussed in
this report may include forward-looking statements that involve risks and
uncertainties. While forward-looking statements are sometimes presented with
numerical specificity, they are based on variety of assumptions made by
management regarding future circumstances over which Waterlink has little or no
control. A number of important factors, including those identified in this
section as well as factors discussed elsewhere herein, could cause Waterlink's
actual results to differ materially from those in forward-looking statements or
financial information. Actual results may differ from forward-looking results
for a number of reasons, including the following:

- the ability to negotiate with its senior lenders amended repayment
terms and with other debt holders, additional amended repayment terms

- the ability to obtain additional credit availability to support working
capital requirements

- changes in world economic conditions, including

i. instability of governments and legal systems in countries in
which Waterlink conducts business
ii. significant changes in currency valuations
iii. recessionary environments
iv. the effects of military conflicts

- changes in customer demand and timing of orders as they affect sales
and product mix, including

i. the effect of strikes at customer's facilities
ii. variations in backlog
iii. the impact of changes in industry business cycles
iv. changes in environmental laws

- competitive factors, including

i. changes in market penetration
ii. introduction of new products by existing and new competitors

- changes in operating costs, including

i. changes in Waterlink's and its subcontractors' manufacturing
processes
ii. changes in costs associated with varying levels of
operations
iii. changes resulting from different levels of customers demands
iv. effects of unplanned work stoppages
v. changes in cost of labor and benefits
vi. the cost and availability of raw materials and energy

- the cost of capital, including interest rate increases

- unanticipated litigation, claims or assessments

- 15 -

RISK FACTORS

We May be Unsuccessful in Complying with Our Obligations Under our Senior Credit
Facility or in Negotiating an Additional Amendment to Our Senior Credit Facility
and Other Debt Instruments

The maturity date of our senior credit facility is October 1, 2003 and
other debt instruments also mature in October 2003. In addition, the senior
credit facility contains numerous covenant provisions that, if not complied
with, would enable the senior lenders to accelerate the maturity date of the
facility to as early as June 30, 2003. It is difficult to state with certainty
that Waterlink will be able to comply with the covenant provisions of the senior
credit facility during the period until the maturity date of October 1, 2003. If
we are unable to successfully develop and execute a plan to repay the senior
credit facility or negotiate satisfactory amendments to the senior credit
facility and the other debt instruments to extend such maturities, and in the
absence of other sources of funds to repay the indebtedness outstanding under
the senior credit facility, the senior lenders and the other lenders could
declare that all borrowings under the senior credit facility and the other debt
instruments, respectively, are immediately due and payable. In this instance,
the senior lenders could proceed to foreclose on their security interest in
substantially all of our assets. In such event, Waterlink would need to examine
all alternatives, including, without limitation, possible protection under the
bankruptcy laws.

Our Substantial Amount of Debt Could Restrict Our Business and Shareholder Value

We have a substantial amount of debt. Our level of debt in relation to
our operating performance limits our ability to:

- obtain additional financing and bonding capabilities to fund or support
our strategy, capital expenditures, sales and other general corporate
purposes;

- use operating cash flow in other areas of our business since we must
dedicate a substantial portion of these funds to pay interest and
retire debt; and

- react to changing market conditions and economic downturns.

At September 30, 2002, our total indebtedness was $39,674,000. Our debt
agreements contain numerous financial and operating covenants that limit our
discretion with respect to certain business matters. These covenants place
significant restrictions on, among other things, our ability to:

- incur additional indebtedness, both under the bank credit agreement and
other debt agreements;

- merge or consolidate with other entities;

- repay our obligations; and

- pay dividends and other distributions.

At September 30, 2002 there were no additional borrowings available under
the senior credit facility. Given our high level of debt, we are unable to
appropriately fund our operations. In addition, given our high level of debt, we
can give no assurance that we will be able to provide any value to our
shareholders.

Our Results of Operations Could Fluctuate Which Could Result in Defaults Under
Our Senior Credit Facility

For a part of our business we need to finalize complicated contracts with
our customers before we recognize our revenues. Often, the timing of those
contracts is also subject to our customers receiving financing, various permits
and other aspects outside our control. A delay in finalizing any of

- 16 -

these contracts could have a significant negative impact on our operating
results in any fiscal quarter. We believe that period-to-period comparisons of
our operating results are not necessarily meaningful and should not necessarily
be relied upon as indicators of our future performance. Given the fluctuations
in our operating results, this could result in our needing to negotiate further
amended terms or being in default of our senior credit facility. Quarterly
operating results have varied significantly in the past and will likely vary
significantly in the future.

Our Industry is Highly Competitive

Our industry, the water and air purification industry, is fragmented and
highly competitive. We compete with many companies, several of which have
greater market penetration, depth of product line, resources and access to
capital, which could be competitive advantages in securing projects. While we
believe we are well positioned to deliver technology and services at a fair
price, some of our competitors have developed product and service integration
capabilities beyond our current scope.

