**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549**

**FORM10-Q**

**x****                     ****QUARTERLY REPORT PURSUANT TO SECTION13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

**Forthe quarterly period ended March 31, 2007**

**Or**

**o****                        ****TRANSITION REPORT PURSUANT TO SECTION13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

**Commissionfile number 333-109686**

**RockwoodSpecialties Group, Inc.**(Exact name of Registrant as specified in its charter)

| **Delaware**                     |   | **52-2277390**       |
|----------------------------------|--------|----------------------|
| (State or other  jurisdiction of |   | (I.R.S. Employer     |
| incorporation or  organization)  |   | Identification  No.) |

 

**100Overlook Center, Princeton, New Jersey 08540**(Address of principal executive offices) (Zip Code)

**(609)514-0300**(Registrant’s telephone number, including area code)

Indicate by check markwhether the Registrant (1) has filed all reports required to be filed bySection13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the Registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.  x  Yes    o  No

Indicate by check markwhether the Registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule12b-2 of the Exchange Act.
| Large accelerated filer o | Accelerated filer o | Non-accelerated filer x |
|---------------------------|---------------------|-------------------------|

 

Indicate by check markwhether the Registrant is a shell company (as defined in Rule 12b-2 of theExchange Act) o  Yes    x  No

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date.

The registrants commonstock, par value $0.01 per share, is not publicly traded.  As of May 15, 2007, there were outstanding382,000 shares of common stock of the Registrant, all of which is held by ourparent company Rockwood Specialties International, Inc.

 

----

**TABLEOF CONTENTSFORM 10-Q**
|         |   | PART I- FINANCIAL  INFORMATION                                                                       |   |
|---------|--------|------------------------------------------------------------------------------------------------------|--------|
| Item 1  |   | Financial  Statements (Unaudited)                                                                    | 3      |
|    |   | Condensed  Consolidated Statements of Operations for the three months ended March 31,  2007 and 2006 | 3      |
|    |   | Condensed  Consolidated Balance Sheets as of March 31, 2007 and December 31, 2006                    | 4      |
|    |   | Condensed  Consolidated Statements of Cash Flows for the three months ended March 31,  2007 and 2006 | 5      |
|    |   | Notes to  Condensed Consolidated Financial Statements                                                | 6      |
| Item 2  |   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations          | 28     |
| Item 3  |   | Quantitative  and Qualitative Disclosures about Market Risk                                          | 44     |
| Item 4  |   | Controls and  Procedures                                                                             | 45     |
|    |   |                                                                                                 |   |
|    |   | PART  II- OTHER INFORMATION                                                                          |   |
| Item 1  |   | Legal Proceedings                                                                                    | 46     |
| Item 1A |   | Risk Factors                                                                                         | 46     |
| Item 2  |   | Unregistered  Sales of Equity Securities and Use of Proceeds                                         | 46     |
| Item 3  |   | Defaults  Upon Senior Securities                                                                     | 46     |
| Item 4  |   | Submission  of Matters to a Vote of Security Holders                                                 | 46     |
| Item 5  |   | Other Information                                                                                    | 46     |
| Item  6 |   | Exhibits                                                                                             | 46     |
|    |   |                                                                                                 |   |
|    |   | Signatures                                                                                           | 47     |

 

2

----

**PART I – FINANCIAL INFORMATION**

**Item1. Financial Statements (Unaudited).**

**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

**(Dollarsin millions)(Unaudited)**
| ** **                                                            | ** ** | **Three months ended March 31,** | ** ** |
|-----------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                            | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
| Net sales                                                             |       | $                                                    | 796.1      |   | $ | 724.1 |   |
| Cost of products sold                                                 |       | 539.1                                                |       | 498.3 |   |
| Gross profit                                                          |       | 257.0                                                |       | 225.8 |   |
| Selling, general and  administrative expenses                         |       | 154.8                                                |       | 140.6 |   |
| Restructuring charges,  net                                           |       | 4.5                                                  |       | 1.2 |   |
| Gain on sale of assets                                                |       | (4.8                                                 | )          | (0.5 | ) |
| Operating income                                                      |       | 102.5                                                |       | 84.5 |   |
| Other income  (expenses):                                             |       |                                                 |       |   |   |
| Interest expense                                                      |       | (54.7                                                | )          | (39.8 | ) |
| Interest income                                                       |       | 5.1                                                  |       | 1.4 |   |
| Refinancing expenses                                                  |       | (0.9                                                 | )          | — |   |
| Foreign exchange gain  (loss), net                                    |       | 0.4                                                  |       | (2.9 | ) |
| Other, net                                                            |       | (0.1                                                 | )          | 1.6 |   |
| Net                                                                   |       | (50.2                                                | )          | (39.7 | ) |
| Income from continuing  operations before taxes and minority interest |       | 52.3                                                 |       | 44.8 |   |
| Income tax provision                                                  |       | 22.0                                                 |       | 18.3 |   |
| Income from continuing  operations before minority interest           |       | 30.3                                                 |       | 26.5 |   |
| Minority interest in  continuing operations                           |       | (1.1                                                 | )          | — |   |
| Net income from  continuing operations                                |       | 29.2                                                 |       | 26.5 |   |
| Income from  discontinued operations, net of tax                      |       | 0.5                                                  |       | 16.5 |   |
| Gain on sale of  disontinued operations, net of tax                   |       | 115.7                                                |       | — |   |
| Minority interest in  discontinued operations                         |       | (0.1                                                 | )          | (3.0 | ) |
| Net income                                                            |       | $                                                    | 145.3      |   | $ | 40.0 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

3

----

**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(Dollarsin millions, except per share amounts)(Unaudited)**
| ** **                                                                                          | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                          | ** ** | **2007**           | ** ** | **2006**              | ** ** |
| **ASSETS**                                                                                          | ** ** | ** **         | ** ** | ** **            | ** ** |
| Current assets:                                                                                     |       |               |       |                  |       |
| Cash and cash  equivalents                                                                          |       | $                  | 489.6      |                  | $          | 25.9 |   |
| Accounts receivable,  net                                                                           |       | 519.2              |       | 463.4                 |       |
| Inventories                                                                                         |       | 453.0              |       | 445.4                 |       |
| Deferred income taxes                                                                               |       | 13.7               |       | 15.1                  |       |
| Prepaid expenses and  other current assets                                                          |       | 36.7               |       | 40.8                  |       |
| Assets of discontinued  operations                                                                  |       | —             |       | 490.6                 |       |
| Total current  assets                                                                               |       | 1,512.2            |       | 1,481.2               |       |
| Property, plant and  equipment, net                                                                 |       | 1,379.7            |       | 1,374.9               |       |
| Goodwill                                                                                            |       | 1,721.8            |       | 1,717.7               |       |
| Other intangible  assets, net                                                                       |       | 629.0              |       | 539.6                 |       |
| Deferred debt issuance  costs, net of accumulated amortization of $28.0 and $25.4, respectively     |       | 49.6               |       | 51.6                  |       |
| Other assets                                                                                        |       | 60.0               |       | 59.1                  |       |
| Total assets                                                                                        |       | $                  | 5,352.3    |                  | $          | 5,224.1 |   |
| **LIABILITIES AND STOCKHOLDER’S  EQUITY**                                                      | ** ** | ** **         | ** ** | ** **            | ** ** |
| Current liabilities:                                                                                |       |               |       |                  |       |
| Accounts payable                                                                                    |       | $                  | 249.5      |                  | $          | 290.3 |   |
| Income taxes payable                                                                                |       | 8.0                |       | 0.2                   |       |
| Accrued compensation                                                                                |       | 94.1               |       | 85.9                  |       |
| Restructuring liability                                                                             |       | 11.7               |       | 8.5                   |       |
| Accrued expenses and  other current liabilities                                                     |       | 183.1              |       | 178.5                 |       |
| Senior secured  revolving credit facility                                                           |       | —             |       | 37.0                  |       |
| Long-term debt, current  portion                                                                    |       | 361.9              |       | 80.8                  |       |
| Liabilities of  discontinued operations                                                             |       | —             |       | 171.1                 |       |
| Total current  liabilities                                                                          |       | 908.3              |       | 852.3                 |       |
| Long-term debt                                                                                      |       | 2,423.6            |       | 2,720.9               |       |
| Pension and related  liabilities                                                                    |       | 358.5              |       | 353.0                 |       |
| Deferred income taxes                                                                               |       | 52.3               |       | 48.5                  |       |
| Other liabilities                                                                                   |       | 148.0              |       | 97.2                  |       |
| Total  liabilities                                                                                  |       | 3,890.7            |       | 4,071.9               |       |
| Minority interest                                                                                   |       | 176.1              |       | 33.6                  |       |
|                                                                                                |       |               |       |                  |       |
| Stockholder's equity:                                                                               |       |               |       |                  |       |
| Common stock ($0.01 par  value, 1,000,000 shares authorized, 382,000 shares issued and outstanding) |       | —             |       | —                |       |
| Paid-in capital                                                                                     |       | 1,005.4            |       | 1,005.4               |       |
| Accumulated other  comprehensive income                                                             |       | 265.7              |       | 236.7                 |       |
| Retained earnings  (deficit)                                                                        |       | 14.4               |       | (123.5                | )          |
| Total  stockholder's equity                                                                         |       | 1,285.5            |       | 1,118.6               |       |
| Total liabilities and  stockholder's equity                                                         |       | $                  | 5,352.3    |                  | $          | 5,224.1 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

4

----

**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Dollarsin millions)(Unaudited)**
| ** **                                                                                               | ** ** | **Three months ended** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                               | ** ** | **March 31,**               | ** ** |
| ** **                                                                                               | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| **CASH FLOWS FROM OPERATING  ACTIVITIES:**                                                               | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Net income                                                                                               |       | $                                | 145.3      |   | $ | 40.0 |   |
| Adjustments to reconcile  net income to net cash provided by operating activities:                       |       |                             |       |   |   |
| Income from  discontinued operations, net of tax                                                         |       | (0.5                             | )          | (16.5 | ) |
| Gain on sale of  discontinued operations, net of tax                                                     |       | (115.7                           | )          | — |   |
| Minority  interest in discontinued operations                                                            |       | 0.1                              |       | 3.0 |   |
| Depreciation and  amortization                                                                           |       | 53.2                             |       | 43.7 |   |
| Deferred  financing costs amortization                                                                   |       | 2.4                              |       | 2.3 |   |
| Foreign exchange  (gain) loss                                                                            |       | (0.4                             | )          | 2.9 |   |
| Fair value  adjustment of derivatives                                                                    |       | 2.8                              |       | (10.7 | ) |
| Bad debt  provision                                                                                      |       | 0.6                              |       | 0.6 |   |
| Deferred income  taxes                                                                                   |       | 9.9                              |       | 7.4 |   |
| Gain on sale of  assets                                                                                  |       | (4.8                             | )          | (0.5 | ) |
| Minority  interest in continuing operations                                                              |       | 1.1                              |       | — |   |
| Changes in assets and  liabilities, net of the effect of foreign currency translation and  acquisitions: |       |                             |       |   |   |
| Accounts  receivable                                                                                     |       | (54.2                            | )          | (57.4 | ) |
| Inventories,  including inventory write-up reversal                                                      |       | (5.0                             | )          | 1.3 |   |
| Prepaid expenses  and other assets                                                                       |       | (1.5                             | )          | 7.0 |   |
| Accounts payable                                                                                         |       | (25.3                            | )          | (14.2 | ) |
| Income taxes  payable                                                                                    |       | 6.9                              |       | 8.2 |   |
| Accrued expenses  and other liabilities                                                                  |       | 54.2                             |       | (22.9 | ) |
| Net cash provided by  (used in) operating activities of continuing operations                            |       | 69.1                             |       | (5.8 | ) |
| Net cash  provided by operating activities of discontinued operations                                    |       | 1.6                              |       | 53.4 |   |
| **Net  cash provided by operating activities**                                                           |       | 70.7                             |       | 47.6 |   |
| ** **                                                                                               |       |                             |       |   |   |
| **CASH FLOWS FROM INVESTING  ACTIVITIES:**                                                               | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Acquisitions, including  transaction fees paid, net of cash acquired                                     |       | (2.1                             | )          | — |   |
| Capital expenditures,  excluding capital leases                                                          |       | (47.3                            | )          | (37.2 | ) |
| Proceeds from formation  of Viance joint venture                                                         |       | 76.6                             |       | — |   |
| Proceeds from sale of  discontinued operations                                                           |       | 426.2                            |       | — |   |
| Proceeds on sale of assets                                                                               |       | 9.9                              |       | 2.4 |   |
| Net cash provided by  (used in) investing activities of continuing operations                            |       | 463.3                            |       | (34.8 | ) |
| Net cash used in  investing activities of discontinued operations                                        |       | —                           |       | (8.3 | ) |
| **Net  cash provided by (used in) investing activities**                                                 |       | 463.3                            |       | (43.1 | ) |
| ** **                                                                                               |       |                             |       |   |   |
| **CASH FLOWS FROM FINANCING  ACTIVITIES:**                                                               | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Proceeds from senior  secured credit facilities                                                          |       | —                           |       | 45.2 |   |
| Repayment of senior  secured credit facilities                                                           |       | (65.0                            | )          | (70.1 | ) |
| Payments on other  long-term debt                                                                        |       | (1.6                             | )          | (0.9 | ) |
| Net cash used in  financing activities of continuing operations                                          |       | (66.6                            | )          | (25.8 | ) |
| Net cash used in  financing activities of discontinued operations                                        |       | —                           |       | (36.4 | ) |
| **Net  cash used in financing activities**                                                               |       | (66.6                            | )          | (62.2 | ) |
| ** **                                                                                               |       |                             |       |   |   |
| Effect of exchange rate  changes on cash and cash equivalents                                            |       | (2.1                             | )          | (1.1 | ) |
| Net increase  (decrease) in cash and cash equivalents                                                    |       | 465.3                            |       | (58.8 | ) |
| Cash and cash  equivalents, beginning of period                                                          |       | 25.9                             |       | 96.4 |   |
| Cash and cash  equivalents, end of period                                                                |       | 491.2                            |       | 37.6 |   |
| Less cash and cash  equivalents of discontinued operations                                               |       | (1.6                             | )          | (8.0 | ) |
| Cash and cash  equivalents of continuing operations, end of period                                       |       | $                                | 489.6      |   | $ | 29.6 |   |
|                                                                                                     |       |                             |       |   |   |
| Supplemental  disclosures of cash flow information:                                                      |       |                             |       |   |   |
| Interest paid, net                                                                                       |       | $                                | 25.1       |   | $ | 17.2 |   |
| Income taxes paid, net  of refunds                                                                       |       | $                                | 5.2        |   | $ | 2.7 |   |
| Non-cash investing  activities:                                                                          |       |                             |       |   |   |
| Acquisition of  equipment under capital leases                                                           |       | $                                | 0.2        |   | $ | — |   |
| Increase in liabilities for property, plant and equipment                                                |       | $                                | (13.1      | ) | $ | (13.6 | ) |

 

See accompanyingnotes to condensed consolidated financial statements.

5

----

**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**Notes To Condensed ConsolidatedFinancial Statements (Unaudited)**

**1.****                                           DESCRIPTIONOF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:**

***Business Description, Background***— RockwoodSpecialties Group, Inc. and Subsidiaries (“Rockwood” or the “Company”) is aglobal developer, manufacturer and marketer of high value-added specialtychemicals and advanced materials used for industrial and commercial purposes.

Rockwood was formed inconnection with an acquisition of certain assets, stock and businesses fromLaporte plc (“Laporte”) on November 20, 2000 (the “KKR Acquisition”) byaffiliates of Kohlberg Kravis Roberts Co. L.P. (“KKR”). The businesses acquiredfocused on specialty compounds, iron-oxide pigments, timber-treatmentchemicals, clay-based additives, pool and spa chemicals, and electronicchemicals in semiconductors and printed circuit boards. The Company is anindirect wholly-owned subsidiary of Rockwood Holdings, Inc. (“Holdings”), anentity controlled by affiliates of KKR.

On July 31, 2004, theCompany completed the acquisition of certain businesses of Dynamit Nobel frommg technologies ag, now known as GEA Group Aktiengesellschaft. The businessesacquired are focused on highly specialized markets and consist of: titaniumdioxide pigments; surface treatment and lithium chemicals; and advancedceramics.

On January 9, 2007, theCompany completed the sale of its Groupe Novasep subsidiary which representedone of its reportable segments. As a result, the condensed consolidatedfinancial statements have been reclassified to reflect the former GroupeNovasep segment as a discontinued operation for all periods presented. See Note2, “Discontinued Operations,” for further details.

***Basis of Presentation***—The accompanyingcondensed financial statements of Rockwood are presented on a consolidatedbasis. All significant intercompany accounts and transactions have beeneliminated in consolidation. Certain prior-year balances have been reclassifiedto conform to current year presentation.

The interim financialstatements included herein are unaudited. The condensed consolidated financialstatements are presented based upon accounting principles generally accepted inthe United States of America (“U.S. GAAP”), except that certain information andfootnote disclosures, normally included in financial statements prepared inaccordance with U.S. GAAP, have been condensed or omitted. The accompanyingcondensed consolidated financial statements should be read in conjunction withthe consolidated financial statements and the notes thereto contained in theCompany’s 2006 Form10-K. In the opinion of management, this informationcontains all adjustments necessary, consisting of normal and recurring accruals,for a fair presentation of the results for the periods presented.

The results of operationsfor the interim periods are not necessarily indicative of the results ofoperations for the full year.

The Company’s minorityinterest in continuing operations represents the total of the minority party’sinterest in certain investments (principally Viance, LLC) that are consolidatedbut less than 100% owned. See Note 3, “Viance, LLC Joint Venture,” for furtherdetails.  In the condensed consolidated balance sheet, the minorityinterest balance as of December 31, 2006 relates to the former Groupe Novasepsegment that was sold in January 2007.

***Nature of Operations/Segment Reporting***—The Company is a global developer, manufacturer and marketer of highvalue-added specialty chemicals and advanced materials. The Company operates invarious business lines within its six reportable segments consisting of: (1)Specialty Chemicals, which includes lithium compounds and chemicals, metalsurface treatment chemicals, and synthetic metal sulfides, (2) PerformanceAdditives, which includes color pigments and services, timber treatmentchemicals, clay-based additives, and water treatment chemicals, (3) TitaniumDioxide Pigments, which consists of titanium dioxide pigments, and zinc- andbarium-based compounds, (4) Advanced Ceramics, which includesceramic-on-ceramic ball head and liner components used in hip-joint prosthesessystems, ceramic cutting tools and a range of other ceramic components, (5)Specialty Compounds, which consists of plastic compounds and (6) Electronics,which consists of electronic chemicals and photomasks.

The basis for determiningan enterprise’s operating segments is the manner in which financial informationis used internally by the enterprise’s chief operating decision maker, theCompany’s Chief Executive Officer. See Note 4, “Segment Information,” forfurther segment reporting information.

***Use of Estimates***— The preparation offinancial statements and related disclosures in conformity with accountingprinciples generally accepted in the United States requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities, the disclosure of contingent assets and liabilities at the date ofthe financial statements, and revenue and expenses during the periods reported.These estimates include, among other things, assessing the collectibility ofaccounts receivable, the use and recoverability of inventory, the valuation ofdeferred tax assets, the measurement of the accrual for uncertain tax benefits,impairment of goodwill as well as property, plant and equipment and otherintangible assets, the accrual of environmental and legal reserves and theuseful lives of tangible and intangible assets, among others. Actual resultscould differ from those estimates. Such estimates also

6

----

include the fair value ofassets acquired and liabilities assumed allocated to the purchase price ofbusiness combinations consummated.

***Risks Associated with International Operations and CurrencyRisk***—The Company’s international operations are subjectto risks normally associated with foreign operations, including, but notlimited to, the disruption of markets, changes in export or import laws,restrictions on currency exchanges and the modification or introduction ofother governmental policies with potentially adverse effects. A majority of theCompany’s sales and expenses are denominated in currencies other than U.S.dollars. Changes in exchange rates may have a material effect on the Company’sreported results of operations and financial position. In addition, asignificant portion of the Company’s indebtedness is denominated in euros.

***Related Party Transactions***—Rockwoodhas engaged in transactions with certain related parties including KKR and DLJ MerchantBanking Partners III, L.P. (“DLJMB”) and affiliates of each.  Information concerning certain transactionsis included in the Rockwood Holdings, Inc. 2006 Form 10-K in Item 13, “CertainRelationships and Related Transactions, and Director Independence.”  There have been no significant changes to ourrelated party transactions as of March 31, 2007.

***Revenue Recognition***—The Companyrecognizes revenue when the earnings process is complete. Product sales arerecognized when products are shipped to the customer in accordance with theterms of the contract of sale, title and risk of loss have been transferred,collectibility is reasonably assured, and pricing is fixed or determinable.Accruals are made for sales returns and other allowances based on the Company’sexperience. Revenue under service agreements, which was less than 1% ofconsolidated revenues in 2006, is realized when the service is performed.

***Foreign Currency Translation***—Thefunctional currency of each of the Company’s foreign subsidiaries is primarilythe respective local currency. Balance sheet accounts of the foreign operationsare translated into U.S. dollars at period-end exchange rates and income andexpense accounts are translated at average exchange rates during the period.Translation gains and losses related to net assets located outside the U.S. areshown as a component of accumulated other comprehensive income. Gains andlosses resulting from foreign currency transactions (transactions denominatedin a currency other than the entity’s functional currency) are included indetermining net income for the period in which exchange rates change, exceptfor gains or losses on certain intercompany transactions that are of along-term investment nature for which settlement is not planned or anticipatedin the foreseeable future and gains or losses on euro-denominated debt that isdesignated as a net investment hedge of the Company’s euro-denominatedinvestments which are reported and accumulated in the same manner astranslation adjustments.

***Derivatives***—The Company accounts forderivatives based on Statement of Financial Accounting Standards (“SFAS”) 133,*Accounting for Derivative Instruments and HedgingActivities*, as amended and interpreted. SFAS 133 requires that allderivatives be recognized as either assets or liabilities at fair value.Changes in the fair value of derivatives not designated as hedging instrumentsare recognized currently in earnings while changes in the fair value ofderivatives that are designated as hedging instruments are recognized as acomponent of comprehensive income. The Company uses derivative instruments tomanage its exposure to market risks associated with fluctuations in interestrates and foreign currency exchange rates. See “Comprehensive Income” sectionof Note 1 for the impact of the Company’s net investment hedges. The Companydoes not enter into derivative contracts for trading purposes nor does it useleveraged or complex instruments.

***Pension, Postemployment and Postretirement Costs***—Definedbenefit costs and liabilities have been determined in accordance with SFAS 87,*Employers’ Accounting for Pensions* andSFAS 158,*Employers’ Accounting for DefinedBenefit Pension and Other Postretirement Plans, an amendment of FASB StatementsNo. 87, 88, 106 and 132 (R)*. Other postretirement benefit costs andliabilities have been determined in accordance with SFAS 106,*Employers’ Accounting for Postretirement BenefitsOther Than Pensions*and SFAS 158,*Employers’ Accounting for Defined Benefit Pension and Other PostretirementPlans, an amendment of FASB Statements No. 87, 88, 106 and 132 (R).*Postemployment benefit costs and liabilities have been determined in accordancewith SFAS 112,*Employers’ Accounting forPostemployment Benefits.*

***Income Taxes***—Income taxes aredetermined in accordance with SFAS109,*Accounting for Income Taxes* and Financial Accounting Standards Board(“FASB”) Interpretation (“FIN”) No.48*,Accounting for Uncertainty in Income Taxes—An Interpretation of FASB StatementNo. 109*. Deferred tax assets and liabilities are recognized forfuture tax consequences attributable to differences between the financialstatement carrying amounts and the corresponding tax carrying amounts of assetsand liabilities. Deferred tax assets are also recognized for tax loss and taxcredit carryforwards. A valuation allowance is recorded to reduce deferred taxassets when it is more likely than not that a tax benefit will not be realizedbased on available evidence weighted toward evidence that is objectivelyverifiable. Deferred taxes are not provided on the undistributed earnings ofsubsidiaries as such amounts are considered to be permanently invested or couldbe distributed to the parent company in a tax free manner.

***Comprehensive Income***—Comprehensiveincome includes net income and the other comprehensive income components whichinclude unrealized gains and losses from foreign currency translation and fromcertain intercompany transactions that are of a long-term investment nature aswell as minimum pension liability adjustments that are recorded directly into aseparate section of stockholder’s equity in the balance sheets. Also includedare the net investment hedges discussed below. Foreign currency translationamounts are not adjusted for income taxes since they relate to indefinitelength investments in non-U.S. subsidiaries and certain intercompany debt.

7

----

Comprehensive income issummarized as follows:
|                                             | ** ** | **Three months ended** | ** ** |
|---------------------------------------------|------------|----------------------------------|------------|
| ** **                                  | ** ** | **March 31,**               | ** ** |
| **($ in millions)**               | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| Net income                                  |       | $                                | 145.3      |   | $ | 40.0 |   |
| Pension related  adjustments, net of tax    |       | 0.5                              |       | 4.6 |   |
| Foreign currency  translation               |       | 36.8                             |       | 25.4 |   |
| Intercompany  foreign currency transactions |       | 2.1                              |       | 31.6 |   |
| Net investment  hedge, net of tax           |       | (10.4                            | )          | (25.3 | ) |
| Total  comprehensive income                 |       | $                                | 174.3      |   | $ | 76.3 |   |

 

In November 2004, theCompany completed the sale of €375.0 million aggregate principal amount of7.625% senior subordinated notes and $200.0 million aggregate principal amountof 7.500% senior subordinated notes, both due in 2014 (“2014 Notes”). Inconnection with the 2014 Notes, the Company entered into a cross-currency swapwith a five-year term and a notional amount of €155.6 million that effectivelyconverted the U.S. dollar fixed-rate debt in respect of the dollar notes soldinto euro fixed-rate debt. The Company has designated this contract as a hedgeof the foreign currency exposure of its net investment in its euro-denominatedoperations. There was no ineffective portion of the net investment hedge as ofMarch 31, 2007. The Company does not expect any of the loss on the netinvestment hedge residing in comprehensive income at March 31, 2007 to bereclassified into earnings during the subsequent twelve months.

In addition, wedesignated the remaining portion of our euro-denominated debt that is recordedon our U.S. books as a net investment hedge of our euro-denominated investmentsas of October 1, 2005 (euro-denominated debt of €680.9 million or $909.3million based on the Friday, March 30, 2007 exchange rate of €1.00 = $1.3354).As a result, effective October 1, 2005, any foreign currency gains and lossesresulting from the euro-denominated debt discussed above are accounted for as acomponent of accumulated other comprehensive income. There was no ineffectiveportion of the net investment hedge as of March 31, 2007. The Company does notexpect any of the loss on the net investment hedge residing in comprehensiveincome at March 31, 2007 to be reclassified into earnings during the subsequenttwelve months.

***Accounting for Environmental Liabilities***—In the ordinary course of business, Rockwood is subject to extensive andchanging federal, state, local and foreign environmental laws and regulations,and has made provisions for the estimated financial impact of environmentalcleanup related costs. Rockwood’s policy has been to accrue costs of anon-capital nature related to environmental clean-up when those costs arebelieved to be probable and can be reasonably estimated. If the aggregateamount of the obligation and the amount and timing of the cash payments for asite are fixed or reliably determinable, the liability is discounted.Expenditures that extend the life of the related property or mitigate orprevent future environmental contamination are capitalized and expendituresrelated to existing conditions resulting from past or present operations andfrom which no current or future benefit is discernible are immediatelyexpensed. The quantification of environmental exposures requires an assessmentof many factors, including changing laws and regulations, advancements inenvironmental technologies, the quality of information available related tospecific sites, the assessment stage of each site investigation and the lengthof time involved in remediation or settlement. In some matters, Rockwood mayshare costs with other parties. Rockwood does not include anticipatedrecoveries from insurance carriers or other third parties in its accruals forenvironmental liabilities.

***Cash and Cash Equivalents***—All highlyliquid instruments and money market funds with an original maturity of threemonths or less are considered to be cash equivalents. The carrying amountapproximates fair value because of the short maturities of these instruments.

***Stock-Based Compensation***— Holdings hasin place the 2005 Amended and Restated Stock Purchase and Option Plan ofRockwood Holdings, Inc. and Subsidiaries (the “Plan”). Under the Plan, Holdingsmay grant stock options, restricted stock and other stock-based awards to theCompany’s employees and directors and allow employees and directors to purchaseshares of its common stock. There are 10,000,000 authorized shares availablefor grant under the Plan. Effective January 1, 2006, the Company adopted SFASNo. 123R,*Share-Based Payment*,and related interpretations and began expensing the grant-date fair value ofstock options.

The Company adopted SFASNo. 123R using the modified prospective approach and therefore has not restatedprior periods. In accordance with SFAS No. 123R, beginning in the first quarterof 2006, the Company recorded compensation cost for the unvested portion ofawards issued after February 2005, which is the date Holding’s first filed itsregistration statement with the Securities and Exchange Commission (“SEC”), andfor any awards modified, repurchased or cancelled after this date.  Thecompensation cost recorded under the Plan caused income before taxes todecrease by less than $0.1 million for the three months ended March 31, 2007and 2006. There were no options granted in the first quarter of 2007.

***Recent Accounting Pronouncements***—TheCompany adopted the following in the first quarter of 2007:

In June 2006, a finalconsensus was reached on Emerging Issues Task Force (“EITF”) Issue No. 06-3,*How Taxes Collected From*

8

----

*Customersand Remitted to Governmental Authorities Should Be Presented in the IncomeStatement (That Is, Gross Versus Net Presentation).*  The scope of this Issue includes any taxassessed by a governmental authority that is directly imposed on arevenue-producing transaction between a seller and a customer and may include,but is not limited to, sales, use, value added, and some excise taxes. ThisIssue affirms that the presentation of taxes in the income statement should beon either a gross (included in revenues and costs) or a net (excluded fromrevenues) basis and that this is an accounting policy decision that should bedisclosed pursuant to APB Opinion No. 22. In addition, if such taxes aresignificant and reported on a gross basis, the amounts of those taxes should bedisclosed in interim and annual financial statements. The Company adopted thisEITF in the first quarter of 2007 and has adopted an accounting policy thatrequires taxes collected from customers and remitted to governmentalauthorities to be reported on a net basis (excluded from revenues). The adoptionof this EITF did not have a material impact on the Company’s financialstatements.

In July 2006, FIN 48,*Accounting for Uncertainty in Income Taxes*—*An Interpretation of FASB Statement No. 109*,was issued. FIN 48 clarifies the accounting for uncertainty in income taxesrecognized in an enterprise’s financial statements in accordance with FASBStatement No. 109. FIN 48 also prescribes a recognition threshold andmeasurement attribute for the financial statement recognition and measurementof a tax position taken or expected to be taken in a tax return. The provisionsof FIN 48 are effective for fiscal years beginning after December 15, 2006. TheCompany adopted this interpretation in the first quarter of 2007.  SeeNote 9, “Income Taxes,” for the impact of adopting this interpretation. In May2007, the FASB issued Staff Position (FSP) FIN 48-1,*“Definition of Settlement in FASB InterpretationNo.48.”*  This FSP amends FIN 48to provide guidance on how an enterprise should determine whether a taxprovision is effectively settled for the purpose of recognizing previouslyunrecognized tax benefits. The adoption of this FSP did not have an impact onthe Company’s financial statements.

In September 2006, theFASB issued FASB Staff Position (“FSP”) No. AUG AIR-1,*Accounting for Planned Major Maintenance Activities*.This FSP prohibits the use of the accrue-in-advance method of accounting forplanned major maintenance activities in annual and interim financial reportingperiods. It continues to permit the application of three alternative methods ofaccounting for planned maintenance activities: direct expense,built-in-overhaul and deferral methods. In addition, this FSP requiresdisclosure of the method of accounting for planned maintenance activitiesselected. The Company adopted this FSP in the first quarter of 2007 and hasadopted an accounting policy that requires planned major maintenance activitiesto be accounted for under the direct-expense method. The adoption of this FSPdid not have a material impact on the Company’s financial statements.

The Company will adoptthe following standards on January 1, 2008:

In September 2006, SFASNo. 157,*Fair Value Measurements*,was issued. This statement defines fair value, establishes a framework formeasuring fair value in generally accepted accounting principles (“GAAP”), andexpands disclosures about fair value measurements. This statement does notrequire any new fair value measurements. This statement is effective for theCompany as of January 1, 2008. The Company is currently evaluating the impactthis statement will have on its financial statements.

In February 2007, SFASNo. 159,*The Fair Value Option for FinancialAssets and Financial Liabilities*—*Includingan Amendment of FASB Statement No. 115*. This standard permits anentity to choose to measure many financial instruments and certain other itemsat fair value. The fair value option established by this standard permits allentities to choose to measure eligible items at fair value at specifiedelection dates. This statement is effective for the Company as of January 1,2008. The Company is currently evaluating the impact this statement will haveon its financial statements.

**2.DISCONTINUED OPERATIONS:**

On January 9, 2007, theCompany completed the sale of its Groupe Novasep subsidiary. The transactionwas valued at approximately €425 million, which included the repayment of thirdparty and intercompany indebtedness. As of December 31, 2006, the Company metthe criteria for reporting the pending sale of its Groupe Novasep subsidiary asan asset held for sale and discontinued operations pursuant to SFAS No. 144,*“Accounting for the Impairment or Disposal ofLong-Lived Assets.”*  TheCompany’s financial statements reflect the Groupe Novasep subsidiary as adiscontinued operation for all periods presented.

9

----

Operating results of thediscontinued operations are as follows:
|                                                   | ** ** | **Three months ended** | ** ** |
|---------------------------------------------------|------------|----------------------------------|------------|
| ** **                                        | ** ** | **March 31,**               | ** ** |
| **($ in millions)**                     | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| Net sales                                         |       | $                                | 8.9        |   | $ | 88.5 |   |
| Cost of products  sold                            |       | 7.0                              |       | 64.6 |   |
| Gross profit                                      |       | 1.9                              |       | 23.9 |   |
| Selling, general  and administrative expenses     |       | 1.0                              |       | 16.4 |   |
| (Gain) loss on  sale of business/assets           |       | (117.7                           | )          | 12.0 |   |
| Operating income (loss)                           |       | 118.6                            |       | (4.5 | ) |
| Other income  (expenses):                         |       |                             |       |   |   |
| Interest  expense, net                            |       | (0.3                             | )          | (0.7 | ) |
| Foreign exchange  gain, net                       |       | —                           |       | 0.3 |   |
| Net                                               |       | (0.3                             | )          | (0.4 | ) |
| Income (loss)  before taxes and minority interest |       | 118.3                            |       | (4.9 | ) |
| Income tax  provision (benefit)                   |       | 2.1                              |       | (21.4 | ) |
| Net income before minority interest               |       | 116.2                            |       | 16.5 |   |
| Minority  interest                                |       | (0.1                             | )          | (3.0 | ) |
| Net income                                        |       | $                                | 116.1      |   | $ | 13.5 |   |

 

The Company received netcash proceeds of $426.2 million in the first quarter of 2007 from the sale ofGroupe Novasep.  The Company expects to incur additional professional feesof approximately $2.9 million related to this sale.  The net gain on thesale recorded in the first quarter of 2007 is $115.7 million (net of $2.0 millionof German taxes).

In connection with thesale of Rohner AG, a subsidiary in the Company’s former Groupe Novasep segment,the Company recorded a pre-tax loss of $12.1 million in the first quarter of2006, representing consideration given less the remaining net liabilities ofRohner, which were transferred to the purchaser.

**3.****              VIANCE, LLC JOINTVENTURE:**

On January 2, 2007,Chemical Specialties, Inc. (“CSI”), a wholly-owned subsidiary of the Companywithin the Timber Treatment Chemicals business of the Performance Additivessegment, and Rohm and Haas Company completed the formation of Viance, LLC, ajoint venture company that provides an extensive range of advanced wood treatmenttechnologies and services to the global wood treatment industry. Viance isjointly-owned by CSI and Rohm and Haas and was formed through the contributionby CSI and its related subsidiaries of their wood protection chemicals businessand the contribution by Rohm and Haas of its wood biocides business and cash of$76.6 million. The assets contributed by Rohm and Haas were recorded at fairvalues whereas the assets contributed by CSI were recorded at book value. The Company was assisted in determining fair value by independentappraisers.  In accordance with the consolidation principles of FIN 46(R),*Consolidation of Variable InterestEntities—An Interpretation of ARB No. 51,* the Company has concludedthat Rockwood is the primary beneficiary of the joint venture and as such hasconsolidated the joint venture.

At March 31, 2007, thenet assets of the joint venture included in the condensed consolidated balancesheet of the Company were $186.7 million excluding minority interest of $176.1million.

All intercompanyaccounts, balances and transactions have been eliminated. The minority interestin the consolidated subsidiary reflected in the Company’s condensedconsolidated balance sheet reflects Rohm and Haas’ share of the estimated fairvalue of the net assets of the joint venture.

At March 31, 2007, thejoint venture had no third party debt outstanding, no consolidated assets ofthe Company were pledged as collateral for any joint venture obligations andthe general creditors of the joint venture had no recourse to the generalcredit of the Company.

**4.****              SEGMENT INFORMATION:**

Rockwood operates in sixreportable segments according to the nature and economic characteristics of itsproducts and services as well as the manner in which the information is usedinternally by the Company’s key decision maker, the Company’s Chief ExecutiveOfficer. The six segments are: (1) Specialty Chemicals, which consists of thesurface treatment and fine chemicals business lines; (2) Performance Additives,which consists of color pigments and services, timber treatment chemicals(including Viance, LLC), clay-based additives and water treatment chemicalsbusiness lines; (3) Titanium Dioxide Pigments; (4) Advanced Ceramics; (5)Specialty Compounds; and (6) Electronics, which consists of electronicchemicals and photomasks business lines.

Items that cannot bereadily attributed to individual segments have been classified as “Corporate.”The corporate operating loss primarily represents payroll, professional feesand other operating expenses of centralized functions such as treasury, legal,internal audit and consolidation accounting as well as the cost of operatingour central offices (including some costs maintained based on legal 

10

----

or tax considerations).The primary components of corporate loss, in addition to operating loss, areinterest expense on external debt (including the amortization of deferredfinancing costs), foreign exchange losses or gains, and mark-to-market gains orlosses on derivatives.

Major corporatecomponents within the reconciliation of income (loss) from continuingoperations before taxes and minority interest (described more fully below)include systems/organization establishment expenses such as outside consultingcosts for Sarbanes-Oxley initial documentation and fees relating to theimplementation of a new consolidation software system, interest expense onexternal debt, interest income, foreign exchange losses or gains andrefinancing expenses related to external debt. Corporate identifiable assetsprimarily represent deferred financing costs that have been capitalized inconnection with corporate external debt financing, deferred income tax assetsand cash balances maintained in accordance with centralized cash managementtechniques. The corporate classification also includes the results ofoperations, assets (primarily real estate) and liabilities (including pensionand environmental) of legacy businesses formerly belonging to Dynamit Nobel.These operations are substantially unrelated by nature to businesses currentlywithin the Company’s operating segments.

Summarized financialinformation for each of the reportable segments is provided in the followingtable:
|                                        | ** ** | ** **    | ** ** | ** **      | ** ** | **Titanium** | ** ** | ** **   | ** ** | ** **    | ** ** | ** **      | ** ** | ** **    | ** ** | ** **                | ** ** |
|----------------------------------------|------------|---------------|------------|-----------------|------------|--------------|------------|--------------|------------|---------------|------------|-----------------|------------|---------------|------------|---------------------------|------------|
| ** **                             | ** ** | **Specialty** | ** ** | **Performance** | ** ** | **Dioxide**  | ** ** | **Advanced** | ** ** | **Specialty** | ** ** | ** **      | ** ** | ** **    | ** ** | ** **                | ** ** |
| **($ in millions)**          | ** ** | **Chemicals** | ** ** | **Additives**   | ** ** | **Pigments** | ** ** | **Ceramics** | ** ** | **Compounds** | ** ** | **Electronics** | ** ** | **Corporate** | ** ** | **Consolidated (a)** | ** ** |
| **Three  months ended March 31, 2007** | ** ** | ** **    | ** ** | ** **      | ** ** | ** **   | ** ** | ** **   | ** ** | ** **    | ** ** | ** **      | ** ** | ** **    | ** ** | ** **                | ** ** |
| Net sales                              |       | $             | 267.9      |            | $          | 184.8        |       | $            | 116.1      |          | $          | 105.5           |       | $             | 69.6       |                      | $          | 52.2 |   | $ | — |   | $ | 796.1 |   |
| Total Adjusted EBITDA                  |       | 68.3          |       | 32.6            |       | 22.4         |       | 28.8         |       | 8.1           |       | 9.4             |       | (13.4         | )          | 156.2                     |       |
| **Three  months ended March 31, 2006** | ** ** | ** **    | ** ** | ** **      | ** ** | ** **   | ** ** | ** **   | ** ** | ** **    | ** ** | ** **      | ** ** | ** **    | ** ** | ** **                | ** ** |
| Net sales                              |       | $             | 228.1      |            | $          | 182.5        |       | $            | 108.2      |          | $          | 92.7            |       | $             | 63.2       |                      | $          | 49.4 |   | $ | — |   | $ | 724.1 |   |
| Total Adjusted  EBITDA                 |       | 51.4          |       | 33.3            |       | 20.9         |       | 23.6         |       | 7.3           |       | 8.6             |       | (12.3         | )          | 132.8                     |       |

 
| ** **                  | ** ** | ** **    | ** ** | ** **      | ** ** | **Titanium** | ** ** | ** **   | ** ** | ** **    | ** ** | ** **      | ** ** | ** **             | ** ** | ** **                | ** ** | ** **                | ** ** |
|-----------------------------|------------|---------------|------------|-----------------|------------|--------------|------------|--------------|------------|---------------|------------|-----------------|------------|------------------------|------------|---------------------------|------------|---------------------------|------------|
| ** **                  | ** ** | **Specialty** | ** ** | **Performance** | ** ** | **Dioxide**  | ** ** | **Advanced** | ** ** | **Specialty** | ** ** | ** **      | ** ** | ** **             | ** ** | ** **                | ** ** | ** **                | ** ** |
| ** **                  | ** ** | **Chemicals** | ** ** | **Additives**   | ** ** | **Pigments** | ** ** | **Ceramics** | ** ** | **Compounds** | ** ** | **Electronics** | ** ** | **Corporate (b)** | ** ** | **Eliminations (c)** | ** ** | **Consolidated (d)** | ** ** |
| Identifiable assets as  of: |       |          |       |            |       |         |       |         |       |          |       |            |       |                   |       |                      |       |                      |       |
| March  31, 2007             |       | $             | 1,670.2    |            | $          | 1,193.0      |       | $            | 726.7      |          | $          | 757.2           |       | $                      | 280.2      |                      | $          | 306.2                     |       | $ | 591.2 |   | $ | (172.4 | ) | $ | 5,352.3 |   |
| December 31, 2006           |       | 1,624.8       |       | 1,041.8         |       | 738.2        |       | 749.5        |       | 272.2         |       | 306.3           |       | 137.3                  |       | (136.6                    | )          | 4,733.5                   |       |
|                             |            |               |            |                 |            |              |            |              |            |               |            |                 |            |                        |            |                           |            |                           |            |  |  |  |  |  |  |  |  |  |

 

----

(a)   Thisamount does not include $1.8 million and $15.9 million for the three monthsended March 31, 2007 and 2006, respectively, of Adjusted EBITDA from the formerGroupe Novasep segment which was sold on January 9, 2007. Total Adjusted EBITDAincluding these amounts was $158.0 million and $148.7 million for the threemonths ended March 31, 2007 and 2006, respectively.

(b)   Thisamount includes $43.8 million and $41.0 million of assets from the legacybusinesses formerly belonging to Dynamit Nobel at March 31, 2007 and December 31,2006, respectively.

(c)   Amountscontained in the “Eliminations” column represent the individual subsidiaries’retained interest in their cumulative net cash balance (deposits lesswithdrawals) included in the corporate centralized cash system and within theidentifiable assets of the respective segment. These amounts are eliminated asthe corporate centralized cash system is included in the Corporate segment’sidentifiable assets.

(d)   Thisamount does not include $490.6 million of identifiable assets at December 31,2006 from the former Groupe Novasep segment which was sold on January 9, 2007.Total identifiable assets including this amount were $5,224.1 million atDecember 31, 2006.

Geographic informationregarding net sales based on seller’s location and long-lived assets aredescribed in Note 4, “Segment Information,” in the Company’s 2006 Form 10-K.

On a segment basis, theCompany defines Adjusted EBITDA as operating income excluding depreciation andamortization, certain non-cash gains and charges, certain other special gainsand charges deemed by our senior management to be non-recurring gains andcharges and certain items deemed by senior management to have little or nobearing on the day-to-day operating performance of its business segments andreporting units. The adjustments made to operating income directly correlatewith the adjustments to net income in calculating Adjusted EBITDA on aconsolidated basis pursuant to the senior secured credit agreement, whichreflects management’s interpretations thereof. The indentures governing the2011 Notes and the 2014 Notes exclude certain adjustments permitted under thesenior credit agreement. Senior management uses Adjusted EBITDA on a segmentbasis as the primary measure to evaluate the ongoing performance of theCompany’s business segments and reporting units.

The Company uses AdjustedEBITDA on a segment basis to assess its operating performance. Because theCompany views Adjusted EBITDA on a segment basis as an operating performancemeasure, the Company uses income (loss) from continuing operations before taxesand minority interest as the most comparable GAAP measure.