We are Dependent on Key Personnel

Our business depends on our ability to hire and retain our executive
officers and senior management. Our business could be adversely affected if for
any reason any of our executive officers or senior managers cease to be employed
by us.

The Current Members of Our Board of Directors and Management Own Approximately
27.9% of Our Common Stock and Can Exercise Significant Influence over Our
Affairs. Also, Several Institutional Investors Own Substantial Percentages of
Our Common Stock

At November 30, 2002, our current directors and management own or
control, in the aggregate, approximately 27.9% of our common stock. In addition,
several large institutional investors own or control a significant percentage of
our common stock. Accordingly, these individuals and institutional investors, if
acting together or even alone, can exercise significant influence over our
affairs including the election of our directors, appointment of our management
and approval of actions requiring the approval of our stockholders, which may
include the adoption of amendments to our certificate of incorporation, the
approval of mergers or sales of all or substantially all our assets, and similar
items. The concentration of voting power of these stockholders, if they act
together, could, under certain circumstances, have the effect of delaying or
preventing a change in control of Waterlink.

Our Foreign Operations Are Subject to Political and Economic Risks and We May Be
Adversely Affected by Foreign Currency Fluctuation

We sell a substantial proportion of our systems, equipment and services
in Western Europe, Asia and other regions outside the United States. Also, we
have one subsidiary that operates in England. Our net sales outside the United
States were approximately 29.8% of our net sales for the year ended September
30, 2002. Political, economic, regulatory and social conditions in foreign
countries in which we sell product may change. Risks associated with sales and
operations in foreign countries include risks of:

- war

- expropriation or nationalization of assets

- renegotiation or nullification of existing contracts

- changing political conditions

- changing laws and policies affecting trade, taxation and investment

- overlap of different tax structures

- 17 -

- the general hazards associated with the assertion of sovereignty over
certain areas in which operations are conducted

Because our reporting currency is the United States dollar, our
operations outside the United States sometimes face the additional risks of
fluctuating currency values and exchange rates, hard currency shortages and
controls on currency exchange. We are subject to the impact of foreign currency
fluctuations and exchange rate charges on our reporting for results from those
operations in our financial statements.

We May Be Subject to Liability Under Environmental Laws

In the United States, the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended, and comparable state laws,
impose liability without fault for the releases of hazardous substances into the
environment. Potentially responsible parties include (a) owners and operators of
a site, (b) parties which create the hazardous substances released at a site,
and (c) parties which arrange for the transportation or disposal of hazardous
substances. We could face claims by governmental authorities, private
individuals and other persons alleging that hazardous substances were released
during the treatment process or from the use or disposal of end products and by-
products of the treatment process in violation of law. We are also subject to
environmental laws in countries outside the United States where we operate or in
which our customers are located. These requirements and their enforcement may
vary by country but in general prescribe standards for the protection of human
health, safety and the environment.

Changes in Environmental Laws Could Affect Our Business

Federal, state, local and foreign environmental laws and regulations
impose substantial standards for properly purifying water and treating
wastewater, and impose liabilities for noncompliance. Environmental laws and
regulations are, and will continue to be, a significant factor affecting our
ability to sell our solutions, systems and equipment. To the extent that demand
for our solutions, systems and equipment is created by the need to comply with
environmental laws and regulations, any modification of the standards imposed by
these laws and environmental laws and regulations may reduce demand for our
products and services, thereby adversely affecting our business and prospects.

Our Business is Subject to Potential Warranty and Performance Guarantee Claims

Some of our customers require us to guarantee that our services and
products will be of a specified level of quality or performance. If a product or
service fails to attain that level of quality or performance, we could incur
significant financial penalties.

Provisions of Our Corporate Documents Could Delay or Prevent a Change in Control
of Waterlink

Our certificate of incorporation and bylaws contain certain provisions
that may have anti-takeover effects and may discourage, delay, or prevent a
takeover attempt that a stockholder might consider in his best interest. These
documents allow our board of directors to authorize the issuance of preferred
stock, which could adversely affect the voting and other rights of the holders
of our common stock, provide that our directors are classified into three
classes with staggered terms, and contain a "fair price provision" which imposes
restrictions in the event of certain business combinations.

ITEM 7(a). QUALITATIVE AND QUANTITATIVE DISCLOSURES REGARDING MARKET RISK

The disclosures required under this item are included in Management's
Discussion and Analysis of Financial Condition and Results of Operations on page
14.

- 18 -

[THIS PAGE INTENTIONALLY LEFT BLANK]

- 19 -

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

CONTENTS

Report of Independent Auditors.............................. 21
Consolidated Balance Sheets at September 30, 2002 and
2001...................................................... 22
Consolidated Statements of Operations for the years ended
September 30, 2002, 2001 and 2000......................... 24
Consolidated Statements of Shareholders' Equity for the
years ended September 30, 2002, 2001 and 2000............. 25
Consolidated Statements of Cash Flows for the years ended
September 30, 2002, 2001 and 2000......................... 26
Notes to Consolidated Financial Statements.................. 27

- 20 -

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Shareholders of
Waterlink, Inc.