11

----

The following tablepresents a reconciliation of income (loss) from continuing operations beforetaxes and minority interest to Adjusted EBITDA on a segment GAAP basis:

 
| ** **                                                                   | ** ** | ** **    | ** ** | ** **      | ** ** | **Titanium** | ** ** | ** **   | ** ** | ** **    | ** ** | ** **      | ** ** | ** **    | ** ** | ** **       | ** ** |
|------------------------------------------------------------------------------|------------|---------------|------------|-----------------|------------|--------------|------------|--------------|------------|---------------|------------|-----------------|------------|---------------|------------|------------------|------------|
| ** **                                                                   | ** ** | **Specialty** | ** ** | **Performance** | ** ** | **Dioxide**  | ** ** | **Advanced** | ** ** | **Specialty** | ** ** | ** **      | ** ** | ** **    | ** ** | ** **       | ** ** |
| **($ in millions)**                                                | ** ** | **Chemicals** | ** ** | **Additives**   | ** ** | **Pigments** | ** ** | **Ceramics** | ** ** | **Compounds** | ** ** | **Electronics** | ** ** | **Corporate** | ** ** | **Consolidated** | ** ** |
| **Three months ended March 31,  2007**                                       | ** ** | ** **    | ** ** | ** **      | ** ** | ** **   | ** ** | ** **   | ** ** | ** **    | ** ** | ** **      | ** ** | ** **    | ** ** | ** **       | ** ** |
| Income (loss)  from continuing operations before taxes and minority interest |       | $             | 46.8       |            | $          | 16.0         |       | $            | 4.2        |          | $          | 10.8            |       | $             | 3.0        |             | $          | 7.0 |   | $ | (35.5 | ) | $ | 52.3 |   |
| Interest expense  (a)                                                        |       | 9.4           |       | 3.3             |       | 7.9          |       | 7.9          |       | 2.4           |       | 0.1             |       | 23.7          |       | 54.7             |       |
| Interest income                                                              |       | (0.8          | )          | (0.2            | )          | —       |       | 0.2          |       | (0.2          | )          | (0.3            | )          | (3.8          | )          | (5.1             | )          |
| Depreciation and  amortization                                               |       | 12.8          |       | 12.6            |       | 10.3         |       | 9.6          |       | 2.7           |       | 4.0             |       | 1.2           |       | 53.2             |       |
| Restructuring and  related charges                                           |       | 0.2           |       | —          |       | —       |       | 0.1          |       | —        |       | 3.7             |       | 0.5           |       | 4.5              |       |
| CCA litigation  defense costs                                                |       | —        |       | 0.1             |       | —       |       | —       |       | —        |       | —          |       | —        |       | 0.1              |       |
| Systems/organization  establishment expenses                                 |       | —        |       | 0.5             |       | —       |       | 0.2          |       | 0.2           |       | —          |       | —        |       | 0.9              |       |
| Cancelled  acquisition and disposal costs                                    |       | —        |       | —          |       | —       |       | —       |       | —        |       | —          |       | 0.1           |       | 0.1              |       |
| Cost incurred  related to debt modifications                                 |       | —        |       | —          |       | —       |       | —       |       | —        |       | —          |       | 0.9           |       | 0.9              |       |
| Loss (gain) on  sale of assets                                               |       | —        |       | 0.1             |       | —       |       | —       |       | —        |       | (4.8            | )          | (0.1          | )          | (4.8             | )          |
| Foreign exchange  loss (gain)                                                |       | 0.2           |       | 0.1             |       | —       |       | —       |       | —        |       | (0.3            | )          | (0.4          | )          | (0.4             | )          |
| Other                                                                        |       | (0.3          | )          | 0.1             |       | —       |       | —       |       | —        |       | —          |       | —        |       | (0.2             | )          |
| Total Adjusted  EBITDA (b)                                                   |       | $             | 68.3       |            | $          | 32.6         |       | $            | 22.4       |          | $          | 28.8            |       | $             | 8.1        |             | $          | 9.4 |   | $ | (13.4 | ) | $ | 156.2 |   |
| **Three months ended March 31,  2006**                                       | ** ** | ** **    | ** ** | ** **      | ** ** | ** **   | ** ** | ** **   | ** ** | ** **    | ** ** | ** **      | ** ** | ** **    | ** ** | ** **       | ** ** |
| Income (loss)  from continuing operations before taxes and minority interest |       | $             | 30.1       |            | $          | 20.0         |       | $            | 6.5        |          | $          | 7.6             |       | $             | 5.4        |             | $          | 2.4 |   | $ | (27.2 | ) | $ | 44.8 |   |
| Interest expense  (a)                                                        |       | 10.6          |       | 4.0             |       | 7.0          |       | 7.4          |       | —        |       | 1.2             |       | 9.6           |       | 39.8             |       |
| Interest income                                                              |       | (1.4          | )          | —          |       | —       |       | —       |       | (0.1          | )          | (0.4            | )          | 0.5           |       | (1.4             | )          |
| Depreciation and  amortization                                               |       | 11.4          |       | 8.1             |       | 9.0          |       | 8.2          |       | 2.0           |       | 4.2             |       | 0.8           |       | 43.7             |       |
| Restructuring and  related charges                                           |       | 0.2           |       | 0.2             |       | —       |       | —       |       | —        |       | 0.8             |       | —        |       | 1.2              |       |
| CCA litigation  defense costs                                                |       | —        |       | 0.3             |       | —       |       | —       |       | —        |       | —          |       | —        |       | 0.3              |       |
| Systems/organization  establishment expenses                                 |       | —        |       | —          |       | —       |       | —       |       | —        |       | —          |       | 1.9           |       | 1.9              |       |
| Cancelled  acquisition and disposal costs                                    |       | 0.6           |       | —          |       | —       |       | —       |       | —        |       | —          |       | —        |       | 0.6              |       |
| Inventory  write-up reversal                                                 |       | —        |       | 0.8             |       | —       |       | —       |       | —        |       | —          |       | —        |       | 0.8              |       |
| Gain on sale of  assets                                                      |       | —        |       | (0.1            | )          | —       |       | —       |       | —        |       | —          |       | (0.4          | )          | (0.5             | )          |
| Foreign exchange  (gain) loss                                                |       | (0.1          | )          | 0.1             |       | —       |       | —       |       | —        |       | 0.4             |       | 2.5           |       | 2.9              |       |
| Other                                                                        |       | —        |       | (0.1            | )          | (1.6         | )          | 0.4          |       | —        |       | —          |       | —        |       | (1.3             | )          |
| Total Adjusted EBITDA  (b)                                                   |       | $             | 51.4       |            | $          | 33.3         |       | $            | 20.9       |          | $          | 23.6            |       | $             | 7.3        |             | $          | 8.6 |   | $ | (12.3 | ) | $ | 132.8 |   |

 

----

(a)   Includeslosses of $2.8 million and gains of $10.7 million for the three months endedMarch 31, 2007 and 2006, respectively, representing the movement in themark-to-market valuation of the Company’s interest rate and cross-currencyhedging instruments.

(b)   Thisamount does not include $1.8 million and $15.9 million for the three monthsended March 31, 2007 and 2006, respectively, of Adjusted EBITDA from the formerGroupe Novasep segment which was sold on January 9, 2007. Total Adjusted EBITDAincluding these amounts was $158.0 million and $148.7 million for the threemonths ended March 31, 2007 and 2006, respectively.

The summary of segmentinformation above includes “Adjusted EBITDA,” a financial measure used by theCompany’s chief decision maker and senior management to evaluate the operatingperformance of each segment.

*Itemsexcluded from Adjusted EBITDA*

The process of refocusingand restructuring the businesses acquired in the KKR Acquisition andestablishing the post-acquisition corporate entity, along with the impact ofthe Dynamit Nobel Acquisition and the Company’s initial public offering,resulted in a number of charges that have affected Rockwood’s historicalresults. These charges, along with certain other items, are added to orsubtracted from income (loss) from continuing operations before taxes andminority interest to derive Adjusted EBITDA, as defined below. These itemsinclude the following:

·                     *Restructuring and related charges*:Restructuring charges of $4.5 million and $1.2 million were recorded in thethree months ended March 31, 2007 and 2006, respectively, for miscellaneousrestructuring activities, including headcount reductions and facility closures(see Note 11, “Restructuring Liability,” for further details).

·                     *Chromated copper arsenate* (*CCA) litigation defense costs*:  Costsof $0.1 million and $0.3 million were recorded in the three months ended March31, 2007 and 2006, respectively, primarily for attorney fees related to theCompany’s Timber Treatment Chemicals business line of the Performance Additivessegment.

·                     *Systems/organization establishment expenses*:For the three months ended March 31, 2007, expenses of $0.9 million wererecorded. In the Performance Additives segment, $0.5 million was incurredprimarily related to the integration of the Viance, LLC joint venture. In theAdvanced Ceramics and Specialty Compounds segments, expenses of $0.2 millionand $0.2 million, respectively, were incurred related to the integration ofbusinesses acquired in 2006. For the three months ended March 31, 2006,expenses of $1.9 million were recorded related to professional fees incurredregarding systems and internal control documentation in connection with theSarbanes-Oxley Act of 2002 and fees relating to the implementation of a newconsolidation software system.

·                     *Cancelled acquisition and disposal costs*:Costs of $0.1 million and $0.6 million were recorded for the three months endedMarch 31, 2007 and 2006, respectively, in connection with non-consummatedacquisitions and dispositions.

12

----

·                     *Cost incurred related to debt modifications*:In March 2007, the Company expensed $0.9 million related to the fourthamendment of the senior secured credit agreement to refinance all outstandingborrowings under the tranche F term loans with new tranche G term loans (seeNote 8, “Long-Term Debt,” for further details).

·                     *Inventory write-up reversal*: Under SFAS 141,*Business Combinations*, all inventoriesacquired in an acquisition must be revalued to “fair value.” In connection withthe acquisition of the Süd-Chemie businesses in 2005, the Company allocated aportion of the total purchase price to inventory to reflect manufacturingprofit in inventory at the date of the acquisition. This resulted in aconsequential reduction in gross profit, including currency effects, of $0.8million for the three months ended March 31, 2006 as the inventory was sold inthe normal course of business.

·                     *Gain on sale of assets*: In the threemonths ended March 31, 2007, the Company recorded gains of $4.8 millionprimarily related to the sale of the assets of the U.S. Wafer Reclaim businessin the Electronics segment.

·                     *Foreign exchange gain (loss), net*: Duringthe periods presented, the Company recorded foreign exchange gains and (losses)related to our long-term debt and other non-operating transactions. Theseamounts primarily reflect the non-cash translation impact on oureuro-denominated debt resulting from the strengthening or weakening of the euroagainst the U.S. dollar and/or the British pound. For the three months endedMarch 31, 2007 and 2006, gains of $0.4 million and losses of $2.9 million,respectively, were recorded.

·                     *Other*:  In the three months endedMarch 31, 2006, the Company recorded $1.6 million of income related to thecorrection of an immaterial error reported in the first quarter of 2006 relatedto a previously unrecorded asset in the Titanium Dioxide Pigments segment.

·                     *Discontinued operations*:  As notedabove, the Company completed the sale of its Groupe Novasep subsidiary onJanuary 9, 2007. As a result, the Company’s financial statements have beenreclassified to reflect the Groupe Novasep subsidiary as a discontinuedoperation for all periods presented. In connection with the sale of Rohner AGin March 2006, the Company recorded a pre-tax loss of $12.1 million in thefirst quarter of 2006.

**5.****              INVENTORIES:**

Inventories are comprisedof the following:
|                               | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-------------------------------|------------|--------------------|------------|-----------------------|------------|
| **($ in millions)** | ** ** | **2007**           | ** ** | **2006**              | ** ** |
| Raw materials                 |       | $                  | 151.5      |                  | $          | 160.1 |   |
| Work-in-process               |       | 54.6               |       | 53.3                  |       |
| Finished goods                |       | 240.2              |       | 226.4                 |       |
| Packaging  materials          |       | 6.7                |       | 5.6                   |       |
|                          |       | $                  | 453.0      |                  | $          | 445.4 |   |

 

**6.****              GOODWILL:**

Below are goodwillbalances and activity by segment:
| ** **                      | ** ** | ** **    | ** ** | ** **      | ** ** | **Titanium** | ** ** | ** **   | ** ** | ** **    | ** ** | ** **      | ** ** | ** ** | ** ** |
|---------------------------------|------------|---------------|------------|-----------------|------------|--------------|------------|--------------|------------|---------------|------------|-----------------|------------|------------|------------|
| ** **                      | ** ** | **Specialty** | ** ** | **Performance** | ** ** | **Dioxide**  | ** ** | **Advanced** | ** ** | **Specialty** | ** ** | ** **      | ** ** | ** ** | ** ** |
| **($ in millions)**   | ** ** | **Chemicals** | ** ** | **Additives**   | ** ** | **Pigments** | ** ** | **Ceramics** | ** ** | **Compounds** | ** ** | **Electronics** | ** ** | **Total**  | ** ** |
| Balance, December 31,  2006     |       | 597.6         |       | 480.8           |       | 172.6        |       | 223.2        |       | 118.5         |       | 125.0           |       | 1,717.7    |       |
| FIN 48 tax adjustments  (a)     |       | (6.1          | )          | —          |       | (1.6         | )          | (2.2         | )          | —        |       | —          |       | (9.9       | )          |
| Other tax adjustments           |       | (1.5          | )          | —          |       | —       |       | —       |       | —        |       | —          |       | (1.5       | )          |
| Foreign exchange and  other (b) |       | 7.4           |       | 2.8             |       | 2.0          |       | 2.8          |       | 0.5           |       | —          |       | 15.5       |       |
| Balance, March 31, 2007         |       | $             | 597.4      |            | $          | 483.6        |       | $            | 173.0      |          | $          | 223.8           |       | $          | 119.0      |   | $ | 125.0 |   | $ | 1,721.8 |   |
|                                 |            |               |            |                 |            |              |            |              |            |               |            |                 |            |            |            |  |  |  |  |  |  |  |

 

----

(a)   See Note9, “Income Taxes,” for details regarding the adoption of FIN 48.

(b)   Consistsprimarily of foreign currency changes. In the Performance Additives segment,the amount includes goodwill related to the Viance, LLC joint venture formed inJanuary 2007.

 

13

----

**7.     OTHER INTANGIBLE ASSETS:**

Other intangible assets,net consist of:
| ** **                               | ** ** | **As of March 31, 2007** | ** ** | **As of December 31, 2006** | ** ** |
|------------------------------------------|------------|----------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                               | ** ** | **Gross**                                    | ** ** | ** **                                      | ** ** | ** ** | ** ** | **Gross** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                               | ** ** | **Carrying**                                 | ** ** | **Accumulated**                                 | ** ** | ** ** | ** ** | **Carrying** | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
| **($ in millions)**            | ** ** | **Amount (a)**                          | ** ** | **Amortization**                                | ** ** | **Net** | ** ** | **Amount** | ** ** | **Amortization** | ** ** | **Net** | ** ** |
| Patents and other  intellectual property |       | $                                            | 356.5      |                                            | $          | (88.2 | ) | $ | 268.3 |   | $ | 311.1 |   | $ | (82.0 | ) | $ | 229.1 |   |
| Trade names and  trademarks              |       | 134.0                                        |       | (16.8                                           | )          | 117.2 |   | 132.7 |   | (15.2 | ) | 117.5 |   |
| Customer relationships                   |       | 227.8                                        |       | (38.6                                           | )          | 189.2 |   | 191.3 |   | (32.6 | ) | 158.7 |   |
| Supply agreements                        |       | 28.5                                         |       | (1.5                                            | )          | 27.0 |   | 6.5 |   | (0.6 | ) | 5.9 |   |
| Other                                    |       | 46.1                                         |       | (18.8                                           | )          | 27.3 |   | 46.4 |   | (18.0 | ) | 28.4 |   |
| Total                                    |       | $                                            | 792.9      |                                            | $          | (163.9 | ) | $ | 629.0 |   | $ | 688.0 |   | $ | (148.4 | ) | $ | 539.6 |   |

 

----

(a)   Theincrease since December 31, 2006 is primarily related to other intangibleassets acquired in the Viance, LLC joint venture completed in January2007.  See Note 3, “Viance, LLC Joint Venture,” for further details.

Amortization of otherintangible assets was $15.2 million and $10.6 million for the three monthsended March 31, 2007 and 2006, respectively. As of March 31, 2007, theestimated aggregate amortization expense for each of the five succeeding yearsis as follows:
| ($ in millions) | ** ** | **Amortization** | ** ** |
|---------------------------|------------|------------------|------------|
| **Year ended**       | ** ** | **Expense**      | ** ** |
| 2007                      |       | $                | 62.4       |   |
| 2008                      |       | 60.9             |       |
| 2009                      |       | 53.5             |       |
| 2010                      |       | 52.0             |       |
| 2011                      |       | 50.5             |       |
|                           |            |                  |            |  |

 

**8.     LONG-TERM DEBT**

Long-term debt and loanspayable are summarized as follows:
|                                                                                       | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| **($, € and £ in millions)**                       | ** ** | **2007**           | ** ** | **2006**              | ** ** |
| Senior secured  credit facilities:                                                    |       |               |       |                  |       |
| Tranche A-1 term loans (€32.3 and €35.2,  respectively)                     |       | $                  | 43.1       |                  | $          | 46.5 |   |
| Tranche A-2 term loans (€140.6 and €153.4,  respectively)                   |       | 187.7              |       | 202.4                 |       |
| Tranche E term loans                                                                  |       | 1,122.1            |       | 1,127.8               |       |
| Tranche F term loans (€270.7 as of December 31,  2006) (repaid March 23, 2007)   |       | —             |       | 357.3                 |       |
| Tranche G term loans (€269.3 as of March 31, 2007)                               |       | 359.6              |       | —                |       |
| Revolving short-term loans                                                            |       | —             |       | 37.0                  |       |
| 2011 Notes                                                                            |       | 273.4              |       | 273.4                 |       |
| 2014 Notes  (€375.0 and $200.0 as of March 31, 2007 and December 31, 2006)       |       | 700.8              |       | 695.0                 |       |
| Other term loan  facilities                                                           |       | 12.2               |       | 12.9                  |       |
| Capitalized  lease obligations (€34.8 and €35.3, respectively)              |       | 46.5               |       | 46.6                  |       |
| Preferred stock  of subsidiary (£12.0 as of March 31 2007 and December 31, 2006) |       | 23.6               |       | 23.5                  |       |
| Other (€12.4 as  of March 31, 2007 and December 31, 2006)                        |       | 16.5               |       | 16.3                  |       |
|                                                                                  |       | 2,785.5            |       | 2,838.7               |       |
| Less current  maturities                                                              |       | (361.9             | )          | (117.8                | )          |
|                                                                                  |       | $                  | 2,423.6    |                  | $          | 2,720.9 |   |

 

In the first quarter of2007, the Company entered into the fourth amendment (the “Fourth CreditAmendment”) to the senior secured credit agreement, dated as of July 30, 2004(as amended by the First Amendment, dated as of October 8, 2004, by the SecondAmendment dated as of December 10, 2004, and by the Third Amendment, dated asof December 13, 2005, the “Credit Agreement”). The Fourth Credit Amendment,among other things, (i) provides for approximately €269.3 million of newtranche G loans, the proceeds of which were used to repay in full theoutstanding borrowings under the tranche F term loans, (ii) permits the Companyto 

14

----

repay its outstanding 105/8% Senior Subordinated Notes due 2011 (“2011 Notes”) any time on or after May15, 2007 without a corresponding repayment of term loans under the CreditAgreement, and (iii) resets substantially all of the baskets contained in therestrictive covenants and elsewhere in the Credit Agreement. The refinancing ofthe tranche F loans with the new tranche G loans effectively reduced theinterest rate on the tranche G term loans by 50 basis points. The Company didnot incur any additional borrowings under the Fourth Credit Amendment.

On April 13, 2007, theCompany provided notice that it has elected to redeem its outstanding 10 5/8%Senior Subordinated Notes due 2011 in the aggregate principal amount of $273.4million, and as such these Notes were redeemed on May 15, 2007. As a result,this amount has been classified as a current liability as of March 31, 2007. Inconnection with this debt repayment, redemption premiums of $14.5 million werepaid.

In the normal course ofbusiness, the Company incurs obligations which include guarantees related tocontract completion, regulatory compliance and product performance. Undercertain circumstances, these obligations are supported through the issuance ofletters of credit and other bank guarantees. As of March 31, 2007, the Companyhad approximately $55.9 million of letters of credit and other bank guarantees,of which $9.8 million will expire in less than one year, $6.8 million willexpire in 2-3 years, $10.8 million will expire in 4-5 years and $28.5 millionwill expire after five years. This amount includes outstanding letters ofcredit of $27.3 million that reduced our availability under the senior securedcredit facility. In the opinion of management, such obligations will notsignificantly affect the Company’s financial position, results of operations orcash flows as the Company anticipates fulfilling its performance obligations.

**9.     INCOME TAXES:**

Income tax expense hasbeen computed based on the projected effective tax rate for the year. Theeffective tax rate for the first three months of 2007 and 2006 was 42.1% and40.8%, respectively. The 2007 effective tax rate is primarily a function offoreign rate differentials and the impact of the valuation allowance on domesticearnings. During the first quarter of 2007, a tax provision of $22.0 millionwas recorded related to pre-tax book income of $52.3 million. The Companyrecorded an income tax provision of $18.3 million in the first quarter of 2006on pre-tax book income of $44.8 million.

In the three months endedMarch 31, 2007, the Company increased its worldwide valuation allowances by$7.3 million. The increase in the valuation allowance was the result of anincrease in the U.S. net deferred tax assets. The change in the valuationallowance for the first quarter of 2007 impacted the effective tax rate by $3.7million. The following table reflects the activity in the valuation allowancefor worldwide net operating losses and other deferred income tax assets:
|                                                      | ** ** | **Valuation** | ** ** |
|------------------------------------------------------|------------|---------------|------------|
| **($ in millions)**                        | ** ** | **Allowance** | ** ** |
| Balance as of  December 31, 2006                     |       | $             | 64.1       |   |
| Increase as  reflected in income tax expense         |       | 3.7           |       |
| Increase as  reflected in other comprehensive income |       | 3.6           |       |
| Balance as of  March 31, 2007                        |       | $             | 71.4       |   |

 

In the first quarter of2007, based on the Company’s policy and steady-state analysis, it wasdetermined that there was not sufficient positive evidence of future taxableincome in order to release the U.S. valuation allowance that has been recorded.During the first three months of 2007, the Company’s net deferred tax assetsand liabilities were maintained at a zero level, other than a noncurrentdeferred tax liability relating to goodwill with an indefinite reversal period.It is the Company’s policy that the valuation allowance is reversed in the yearmanagement determines it is more likely than not that the deferred tax assetswill be realized.

On July 13, 2006, theFASB issued FIN No. 48,*Accounting forUncertainty in Income Taxes*—*AnInterpretation of FASB Statement No. 109*.  FIN 48 clarifies the accounting foruncertainty in income taxes recognized in an entity’s financial statements inaccordance with FASB Statement No. 109,*Accounting for Income Taxes,* and prescribes a recognition thresholdand measurement attribute for financial statement disclosure of tax positionstaken or expected to be taken on a tax return. Under FIN 48, the impact of anuncertain income tax position on the income tax return must be recognized atthe largest amount that is more-likely-than-not to not be sustained upon auditby the relevant authority. An uncertain income tax position will not berecognized if it has less than a 50% likelihood of being sustained.Additionally, FIN 48 provides guidance on derecognizing, classification, interestand penalties, accounting in interim periods, disclosure and transition. FIN 48is effective for fiscal years beginning after December 15, 2006.

15

----

 

The Company adopted theprovisions of FIN 48 on January 1, 2007. The total amount of unrecognized taxbenefits as of the date of adoption was $44.1 million. In conjunction with theadoption of FIN 48, we have classified uncertain tax positions as non-currentincome tax liabilities (other liabilities) unless expected to be paid in oneyear. Previously, accrued income tax liabilities were classified as currentliabilities. As of March 31, 2007, the total amount of unrecognized taxbenefits was $44.7 million. As a result of the implementation of FIN 48, theCompany recognized a $1.0 million increase in the liability for unrecognizedtax benefits which was accounted for as follows:

 
| ($ in millions)                            | ** ** | ** ** | ** ** |
|------------------------------------------------------|------------|------------|------------|
| Increase in  accumulated deficit (cumulative effect) |       | $          | 7.4        |   |
| Additional  deferred tax assets                      |       | 3.5        |       |
| Reduction in  goodwill                               |       | (9.9       | )          |
| Increase in liability                                |       | $          | 1.0        |   |

 

Included in the balanceof unrecognized tax benefits at January 1, 2007 are $27.7 million of taxbenefits that, if recognized, would affect the effective tax rate. Alsoincluded in the balance of unrecognized tax benefits at January 1, 2007, are$13.1 million of tax benefits that if recognized, would result in a decrease togoodwill recorded in purchase business combinations, and $3.5 million of taxbenefits that, if recognized, would result in an adjustment to other taxaccounts.

The Company recognizesinterest and penalties related to unrecognized tax benefits in its income taxprovision. The Company had accrued $2.4 million for interest and penalties atDecember 31, 2006. Upon adoption of FIN 48 on January 1, 2007, the Companyincreased its accrual for interest and penalties by $0.9 million. For thethree months ended March 31, 2007, the accrual for interest and penalties wasincreased by $0.1 million. As of March 31, 2007, the Company had accrued atotal of $3.4 million.

During the next twelvemonths it is reasonably possible that resolution of uncertain tax liabilitiescould result in a benefit of up to $3.0 million or a cost of up to $5.0million. Audit outcomes and the timing of audit settlements are subject tosignificant uncertainty.

The Company is subject totaxation in the U.S., various states, and foreign jurisdictions. The Company’stax filings in major jurisdictions are open to investigation by taxauthorities; in the U.S. from 2000, in the U.K. from 2003, and in Germany from2000.

**10.   EMPLOYEE BENEFIT PLANS:**

The following tablerepresents the net periodic benefit costs and related components in accordancewith SFAS 158,*Employers’ Accounting forDefined Benefit Pension and Other Postretirement Plans, an amendment of FASBStatements No. 87, 88, 106 and 132 (R)* :
|                                       | ** ** | **Three months ended** | ** ** |
|---------------------------------------|------------|----------------------------------|------------|
| ** **                            | ** ** | **March 31,**               | ** ** |
| **($ in millions)**         | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| Service cost                          |       | $                                | 2.1        |   | $ | 2.2 |   |
| Interest cost                         |       | 6.0                              |       | 5.2 |   |
| Expected return  on assets            |       | (2.4                             | )          | (1.9 | ) |
| Net amortization  of actuarial losses |       | 0.2                              |       | 0.6 |   |
| Total pension  cost                   |       | $                                | 5.9        |   | $ | 6.1 |   |

 

**11.   RESTRUCTURING LIABILITY:**

The Company recordedrestructuring charges of $4.5 million and $1.2 million for the three monthsended March 31, 2007 and 2006, respectively. The Company records restructuringliabilities from time to time that represent charges incurred in connectionwith consolidations and cessations of certain of its operations, includingoperations from acquisitions, as well as headcount reduction programs. Thesecharges consist primarily of write-offs of assets and severance costs.Severance charges are based on various factors including the employee’s lengthof service, contract provisions, salary levels and local governmentallegislation. At the time a related charge is recorded, the Company calculatesits best estimate based upon detailed analysis. Although significant changesare not expected, actual costs may differ from these estimates.

During the three monthsended March 31, 2007, the Company expensed $4.5 million of restructuringcharges.  In the Electronics segment, facility closure and severance costsof $3.7 million were recorded related to the restructuring of the Wafer Reclaimbusiness.  In addition, $0.5 million was recorded in Corporate, $0.2million was recorded in the Specialty Chemicals segment and $0.1 million wasrecorded in the Advanced Ceramics segment for miscellaneous headcountreductions.

During the three monthsended March 31, 2006, the Company expensed $1.2 million of restructuringcharges for miscellaneous restructuring actions, including $0.8 million for theannounced restructuring of the Wafer Reclaim business in the Electronicssegment. The Company recorded severance and related costs for employees inconnection with the closure of two Wafer Reclaim facilities (one each in theU.K. and U.S.). The Wafer Reclaim operating facility in the U.K. was closed inJanuary 2006 and one of the facilities in the U.S. was closed in March 2006. Inaddition, $0.2 million was recorded in the Specialty Chemicals segment and $0.2million was recorded in the Performance Additives segment for miscellaneousheadcount reductions and the announced closure of the Baulking, United Kingdomfacility for the Clay-based Additives business in the Performance Additivessegment.

In 2005, the Companyrecorded restructuring charges for miscellaneous restructuring actions,including the announced closure of the Baulking, United Kingdom facility in theClay-based Additives business and the announced restructuring of the WaferReclaim 

16

----

business. The Companyrecorded severance and related costs for employees in connection with theclosure of the Wafer Reclaim facilities (one each in the U.K. and U.S.). Inaddition, miscellaneous headcount reductions were recorded in the SpecialtyChemicals, Performance Additives and Advanced Ceramics segments. Costs werealso incurred in the Advanced Ceramics segment related to the closure of afacility in Italy.

The Company began toassess and formulate specific plans to involuntarily terminate or relocatecertain employees and/or exit certain activities of the Dynamit Nobelbusinesses as of the Dynamit Nobel acquisition date. As a result, the Companyclosed the former corporate office of Dynamit Nobel located in Troisdorf,Germany in the fourth quarter of 2004. The Company recorded restructuringcharges related to this closure including severance costs for general andadministrative personnel of the former Dynamit Nobel company, the closure costson this building and the relocation costs for the remaining employees who wererelocated to the Company’s new Frankfurt, Germany location. Also in 2004, aspart of the acquisition of the Pigments and Dispersions business of JohnsonMatthey, the Company enacted a restructuring program and severance costs wereincurred for selling, general and administrative personnel.

Selected information forthe 2007 restructuring actions follows:
|                                       | ** ** | ** **    | ** ** | **Facility** | ** ** | ** ** | ** ** |
|---------------------------------------|------------|---------------|------------|--------------|------------|------------|------------|
| **($ in millions)**         | ** ** | **Severance** | ** ** | **Closure**  | ** ** | ** ** | ** ** |
| **2007**                              | ** ** | **Costs**     | ** ** | **Costs**    | ** ** | **Total**  | ** ** |
| Liability  balance, December 31, 2006 |       | $             | —     |         | $          | —     |       | $ | — |   |
| Restructuring  charge in 2007         |       | 1.2           |       | 0.1          |       | 1.3        |       |
| Utilized in 2007                      |       | (0.3          | )          | —       |       | (0.3       | )          |
| Liability balance,  March 31, 2007    |       | $             | 0.9        |         | $          | 0.1        |       | $ | 1.0 |   |

 

Selected information forthe 2006 restructuring actions follows:
|                                       | ** ** | ** **    | ** ** | **Facility** | ** ** | ** **     | ** ** | ** ** | ** ** |
|---------------------------------------|------------|---------------|------------|--------------|------------|----------------|------------|------------|------------|
| **($ in millions)**         | ** ** | **Severance** | ** ** | **Closure**  | ** ** | **Relocation** | ** ** | ** ** | ** ** |
| **2006**                              | ** ** | **Costs**     | ** ** | **Costs**    | ** ** | **Costs**      | ** ** | **Total**  | ** ** |
| Liability  balance, December 31, 2006 |       | $             | 4.4        |         | $          | 0.7            |       | $          | 0.7        |   | $ | 5.8 |   |
| Restructuring  charge in 2007         |       | 0.3           |       | 2.9          |       | —         |       | 3.2        |       |
| Utilized in 2007                      |       | (0.6          | )          | (0.1         | )          | —         |       | (0.7       | )          |
| Foreign exchange  and other           |       | —        |       | 0.1          |       | —         |       | 0.1        |       |
| Liability balance,  March 31, 2007    |       | $             | 4.1        |         | $          | 3.6            |       | $          | 0.7        |   | $ | 8.4 |   |

 

Selected information forthe 2005 restructuring actions follows:
|                                       | ** ** | ** **    | ** ** | **Facility** | ** ** | ** ** | ** ** |
|---------------------------------------|------------|---------------|------------|--------------|------------|------------|------------|
| **($ in millions)**         | ** ** | **Severance** | ** ** | **Closure**  | ** ** | ** ** | ** ** |
| **2005**                              | ** ** | **Costs**     | ** ** | **Costs**    | ** ** | **Total**  | ** ** |
| Liability  balance, December 31, 2006 |       | $             | 0.2        |         | $          | 0.5        |       | $ | 0.7 |   |
| Utilized in 2007                      |       | —        |       | (0.1         | )          | (0.1       | )          |
| Foreign exchange  and other           |       | —        |       | (0.1         | )          | (0.1       | )          |
| Liability balance,  March 31, 2007    |       | $             | 0.2        |         | $          | 0.3        |       | $ | 0.5 |   |

 

17

----

 

Selected information forthe 2004 restructuring actions follows:

 
|                                       | ** ** | ** **    | ** ** | **Facility** | ** ** | ** **     | ** ** | ** ** | ** ** |
|---------------------------------------|------------|---------------|------------|--------------|------------|----------------|------------|------------|------------|
| **($ in millions)**         | ** ** | **Severance** | ** ** | **Closure**  | ** ** | **Relocation** | ** ** | ** ** | ** ** |
| **2004**                              | ** ** | **Costs**     | ** ** | **Costs**    | ** ** | **Costs**      | ** ** | **Total**  | ** ** |
| Liability  balance, December 31, 2006 |       | $             | 1.6        |         | $          | 0.1            |       | $          | 0.3        |   | $ | 2.0 |   |
| Utilized in 2007                      |       | (0.3          | )          | (0.1         | )          | —         |       | (0.4       | )          |
| Foreign exchange  and other           |       | 0.1           |       | 0.1          |       | —         |       | 0.2        |       |
| Liability balance,  March 31, 2007    |       | $             | 1.4        |         | $          | 0.1            |       | $          | 0.3        |   | $ | 1.8 |   |

 

Restructuring reserves bysegment are as follows:
|                               | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-------------------------------|------------|--------------------|------------|-----------------------|------------|
| **($ in millions)** | ** ** | **2007**           | ** ** | **2006**              | ** ** |
| Specialty  Chemicals          |       | $                  | 1.8        |                  | $          | 1.9 |   |
| Performance  Additives        |       | 0.6                |       | 0.6                   |       |
| Advanced  Ceramics            |       | 0.3                |       | 0.7                   |       |
| Specialty  Compounds          |       | 4.9                |       | 4.9                   |       |
| Electronics                   |       | 3.4                |       | 0.1                   |       |
| Corporate                     |       | 0.7                |       | 0.3                   |       |
|                          |       | $                  | 11.7       |                  | $          | 8.5 |   |

 

**12.   COMMITMENTS AND CONTINGENCIES:**

***Legal Proceedings***—The Company isinvolved in various legal proceedings, including commercial, intellectualproperty, product liability and environmental matters of a nature considerednormal to its business. It is the Company’s policy to accrue for amountsrelated to these matters in accordance with SFAS No. 5,*Accounting for Contingencies*, if it isprobable that a liability has been incurred and an amount can be reasonablyestimated. It is the Company’s policy to disclose such matters when there is atleast a reasonable possibility that a material loss may have been incurred.Although the Company expects to continue to pay legal fees in connection withcertain legal actions related to chromated copper arsenate and other productliability matters, based on currently available facts, the Company does notbelieve that these actions will have a material effect on the financialcondition, results of operations or liquidity of the Company. Reserves inconnection with such product liability matters do not individually exceed $0.5million and in the aggregate $3.0 million. The Company’s reserve estimates arebased on available facts, including damage claims and input from its internaland external legal counsel, past experience, and, in some instances wheredefense costs are being paid by its insurer’s insurance coverage, knowninsurance recoveries. The Company is unable to estimate the amount or range ofany potential incremental charges should facts and circumstances change and mayin the future revise its estimates based on new information becoming available.In addition, the Company does not believe that there is any other individuallegal proceeding that is likely to have a material adverse effect on itsbusiness or financial condition. However, the Company cannot predict theoutcome of any litigation or the potential for future litigation.

***Indemnity Matters***—Under the terms ofthe Business and Share Sale and Purchase Agreement, the Deed of Tax Covenantand the Environmental Deed entered into in connection with the KKR Acquisition,Degussa U.K. Holdings Ltd., as successor to Laporte Plc, is obligated toindemnify the Company for certain legal, tax and environmental liabilities andobligations that relate to the period prior to the closing of the KKRAcquisition. Under the terms of the Sale and Purchase Agreement with mgtechnologies ag (now known as GEA Group Aktiengesellschaft (“GEA Group”)) andits subsidiary MG North America Holdings, Inc. (now known as GEA North AmericaInc. (“GEA North America”)), GEA Group is obligated to indemnify the Companyfor certain legal, tax and environmental liabilities and obligations thatrelate to the period prior to the closing, subject to certain limits andexclusions. Pursuant to these agreements, the Company has various claims forindemnification with Degussa and GEA Group. In addition, the Company may besubject to indemnity claims relating to properties or businesses it divested.In the opinion of management, and based upon information currently available,the ultimate resolution of any indemnification obligations owed to the Companyor by the Company will not have a material effect on the Company’s financialcondition, results of operations or cash flows.

**Safety,Health and Environmental Matters**

***General***

The Company is subject toextensive environmental, health and safety laws in the United States, theEuropean Union (“EU”) and elsewhere at the international, national, state, andlocal levels. Many of these laws impose requirements relating to clean-up ofcontamination, and impose liability in the event of damage to human beings,natural resources or property, and provide for substantial fines, injunctionsand potential criminal sanctions for violations. The products, including theraw materials handled, are also subject to rigorous industrial hygieneregulations and investigation. The nature of the Company’s operations exposesit to risks of liability for breaches of these laws and regulations as a resultof the production, storage, transportation and sale of materials that can cause

18

----

contamination or personalinjury when released into the environment. Environmental laws are subject tochange and have tended to become stricter over time. Such changes inenvironmental laws, or the enactment of new environmental laws, could result inmaterially increased capital, operating and compliance costs.

***Safety, Health and Environmental Systems***

The Company is committedto achieving and maintaining compliance with all applicable safety, health andenvironmental (“SHE”) legal requirements, and the Company’s subsidiaries havedeveloped policies and management systems that are intended to identify the SHElegal requirements applicable to their operations, enhance compliance with suchrequirements, ensure the safety of the Company’s employees, contractors, communityneighbors and customers and minimize the production and emission of wastes andother pollutants. Although SHE legal requirements are constantly changing,these SHE management systems are designed to assist the Company in meeting itscompliance goals and minimizing overall risk.

***SHE Capital Expenditures***

The Company may incurfuture costs for capital improvements and general compliance under SHE laws.For the year ended December 31, 2006, the capital expenditures for SHE matterstotaled approximately $35.3 million, excluding costs to maintain and repairpollution control equipment. For 2007, the Company estimates capitalexpenditures for compliance with SHE laws to be at similar levels; however,because capital expenditures for these matters are subject to changes inexisting and new SHE laws, the Company cannot provide assurance that its recentexpenditures will be indicative of future amounts required to comply with theselaws.

***Regulatory Developments***

In December 2006, theEuropean Parliament and Counsel of the EU adopted legislation for a new EUframework for chemicals known as the Registration, Evaluation and Authorizationof Chemicals, or REACH, which will significantly expand the EU’s regulation ofchemicals. REACH includes requirements that certain manufacturers and importersof chemicals register those chemicals, perform health and environmental riskanalyses of those chemicals, and in certain instances, obtain authorizationsfor the use of the chemicals. Substances that are not registered within theprescribed deadlines will not be permitted to be manufactured or marketedwithin the EU. As a specialty chemicals company, it is possible that theCompany is the only manufacturer of one or more substances to be regulatedunder REACH and thus could potentially bear the full cost of compliance withREACH for some or all of the Company’s products. The Company estimates it hasapproximately 350 products that might be subject to REACH, compliance withwhich is required starting in June 2007. The Company is taking steps to complywith REACH and is evaluating the potential costs of compliance.

Under the European UnionIntegrated Pollution Prevention and Control Directive (“IPPC”), EU membergovernments are to adopt rules and implement a cross-media (air, water andwaste) environmental permitting program for individual facilities. IPPCrequires a consistent application of Best Available Techniques throughout theEU. While the EU countries are at varying stages in their respectiveimplementation of the IPPC permit program, the Company has submitted allnecessary IPPC permit applications required to date, and in some cases receivedcompleted permits from the applicable government agency. The Company expects tosubmit all other IPPC applications and related documents on a timely basis asthe various countries implement the IPPC permit program. Although it is notknown with certainty what each IPPC permit will require, the Company believes,based upon its experience with the permits received to date, that the costs of compliancewith the IPPC permit program will not be material to its results of operations,financial position or liquidity.

The Kyoto Protocol is anamendment to an international treaty on global warming. The Protocolestablishes significant emission reduction targets for six gases considered tohave global warming potential, referred to as greenhouse gases. The Protocolwas adopted in 1997 and became effective in February 2005 in over 140 countriesthat have ratified it. The EU, including Germany and other countries where theCompany has interests, ratified the Kyoto Protocol in 2002 and, in doing so,have enacted regulations that reduce the emission of greenhouse gases and haveestablished a trading system covering carbon dioxide emissions. Such a trading systembecame effective at the start of 2005. The new regulation directly affects theCompany’s power plants at the Duisburg and Langelsheim sites in Germany, aswell as the power plant being operated by a third party on one of the Company’ssites. Rockwood and such third party will be required to purchase carbondioxide credits, which could result in increased operating costs, and may berequired to develop additional cost-effective methods to reduce carbon dioxideemissions, which could result in increased capital expenditures. The newregulation indirectly affects the Company’s other operations in the EU, whichmay experience higher energy costs from third party providers. The Companycontinues to evaluate options in order to comply with the Protocol. However,the Company does not expect this to have a material impact on its cash flow orresults of operations.

***Remediation Liabilities***

Environmental laws have asignificant effect on the nature and scope of any clean-up of contamination atcurrent and former operating facilities, the costs of transportation andstorage of chemicals and finished products and the costs of the storage anddisposal of wastes. In addition, “Superfund” statutes in the United States aswell as statutes in other jurisdictions impose strict, joint and severalliability for clean-up costs on the entities that generated waste and/orarranged for its disposal at contaminated third party sites, as well as thepast and present owners and operators of contaminated sites. All responsibleparties may be required to bear some or all clean-up costs regardless of fault,legality of the original disposal or ownership of the disposal site.

19

----

Environmentalcontamination is known to exist at certain of the Company’s present and formerfacilities, including its facilities located in Turin, Italy; St. Fromond, St.Cheron and Sens, France; Hainhausen, Troisdorf, Stadeln, Duisburg, Plochingen,Marktredwitz, Ronnenberg-Empelde and Langelsheim, Germany; Oss, TheNetherlands; Kidsgrove, Sudbury and Barrow, U.K.; Boksburg East, South Africaand in the United States, in Valdosta, Georgia, Beltsville, Maryland,Louisville, Kentucky, New Johnsonville, Tennessee, Harrisburg, North Carolina,Laurens, South Carolina, Silver Peak, Nevada and La Mirada, California. Soil contaminationis also known to exist at the Company’s facilities at Freeport, Texas, Sudbury,U.K. and Sumperk in Czech Republic; however, no further regulatory remedialactions are currently required for these facilities and any liabilities arisingfrom such contamination is covered by indemnity obligations or the previousowners of these facilities with the exception of Freeport. The Company iscurrently operating groundwater remediation systems at its Hainhausen, Stadeln,Valdosta, and Silver Peak facilities. The Company also operates groundwaterremediation and/or monitoring systems at its Plochingen, Marktredwitz, Stadeln,Troisdorf, New Johnsonville and Laurens facilities, for which prior owners orinsurers have assumed responsibility. The Company also continues to monitorgroundwater at the Beltsville and St. Cheron facilities, which were previouslythe subject of a soil removal action. Groundwater is also monitored at the St.Fromond and Barrow facilities due to prior spills and at the Harrisburg facilitydue to a landfill closure. The Company believes that additional environmentalstudies, and possibly environmental remediations, will be required at theHarrisburg and Louisville facilities. The Company is also in the process ofdetermining appropriate remedial actions with the regulatory authorities at thefollowing locations: Duisburg, Langelsheim, Troisdorf, Turin and La Mirada.Furthermore, as a result of facility closings, divestitures and offsitedisposal activities, the Company is responsible for the following othermatters: contamination beneath divested portions of the manufacturing facilityin Troisdorf; a former disposal site in Laurel, Maryland; contamination at aclosed Specialty Chemicals facility in Houston, Texas; contamination at a formerSpecialty Chemicals facility in Sunbright, Virginia; groundwater remediation atStadeln; and former sites operated by Dynamit Nobel’s previously divestedexplosives business. The Company is also a*de minimis* participant in several Superfund matters.

Although the Companycannot provide assurances in this regard, the Company does not believe thatthese issues will have a material adverse effect on its business or financialcondition, but may have a material adverse effect on the results of operationsor cash flows in any given quarterly or annual reporting period. Nonetheless,the discovery of contamination arising from present or historical industrialoperations at some of the Company’s and the Company’s predecessor’s former andpresent properties and/or at sites the Company and its predecessor disposedwastes could expose the Company to cleanup obligations and other damages in thefuture.

***Government Enforcement Proceedings and Civil Litigation***

During the course of theCompany’s business, the Company may receive notices of violation, enforcementand other complaints from regulatory agencies alleging non-compliance withapplicable SHE laws. Currently, the Company is a party to a consent order withthe Metropolitan Sewer District (“MSD”) in Saint Louis, Missouri to reduceammonia concentrations in wastewater discharge to a city treatment plant. MSD’snew National Pollution Discharge Elimination System (“NPDES”) permit requiresthe Company to reduce the facility’s ammonia discharge by an average of 50% byDecember 31, 2008. The Company is evaluating various options to reduce theamount of ammonia discharge. Although the Company will be required to makecapital expenditures in connection with this matter, it does not believe thatthis issue will have a material adverse effect on its business or financialcondition.

***Environmental Indemnity Obligations***

Pursuant to the sharepurchase agreement entered into in connection with the sale of the GroupeNovasep subsidiary, the Company agreed to indemnify the buyers for certainknown and unknown environmental actions which may arise in the future relatedto periods prior to closing. These obligations expire three years after theclosing; however, the Company’s liability for such obligations is reduced from 90%of any qualifying environmental liability claim to 70% of such claims 15 monthsafter the closing. In addition, the Company is required to indemnify thepurchaser of the Company’s U.S. Wafer Reclaim business for six years for anyunknown environmental actions attributable to the conduct of such businessprior to the closing of the disposition. The business purchase agreementprovides that the Company must indemnify the buyer for 100% of claims relatedto contamination of the business’ site or the migration of any hazardoussubstances from such site if notice of any such claim is given within fouryears of the closing of the disposition, and 50% of such claims if notice isgiven after the fourth but before the sixth anniversary of the closing.