We have audited the accompanying consolidated balance sheets of
Waterlink, Inc. and subsidiaries as of September 30, 2002 and 2001, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended September 30, 2002. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Waterlink, Inc. and subsidiaries at September 30, 2002 and 2001, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended September 30, 2002, in conformity with
accounting principles generally accepted in the United States.

The accompanying consolidated financial statements for 2002 have been
prepared assuming that the Company will continue as a going concern. As more
fully described in Note 3, the Company has incurred losses and has a working
capital deficiency. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regards to these
matters are also described in Note 3. The financial statements do not include
any adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
might result from the outcome of this uncertainty.

/s/ Ernst & Young LLP
Canton, Ohio
November 1, 2002, except for Note 17,
as to which the date is December 5, 2002

- 21 -

WATERLINK, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------

The accompanying notes are an integral part of these statements
- 22 -

WATERLINK, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET
- --------------------------------------------------------------------------------

The accompanying notes are an integral part of these statements.
- 23 -

WATERLINK, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------

The accompanying notes are an integral part of these statements.
- 24 -

WATERLINK, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------

The accompanying notes are an integral part of these statements.
- 25 -

WATERLINK, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------

The accompanying notes are an integral part of these statements.
- 26 -

WATERLINK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 20, 2002
- --------------------------------------------------------------------------------

1. ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements
include the accounts of Waterlink, Inc. and its wholly-owned subsidiaries (the
"Company"). All significant intercompany accounts and transactions have been
eliminated upon consolidation.

FISCAL YEAR END -- The Company's fiscal year ends on September 30th.
References in the notes to the financial statements to the years 2002, 2001 and
2000 refer to the fiscal years ended September 30, 2002, 2001 and 2000,
respectively.

DESCRIPTION OF THE BUSINESS -- The Company specializes in the development
and production of activated carbons used to purify air, water and gases.
Waterlink is a supplier of activated carbon for liquid, air and gas filtration
systems and is a manufacturer of specialized impregnated carbons. Its products
include absorption equipment, bioreactors and bioscrubbers, corrosive gas
control systems, solvent recovery systems, and a variety of air, odor and vapor
control and filtration systems.

CASH EQUIVALENTS -- The Company considers all highly liquid investments
with a maturity date of three months or less when purchased to be cash
equivalents.

CONTRACTS AND REVENUE RECOGNITION -- A portion of the Company's systems
and equipment are custom designed and take a number of months to produce.
Revenues from large contracts are recognized using the percentage of completion
method of accounting in the proportion that costs bear to total estimated costs
at completion. Revisions of estimated costs or potential contract losses are
recognized in the period in which they are determined. Provisions are made
currently for all known or anticipated losses. Variations from estimated
contract performance could result in a material adjustment to operating results
for any fiscal quarter or year. Claims for extra work or changes in scope of
work are included in revenues when collection is probable.

Contract costs include all material and labor costs, as well as
applicable overheads related to contract performance. General and administrative
expenses are charged to expense as incurred.

Revenues from the remaining equipment and product sales are recognized
when title passes upon shipment.

INVENTORIES -- Inventories are valued at the lower of cost or market.
Cost is determined using the first-in, first-out (FIFO) method.

CONCENTRATIONS OF CREDIT RISK -- Financial instruments, which potentially
subject the Company to concentrations of credit risk, consist principally of
cash equivalents and trade receivables. The Company places its cash equivalents
with major financial institutions. Concentrations of credit risk with respect to
trade receivables are limited due to the Company's large number of customers and
their dispersion across many different regions and industries. The Company
grants credit to customers based on an evaluation of their financial condition
and collateral is generally not required. Losses from credit sales are provided
for in the financial statements and have historically been within management's
expectations.

LONG-LIVED ASSETS -- Property, plant and equipment is valued at cost.
Expenditures for repairs and maintenance are charged to operations as incurred,
while expenditures for additions and improvements are capitalized. Depreciation
is computed principally using the straight-line method

- 27 -

WATERLINK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

- --------------------------------------------------------------------------------

over the estimated useful lives of assets. The useful lives range from 30 to 40
years for building and improvements; 5 to 10 years for machinery and equipment
and 3 to 7 years for office equipment.

Goodwill represents costs in excess of net assets of acquired businesses,
which are amortized using the straight-line method over a period of 40 years.

The Company evaluates the realizability of its long-lived assets based on
the undiscounted cash flows of the applicable businesses acquired over the
remaining economic useful life. Should the review indicate that the carrying
value of the assets is not recoverable, the Company's carrying value of the
asset would be reduced by the estimated shortfall of the cash flows.

FOREIGN CURRENCY TRANSLATION -- Assets and liabilities of subsidiaries
are translated at the rate of exchange in effect on the balance sheet date;
income and expenses are translated at the average rates of exchange prevailing
during the year. The related translation adjustments are reflected in
accumulated other comprehensive loss in shareholders' equity. Foreign currency
gains and losses resulting from transactions included in the results of
continuing operations amounted to a loss of $9,000 in 2002 and gains of $17,000
in 2001 and gains of $163,000 in 2000.