***Environmental Indemnities***

Pursuant to theenvironmental deed entered into in connection with the KKR Acquisition,Degussa, as successor to Laporte, is required to indemnify us and oursubsidiaries for certain environmental matters that relate to the business asconducted prior to the closing of the KKR Acquisition. The environmental deedprovides that Degussa will indemnify the Company and its subsidiaries forclaims for which notice is given within a period of two years for breaches ofrepresentations and warranties, which expired in 2002, and five years, whichexpired in September 2005, for claims related to the contamination of theCompany’s properties or the Company’s subsidiaries’ properties (inclusive ofcontamination which leaks or escapes from the Company’s properties or theCompany’s subsidiaries’ properties). These indemnity obligations are subject toa minimum per matter loss of $0.2 million and are further subject to a $5.0million deductible for the indemnity to be available. In addition, theenvironmental deed provides that Degussa will indemnify the Company and itssubsidiaries for claims relating to properties that were formerly owned,occupied or used as of November 20, 2000, as well as properties owned by thirdparties (inclusive of disposal of waste and certain other identified issuesprior to November 20, 2000). The environmental deed provides that in thisinstance, Degussa will be responsible for reasonable costs and expensesincurred.

20

----

In addition, pursuant tothe sale and purchase agreement entered into in connection with the DynamitNobel Acquisition in April 2004, GEA Group and its subsidiary, GEA NorthAmerica, are required to indemnify the Company and its subsidiaries for 50% ofthe excess amount of losses over the amount of the related reserves (in thecase of known claims) and 50% of claims (in the case of unknown claims) relatedto the contamination of the Company or its subsidiaries’ properties, ifnotified within ten years. If GEA Group’s and GEA North America’sresponsibility for contamination matters cannot be proven, a sliding scalereduces the percentage further for each year during the five-year period fromyear six to ten. GEA Group and GEA North America are also obligated toindemnify us for 85% of claims related to legacy site matters, such asenvironmental matters relating to properties or businesses owned or operated byDynamit Nobel prior to, but not on, the closing of Dynamit Nobel Acquisition,if notified within ten years from closing (which occurred on July 31, 2004). Inaddition, GEA Group and GEA North America are obligated to indemnify theCompany for 50% of the excess amount of losses over the amount of the relatedreserves for operational compliance matters, if notified by December 31, 2006,and 50% of the excess amount of losses over the amount of the related reserves(in the case of known claims) and 50% of claims (in the case of unknown claims)related to certain environmental damage claims unknown at the time of theclosing of the Dynamit Nobel Acquisition, if notified within ten years. All ofthese indemnity obligations are subject to different minimum per claimthresholds depending on whether the matter was disclosed or not, and on thesubject matter, ranging between €100,000 and €750,000 ($133,540 and $1,001,550using the Friday, March 30, 2007 exchange rate of €1.00=$1.3354) depending onthe type of claim. The indemnity obligations are further subject to certaindeductibles, exclusions and limitations. Furthermore, GEA Group and GEA NorthAmerica are obligated to indemnify the Company for certain environmental risksarising from certain “shared site” structures for a duration of ten years fromclosing. This indemnity obligation is not subject to the percentages,*de minimis* exclusions, deductibles andthresholds described above, and it is not subject to most of the generallimitations.

Although the Company hasno reason to believe that the financial condition of those parties who may haveindemnification obligations to the Company is other than sound, in the eventthe Company seeks indemnity under any of these agreements or through othermeans, there can be no assurance that GEA Group, GEA North America, Degussa orany other party who may have obligations to indemnify the Company will adhereto their obligations and the Company may have to resort to legal action toenforce its rights under the indemnities. In cases where the Company’sindemnification claims to third parties are uncontested, the Company expects torealize recoveries within a short period of time. In addition, the Company maybe required to make indemnity payments in connection with certain environmentalmatters. However, the Company does not believe that resolution of the knownenvironmental matters subject to indemnification obligations owed to theCompany will have a material adverse effect on its business or financialcondition, but may have a material adverse effect on the Company’s results ofoperations or cash flow in any quarterly or annual reporting period.

***Environmental Reserves***

The Company has establishedfinancial reserves relating to anticipated environmental cleanup obligations,site reclamation and remediation and closure costs, which are reviewed at leastquarterly based on currently available information. Liabilities are recordedwhen potential liabilities are either known or believed to be probable and canbe reasonably estimated. In the event that the Company establishes a financialreserve in connection with site remediation costs, the Company records areserve for the estimated cost of the remediation, even though the costs of theremediation will likely be spread out over many years. The Company does notinclude unasserted claims in its reserves.

The Company’s liabilityestimates are based upon available facts, existing technology, past experienceand, in some instances, insurance recoveries where the remediation costs arebeing paid directly by its insurers and are generated by several means,including State-mandated schedules, environmental consultants and internalexperts, depending on the circumstances. On a consolidated basis, the Companyhas accrued $35.1 million and $34.9 million for known environmentalliabilities as of March 31, 2007 and December 31, 2006, respectively, all ofwhich are classified as other non-current liabilities on our consolidatedbalance sheets for such periods. Included in the $35.1 million as of March 31,2007 is €6.7 million ($9.0 million using the Friday, March 30, 2007 exchangerate of €1.00=$1.3354) that is discounted using a 5.0% discount rate(undiscounted amount equals $13.5 million), and €1.9 million ($2.5 million)that is discounted using a 5.5% discount rate (undiscounted amount equals $3.2million). Included in the $34.9 million as of December 31, 2006 is €6.7 million($8.8 million using the December 31, 2006 exchange rate of €1.00=$1.3199) thatis discounted using a 5.0% discount rate (undiscounted amount equals $13.2million), and €1.9 million ($2.5 million) that is discounted using a 5.5%discount rate (undiscounted amount equals $3.2 million).  In certaincases, the Company’s remediation liabilities are payable over periods of up to30 years.

The Company is obligatedto undertake soil remediation at two facilities in Europe in the eventmanufacturing operations are discontinued there at some future date. Inaddition, in the event that manufacturing operations are discontinued at any ofthe Company’s other facilities with known contamination, regulatory authoritiesmay impose more stringent requirements on the Company including soilremediation. The Company does not contemplate any such action occurring in theforeseeable future, as these facilities’ remaining lives are indefinite. Giventhe indeterminate useful life of these facilities and the correspondingindeterminate settlement date of any soil remediation obligations, the Companydoes not have sufficient information to estimate a range of potentialsettlement dates for it’s obligations. Consequently, the Company cannot employa present value technique to estimate fair value and, accordingly, has not accruedfor any environmental related costs to remediate soil at these facilities.

The Company believesthese accruals are adequate based on currently available information. TheCompany may incur losses in excess of the amounts accrued, however, based oncurrently available information it does not believe the additional amount ofpotential losses

21

----

would have a materialeffect on its results of operations or financial condition, but may have amaterial effect on the results of operations or cash flow in any givenquarterly or annual reporting period. The Company does not believe that anyknown individual environmental matter would have a material effect on itsresults of operations or financial condition. The Company is unable to estimatethe amount or range of any potential incremental charges should facts andcircumstances change and may in the future revise its estimates based on newinformation becoming available.

**13.     CONSOLIDATING FINANCIAL INFORMATION:**

As described in Note 8, “Long-termDebt,” the Company issued the 2011 Notes in July 2003 and the 2014 Notes inNovember 2004. The following consolidating financial statements present theresults of operations, financial condition and cash flows, in separate columns,of the parent company (Rockwood Specialties Group, Inc.), which is the issuerof the 2011 Notes and the 2014 Notes, guarantor subsidiaries, non-guarantorsubsidiaries, elimination adjustments and consolidated totals.

**ROCKWOOD SPECIALTIES GROUP, INC.AND SUBSIDIARIES**

**CONSOLIDATED STATEMENT OFOPERATIONS**

**THREE MONTHS ENDED MARCH 31, 2007**

**(Dollars in millions)**
| ** **                                                                   | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** |
|------------------------------------------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|
| ** **                                                                   | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Consolidated** | ** ** |
| Net sales                                                                    |       | $           | —     |             | $          | 188.8             |       | $                | 607.3      |   | $ | 796.1 |   |
| Cost of products sold                                                        |       | —      |       | 134.2            |       | 404.9             |       | 539.1            |       |
| Gross profit                                                                 |       | —      |       | 54.6             |       | 202.4             |       | 257.0            |       |
| Selling, general and  administrative expenses                                |       | 0.1         |       | 42.9             |       | 111.8             |       | 154.8            |       |
| Restructuring charges,  net                                                  |       | —      |       | 0.5              |       | 4.0               |       | 4.5              |       |
| Loss (gain) on sale of  assets                                               |       | 0.1         |       | (4.3             | )          | (0.6              | )          | (4.8             | )          |
| Operating (loss)  income                                                     |       | (0.2        | )          | 15.5             |       | 87.2              |       | 102.5            |       |
| Other income  (expenses):                                                    |       |        |       |             |       |              |       |             |       |
| Intergroup interest,  net                                                    |       | 18.3        |       | (5.5             | )          | (12.8             | )          | —           |       |
| Interest expense                                                             |       | (47.6       | )          | (0.7             | )          | (6.4              | )          | (54.7            | )          |
| Interest income                                                              |       | 7.6         |       | —           |       | (2.5              | )          | 5.1              |       |
| Intergroup other, net                                                        |       | 0.3         |       | 4.0              |       | (4.3              | )          | —           |       |
| Refinancing expenses                                                         |       | (0.9        | )          | —           |       | —            |       | (0.9             | )          |
| Foreign exchange gain  (loss), net                                           |       | 1.3         |       | (0.1             | )          | (0.8              | )          | 0.4              |       |
| Other, net                                                                   |       | —      |       | —           |       | (0.1              | )          | (0.1             | )          |
| Net                                                                          |       | (21.0       | )          | (2.3             | )          | (26.9             | )          | (50.2            | )          |
| (Loss) income from  continuing operations before taxes and minority interest |       | (21.2       | )          | 13.2             |       | 60.3              |       | 52.3             |       |
| Income tax provision                                                         |       | 0.4         |       | 3.7              |       | 17.9              |       | 22.0             |       |
| (Loss) income from  continuing operations before minority interest           |       | (21.6       | )          | 9.5              |       | 42.4              |       | 30.3             |       |
| Minority interest in  continuing operations                                  |       | —      |       | —           |       | (1.1              | )          | (1.1             | )          |
| Net (loss) income  from continuing operations                                |       | (21.6       | )          | 9.5              |       | 41.3              |       | 29.2             |       |
| Income from  discontinued operations, net of tax                             |       | —      |       | —           |       | 0.5               |       | 0.5              |       |
| Gain on sale of  discontinued operations, net of tax                         |       | —      |       | —           |       | 115.7             |       | 115.7            |       |
| Minority interest in  discontinued operations                                |       | —      |       | —           |       | (0.1              | )          | (0.1             | )          |
| Net (loss) income                                                            |       | $           | (21.6      | )                | $          | 9.5               |       | $                | 157.4      |   | $ | 145.3 |   |

 

22

----

**ROCKWOOD SPECIALTIES GROUP, INC.AND SUBSIDIARIES**

**CONSOLIDATED STATEMENT OFOPERATIONS**

**THREE MONTHS ENDED MARCH 31, 2006**

**(Dollars in millions)**
| ** **                                             | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** |
|--------------------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|
| ** **                                             | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Consolidated** | ** ** |
| Net sales                                              |       | $           | —     |             | $          | 238.7             |       | $                | 485.4      |   | $ | 724.1 |   |
| Cost of products sold                                  |       | —      |       | 173.4            |       | 324.9             |       | 498.3            |       |
| Gross profit                                           |       | —      |       | 65.3             |       | 160.5             |       | 225.8            |       |
| Selling, general and  administrative expenses          |       | —      |       | 46.4             |       | 94.2              |       | 140.6            |       |
| Restructuring charges,  net                            |       | —      |       | 0.1              |       | 1.1               |       | 1.2              |       |
| Gain on sale of assets                                 |       | —      |       | —           |       | (0.5              | )          | (0.5             | )          |
| Operating income                                       |       | —      |       | 18.8             |       | 65.7              |       | 84.5             |       |
| Other income  (expenses):                              |       |        |       |             |       |              |       |             |       |
| Intergroup interest,  net                              |       | 26.3        |       | (7.5             | )          | (18.8             | )          | —           |       |
| Interest expense                                       |       | (33.6       | )          | (0.2             | )          | (6.0              | )          | (39.8            | )          |
| Interest income                                        |       | —      |       | —           |       | 1.4               |       | 1.4              |       |
| Intergroup other, net                                  |       | —      |       | (0.7             | )          | 0.7               |       | —           |       |
| Foreign exchange gain  (loss), net                     |       | 0.4         |       | 0.1              |       | (3.4              | )          | (2.9             | )          |
| Other, net                                             |       | —      |       | —           |       | 1.6               |       | 1.6              |       |
| Net                                                    |       | (6.9        | )          | (8.3             | )          | (24.5             | )          | (39.7            | )          |
| (Loss) income from  continuing operations before taxes |       | (6.9        | )          | 10.5             |       | 41.2              |       | 44.8             |       |
| Income tax provision                                   |       | —      |       | 2.6              |       | 15.7              |       | 18.3             |       |
| Net (loss)  income from continuing operations          |       | (6.9        | )          | 7.9              |       | 25.5              |       | 26.5             |       |
| Income from  discontinued operations, net of tax       |       | —      |       | —           |       | 16.5              |       | 16.5             |       |
| Minority interest in  discontinued operations          |       | —      |       | —           |       | (3.0              | )          | (3.0             | )          |
| Net (loss) income                                      |       | $           | (6.9       | )                | $          | 7.9               |       | $                | 39.0       |   | $ | 40.0 |   |

 

23

----

**ROCKWOOD SPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEET**

**MARCH 31, 2007**

**(Dollars in millions)**
| ** **                                       | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** | ** **       | ** ** |
|--------------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|------------------|------------|
| ** **                                       | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                       |       |        |       |             |       |              |       |             |       |             |       |
| Current assets:                                  |       |        |       |             |       |              |       |             |       |             |       |
| Cash and cash  equivalents                       |       | $           | 834.9      |             | $          | (143.6            | )          | $                | (201.7     | )                | $          | — |   | $ | 489.6 |   |
| Accounts receivable,  net                        |       | —      |       | 126.3            |       | 392.9             |       | —           |       | 519.2            |       |
| Inventories                                      |       | —      |       | 109.0            |       | 344.0             |       | —           |       | 453.0            |       |
| Deferred income taxes                            |       | (6.4        | )          | 18.5             |       | 1.6               |       | —           |       | 13.7             |       |
| Prepaid expenses and  other current assets       |       | —      |       | 7.4              |       | 29.3              |       | —           |       | 36.7             |       |
| Total current  assets                            |       | 828.5       |       | 117.6            |       | 566.1             |       | —           |       | 1,512.2          |       |
| Property, plant and  equipment, net              |       | —      |       | 227.3            |       | 1,152.4           |       | —           |       | 1,379.7          |       |
| Investment in  subsidiary                        |       | 1,685.2     |       | 96.8             |       | —            |       | (1,782.0         | )          | —           |       |
| Goodwill                                         |       | —      |       | 347.8            |       | 1,374.0           |       | —           |       | 1,721.8          |       |
| Intergroup receivable                            |       | 1,486.9     |       | 422.1            |       | 3,463.2           |       | (5,372.2         | )          | —           |       |
| Other intangible  assets, net                    |       | —      |       | 54.6             |       | 574.4             |       | —           |       | 629.0            |       |
| Deferred debt issuance  costs, net               |       | 3.5         |       | 8.2              |       | 37.9              |       | —           |       | 49.6             |       |
| Other assets                                     |       | 14.4        |       | 5.4              |       | 40.2              |       | —           |       | 60.0             |       |
| Total assets                                     |       | $           | 4,018.5    |             | $          | 1,279.8           |       | $                | 7,208.2    |             | $          | (7,154.2 | ) | $ | 5,352.3 |   |
| **LIABILITIES AND STOCKHOLDER’S  EQUITY**   |       |        |       |             |       |              |       |             |       |             |       |
| Current liabilities:                             |       |        |       |             |       |              |       |             |       |             |       |
| Accounts payable                                 |       | $           | —     |             | $          | 67.3              |       | $                | 182.2      |             | $          | — |   | $ | 249.5 |   |
| Income taxes payable                             |       | 4.5         |       | (2.8             | )          | 6.3               |       | —           |       | 8.0              |       |
| Accrued compensation                             |       | —      |       | 17.9             |       | 76.2              |       | —           |       | 94.1             |       |
| Restructuring liability                          |       | —      |       | 0.9              |       | 10.8              |       | —           |       | 11.7             |       |
| Accrued expenses and  other current liabilities  |       | 48.5        |       | 30.3             |       | 104.3             |       | —           |       | 183.1            |       |
| Long-term debt, current  portion                 |       | 296.4       |       | —           |       | 65.5              |       | —           |       | 361.9            |       |
| Total current  liabilities                       |       | 349.4       |       | 113.6            |       | 445.3             |       | —           |       | 908.3            |       |
| Long-term debt                                   |       | 2,202.5     |       | —           |       | 221.1             |       | —           |       | 2,423.6          |       |
| Pension and related  liabilities                 |       | —      |       | 9.3              |       | 349.2             |       | —           |       | 358.5            |       |
| Intergroup payable                               |       | 415.4       |       | 812.9            |       | 4,143.9           |       | (5,372.2         | )          | —           |       |
| Deferred income taxes                            |       | (16.5       | )          | 29.2             |       | 39.6              |       | —           |       | 52.3             |       |
| Other liabilities                                |       | 22.1        |       | 30.2             |       | 95.7              |       | —           |       | 148.0            |       |
| Total  liabilities                               |       | 2,972.9     |       | 995.2            |       | 5,294.8           |       | (5,372.2         | )          | 3,890.7          |       |
| Minority interest                                |       | —      |       |             |       | 176.1             |       | —           |       | 176.1            |       |
| Stockholder’s equity:                       |       |        |       |             |       |              |       |             |       |             |       |
| Common stock                                     |       | —      |       | 190.6            |       | 164.7             |       | (355.3           | )          | —           |       |
| Paid-in capital                                  |       | 1,005.4     |       | 298.6            |       | 1,128.1           |       | (1,426.7         | )          | 1,005.4          |       |
| Accumulated other  comprehensive income          |       | 50.1        |       | (1.2             | )          | 216.8             |       | —           |       | 265.7            |       |
| Retained (deficit)  earnings                     |       | (9.9        | )          | (203.4           | )          | 227.7             |       | —           |       | 14.4             |       |
| Total  stockholder’s equity                 |       | 1,045.6     |       | 284.6            |       | 1,737.3           |       | (1,782.0         | )          | 1,285.5          |       |
| Total liabilities and  stockholder’s equity |       | $           | 4,018.5    |             | $          | 1,279.8           |       | $                | 7,208.2    |             | $          | (7,154.2 | ) | $ | 5,352.3 |   |

 

24

----

**ROCKWOOD SPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEET**

**DECEMBER 31, 2006**

**(Dollars in millions)**
| ** **                                       | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** | ** **       | ** ** |
|--------------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|------------------|------------|
| ** **                                       | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                       |       |        |       |             |       |              |       |             |       |             |       |
| Current assets:                                  |       |        |       |             |       |              |       |             |       |             |       |
| Cash and cash  equivalents                       |       | $           | 463.7      |             | $          | (168.4            | )          | $                | (269.4     | )                | $          | — |   | $ | 25.9 |   |
| Accounts  receivable, net                        |       | —      |       | 119.4            |       | 344.0             |       | —           |       | 463.4            |       |
| Inventories                                      |       | —      |       | 103.6            |       | 341.8             |       | —           |       | 445.4            |       |
| Deferred income  taxes                           |       | (6.4        | )          | 13.1             |       | 8.4               |       | —           |       | 15.1             |       |
| Prepaid expenses  and other current assets       |       | —      |       | 8.4              |       | 32.4              |       | —           |       | 40.8             |       |
| Assets of  discontinued operations               |       | —      |       | —           |       | 490.6             |       | —           |       | 490.6            |       |
| Total current assets                             |       | 457.3       |       | 76.1             |       | 947.8             |       | —           |       | 1,481.2          |       |
| Property, plant  and equipment, net              |       | —      |       | 228.8            |       | 1,146.1           |       | —           |       | 1,374.9          |       |
| Investment in  subsidiary                        |       | 1,685.2     |       | 87.3             |       | —            |       | (1,772.5         | )          | —           |       |
| Goodwill                                         |       | —      |       | 349.2            |       | 1,368.5           |       | —           |       | 1,717.7          |       |
| Intergroup  receivable                           |       | 1,488.0     |       | 682.7            |       | 3,859.2           |       | (6,029.9         | )          | —           |       |
| Other intangible  assets, net                    |       | —      |       | 56.5             |       | 483.1             |       | —           |       | 539.6            |       |
| Deferred debt  issuance costs, net               |       | 3.4         |       | 8.9              |       | 39.3              |       | —           |       | 51.6             |       |
| Other assets                                     |       | 16.9        |       | 2.9              |       | 39.3              |       | —           |       | 59.1             |       |
| Total assets                                     |       | $           | 3,650.8    |             | $          | 1,492.4           |       | $                | 7,883.3    |             | $          | (7,802.4 | ) | $ | 5,224.1 |   |
| **LIABILITIES  AND STOCKHOLDER’S EQUITY**   |       |        |       |             |       |              |       |             |       |             |       |
| Current  liabilities:                            |       |        |       |             |       |              |       |             |       |             |       |
| Accounts payable                                 |       | $           | —     |             | $          | 66.3              |       | $                | 224.0      |             | $          | — |   | $ | 290.3 |   |
| Income taxes  payable                            |       | 4.5         |       | (6.4             | )          | 2.1               |       | —           |       | 0.2              |       |
| Accrued  compensation                            |       | —      |       | 24.5             |       | 61.4              |       | —           |       | 85.9             |       |
| Restructuring  liability                         |       | —      |       | 0.5              |       | 8.0               |       | —           |       | 8.5              |       |
| Accrued expenses  and other current liabilities  |       | 38.6        |       | 28.1             |       | 111.8             |       | —           |       | 178.5            |       |
| Senior secured  revolving credit facility        |       | —      |       | —           |       | 37.0              |       | —           |       | 37.0             |       |
| Long-term debt,  current portion                 |       | 59.8        |       | —           |       | 21.0              |       | —           |       | 80.8             |       |
| Liabilities of  discontinued operations          |       | —      |       | —           |       | 171.1             |       | —           |       | 171.1            |       |
| Total current liabilities                        |       | 102.9       |       | 113.0            |       | 636.4             |       | —           |       | 852.3            |       |
| Long-term debt                                   |       | 2,477.1     |       | —           |       | 243.8             |       | —           |       | 2,720.9          |       |
| Pension and  related liabilities                 |       | —      |       | 9.3              |       | 343.7             |       | —           |       | 353.0            |       |
| Intergroup  payable                              |       | —      |       | 1,052.2          |       | 4,977.7           |       | (6,029.9         | )          | —           |       |
| Deferred income  taxes                           |       | (16.1       | )          | 24.6             |       | 40.0              |       | —           |       | 48.5             |       |
| Other  liabilities                               |       | 10.4        |       | 18.9             |       | 67.9              |       | —           |       | 97.2             |       |
| Total liabilities                                |       | 2,574.3     |       | 1,218.0          |       | 6,309.5           |       | (6,029.9         | )          | 4,071.9          |       |
| Minority  interest                               |       | —      |       | —           |       | 33.6              |       | —           |       | 33.6             |       |
| Stockholder’s  equity:                      |       |        |       |             |       |              |       |             |       |             |       |
| Common stock                                     |       | —      |       | 190.6            |       | 164.7             |       | (355.3           | )          | —           |       |
| Paid-in capital                                  |       | 1,005.4     |       | 296.4            |       | 1,120.8           |       | (1,417.2         | )          | 1,005.4          |       |
| Accumulated  other comprehensive income          |       | 58.1        |       | (1.2             | )          | 179.8             |       | —           |       | 236.7            |       |
| Retained  earnings (deficit)                     |       | 13.0        |       | (211.4           | )          | 74.9              |       | —           |       | (123.5           | )          |
| Total stockholder’s equity                  |       | 1,076.5     |       | 274.4            |       | 1,540.2           |       | (1,772.5         | )          | 1,118.6          |       |
| Total  liabilities and stockholder’s equity |       | $           | 3,650.8    |             | $          | 1,492.4           |       | $                | 7,883.3    |             | $          | (7,802.4 | ) | $ | 5,224.1 |   |

 

25

----

**ROCKWOOD SPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**CONSOLIDATING STATEMENT OF CASH FLOWS**

**THREE MONTHS ENDED MARCH 31, 2007**

**(Dollars in millions)**
| ** **                                                                                               | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|
| ** **                                                                                               | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Consolidated** | ** ** |
| **CASH  FLOWS FROM OPERATING ACTIVITIES:**                                                               |       |        |       |             |       |              |       |             |       |
| Net (loss) income                                                                                        |       | $           | (21.6      | )                | $          | 9.5               |       | $                | 157.4      |   | $ | 145.3 |   |
| Adjustments to  reconcile net (loss) income to net cash provided by (used in) operating  activities:     |       |        |       |             |       |              |       |             |       |
| Income from discontinued operations, net of tax                                                          |       | —      |       | —           |       | (0.5              | )          | (0.5             | )          |
| Gain on sale of discontinued operations, net of tax                                                      |       | —      |       | —           |       | (115.7            | )          | (115.7           | )          |
| Minority interest in discontinued operations                                                             |       | —      |       | —           |       | 0.1               |       | 0.1              |       |
| Depreciation and amortization                                                                            |       | —      |       | 9.0              |       | 44.2              |       | 53.2             |       |
| Deferred financing costs amortization                                                                    |       | 0.2         |       | 0.5              |       | 1.7               |       | 2.4              |       |
| Foreign exchange gain                                                                                    |       | (1.3        | )          | 0.1              |       | 0.8               |       | (0.4             | )          |
| Fair value adjustment of derivatives                                                                     |       | 2.6         |       | —           |       | 0.2               |       | 2.8              |       |
| Bad debt provision                                                                                       |       | —      |       | 0.2              |       | 0.4               |       | 0.6              |       |
| Deferred income taxes                                                                                    |       | 0.3         |       | 0.7              |       | 8.9               |       | 9.9              |       |
| Gain on sale of assets                                                                                   |       | 0.1         |       | (4.3             | )          | (0.6              | )          | (4.8             | )          |
| Minority interest in continuing operations                                                               |       | —      |       | —           |       | 1.1               |       | 1.1              |       |
| Changes in  assets and liabilities, net of the effect of foreign currency translation and  acquisitions: |       |        |       |             |       |              |       |             |       |
| Accounts receivable                                                                                      |       | —      |       | (8.3             | )          | (45.9             | )          | (54.2            | )          |
| Inventories, including inventory write-up reversal                                                       |       | —      |       | (6.2             | )          | 1.2               |       | (5.0             | )          |
| Prepaid expenses and other assets                                                                        |       | (0.4        | )          | (2.0             | )          | 0.9               |       | (1.5             | )          |
| Accounts payable                                                                                         |       | —      |       | 4.6              |       | (29.9             | )          | (25.3            | )          |
| Income taxes payable                                                                                     |       | 0.1         |       | 3.5              |       | 3.3               |       | 6.9              |       |
| Accrued expenses and other liabilities                                                                   |       | 19.6        |       | 5.6              |       | 29.0              |       | 54.2             |       |
| Intercompany operating activities, net                                                                   |       | 20.2        |       | (27.8            | )          | 7.6               |       | —           |       |
| Net cash  provided by (used in) operating activities of continuing operations                            |       | 19.8        |       | (14.9            | )          | 64.2              |       | 69.1             |       |
| Net cash provided by operating activities of  discontinued operations                                    |       | —      |       | —           |       | 1.6               |       | 1.6              |       |
| **Net cash provided by (used in) operating  activities**                                                 |       | 19.8        |       | (14.9            | )          | 65.8              |       | 70.7             |       |
| ** **                                                                                               |       |        |       |             |       |              |       |             |       |
| **CASH  FLOWS FROM INVESTING ACTIVITIES:**                                                               |       |        |       |             |       |              |       |             |       |
| Acquisitions,  including transaction fees paid, net of cash acquired                                     |       | —      |       | —           |       | (2.1              | )          | (2.1             | )          |
| Capital  expenditures, excluding capital leases                                                          |       | —      |       | (7.5             | )          | (39.8             | )          | (47.3            | )          |
| Proceeds from  formation of Viance joint venture                                                         |       | —      |       | 46.1             |       | 30.5              |       | 76.6             |       |
| Proceeds from  sale of discontinued operations                                                           |       | —      |       | —           |       | 426.2             |       | 426.2            |       |
| Proceeds on sale  of assets                                                                              |       | (0.1        | )          | 7.2              |       | 2.8               |       | 9.9              |       |
| Net cash (used  in) provided by investing activities of continuing operations                            |       | (0.1        | )          | 45.8             |       | 417.6             |       | 463.3            |       |
| Net cash used in investing activities of  discontinued operations                                        |       | —      |       | —           |       | —            |       | —           |       |
| **Net cash (used in) provided by investing  activities**                                                 |       | (0.1        | )          | 45.8             |       | 417.6             |       | 463.3            |       |
| ** **                                                                                               |       |        |       |             |       |              |       |             |       |
| **CASH  FLOWS FROM FINANCING ACTIVITIES:**                                                               |       |        |       |             |       |              |       |             |       |
| Repayment of  senior secured credit facilities                                                           |       | (48.3       | )          | —           |       | (16.7             | )          | (65.0            | )          |
| Payments on  other long-term debt                                                                        |       | —      |       | —           |       | (1.6              | )          | (1.6             | )          |
| Intercompany  debt related activity                                                                      |       | 398.8       |       | (6.0             | )          | (392.8            | )          | —           |       |
| Net cash  provided by (used in) financing activities of continuing operations                            |       | 350.5       |       | (6.0             | )          | (411.1            | )          | (66.6            | )          |
| Net cash used in financing activities of  discontinued operations                                        |       | —      |       | —           |       | —            |       | —           |       |
| **Net cash provided by (used in) financing activities**                                                  |       | 350.5       |       | (6.0             | )          | (411.1            | )          | (66.6            | )          |
| ** **                                                                                               |       |        |       |             |       |              |       |             |       |
| Effect of  exchange rate changes on cash and cash equivalents                                            |       | 1.0         |       | (0.1             | )          | (3.0              | )          | (2.1             | )          |
| Net increase in cash and cash equivalents                                                                |       | 371.2       |       | 24.8             |       | 69.3              |       | 465.3            |       |
| Cash and cash  equivalents, beginning of period                                                          |       | 463.7       |       | (168.4           | )          | (269.4            | )          | 25.9             |       |
| Cash and cash equivalents, end of period                                                                 |       | 834.9       |       | (143.6           | )          | (200.1            | )          | 491.2            |       |
| Less cash and  cash equivalents of discontinued operations                                               |       | —      |       | —           |       | (1.6              | )          | (1.6             | )          |
| Cash and cash  equivalents of continuing operations, end of period                                       |       | $           | 834.9      |             | $          | (143.6            | )          | $                | (201.7     | ) | $ | 489.6 |   |

 

26

----

**ROCKWOOD SPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**CONSOLIDATING STATEMENT OF CASH FLOWS**

**THREE MONTHS ENDED MARCH 31, 2006**

**(Dollars in millions)**
| ** **                                                                                               | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|
| ** **                                                                                               | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Consolidated** | ** ** |
| **CASH  FLOWS FROM OPERATING ACTIVITIES:**                                                               |       |        |       |             |       |              |       |             |       |
| Net (loss) income                                                                                        |       | $           | (6.9       | )                | $          | 7.9               |       | $                | 39.0       |   | $ | 40.0 |   |
| Adjustments to  reconcile net (loss) income to net cash provided by (used in) operating  activities:     |       |        |       |             |       |              |       |             |       |
| Income from discontinued operations, net of tax                                                          |       | —      |       | —           |       | (16.5             | )          | (16.5            | )          |
| Minority interest in discontinued operations                                                             |       | —      |       | —           |       | 3.0               |       | 3.0              |       |
| Depreciation and amortization                                                                            |       | —      |       | 8.7              |       | 35.0              |       | 43.7             |       |
| Deferred financing costs amortization                                                                    |       | 0.2         |       | 0.4              |       | 1.7               |       | 2.3              |       |
| Foreign exchange gain                                                                                    |       | (0.4        | )          | (0.1             | )          | 3.4               |       | 2.9              |       |
| Fair value adjustment of derivatives                                                                     |       | (9.9        | )          | —           |       | (0.8              | )          | (10.7            | )          |
| Bad debt provision                                                                                       |       | —      |       | 0.4              |       | 0.2               |       | 0.6              |       |
| Deferred income taxes                                                                                    |       | 5.0         |       | (3.7             | )          | 6.1               |       | 7.4              |       |
| Gain on sale of assets                                                                                   |       | —      |       | —           |       | (0.5              | )          | (0.5             | )          |
| Changes in  assets and liabilities, net of the effect of foreign currency translation and  acquisitions: |       |        |       |             |       |              |       |             |       |
| Accounts receivable                                                                                      |       | —      |       | (27.1            | )          | (30.3             | )          | (57.4            | )          |
| Inventories, including inventory write-up reversal                                                       |       | —      |       | (3.1             | )          | 4.4               |       | 1.3              |       |
| Prepaid expenses and other assets                                                                        |       | (0.3        | )          | 0.2              |       | 7.1               |       | 7.0              |       |
| Accounts payable                                                                                         |       | —      |       | 3.9              |       | (18.1             | )          | (14.2            | )          |
| Income taxes payable                                                                                     |       | (5.0        | )          | 6.5              |       | 6.7               |       | 8.2              |       |
| Accrued expenses and other liabilities                                                                   |       | 30.3        |       | (6.8             | )          | (46.4             | )          | (22.9            | )          |
| Intercompany operating activities, net                                                                   |       | 74.8        |       | (66.0            | )          | (8.8              | )          | —           |       |
| Net cash  provided by (used in) operating activities of continuing operations                            |       | 87.8        |       | (78.8            | )          | (14.8             | )          | (5.8             | )          |
| Net cash provided by operating activities of  discontinued operations                                    |       | —      |       | —           |       | 53.4              |       | 53.4             |       |
| **Net cash provided by (used in) operating  activities**                                                 |       | 87.8        |       | (78.8            | )          | 38.6              |       | 47.6             |       |
| ** **                                                                                               |       |        |       |             |       |              |       |             |       |
| **CASH  FLOWS FROM INVESTING ACTIVITIES:**                                                               |       |        |       |             |       |              |       |             |       |
| Acquisitions,  related intercompany                                                                      |       | 7.7         |       | (7.7             | )          | —            |       | —           |       |
| Capital  expenditures, excluding capital leases                                                          |       | —      |       | (8.2             | )          | (29.0             | )          | (37.2            | )          |
| Proceeds from sale  of assets                                                                            |       | —      |       | —           |       | 2.4               |       | 2.4              |       |
| Net cash provided  by (used in) investing activities of continuing operations                            |       | 7.7         |       | (15.9            | )          | (26.6             | )          | (34.8            | )          |
| Net cash used in investing activities of  discontinued operations                                        |       | —      |       | —           |       | (8.3              | )          | (8.3             | )          |
| **Net cash provided by (used in) investing  activities**                                                 |       | 7.7         |       | (15.9            | )          | (34.9             | )          | (43.1            | )          |
| ** **                                                                                               |       |        |       |             |       |              |       |             |       |
| **CASH  FLOWS FROM FINANCING ACTIVITIES:**                                                               |       |        |       |             |       |              |       |             |       |
| Proceeds from  senior secured credit facilities                                                          |       | 21.0        |       | —           |       | 24.2              |       | 45.2             |       |
| Repayment of  senior secured credit facilities                                                           |       | (59.7       | )          | —           |       | (10.4             | )          | (70.1            | )          |
| Payments on  other long-term debt                                                                        |       | —      |       | —           |       | (0.9              | )          | (0.9             | )          |
| Intercompany  debt related                                                                               |       | 134.8       |       | (125.8           | )          | (9.0              | )          | —           |       |
| Net cash  provided by (used in) financing activities of continuing operations                            |       | 96.1        |       | (125.8           | )          | 3.9               |       | (25.8            | )          |
| Net cash used in financing activities of  discontinued operations                                        |       | —      |       | —           |       | (36.4             | )          | (36.4            | )          |
| **Net cash provided by (used in) financing  activities**                                                 |       | 96.1        |       | (125.8           | )          | (32.5             | )          | (62.2            | )          |
|                                                                                                     |       |        |       |             |       |              |       |             |       |
| Effect of  exchange rate changes on cash and cash equivalents                                            |       | 0.4         |       | —           |       | (1.5              | )          | (1.1             | )          |
| Net increase (decrease) in cash and cash equivalents                                                     |       | 192.0       |       | (220.5           | )          | (30.3             | )          | (58.8            | )          |
| Cash and cash  equivalents, beginning of period                                                          |       | 109.4       |       | (26.5            | )          | 13.5              |       | 96.4             |       |
| Cash and cash equivalents, end of period                                                                 |       | 301.4       |       | (247.0           | )          | (16.8             | )          | 37.6             |       |
| Less cash and  cash equivalents of discontinued operations                                               |       | —      |       | —           |       | (8.0              | )          | (8.0             | )          |
| Cash and cash  equivalents of continuing operations, end of period                                       |       | $           | 301.4      |             | $          | (247.0            | )          | $                | (24.8      | ) | $ | 29.6 |   |

 

27

----

**Item2.    Management’s Discussion and Analysis of FinancialCondition and Results of Operations.**

*Thefollowing discussion contains forward-looking statements that involve numerousrisks and uncertainties. Our actual results could differ materially from thosediscussed in the forward-looking statements as a result of these risks anduncertainties, including those set forth in “Forward-Looking Statements” at theend of this Management Discussion and Analysis section and the risk factorssection of the Company’s 2006 Form10-K. You should read the followingdiscussion and analysis together with our condensed consolidated financialstatements and the notes to those statements that appear elsewhere in thisQuarterly Report. Amounts may not recalculate due to rounding differences.*

*OnJanuary 9, 2007, we completed the sale of our Groupe Novasep segment.  Asa result, our condensed consolidated financial statements have beenreclassified to reflect the Groupe Novasep segment as a discontinued operationfor all periods presented.  See Note 2, “Discontinued Operations,” forfurther details.*

**General**

We are a globaldeveloper, manufacturer and marketer of technologically advanced, highvalue-added specialty chemicals and advanced materials. We serve more than60,000 customers across a wide variety of industries and geographic areas. Weoperate through six business segments: (1) Specialty Chemicals; (2) PerformanceAdditives; (3) Titanium Dioxide Pigments; (4) Advanced Ceramics; (5) SpecialtyCompounds; and (6) Electronics. Of these six segments, we acquired SpecialtyChemicals, Titanium Dioxide Pigments and Advanced Ceramics in the Dynamit NobelAcquisition.

Our net sales consist ofsales of our products, net of sales discounts, product returns and allowances.Sales are primarily made on a purchase order basis.

Our cost of products soldconsists of variable and fixed components. Our variable costs are proportional tovolume and consist principally of raw materials, packaging and relatedsupplies, certain energy costs, and certain distribution costs includinginbound, outbound, and internal shipping and transfer costs. Our fixed costsare not significantly impacted by production volume and consist principally ofcertain fixed manufacturing costs and other distribution network costs,including warehousing. Fixed manufacturing costs comprise headcount-relatedcosts and overhead, including depreciation, periodic maintenance costs,purchasing and receiving costs, inspection costs and certain energy costs.

Our selling, general andadministrative expenses include research and development costs, sales andmarketing, divisional management expenses and corporate services including cashmanagement, legal, benefit plan administration and other administrative andprofessional services.

We are focused on growth,productivity, cost reduction, margin expansion, divestment of non-corebusinesses and debt reduction. In connection with this focus, among otherthings:

·                     We have cutcosts, reduced overhead and eliminated duplicative positions in both acquiredand existing businesses. For example, during the first quarter of 2006, weclosed facilities in the United States and the U.K. in our Wafer Reclaimbusiness in our Electronics segment. We have also announced the consolidationin 2007 of several U.K. facilities resulting from an acquisition in October2006 by our Specialty Compounds segment. We also implemented otherrestructuring measures in our other segments, including the closure of ourBaulking, U.K. facility in our Clay-based Additives business; and

·                     We completedthe sale of our Groupe Novasep subsidiary in January 2007 and our United StatesWafer Reclaim business in February 2007.

**FactorsWhich Affect Our Results of Operations**

**OurMarkets**

Because the businesses inour segments generally serve many unrelated end-use markets, we discuss theprincipal market conditions on a segment basis rather than a consolidatedbasis. The principal market conditions in our segments and regions in which weoperate that impacted our results of operations during the periods presentedinclude the following:

***Specialty Chemicals***

·                     Demand forSurface Treatment products in our Specialty Chemicals segment generally followsthe activity levels of metal processing manufacturers, including the automotivesupply, steel and aerospace industries.  Growth in the Surface Treatmentbusiness occurred in 2006 and continued in the first quarter of 2007 in mostmarkets and regions served, especially in the European automotive, generalindustrial and aerospace industries, as price and volume increases offset rawmaterial cost increases. We expect the Surface Treatment business to growthroughout 2007 in all markets as price and volume increases are expected tooffset raw material cost increases and higher personnel costs to support thecontinuing growth of the 

28

----

business.

·                     Demand forour lithium products in the Fine Chemicals business line of our SpecialtyChemicals segment is generally driven by demand for lithium carbonate inindustrial applications, the aluminum business, glass ceramics, cement and thegeneral demand in China. Sales of lithium products specifically used in lifescience applications depend on the trends in drug development and growth inpharmaceuticals markets as well as generic competition. Market conditions forlithium products in the industries served provided increasing price trends forlithium salts in 2006. Growth in the Fine Chemicals business occurred in 2006and continued in the first quarter of 2007 in most market segments, especiallydriven by lithium salt applications through price increases and strong demandfor lithium applications, particularly sales of lithium specialty products tothe pharmaceutical industry and lithium compounds. Tight supplies in the globalmarket and unfavorable weather conditions at the lithium ponds in Chile inearly 2006 led to shortages in lithium salts as a raw material and customerdemand for lithium carbonate was not completely satisfied. Although we expectshortages for lithium carbonate to continue, growth in the Fine Chemicalsbusiness is expected in all market segments, particularly driven by lithiumsalt applications through price increases and higher demand for lithiumspecialties.

***Performance Additives***

·                     Sales in ourColor Pigments and Services business in North America increased in 2006 onhigher construction volumes and selling price increases that were necessary torecover raw material and energy cost increases. Generally, a continuing trendtowards the increased use of colored concrete products in the North Americanconstruction market has had a positive effect on our Color Pigments andServices business line.  However, construction sales in North America weredown on lower volumes and selling prices in the first quarter of 2007 due tothe general slowdown in the construction market.

·                     Demand incertain European end-use markets over the last few years has slowed. Thisaffected sales of Color Pigments and Services in the construction market and,as a result, we experienced a decrease in European construction volumes in ourColor Pigments and Services business in 2006.  However, Europeanconstruction sales in our Color Pigments and Services business increased in thefirst quarter of 2007 on higher volumes and are expected to continue to improvethroughout 2007 on increased volumes resulting from a stronger European economyand higher selling prices.

·                     The change inthe market to environmentally advanced wood treatment chemical products, suchas alkaline copper quaternary, or ACQ, and the phase out of chromated copperarsenate, or CCA, for residential use previously had a positive impact on theTimber Treatment Chemicals business, which is a leading supplier of thesehigher margin products. However, the market position of ACQ was negativelyimpacted in 2006 and the first quarter of 2007 by customer losses andcompetitive pricing pressure. In addition, demand for treated wood continues tobe negatively impacted by the increasing use of wood substitutes.  Theexpiration of the ACQ patent in May 2007 could also have a negative impact onthe market position of ACQ’s sales and margins.

·                     For 2006, themajor drivers of growth in the Clay-based Additives business, which suppliesspecialty rheology modifiers and additives, both clay-based and synthetic, to avariety of end-use markets, were the acquisition of Süd-Chemie’s rheologicaladditives and carbonless clay businesses, continued strength in oilfield salesand growth in additives for water-based coatings.  Growth in 2007 isexpected from strength in oilfield, coatings and inks sales.

·                     Raw materialcosts have increased in general in the Performance Additives segment since 2004and continue to trend upward. In the Color Pigments and Services business,selling price increases were initiated to partially offset the increases in rawmaterial and energy costs and we have implemented further price increases inthe beginning of 2007 to offset these costs. In 2006, the Timber TreatmentChemicals business experienced record high costs for copper, a primarycomponent in ACQ, and was unable to pass on these increased material costs tocustomers in 2006.  However, in the first quarter of 2007, selling priceincreases were implemented to partially offset raw material cost increases. Inthe Clay-based Additives business, price increases were implemented in 2006 andhave continued in the first quarter of 2007 in a majority of product lines topartially offset raw material cost increases. Further price increases areexpected in 2007 as needed to offset any additional increases in raw materialand energy costs.

***Titanium Dioxide Pigments***

·                     Demand forour titanium dioxide products in anatase grade is driven mainly by demand inthe synthetic fiber industry, while demand for titanium dioxide products inrutile grade and our functional additives is driven by demand in the coatings,paper and plastics industries.  While volumes and selling prices in thefiber anatase business increased in 2006, volumes and selling prices were lowerin the first quarter of 2007 and are expected to be down slightly throughout2007.  Our functional additives business increased in 2006 on higherselling prices and volumes.  In the first quarter of 2007, our functionaladditives business was down on lower volumes, partially offset by higherselling prices.  Growth in this business is expected in 2007 on higherselling prices.