ACCUMULATED OTHER COMPREHENSIVE LOSS -- At September 30, 2002 accumulated
other comprehensive loss consists of a loss of $5,114,000 relating to a minimum
pension liability adjustment and a loss of $1,200,000 relating to accumulated
foreign currency translation adjustments. At September 30, 2001 the accumulated
other comprehensive loss consisted of a loss of $2,895,000 relating to the
minimum pension liability adjustment and a loss of $2,246,000 relating to
accumulated foreign currency translation adjustments. In previous years the
accumulated other comprehensive loss related entirely to foreign currency
translation adjustments.

EARNINGS (LOSS) PER SHARE -- Earnings (loss) per share is computed by
dividing the net income (loss) by the weighted-average number of common shares
outstanding during the year. Earnings (loss) per share -- assuming dilution is
computed by dividing the net income (loss) by the weighted-average number of
common shares outstanding adjusted for any dilutive impact of potential common
shares for options, warrants and convertible subordinated debt. Because the
Company recognized net losses for all periods presented, the effect of
outstanding common stock equivalents are anti-dilutive and have therefore been
excluded from the computation of loss per share-assuming dilution.

USE OF ESTIMATES -- The preparation of financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates.

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS -- In June 2001, the
Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets"
effective for fiscal years beginning after December 15, 2001. Under the new
rules, goodwill and intangible assets deemed to have indefinite lives will no
longer be amortized but will be subject to annual impairment tests in accordance
with SFAS No. 142. Other intangible assets will continue to be amortized over
their useful lives.

Waterlink is required to apply the new rules on accounting for goodwill
and other intangible assets beginning in the first quarter of fiscal 2003, or as
of October 1, 2002. Application of the nonamortization provisions of SFAS No.
142 is expected to result in an increase in income from

- 28 -

WATERLINK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

- --------------------------------------------------------------------------------

continuing operations and net income of approximately $639,000, or $0.03 per
share, in fiscal 2003. Waterlink will test goodwill for impairment using a
two-step process prescribed in SFAS No. 142. The first step is a screening for
potential impairment, while the second step measures the amount of impairment.
Waterlink expects to perform the first of the required impairment tests of
goodwill and indefinite-lived intangible assets as of October 1, 2002 during the
first quarter of fiscal 2003. Impairment charges resulting from these
transitional impairment tests will be reflected as a cumulative effect of a
change in accounting principle in the first quarter of fiscal 2003. Although
Waterlink has not completed its transitional impairment test, a preliminary
analysis indicates a pre-tax impairment charge in the range of $12 million up to
the entire unamortized balance of goodwill.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" (SFAS No. 144), which addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets and supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of", and the accounting and
reporting provisions of APB Opinion No. 30, Reporting the Results of Operations
for a disposal of a segment of a business. SFAS No. 144 is effective for fiscal
years beginning after December 15, 2001, with earlier application encouraged.
Waterlink will adopt SFAS No. 144 as of October 1, 2002 and it does not expect
that the adoption of SFAS No. 144 will have a significant impact.

In July 2002, FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan and nullifies
Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)." SFAS No. 146 is to be applied
prospectively to exit or disposal activities initiated after December 31, 2002
and accordingly, the Company can only determine prospectively the impact, if
any, SFAS No. 146 would have on Waterlink's financial position and results of
operations.

RECLASSIFICATIONS -- Certain amounts reported in the 2001 and 2000
financial statements have been reclassified to conform to the 2002 presentation.

2. DISCONTINUED OPERATIONS

During the fiscal year ended September 30, 2001, the Company sold three
of its five operating Divisions. The sale of the Biological Wastewater Treatment
Division was completed in December 2000, the sale of the Separations Division
was completed on February 28, 2001, and the European Water and Wastewater
Division was sold in a series of transactions during the fourth quarter of
fiscal 2001.

On May 30, 2002, the Company sold substantially all of the assets of its
Pure Water Division for approximately $15.6 million in cash, $12.9 million of
which was received at closing and $2.7 million of which has either been placed
in escrow or has been held back by the purchaser, subject to reduction for any
indemnification claims made on or before May 30, 2004. There was no gain or loss
recorded in connection with the sale of the Pure Water Division until such time
as all indemnification periods have expired and the amounts have been released
from escrow.

Accordingly, the results of operations for these four Divisions have been
presented within discontinued operations in the accompanying consolidated
financial statements for all periods presented.

- 29 -

WATERLINK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

- --------------------------------------------------------------------------------

The Company allocates interest expense to its discontinued operations
based on the expected net proceeds from the sale of its assets. Information
regarding discontinued operations for each period is presented below:

3. GOING CONCERN CONSIDERATIONS

The accompanying consolidated financial statements have been prepared on
a going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. As shown in the
financial statements, the Company has incurred net losses of $38,356,000 in
2000, $22,977,000 in 2001 and $385,000 in 2002. In addition, the Company's
Senior Credit Facility has numerous covenant provisions that, if not complied
with, enable the senior lenders to accelerate the maturity of the debt. It is
difficult to state with certainty that the Company will be able to comply with
the covenant provisions of the Senior Credit Facility during the period until
its maturity on October 1, 2003. Because of these uncertainties, all debt
obligations at September 30, 2002 have been classified as current liabilities,
creating a working capital deficiency of $25,234,000 at September 30, 2002.
These factors raise substantial doubt about the Company's ability to continue as
a going concern for a reasonable period of time.

To address the issues noted above, the Company has agreed that on or
before June 30, 2003, the Board of Directors of the Company will have approved
and presented to the senior lenders a reasonably feasible plan to repay the
Senior Credit Facility obligations on or prior to October 1, 2003, with
measurements of progress on July 31 and August 31, 2003. At this time the
Company can give no level of assurance that it will be successful in developing
and executing a plan to repay the Senior Credit Facility obligations on or prior
to the maturity date.

The financial statements do not include any adjustments relating to the
recoverability and classification of assets or the amounts and classification of
liabilities that might be necessary should the Company be unable to continue as
a going concern. The Company's continuation as a going concern is dependent on
its ability to: generate sufficient cash flows to operate its business; meet its
debt covenant requirements; and develop and execute a plan to repay the Senior
Credit Facility obligations on or prior to the maturity date.

- 30 -

WATERLINK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

- --------------------------------------------------------------------------------

4. INVENTORIES

Inventories consisted of the following:

5. CONTRACT BILLING STATUS

Information with respect to the billing status of contracts in process is
as follows:

The above amounts are included in the accompanying consolidated balance
sheet at:

- 31 -

WATERLINK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

- --------------------------------------------------------------------------------

6. DEBT OBLIGATIONS

Debt obligations consisted of the following:

The Company's Senior Credit Facility is with Bank of America, NA, as
agent, and with five other participating banks. Effective October 1, 2002, the
Company entered into an amendment to its Senior Credit Facility that extended
the maturity date of the facility from October 1, 2002 to October 1, 2003,
assuming the Company maintains a certain level of earnings before interest and
taxes and maintains certain balance sheet ratios through September 30, 2003. The
amendment also required that on or before January 1, 2003, the Company cause its
operating subsidiary in England to secure a financing arrangement to borrow
against its accounts receivable in England and remit $1,000,000 to the senior
lenders. As described in Note 17, this financing arrangement was entered into on
December 5, 2002. In addition, the Company is required under the terms of the
amendment to present to the senior lenders on or before June 30, 2003 a plan to
repay the senior debt obligations. It is difficult to state with certainty that
the Company will be able to comply with the covenant provisions of the Senior
Credit Facility during the period until its maturity on October 1, 2003. Because
of these uncertainties, all debt obligations at September 30, 2002 have been
classified as current liabilities.

The Senior Credit Facility restricts or prohibits the Company from taking
many actions, including paying dividends and incurring or assuming other
indebtedness or liens. The Company's obligations under the senior credit
facility are secured by liens on substantially all of the Company's domestic
assets, including equipment, inventory, accounts receivable and general
intangibles and the pledge of most of the stock of the Company's subsidiaries.

- 32 -

WATERLINK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

- --------------------------------------------------------------------------------

Effective October 15, 2002 the maturity date of the $2,250,000 of
convertible subordinated notes payable to former shareholders of C'treat was
extended to October 15, 2003. The conversion rate on these notes to Common Stock
is $15.63 per share.

Effective October 15, 2002 the maturity dates of $1,000,000 of
subordinated notes were extended until October 15, 2003. In connection with this
indebtedness, the Company issued warrants to purchase up to 100,000 shares of
Waterlink common stock at an exercise price of $0.01 per share. The value of
these warrants, totaling $92,000, has been fully amortized through the original
maturity date of the notes, January 18, 2002. The warrants will expire on
January 17, 2006.

In connection with various financing activities, the Company has issued
warrants to purchase shares of Common Stock, 486,637 of which are outstanding at
September 30, 2002. The warrants carry exercise prices ranging from $0.01 to
$3.125 with expiration dates ranging from July 2004 to January 2006.

7. LEASES

The Company leases certain facilities and equipment under operating
leases. Rent expense totaled $1,251,000 in 2002, $1,183,000 in 2001 and $672,000
in 2000. Aggregate future minimum lease payments under noncancelable operating
leases at September 30, 2002 are as follows (in thousands):

Years ending September 30:
2003 $ 641
2004 376
2005 258
2006 189
2007 147
Thereafter 534
------
$2,145
======

8. SPECIAL CHARGES

In September 2001 the Board of Directors of the Company determined the
corporate office of Waterlink should be relocated to its Columbus, Ohio
facility. This consolidation resulted in personnel reductions and the disposal
of certain fixed assets. Accordingly, the Company recorded a special charge of
$2,560,000 in 2001 relating to severance obligations to eight individuals and
the write off of certain fixed assets. During fiscal 2002 the Company paid
approximately $924,000 relating to these severance obligations. At September 30,
2002, approximately $1,443,000 remains accrued for severance obligations
relating to two of these individuals and is currently being paid at a rate of
approximately $24,000 per month.