·                     Throughout2006, we experienced pricing pressure from global suppliers in Asia,specifically Chinese suppliers related to titanium dioxide products in anatasegrade. We also experienced pricing pressures on our titanium products in rutilegrade. 

29

----

Sales of titanium dioxide products in rutile grade were down slightlyin 2006 as lower volumes were partially offset by higher selling prices. Although sales of titanium dioxide products in rutile grade were lower in thefirst quarter of 2007 on decreased selling prices and slightly lower volumes,we expect sales of these products to be up in 2007 on higher volumes.

***Advanced Ceramics***

·                     Demand forour ceramic medical devices is mainly tied to the aging population in Europeand the United States.  Although the volume of our products used inmedical device applications sold experienced double-digit growth each year from2001 through 2005, in 2006 some customers in the U.S. reduced their demand dueto high inventory levels and delayed approvals resulting in lowervolumes.  However, growth of our medical device applications increasedslightly in the first quarter of 2007 on higher volumes and is expected tocontinue to increase throughout the year.

·                     Sales ofceramic products for use in cutting tool products and mechanical systems werehigher in 2006 as volume increases were partially offset by the negative impactof pricing pressure from Asian competitors. Growth of ceramic products for usein cutting tool products and mechanical systems increased in the first quarterof 2007 and is expected to continue to increase throughout the year on highervolumes and increased market share. Selling prices in our electronic productsbusiness as well as for some Piezo applications were lower in 2006. In thefirst quarter of 2007, sales of our electronics products business were lowerprimarily on lower volumes and this is expected to continue throughout theyear.  Sales of our Piezo applications were higher in the first quarter of2007 from increased volumes and are expected to continue to increase throughout2007.

***Specialty Compounds***

·                     Our largestproduct line in the Specialty Compounds segment is wire and cable compounds.Sales within this product line are dependent upon the telecommunications marketand related sectors, specifically demand for high-end voice and datacommunication wire and cable, for which our Specialty Compounds segment is asignificant provider of sheathing materials. Sales for these wire and cableproducts were up slightly in 2006 and were higher in the first quarter of 2007due to the acquisition of the Megolon division of Scapa Group, plc. Growth is expected to continue throughout 2007 primarily due to the acquisitionof Megolon. Newly developed non-halogen products for wire and cable datacommunication, military and other applications have expanded business in NorthAmerica and created opportunities in Europe.

·                     Most of theother end-use markets for which Specialty Compounds’ products are usedgenerally track growth of gross domestic product, but many are also applicationspecific, such as automotive. Our net sales in medical, regulated packaging andconsumer/industrial thermoplastic elastomers were up in 2006 and the firstquarter of 2007 and we expect continued growth in these markets for 2007. Weare focusing more of our efforts towards increasing high margin specialtyproducts, in particular, thermoplastic elastomers, and less of our efforts inautomotive and footwear.

·                     The price ofammonium octamolybdate (“AOM”) and polyvinyl chloride (“PVC”) resin andplasticizers, key raw materials used in the production of wire and cableproducts, has increased since 2004. Selling price increases were successfullyinitiated in 2005 and 2006 to help offset the raw materials price increase. Rawmaterial prices were lower in the first quarter of 2007 and are not expected tobe as volatile this year.

***Electronics***

·                     Demand forour Electronics products generally follows the activity levels of semiconductorand printed circuit board manufacturers. The global semiconductor and printedcircuit board (“PCB”) markets are cyclical in nature. Worldwide sales ofsemiconductors increased in 2006 and in the first quarter of 2007 and areexpected to continue to rise in 2007 driven by strong demand for consumerelectronics, including cell phones and PC’s. The printed circuit board industryin the United States and Europe improved in 2006, while the market in Asiaexperienced significant growth during this period.  Volumes in ourelectronic chemicals business increased in 2006 and the first quarter of 2007,particularly in Asia, which provides nearly half of the global market. We expectthis trend to continue in 2007.

·                     The price ofcertain of our products is insulated to some degree from the effect of changesin the price of semiconductors and printed circuit boards due to the fact thatthe cost of these products is generally a small component of the cost of theend product. Despite this, we have experienced pricing pressure in certainbusinesses, particularly with respect to photomasks in Europe due to veryaggressive competition. We expect that this pricing pressure will continueduring 2007.

**GlobalExposure**

We operate ageographically diverse business. Of our 2006 net sales, 49% were shipments toEurope, 34% to North America (predominantly the United States) and 17% to therest of the world. For a geographic description of the origin of our net salesand location of our long-lived assets, see Note 4, “Segment Information” in our2006 Form 10-K.

We estimate that we soldto customers in more than 60 countries during this period. Currently, we serveour diverse and extensive customer base with 88 manufacturing facilities in 25countries. Consequently, we are exposed to global economic and politicalchanges, particularly currency fluctuations that could impact ourprofitability.

30

----

Our sales and productioncosts are mainly denominated in U.S. dollars or euros. Our results ofoperations and financial condition have been historically impacted by thefluctuation of the euro against our reporting currency, the U.S. dollar. Forthe three month period ended March 31, 2007, the average exchange rate of theeuro against the U.S. dollar was higher compared to the same period in 2006. Asa result, our net sales, gross profit and operating income were positivelyimpacted. Historically, however, our operating margins have not beensignificantly impacted by currency fluctuations because, in general, sales andcosts of products sold are generated or incurred in the same currency, subjectto certain exceptions.

**RawMaterials**

Raw materials constitutedapproximately 53% of our 2006 cost of products sold. We have a broad rawmaterial base, with the cost of no single raw material representing more than3% of our cost of products sold in 2006. Nonetheless, the significant pricefluctuations our raw materials have experienced in the past during periods ofhigh demand have had an adverse impact on our results of operations. Inparticular, higher prices for copper used in the Timber Treatment Chemicalsbusiness of our Performance Additives segment had a negative impact on resultsin 2006 and the first quarter of 2007. We cannot accurately predict the impactof any future price increases for raw materials or any raw material shortageson our business as a whole or in specific geographic regions. In addition, wemay not be able to pass on raw material price increases to our customers.

**EnergyCosts**

In 2006, energy purchasesrepresented approximately 5% of our cost of products sold. However, withincertain business lines, such as our Titanium Dioxide Pigments segment and theColor Pigments and Services and Clay-based Additives businesses of ourPerformance Additives segment, energy costs are more significant. The cost ofproducts sold for certain of our businesses, including Color Pigments andServices and Clay-based Additives, increases when the price of natural gas inNorth America rises. Natural gas prices were volatile and continued to increasein North America in 2006, but were relatively stable in the first quarter of2007. In contrast, natural gas prices in Europe, where our Titanium DioxidePigments segment is located, have historically been relatively stable, althoughprices were higher in 2006 and in the first quarter of 2007.

**IncomeTaxes**

The effective tax ratefor the first quarter of 2007 was 42.1% which is primarily a function offoreign rate differentials and the valuation allowance related to domesticearnings and their impact on the effective rate. In the first quarter of 2007,the worldwide valuation allowance increased by $7.3 million. The increase inthe valuation allowance was primarily due to an increase of $3.7 million indeferred tax assets associated with the Company’s losses and $3.6 million inother comprehensive income. The $3.7 million increase in the valuationallowance for the first quarter of 2007 impacted the effective tax rate.

**Acquisitions**

We recently announcedthat we have entered into a definitive agreement to acquire the global colorpigments business of Elementis plc for approximately $140 million.  This transaction includes facilities in theUnited States, the United Kingdom and China. We expect to incorporate the business into our Color Pigments andServices business unit, which is part of our Performance Additives segment.  The transaction is subject to approval by appropriateregulatory authorities.

**SpecialCharges and Credits**

During the periodspresented, we incurred certain special charges that includesystems/organization establishment expenses, restructuring and related charges,foreign exchange gains and losses and inventory write-up reversals. See “Itemsexcluded from Adjusted EBITDA” section in Note 4, “Segment Information,” for adiscussion of special charges and credits recorded in the three months endedMarch 31, 2007 and 2006.

**SpecialNote Regarding Non-GAAP Financial Measures**

A non-GAAP financialmeasure is generally defined by the SEC as one that purports to measurehistorical or future financial performance, financial position or cash flowsbut excludes or includes amounts that would not be so adjusted in the mostcomparable U.S. GAAP measure. From time to time in this management’s discussionand analysis, we disclose non-GAAP financial measures, primarily AdjustedEBITDA, as defined below.

**Definitionof Adjusted EBITDA**

The presentation ofconsolidated Adjusted EBITDA contained in this report is calculated using thedefinition set forth in the senior secured credit agreement as a basis andreflects management’s interpretations thereof. Adjusted EBITDA, which isreferred to under the senior secured credit agreement as “Consolidated EBITDA,”is defined in the senior secured credit agreement as consolidated earnings(which, as defined in the senior secured credit agreement, equals income (loss)before the deduction of income taxes of Rockwood Specialties Group, Inc. andthe Restricted Subsidiaries (as such term is defined in the senior securedcredit agreement), excluding extraordinary items) plus:

31

----

·                     interestexpense;

·                     depreciationexpense;

·                     amortizationexpense, including amortization of deferred financing fees;

·                     extraordinarylosses and non-recurring charges;

·                     non-cashcharges;

·                     losses onasset sales;

·                     restructuringcharges or reserves (including severance, relocation costs and one-timecompensation charges and costs relating to the closure of facilities);

·                     expenses paidby us or any of our subsidiaries in connection with the Dynamit NobelAcquisition, the senior secured credit agreement, the granting of liens underthe security documents (as such term is defined in the senior secured creditagreement), the indenture governing the 2014 Notes and the offering of the 2014Notes and any other related transactions;

·                     any expensesor charges incurred in connection with any issuance of debt or equitysecurities;

·                     any fees andexpenses related to permitted acquisitions;

·                     any deductionfor minority interest expense; and

·                     items arisingin connection with CCA litigation related to our Timber Treatment Chemicalsbusiness of our Performance Additives segment;

less:

·                     extraordinarygains and non-recurring gains;

·                     non-cashgains; and

·                     gains onasset sales,

in all cases, subject tocertain exclusions.

For presentation purposeswithin this report, we use the computation set forth in our senior securedcredit agreement as a basis which reflects management’s interpretationsthereof. Specifically, calculation of Adjusted EBITDA according to theindentures underlying our 2011 Notes and 2014 Notes excludes certainadjustments prescribed within the senior secured credit agreement. Given thatborrowings under the senior secured credit agreement are secured by most of ourassets and given that the calculation does not materially differ from thecalculation of Adjusted EBITDA for performance measurement purposes, we believethis is the most appropriate computation of Adjusted EBITDA to present.

**Management’sUses**

We use Adjusted EBITDA ona consolidated basis to assess our operating performance. We believe thisfinancial measure on a consolidated basis is helpful in highlighting trends inour overall business because the items excluded in calculating Adjusted EBITDAhave been deemed by management to have little or no bearing on our day-to-dayoperating performance. It is also the most significant criterion in ourcalculation of performance-based cash bonuses and our determination of whethercertain performance-based stock options vest, both of which are tied toAdjusted EBITDA targets.

We also use AdjustedEBITDA on a consolidated basis as a liquidity measure. We believe thisfinancial measure on a consolidated basis is important in analyzing ourliquidity because our senior secured credit agreement and indentures governingthe 2011 Notes and 2014 Notes contain financial covenants that are determinedbased on Adjusted EBITDA. These covenants are material terms of theseagreements, because they govern substantially all of our long-term debt, whichin turn represents a substantial portion of our capitalization. Non-compliancewith these financial covenants under our senior secured credit facilities—ourmaximum total leverage ratio and our minimum interest coverage ratio, inparticular—could result in the lenders requiring us to immediately repay allamounts borrowed. Any such acceleration could also lead to the noteholdersaccelerating the maturity of the 2011 Notes and the 2014 Notes. In addition, ifwe cannot satisfy these financial covenants in the indentures governing the2011 Notes and 2014 Notes, we cannot engage in certain activities, such asincurring additional indebtedness or making certain payments. Consequently,Adjusted EBITDA is critical to our assessment of our liquidity.

We also use AdjustedEBITDA on a segment basis as the primary measure used by our chief operatingdecision maker, our Chief 

32

----

Executive Officer, toevaluate the ongoing performance of our business segments and reporting units.On a segment basis, we define Adjusted EBITDA as operating income excludingdepreciation and amortization, certain non-cash gains and charges, certainother special gains and charges determined by our senior management to benon-recurring gains and charges and certain items deemed by our seniormanagement to have little or no bearing on the day-to-day operating performanceof our business segments and reporting units. The adjustments made to operatingincome directly correlate with the adjustments to net income in calculatingAdjusted EBITDA on a consolidated basis pursuant to the senior secured creditagreement, which reflects management’s interpretations thereof.

**Limitations**

Adjusted EBITDA haslimitations as an analytical tool, and should not be viewed in isolation and isnot a substitute for U.S. GAAP measures of earnings and cash flows. Materiallimitations associated with making the adjustments to our earnings and cashflows to calculate Adjusted EBITDA, and using this non-GAAP financial measureas compared to the most directly comparable U.S. GAAP financial measures,include:

·                     the cashportion of interest expense, net, income tax provision (benefit), andrestructuring as well as non-recurring charges related to securities issuance,acquisition activities, and systems/organization establishment, generallyrepresent charges (gains) which may significantly affect funds available to usein our operating, investing and financing activities;

·                     non-operatingforeign exchange gains (losses), although not immediately affecting cash usedin investing activities, may affect the amount of funds needed to service ourdebt if those currency impacts remain in place as we meet our future principalrepayment obligations; and

·                     depreciation,amortization, non-cash (gains) charges and impairment charges, though notdirectly affecting our current cash position, represent the wear and tearand/or reduction in value of the plant, equipment and intangible assets whichpermit us to manufacture and/or market our products; these items may beindicative of future needs for capital expenditures, for development oracquisition of intangible assets or relevant trends causing asset valuechanges.

An investor or potentialinvestor may find any one or all of these items important in evaluating ourperformance, results of operations, financial position and liquidity.Management compensates for the limitations of using non-GAAP financial measuresby using them only to supplement our U.S. GAAP results to provide a more completeunderstanding of the factors and trends affecting our business.

Adjusted EBITDA is not analternative to net income (loss) or income (loss) from continuing operationsbefore taxes and minority interest or operating income or cash flows fromoperating activities as calculated and presented in accordance with U.S. GAAP.You should not rely on Adjusted EBITDA as a substitute for any such U.S. GAAPfinancial measures. We strongly urge you to review the reconciliations ofAdjusted EBITDA to GAAP financial measures and other financial information, ineach case included elsewhere in this Annual Report. We also strongly urge younot to rely on any single financial measure to evaluate our business. Ourmeasure of Adjusted EBITDA may not be comparable to those of other companies.

**Resultsof Operations**

**ActualResults of Operations**

The following tablepresents the major components of our operations on an actual basis and AdjustedEBITDA (the reconciliation to net income is set forth in—Reconciliation of NetIncome to Adjusted EBITDA for the three months ended March 31, 2007 and 2006,including as a percentage of net sales, for the periods presented. See Note 4, “SegmentInformation,” for segment information and a reconciliation to income (loss)from continuing operations before taxes and minority interest on a segmentbasis.

33

----

|                                                                       | ** ** | **Three months ended** | ** ** |
|-----------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                            | ** ** | **March 31,**               | ** ** |
| **($ in millions)**                                         | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| **Statement  of operations data:**                                    | ** ** | ** **                       | ** ** | ** ** | ** ** |
| **Net  sales:**                                                       | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Specialty  Chemicals                                                  |       | $                                | 267.9      |   | $ | 228.1 |   |
| Performance  Additives                                                |       | 184.8                            |       | 182.5 |   |
| Titanium Dioxide  Pigments                                            |       | 116.1                            |       | 108.2 |   |
| Advanced  Ceramics                                                    |       | 105.5                            |       | 92.7 |   |
| Specialty  Compounds                                                  |       | 69.6                             |       | 63.2 |   |
| Electronics                                                           |       | 52.2                             |       | 49.4 |   |
| Total net sales                                                       |       | 796.1                            |       | 724.1 |   |
|                                                                  |       |                             |       |   |   |
| Gross profit                                                          |       | 257.0                            |       | 225.8 |   |
|                                                                  |       | 32.3                             | %          | 31.2 | % |
| Selling, general  and administrative expenses                         |       | 154.8                            |       | 140.6 |   |
|                                                                  |       | 19.4                             | %          | 19.4 | % |
| Restructuring  charges, net                                           |       | 4.5                              |       | 1.2 |   |
| Gain on sale of  assets                                               |       | (4.8                             | )          | (0.5 | ) |
| **Operating  income (loss):**                                         | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Specialty  Chemicals                                                  |       | 55.6                             |       | 39.2 |   |
|                                                                  |       | 20.8                             | %          | 17.2 | % |
| Performance  Additives                                                |       | 19.3                             |       | 24.1 |   |
|                                                                  |       | 10.4                             | %          | 13.2 | % |
| Titanium Dioxide  Pigments                                            |       | 12.1                             |       | 11.9 |   |
|                                                                  |       | 10.4                             | %          | 11.0 | % |
| Advanced  Ceramics                                                    |       | 18.9                             |       | 15.1 |   |
|                                                                  |       | 17.9                             | %          | 16.3 | % |
| Specialty  Compounds                                                  |       | 5.1                              |       | 5.3 |   |
|                                                                  |       | 7.3                              | %          | 8.4 | % |
| Electronics                                                           |       | 6.5                              |       | 3.5 |   |
|                                                                  |       | 12.5                             | %          | 7.1 | % |
| Corporate costs                                                       |       | (15.0                            | )          | (14.6 | ) |
| Total operating  income                                               |       | 102.5                            |       | 84.5 |   |
| **Other  income (expenses):**                                         | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Interest expense                                                      |       | (54.7                            | )          | (39.8 | ) |
| Interest income                                                       |       | 5.1                              |       | 1.4 |   |
| Refinancing  expenses                                                 |       | (0.9                             | )          | — |   |
| Foreign exchange  gain (loss), net                                    |       | 0.4                              |       | (2.9 | ) |
| Other, net                                                            |       | (0.1                             | )          | 1.6 |   |
| Income from  continuing operations before taxes and minority interest | ** ** | 52.3                             | ** ** | 44.8 | ** ** |
| Income tax  provision                                                 |       | 22.0                             |       | 18.3 |   |
| Income from  continuing operations before minority interest           |       | 30.3                             |       | 26.5 |   |
| Minority  interest in continuing operations                           |       | (1.1                             | )          | — |   |
| Net income from  continuing operations                                |       | 29.2                             |       | 26.5 |   |
| Income from  discontinued operations, net of tax                      |       | 0.5                              |       | 16.5 |   |
| Gain on sale of  discontinued operations, net of tax                  |       | 115.7                            |       | — |   |
| Minority  interest in discontinued operations                         |       | (0.1                             | )          | (3.0 | ) |
| Net income                                                            |       | $                                | 145.3      |   | $ | 40.0 |   |
| **Adjusted  EBITDA:**                                                 | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Specialty  Chemicals                                                  |       | $                                | 68.3       |   | $ | 51.4 |   |
|                                                                  |       | 25.5                             | %          | 22.5 | % |
| Performance  Additives                                                |       | 32.6                             |       | 33.3 |   |
|                                                                  |       | 17.6                             | %          | 18.2 | % |
| Titanium Dioxide  Pigments                                            |       | 22.4                             |       | 20.9 |   |
|                                                                  |       | 19.3                             | %          | 19.3 | % |
| Advanced  Ceramics                                                    |       | 28.8                             |       | 23.6 |   |
|                                                                  |       | 27.3                             | %          | 25.5 | % |
| Specialty  Compounds                                                  |       | 8.1                              |       | 7.3 |   |
|                                                                  |       | 11.6                             | %          | 11.6 | % |
| Electronics                                                           |       | 9.4                              |       | 8.6 |   |
|                                                                  |       | 18.0                             | %          | 17.4 | % |
| Corporate costs                                                       |       | (13.4                            | )          | (12.3 | ) |
| Total Adjusted EBITDA  (a)                                            |       | $                                | 156.2      |   | $ | 132.8 |   |

 

----

(a)   Thisamount does not include $1.8 million and $15.9 million for the three monthsended March 31, 2007 and 2006, respectively, of Adjusted EBITDA from the formerGroupe Novasep segment which was sold on January 9, 2007.  Total AdjustedEBITDA including these amounts was $158.0 million and $148.7 million for thethree months ended March 31, 2007 and 2006, respectively.