- 33 -

WATERLINK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

- --------------------------------------------------------------------------------

9. INCOME TAXES

The provision for income taxes consists of the following:

Income (loss) before income taxes consists of the following:

Following is the reconciliation between the provision for income taxes
and the amount computed by applying the statutory U.S. federal income tax rate
of 34% to income (loss) before income taxes:

Deferred income taxes reflect the net effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax

- 34 -

WATERLINK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

- --------------------------------------------------------------------------------

purposes. The tax effects of the net operating loss carryforward and temporary
differences are as follows:

In connection with acquisitions made in 1998, the Company recorded
deferred tax asset valuation reserves as part of purchase price allocations
totaling $7,417,000 in the United Kingdom and $509,000 in the United States due
primarily to net operating loss carryforwards existing in these tax
jurisdictions. The benefit of net operating loss carryforwards realized in the
future will be recorded as a reduction of goodwill rather than as a credit to
income tax expense during that period. The amount of income taxes recorded which
resulted in a corresponding decrease in goodwill was $310,000 in 2000. No such
amounts were recorded in 2002 and 2001.

For tax purposes, the Company has U.S. federal loss carryforwards of
approximately $61,623,000 that expire in varying years through 2022, and net
operating loss carryforwards in the United Kingdom of $20,475,000 that have no
expiration dates. A valuation allowance has been established for the entire
amount of the net operating loss carryforwards since the realization is
uncertain.

The Company plans to reinvest the undistributed earnings of its non-U.S.
subsidiaries. The amount of undistributed earnings considered to be indefinitely
reinvested for this purpose was approximately $5,907,000 at September 30, 2002.
Accordingly, no provisions have been made for U.S. income tax purposes on such
undistributed earnings. While the amount of any U.S. income taxes on these
undistributed earnings, if distributed in the future, is not determinable, it is
expected that they would be reduced by the utilization of tax credits or
deductions. A distribution of these earnings would be subject to withholding
taxes.

10. STOCK OPTION PLANS

During 1998, the shareholders approved the Omnibus Incentive Plan (the
"Omnibus Plan"), which provides for compensatory equity based awards to officers
and certain other key employees of the Company. Awards may be granted for no
consideration and consist of stock options, stock awards, SARs, dividend
equivalents, other stock based awards (such as phantom stock) and performance
awards consisting of any combination of the foregoing.

The Company's 1995 Stock Option Plan (the "Stock Option Plan") provides
grants to officers, certain other key employees, and directors of awards
consisting of "incentive stock options" as

- 35 -

WATERLINK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

- --------------------------------------------------------------------------------

defined under the provisions of Section 422 of the Internal Revenue Code and
non-qualified stock options. All options granted under the Stock Option Plan
expire ten years after the date of grant (see Note 11).

The Company's 1997 Non-Employee Director Stock Option Plan (the "Director
Plan") is authorized to issue up to 150,000 shares of Common Stock. Each
non-employee director is automatically granted an option to purchase 3,000
shares of Common Stock. In addition, on each anniversary date of the Director
Plan, each of the Company's then non-employee directors who have served at least
six-months shall automatically be granted an option to purchase 5,000 shares of
Common Stock. The per share exercise price of options granted under the Director
Plan will be the fair market value of the Common Stock on the date of grant.
Options granted under the Director Plan expire ten years after the date of grant
(see Note 11). In July 2001 non-employee directors elected to suspend all
compensation, including grants under the Director Plan, until a time in which it
would be more appropriate.

Collectively, 2,750,000 shares of Common Stock are available for granting
of awards under the above plans at September 30, 2002.

Under the Company's Employee Stock Purchase Plan (the "Stock Purchase
Plan"), the Company is authorized to issue up to 500,000 shares of Common Stock.
Under the terms of the Stock Purchase Plan, employees can choose to have up to
20% of their annual compensation, but no more that $25,000 per year, withheld to
purchase Common Stock. The exercise price for shares subject to purchase under
options granted shall be 85% of the fair market value of the Common Stock on the
first day of the purchase period, unless otherwise determined by the
compensation committee. On the last day of the purchase period of any offering
of shares made under the Stock Purchase Plan, each outstanding option shall
automatically be exercised. At any time prior to the end of the purchase period
applicable to each offering, an employee is permitted to terminate or reduce his
or her payroll deductions, to reduce his or her options to purchase or to
withdraw all or part of the amount in his or her account. The employee has the
right to receive in cash the amount accumulated in such account. In connection
with the Stock Purchase Plan, 55,493 shares of Common Stock were issued in 2000.
The Stock Purchase Plan will terminate in 2007.

11. STOCK BASED COMPENSATION

It is the Company's policy to generally grant stock options for a fixed
number of shares to employees with the exercise price approximating fair value
on the date of grant. The Company has elected to follow APB Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"), and related
interpretations and accordingly, recognizes no compensation expense for stock
options granted at fair value. Management believes that the alternative fair
value accounting provided for under SFAS No. 123, "Accounting For Stock Based
Compensation" ("SFAS 123"), requires use of option valuation methods that were
not developed for use in valuing employee stock options. Under APB 25,
compensation expense has been recognized for all options granted at less than
the fair market value of the Company's common shares on the date of grant.

Pro forma information regarding net income and earnings per share is
required to be disclosed by SFAS 123 and has been determined as if the Company
had accounted for its employee stock options under the fair value method of that
Statement. The fair value of these options and the options granted as part of
the Plan were estimated at the date of grant using a Black-Scholes
option-pricing model. The

- 36 -

WATERLINK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

- --------------------------------------------------------------------------------

Company assumed a dividend yield rate of 0% and a weighted-average expected life
of the options of 5 years for all periods presented. The risk-free interest
factor utilized was 5.0% in 2002, 6.3% in 2001 and 5.5% in 2000. Further, the
volatility factor of the expected market price of the Company's stock was 42% in
2002, 34% in 2001 and 35% in 2000. Following is the weighted-average grant-date
fair value of options granted during 2002, 2001 and 2000 using the Black-Scholes
model, with the weighted average exercise price for comparison purposes:

The weighted-average grant-date fair value of the shares granted under
the Stock Purchase Plan was $1.21 during 2000. No such shares were granted
during 2001 or 2002.

The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.

For purposes of pro forma disclosures, the estimated value of the options
is amortized to expense over the options' vesting period. The pro forma results
are not necessarily indicative of what would have occurred had the Company
adopted SFAS 123. The Company's pro forma information follows:

- 37 -

WATERLINK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

- --------------------------------------------------------------------------------

A summary of the Company's stock option activity and related information
follows:

The following table summarizes information concerning outstanding and
exercisable options at September 30, 2002:

The Company has reserved 2,285,000 shares of Common Stock for the
possible exercise of outstanding stock options.

12. RETIREMENT PLANS

The Company sponsors two defined benefit pension plans. One of the plans
is in the U.K., which covers substantially all of the employees of Sutcliffe
Speakman Carbons and Sutcliffe Croftshaw;

- 38 -

WATERLINK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

- --------------------------------------------------------------------------------

and the other is a U.S. plan, which covers substantially all of the employees of
Barnebey Sutcliffe. Information pertaining to the Company's defined benefit
pension plans follows:

- 39 -

WATERLINK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

- --------------------------------------------------------------------------------

Amounts applicable to the Company's pension plan with projected or
accumulated benefit obligations in excess of plan assets are:

The Company also sponsors a defined contribution plan that covers
substantially all domestic employees. Company contributions to the Plan totaled
$56,000 in 2002, $37,000 in 2001 and $47,000 in 2000.

13. FINANCIAL INSTRUMENTS

The carrying values of cash, cash equivalents, accounts receivable and
accounts payable are a reasonable estimate of their fair value due to the
short-term nature of these instruments. Substantially all of the Company's
long-term debt obligations, except for the convertible subordinated notes to the
former shareholders of C'treat and to related parties, have variable rates and
cost approximates fair value at September 30, 2002. The convertible subordinated
notes do not have a ready market and cost is assumed to approximate fair value.
The aggregate carrying value of these notes is $3,250,000 at September 30, 2002,
with interest rates ranging from 11.00% to 13.00% and maturity dates in October
2003.

14. SEGMENT INFORMATION

Historically the Company's reportable segments were its five operating
Divisions. As described in Note 2 the Company has sold all of its operating
divisions with the exception of its Specialty Products Division. Accordingly,
Waterlink now has only one reportable segment for all periods presented.

- 40 -

WATERLINK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

- --------------------------------------------------------------------------------

Net sales are reflected in the country from which the sales are made.
Information with regard to revenues and long-lived assets by geographic areas
follows:

The Company did not derive more than 10% of its net sales from any
individual customer during any of the three years in the period ended September
30, 2002.

15. SUPPLEMENTAL CASH FLOW DATA

Supplemental cash flow data is as follows:

16. CONTINGENCIES

The Company is subject to various lawsuits, claims and proceedings that
arise in the ordinary course of business. The Company accrues the cost
associated with legal matters when they become probable and reasonable
estimable. Management believes that any ultimate liability with respect to these
actions, in excess of the amount provided, will not materially affect the
Company's operations, cash flows or consolidated financial position.

17. SUBSEQUENT EVENT

On December 5, 2002, pursuant to the terms of the October 1, 2002
amendment to its Senior Credit Facility, the Company caused its operating
subsidiary in England to enter into a financing arrangement, pledging certain
accounts receivable in England as collateral. Under the terms of the amendment
the Company is obligated to remit from this transaction the amount of $1,000,000
to the senior lenders to reduce the amounts outstanding under the Senior Credit
Facility.

- 41 -

WATERLINK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

- --------------------------------------------------------------------------------

18. QUARTERLY OPERATING RESULTS (UNAUDITED)

The following is a summary of unaudited quarterly results of operations
for the years ended September 30, 2002 and 2001.

The quarter ended September 30, 2001 includes a special charge of
$2,560,000 related to the closure of the corporate office.

- 42 -

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

Information required by this item is located in Waterlink's definitive
Proxy Statement to be filed with the Securities and Exchange Commission within
120 days of the close of Waterlink's fiscal year ended September 30, 2002 and is
incorporated herein by reference thereto.

ITEM 11. EXECUTIVE COMPENSATION.

Information required by this item is located in Waterlink's definitive
Proxy Statement to be filed with the Securities and Exchange Commission within
120 days of the close of Waterlink's fiscal year ended September 30, 2002 and is
incorporated herein by reference thereto.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information required by this item is located in Waterlink's definitive
Proxy Statement to be filed with the Securities and Exchange Commission within
120 days of the close of Waterlink's fiscal year ended September 30, 2002 and is
incorporated herein by reference thereto.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

None.

PART IV

ITEM 14. CONTROLS AND PROCEDURES

(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES.

Under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, we
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures as of November 1, 2002, the evaluation date. Based
upon the evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that, as of the evaluation date, our disclosure controls
and procedures are effective in timely alerting them to the material
information relating to us required to be included in our periodic filings
with the Securities and Exchange Commission.

(b) CHANGES IN INTERNAL CONTROLS.

There were no significant changes made in our internal controls during the
period covered by this report or, to our knowledge, in other factors that
could significantly affect these controls subsequent to the date of their
evaluation.

- 43 -

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) 1. FINANCIAL STATEMENTS

The following report and consolidated financial statements of Waterlink,
Inc. and Subsidiaries are included in Item 8, Part II of this report:

Report of Independent Auditors

Consolidated Balance Sheets at September 30, 2002 and 2001

Consolidated Statements of Operations for the years ended September 30,
2002, 2001 and 2000

Consolidated Statements of Shareholders' Equity for the years ended
September 30, 2002, 2001 and 2000

Consolidated Statements of Cash Flows for the years ended September 30,
2002, 2001 and 2000

Notes to Consolidated Financial Statements

(a) 2. FINANCIAL STATEMENT SCHEDULES

Schedules are omitted because of the absence of conditions under which
they are required or because the required information is given in the
Financial Statements or notes thereto.

(b) REPORTS ON FORM 8-K

Waterlink did not file any reports on Form 8-K during the last quarter of
the period covered by this report.

(c) EXHIBITS

The exhibits are set forth on the attached Exhibit Index which is
incorporated by reference. Exhibits are included only in the copies of
this Form 10-K filed with the Securities and Exchange Commission.

- 44 -

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Waterlink, Inc. has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.

WATERLINK, INC.

By: /s/ William W. Vogelhuber
--------------------------------------
Its President and Chief Executive
Officer

Date: December 10, 2002

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated:

/s/ Robert P. Pinkas /s/ Kenneth Ch'uan-k'ai Leung
- ------------------------------------------- -------------------------------------------
Robert P. Pinkas, Kenneth Ch'uan-k'ai Leung,
Director and Chairman of the Board Director
Date: December 10, 2002 Date: December 10, 2002

/s/ Dr. R. Gary Bridge /s/ William W. Vogelhuber
- ------------------------------------------- -------------------------------------------
Dr. R. Gary Bridge, William W. Vogelhuber,
Director Director, President and Chief Executive
Date: December 10, 2002 Officer
Date: December 10, 2002

/s/ B. Bruce Cummings /s/ Donald A. Weidig
- ------------------------------------------- -------------------------------------------
B. Bruce Cummings, Donald A. Weidig,
Director Chief Financial Officer
Date: December 10, 2002 (and principal accounting officer)
Date: December 10, 2002

/s/ Peter G. Kleinhenz
- -------------------------------------------
Peter G. Kleinhenz,
Director
Date: December 10, 2002

- 45 -

CERTIFICATIONS

I, William W. Vogelhuber, certify that:

1. I have reviewed this annual report on Form 10-K of Waterlink, Inc.;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing of
this annual report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluations,
including any corrective actions with regard to significant
deficiencies and material weaknesses.

December 10, 2002

By: /s/ William W. Vogelhuber
--------------------------------------
President and Chief Executive Officer

- 46 -

CERTIFICATIONS -- (CONTINUED)

I, Donald A. Weidig, certify that:

1. I have reviewed this annual report on Form 10-K of Waterlink, Inc.;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:

a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;

b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing of
this annual report (the "Evaluation Date"); and

c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):

a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluations,
including any corrective actions with regard to significant
deficiencies and material weaknesses.

December 10, 2002

By: /s/ Donald A. Weidig
--------------------------------------
Chief Financial Officer

- 47 -

INDEX TO EXHIBITS

- 48 -

- 49 -

- 50 -

- ---------------

* Incorporated herein by reference as indicated.

- 51 -