34

----

The following tablepresents the changes in the major components of our operations on a historicalbasis in dollars and percentages:
|                                                                           | ** ** | **Change: Three months ended March 31, 2007 versus 2006** | ** ** |
|---------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------|------------|
| ** **                                                                | ** ** | ** **                                                                                        | ** ** | **%** | ** ** | **FX** | ** ** | ** ** | ** ** |
| **($ in millions)**                                             | ** ** | **Total**                                                                                         | ** ** | **Change** | ** ** | **Effect (a)** | ** ** | **Organic** | ** ** |
| **Statement  of operations data:**                                        | ** ** | ** **                                                                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net  sales:**                                                           | ** ** | ** **                                                                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Specialty  Chemicals                                                      |       | $                                                                                                 | 39.8       |   | 17.4 | % | $ | 13.6 |   | $ | 26.2 |   |
| Performance  Additives                                                    |       | 2.3                                                                                               |       | 1.3 |   | 5.7 |   | (3.4 | ) |
| Titanium Dioxide  Pigments                                                |       | 7.9                                                                                               |       | 7.3 |   | 9.6 |   | (1.7 | ) |
| Advanced  Ceramics                                                        |       | 12.8                                                                                              |       | 13.8 |   | 7.9 |   | 4.9 |   |
| Specialty  Compounds                                                      |       | 6.4                                                                                               |       | 10.1 |   | 2.5 |   | 3.9 |   |
| Electronics                                                               |       | 2.8                                                                                               |       | 5.7 |   | 1.9 |   | 0.9 |   |
| Total net sales                                                           |       | 72.0                                                                                              |       | 9.9 |   | 41.2 |   | 30.8 |   |
|                                                                      |       |                                                                                              |       |   |   |   |   |   |   |
| Gross profit                                                              |       | 31.2                                                                                              |       | 13.8 |   | 13.4 |   | 17.8 |   |
| Selling, general  and administrative expenses                             |       | 14.2                                                                                              |       | 10.1 |   | 8.0 |   | 6.2 |   |
| Restructuring  charges                                                    |       | 3.3                                                                                               |       |   |   |   |   | 3.3 |   |
| Gain on sale of  assets                                                   |       | (4.3                                                                                              | )          |   |   |   |   | (4.3 | ) |
| Total operating  expenses                                                 |       | 13.2                                                                                              |       | 9.3 |   | 8.0 |   | 5.2 |   |
| **Operating  income (loss):**                                             | ** ** | ** **                                                                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Specialty  Chemicals                                                      |       | 16.4                                                                                              |       | 41.8 |   | 2.6 |   | 13.8 |   |
| Performance  Additives                                                    |       | (4.8                                                                                              | )          | (19.9 | ) | 0.4 |   | (5.2 | ) |
| Titanium Dioxide  Pigments                                                |       | 0.2                                                                                               |       | 1.7 |   | 1.0 |   | (0.8 | ) |
| Advanced  Ceramics                                                        |       | 3.8                                                                                               |       | 25.2 |   | 1.6 |   | 2.2 |   |
| Specialty  Compounds                                                      |       | (0.2                                                                                              | )          | (3.8 | ) | — |   | (0.2 | ) |
| Electronics                                                               |       | 3.0                                                                                               |       | 85.7 |   | 0.1 |   | 2.9 |   |
| Corporate costs                                                           |       | (0.4                                                                                              | )          | (2.7 | ) | (0.3 | ) | (0.1 | ) |
| Total                                                                     |       | 18.0                                                                                              |       | 21.3 |   | 5.4 |   | 12.6 |   |
| **Other  income (expenses):**                                             | ** ** | ** **                                                                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest expense                                                          |       | (14.9                                                                                             | )          | 37.4 |   | (1.9 | ) | (13.0 | ) |
| Interest income                                                           |       | 3.7                                                                                               |       | 264.3 |   | (0.3 | ) | 4.0 |   |
| Refinancing  expenses                                                     |       | (0.9                                                                                              | )          |   |   |   |   |   |   |
| Foreign exchange  gain (loss), net                                        |       | 3.3                                                                                               |       |   |   |   |   |   |   |
| Other, net                                                                |       | (1.7                                                                                              | )          |   |   |   |   |   |   |
| **Income  from continuing operations before taxes and minority interest** | ** ** | ** **                                                                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Specialty  Chemicals                                                      |       | 16.7                                                                                              |       |   |   |   |   |   |   |
| Performance  Additives                                                    |       | (4.0                                                                                              | )          |   |   |   |   |   |   |
| Titanium Dioxide  Pigments                                                |       | (2.3                                                                                              | )          |   |   |   |   |   |   |
| Advanced  Ceramics                                                        |       | 3.2                                                                                               |       |   |   |   |   |   |   |
| Specialty  Compounds                                                      |       | (2.4                                                                                              | )          |   |   |   |   |   |   |
| Electronics                                                               |       | 4.6                                                                                               |       |   |   |   |   |   |   |
| Corporate costs                                                           |       | (8.3                                                                                              | )          |   |   |   |   |   |   |
| Total                                                                     |       | 7.5                                                                                               |       |   |   |   |   |   |   |
| Income tax  provision                                                     |       | 3.7                                                                                               |       |   |   |   |   |   |   |
| Income from  continuing operations before minority interest               |       | 3.8                                                                                               |       |   |   |   |   |   |   |
| Minority  interest in continuing operations                               |       | (1.1                                                                                              | )          |   |   |   |   |   |   |
| Net income from  continuing operations                                    |       | 2.7                                                                                               |       |   |   |   |   |   |   |
| Income from  discontinued operations, net of tax                          |       | (16.0                                                                                             | )          |   |   |   |   |   |   |
| Gain on sale of  discontinued operations, net of tax                      |       | 115.7                                                                                             |       |   |   |   |   |   |   |
| Minority  interest in discontinued operations                             |       | 2.9                                                                                               |       |   |   |   |   |   |   |
| Net income                                                                |       | $                                                                                                 | 105.3      |   |   |   |   |   |   |   |
| **Adjusted  EBITDA:**                                                     | ** ** | ** **                                                                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Specialty  Chemicals                                                      |       | $                                                                                                 | 16.9       |   | 32.9 | % | $ | 3.2 |   | $ | 13.7 |   |
| Performance  Additives                                                    |       | (0.7                                                                                              | )          | (2.1 | ) | 1.0 |   | (1.7 | ) |
| Titanium Dioxide  Pigments                                                |       | 1.5                                                                                               |       | 7.2 |   | 1.9 |   | (0.4 | ) |
| Advanced  Ceramics                                                        |       | 5.2                                                                                               |       | 22.0 |   | 2.4 |   | 2.8 |   |
| Specialty  Compounds                                                      |       | 0.8                                                                                               |       | 11.0 |   | 0.2 |   | 0.6 |   |
| Electronics                                                               |       | 0.8                                                                                               |       | 9.3 |   | 0.3 |   | 0.5 |   |
| Corporate costs  and eliminations                                         |       | (1.1                                                                                              | )          | (8.9 | ) | (0.3 | ) | (0.8 | ) |
| Total Adjusted EBITDA                                                     |       | $                                                                                                 | 23.4       |   | 17.6 | % | $ | 8.7 |   | $ | 14.7 |   |

 

----

(a)   Theforeign exchange effect was calculated based on the change in the applicablerate, primarily the euro, to the U.S. dollar exchange rate for the applicableperiod.

35

----

***Three months ended March 31, 2007 compared to three monthsended March 31, 2006***

**Overview**

Net sales increased $72.0million in the first quarter of 2007 compared with the same period in the prioryear driven by strong demand in a number of our segments, particularly in ourSpecialty Chemicals segment, and the positive impact of currencychanges.   See further discussion by segment below.

We also had increasedoperating income and Adjusted EBITDA in the first quarter of 2007 compared withthe same period in the prior year primarily due to the sales increases notedabove. Operating income and Adjusted EBITDA were negatively impacted by higherraw material costs in most businesses, particularly from the impact of highercopper costs in our Timber Treatment Chemicals business in our PerformanceAdditives segment, higher zinc and other raw material costs in our SpecialtyChemicals segment and higher zinc costs in our Titanium Dioxide Pigmentssegment. In addition, higher selling, general and administrative expenses primarilyrelated to increased sales volumes and higher energy costs had an unfavorableeffect on operating income and Adjusted EBITDA.

Net income fromcontinuing operations increased $2.7 million in the first quarter of 2007compared with the same period in the prior year primarily due to the reasonsnoted above. This was partially offset by higher interest expense recorded inthe first quarter of 2007 compared to the same period in the prior year due toa decrease in mark-to-market gains on our interest rate and cross-currencyhedging instruments.

Income from discontinuedoperations, net of tax and minority interest, increased $102.6 million in thefirst quarter of 2007 compared with the same period in the prior year primarilydue to the recording of a gain of $115.7 million (net of taxes) on the sale ofGroupe Novasep in the first quarter of 2007, partially offset by income fromoperating the business and the tax benefit recorded in the first quarter of2006 related to the favorable treatment on the sale of Rohner AG.

Net income increased$105.3 million in the first quarter of 2007 compared with the same period inthe prior year primarily due to the reasons noted above.

**Netsales**

*SpecialtyChemicals*.  Net salesfor our Specialty Chemicals segment increased $39.8 million over the prioryear, primarily on higher volumes and selling prices. The impact of currencychanges of $13.6 million also had a favorable impact on net sales. Net sales inthe Surface Treatment business were favorably impacted by growth in most marketsand all regions, particularly in European automotive, general industrial andaerospace applications. In the Fine Chemicals business, increased volumes oflithium products and higher lithium specialties volumes to the pharmaceuticalindustry had a favorable impact on sales.

*PerformanceAdditives*.  Net salesfor our Performance Additives segment increased $2.3 million over the prioryear due to the positive impact of currency changes of $5.7 million, as well ashigher selling prices of $6.1 million. Higher construction volumes in Europe inour Color Pigments and Services business also had a favorable impact on netsales. The increase in net sales were partially offset by lower volumes of ACQproducts in our Timber Treatment Chemicals business, lower construction volumesin North America in our Color Pigments and Services business and lower volumesto the oilfield and carbonless paper markets in our Clay-based Additivessegment.

*TitaniumDioxide Pigments*. Net sales for our Titanium Dioxide Pigmentssegment increased $7.9 million over the prior year due to the positive impactof currency changes of $9.6 million, as well as higher selling prices forfunctional additives. This was partially offset by lower volumes of titaniumdioxide products in anatase and rutile grade, as well as functional additives.

*AdvancedCeramics*. Net sales for our Advanced Ceramics segmentincreased $12.8 million over the prior year primarily due to the positiveimpact of currency changes of $7.9 million and increased volumes. The increasedvolumes were due to higher volumes in most businesses, particularly inmechanical systems, Piezo, cutting tool and medical applications, partiallyoffset by lower selling prices of $2.2 million.

*SpecialtyCompounds*. Net sales for our Specialty Compounds segmentincreased $6.4 million over the prior year primarily due to higher volumesresulting from an acquisition made in October 2006 in the wire and cablebusiness and the positive impact of currency changes of $2.5 million. This waspartially offset by lower selling prices of $1.2 million.

*Electronics*.Net sales for our Electronics segment increased $2.8 million over the prioryear primarily due to the positive impact of currency changes of $1.9 millionand increased volumes in our Electronic Chemicals businesses in all regions onsales to the printed circuit board and semiconductor markets.

**Grossprofit**

Gross profit increased$31.2 million over the prior year primarily due to the sales increases notedabove, in particular selling price increases, productivity improvements and thepositive impact of currency changes of $13.4 million. This was partially offsetby raw 

36

----

material cost increases,particularly from the impact of higher copper costs in our Timber TreatmentChemicals business in the Performance Additives segment, higher zinc costs inthe Titanium Dioxide segment, and higher zinc and other raw material costs inthe Specialty Chemicals segment, and higher energy costs. Gross profit as apercentage of net sales was 32.3% in the first quarter of 2007 versus 31.2% inthe first quarter of 2006.

**Selling,general and administrative expenses**

Selling, general andadministrative expenses, or SG&A, increased $14.2 million over the prioryear primarily due to the impact of currency changes of $8.0 million.  HigherSG&A costs were also recorded in a number of our segments related toincreased sales volumes. SG&A expenses as a percentage of net sales were19.4% in the first quarter of 2007 and 2006.

**Restructuringcharges, net**

We recorded $4.5 millionof restructuring charges in the first quarter of 2007 primarily related tofacility closure costs in the Electronics segment. We recorded $1.2 million ofrestructuring charges in the first quarter of 2006 for miscellaneousrestructuring actions in the Specialty Chemicals, Performance Additives andElectronics segments for miscellaneous headcount reductions and facilityclosures. See Note 11, “Restructuring Liability,” for further details.

**Gain onsale of assets**

We recorded gains of $4.8million and $0.5 million for the three months ended March 31, 2007 and 2006,respectively, related to asset sales.  In the first quarter of 2007, wesold our United States Wafer Reclaim business and reported a gain of $4.3million.

**Operatingincome**

*SpecialtyChemicals*. Operating income for our Specialty Chemicalssegment increased $16.4 million primarily due to higher sales in both theSurface Treatment and Fine Chemicals businesses and the positive impact ofcurrency changes of $2.6 million. This increase was partially offset by higherraw material costs of $6.4 million primarily related to zinc and other rawmaterials and higher selling, general and administrative expenses of $3.2million primarily related to the increased sales volumes.

*PerformanceAdditives*. Operating income decreased $4.8 million over theprior year primarily from higher raw material costs of $5.3 million,particularly copper costs in the Timber Treatment Chemicals business, higherdepreciation and amortization costs of $4.5 million primarily due to theViance, LLC joint venture formed in January 2007 and the lower sales volumesnoted above.  The above decreases in operating income were partiallyoffset by increased construction volumes in Europe in our Color Pigments andServices business, higher selling prices and an inventory write-up reversalcharge of $0.8 million recorded in the first quarter of 2006.

*TitaniumDioxide Pigments*. Operating income for our Titanium DioxidePigments segment increased $0.2 million over the prior year due to the positiveimpact of currency changes of $1.0 million and higher selling prices forfunctional additives, partially offset by lower volumes of titanium dioxideproducts in anatase and rutile grade, as well as functional additives, andhigher energy and raw material costs of $1.2 million and $0.9 million,respectively. Higher depreciation and amortization costs of $1.3 million alsohad an unfavorable impact on operating income.

*AdvancedCeramics*. Operating income for our Advanced Ceramics segmentincreased $3.8 million over the prior year primarily due to productivityimprovements and increased sales in most businesses, particularly fromincreased volumes in mechanical systems, piezo, cutting tool and medicalapplications. Currency changes of $1.6 million also had a favorable impact onoperating income. This increase was partially offset by lower selling prices of$2.2 million and increased depreciation and amortization costs of $1.4 million.

*SpecialtyCompounds*. Operating income decreased $0.2 million due to theimpact of lower selling prices of $1.2 million, increased depreciation andamortization costs of $0.7 million and higher costs associated with anacquisition made in October 2006.  This decrease was partially offset byhigher sales volumes and lower raw material costs of $1.8 million primarilyrelated to price declines for PVC resin.

*Electronics*.Operating income increased $3.0 million over the prior year primarily due tohigher volumes in our Electronic Chemicals businesses in all regions on salesto the printed circuit board and semiconductor markets and gains on asset salesof $4.8 million recorded in the first quarter of 2007 primarily from the saleof our U.S. Wafer Reclaim business in February 2007.  This was partiallyoffset by higher restructuring costs of $2.9 million primarily related tofacility closure costs.

**Otherincome (expenses)**

*Interestexpense*. Interest expense increased $14.9 million in thefirst quarter of 2007 compared to the same period in the prior year. The firstquarter of 2007 and 2006 included losses of $2.8 million and gains of $10.7million, respectively, representing the movement in the mark-to-marketvaluation of our interest rate and cross-currency hedging instruments as wellas $2.4 million and $2.3 million, respectively, of amortization expense relatedto deferred financing costs. The remaining increase of $1.3 million wasprimarily due to higher interest rates.

*Interestincome*.  Interestincome increased $3.7 million in the first quarter of 2007 compared to the sameperiod in the prior year 

37

----

primarily related tointerest earned on the net cash proceeds received from the sale of GroupeNovasep in January 2007.

*Refinancingexpenses*. In March 2007, we expensed $0.9 million related tothe fourth amendment of the senior secured credit agreement resulting in a 50basis point reduction on our new tranche G term loans.

*Foreignexchange gain (loss), net*. In the first quarter of 2007, wehad foreign exchange gains of $0.4 million compared to foreign exchange lossesof $2.9 million recorded in the same period in the prior year.  In thefirst quarter of 2006, the euro strengthened from the beginning of the quarterto the end of the quarter causing a loss related to the unhedged portion of oureuro-denominated debt at one of our U.K. subsidiaries. The change from theprior year is primarily related to lower euro-denominated debt levels at ourU.K. subsidiaries.

*Other,net*. For the first quarter of 2006, we recorded $1.6 millionof income in connection with the correction of an immaterial error related to apreviously unrecorded asset in the Titanium Dioxide Pigments segment.

**Provisionfor income taxes**

The effective income taxrate for the first quarter of 2007 was 42.1%. We recorded an income taxprovision of $22.0 million for the first quarter of 2007. The effective incometax rate compared to the federal statutory rate was negatively impacted by anincrease in the valuation allowance related to U.S. operations. The effectiveincome tax rate for the first quarter of 2006 of 40.8% was impacted by foreignrate differentials offset by the U.S. valuation allowance.

**Minorityinterest in continuing operations**

Minority interestrepresents the minority interest portion of the Viance, LLC joint venture thatwas completed in January 2007 between our Timber Treatment Chemicals businessand Rohm and Haas Company.

**Netincome from continuing operations**

Net income fromcontinuing operations for the first quarter of 2007 was $29.2 million ascompared to net income from continuing operations of $26.5 million for thefirst quarter of 2006 for the reasons described above.

**Incomefrom discontinued operations, net of tax**

Income from discontinuedoperations, net of tax decreased to $0.5 million for the first quarter of 2007compared to income of $16.5 million for the first quarter of 2006 due to incomeearned from the segment in the first quarter of 2006 and the tax benefitrecorded in the first quarter of 2006 related to the favorable treatment on thesale of Rohner AG.  As noted above, the Groupe Novasep segment was sold onJanuary 9, 2007.

**Gain onsale of discontinued operations, net of tax**

Gain on sale ofdiscontinued operations, net of tax was $115.7 million for the first quarter of2007 as a result of the sale of Groupe Novasep.

**MinorityInterest in discontinued operations**

Minority interest indiscontinued operations represents the minority interest portion of GroupeNovasep’s net income for the first quarter of 2007 and 2006.

**Netincome**

Net income for the firstquarter of 2007 was $145.3 million as compared to net income of $40.0 millionfor the first quarter of 2006 for the reasons described above.

**AdjustedEBITDA**

*SpecialtyChemicals*. Adjusted EBITDA for our Specialty Chemicalssegment increased $16.9 million primarily due to higher sales in both theSurface Treatment and Fine Chemicals businesses and the positive impact ofcurrency changes of $3.2 million. This increase was partially offset by higherraw material costs and higher selling, general and administrative expenses asdiscussed above in operating income.

*PerformanceAdditives*. Adjusted EBITDA for our Performance Additivessegment decreased $0.7 million over the prior year primarily from higher rawmaterial costs and lower sales volumes, partially offset by higher sellingprices and the positive impact of currency changes of $1.0 million.  Seediscussion above in operating income for further details.

*TitaniumDioxide Pigments*. Adjusted EBITDA for our Titanium DioxidePigments segment increased $1.5 million over the prior year due to the positiveimpact of currency changes of $1.9 million and higher selling prices forfunctional additives.  Excluding the impact of currency changes, AdjustedEBITDA was lower primarily from lower sales volumes and higher energy and rawmaterial costs.  See 

38

----

discussion above inoperating income for further details.

*AdvancedCeramics*. Adjusted EBITDA for our Advanced Ceramics segmentincreased $5.2 million over the prior year primarily due to productivityimprovements, increased sales and the positive impact of currency changes of$2.4 million. This increase was partially offset by lower selling prices. See discussion above in operating income for further details.

*SpecialtyCompounds*. Adjusted EBITDA increased $0.8 million primarilydue to higher sales volumes and lower PVC resin raw material costs.  Thiswas partially offset by lower selling prices and higher costs associated withan acquisition made in October 2006.

*Electronics*.Adjusted EBITDA increased $0.8 million over the prior year primarily due tohigher volumes in our Electronic Chemicals businesses in all regions on salesto the printed circuit board and semiconductor markets and the positive impactof currency changes of $0.3 million.

*Corporate*.Adjusted EBITDA loss at Corporate increased $1.1 million primarily due tohigher Corporate costs to meet the requirements of being a public company.

*Discontinuedoperations*. Adjusted EBITDA from discontinued operationsdecreased $14.1 million over the prior year primarily due to the sale of theGroupe Novasep segment on January 9, 2007.

***Reconciliation of Net Income to Adjusted EBITDA***

Because we view AdjustedEBITDA on both a consolidated basis and segment basis as an operatingperformance measure, we use net income as the most comparable U.S. GAAP measureon a consolidated basis. The following table, which sets forth the applicablecomponents of Adjusted EBITDA, presents a reconciliation of net income toAdjusted EBITDA on a consolidated basis:
|                                                                       | ** ** | **Three months ended** | ** ** |
|-----------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                            | ** ** | **March 31,**               | ** ** |
| **($ in millions)**                                         | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| Net income                                                            |       | $                                | 145.3      |   | $ | 40.0 |   |
| Income from  discontinued operations, net of tax                      |       | (0.5                             | )          | (16.5 | ) |
| Gain on sale of  discontinued operations, net of tax                  |       | (115.7                           | )          | — |   |
| Minority  interest in discontinued operations                         |       | 0.1                              |       | 3.0 |   |
| Net income from  continuing operations                                |       | 29.2                             |       | 26.5 |   |
| Income tax  provision                                                 |       | 22.0                             |       | 18.3 |   |
| Minority  interest in continuing operations                           |       | 1.1                              |       | — |   |
| Income from continuing operations before taxes and minority  interest |       | 52.3                             |       | 44.8 |   |
| Interest expense  (a)                                                 |       | 54.7                             |       | 39.8 |   |
| Interest income                                                       |       | (5.1                             | )          | (1.4 | ) |
| Depreciation and  amortization                                        |       | 53.2                             |       | 43.7 |   |
| Restructuring  and related charges                                    |       | 4.5                              |       | 1.2 |   |
| CCA litigation  defense costs                                         |       | 0.1                              |       | 0.3 |   |
| Systems/organization  establishment expenses                          |       | 0.9                              |       | 1.9 |   |
| Cancelled  acquisition and disposal costs                             |       | 0.1                              |       | 0.6 |   |
| Costs incurred  related to debt modifications                         |       | 0.9                              |       | — |   |
| Inventory  write-up reversal                                          |       | —                           |       | 0.8 |   |
| Gain on sale of  assets                                               |       | (4.8                             | )          | (0.5 | ) |
| Foreign exchange  (gain) loss                                         |       | (0.4                             | )          | 2.9 |   |
| Other                                                                 |       | (0.2                             | )          | (1.3 | ) |
| Total Adjusted  EBITDA (b)                                            |       | $                                | 156.2      |   | $ | 132.8 |   |

 

----

(a)           Includes losses of $2.8 million andgains $10.7 million for the three months ended March 31, 2007 and 2006,respectively, representing the movement in the mark-to-market valuation of theCompany’s interest rate and cross-currency hedging instruments.

(b)           This amount does not include $1.8million and $15.9 million for the three months ended March 31, 2007 and 2006,respectively, of Adjusted EBITDA from the former Groupe Novasep segment whichwas sold on January 9, 2007. Total Adjusted EBITDA including these amounts was$158.0 million and $148.7 million for the three months ended March 31, 2007 and2006, respectively.

39

----

**Liquidityand Capital Resources**

**CashFlows**

*Unlessotherwise noted, all amounts below which are denominated in currencies otherthan the U.S. dollar are converted at the Friday, March 30, 2007 exchange rate.*

*OperatingActivities*.  Net cashprovided by operating activities was $70.7 million and $47.6 million for thethree months ended March 31, 2007 and 2006, respectively. Net cash fromoperating activities increased in 2007 primarily from lower cash interestexpense and higher operating income, partially offset by higher operatingworking capital.

*InvestingActivities*. Net cash provided by investing activities was$463.3 million for the three months ended March 31, 2007. Net cash used in investingactivities was $43.1 million for the three months ended March 31, 2006. Netcash from investing activities increased in 2007 primarily due to the proceedsfrom the sale of the Groupe Novasep segment and the proceeds received from theformation of the Viance, LLC joint venture in the Performance Additivessegment. For the three months ended March 31, 2006, net cash used in investingactivities was primarily comprised of capital expenditures.

*FinancingActivities*. Net cash used in financing activities was $66.6million and $62.2 million for the three months ended March 31, 2007 and 2006,respectively, and was comprised of scheduled payments for long-term debt.

**Liquidity**

Our primary source ofliquidity has been and will continue to be cash generated from the operationsof our subsidiaries. In addition, the following events are also sources ofliquidity:

·                    On January 2,2007, our wholly-owned subsidiary and Rohm and Haas Company formed Viance, LLC,a joint venture company. We received cash proceeds of $76.6 million and usedapproximately $1.0 million to pay fees and expenses associated with thistransaction. A total amount of $9.0 million from both parties was designated asa working capital contribution to the joint venture. The remainder was used forgeneral corporate purposes.

·                    On January 9,2007, we sold our Groupe Novasep subsidiary. We received net cash proceeds of$426.2 million in the first quarter of 2007. We expect to incur additionalprofessional fees of approximately $2.9 million related to this sale.

·                    On April 13,2007, we provided notice that we have elected to redeem our outstanding 10 5/8%Senior Subordinated Notes due 2011 in the aggregate principal amount of$273.4 million, and as such these Notes were redeemed on May 15,2007.  In connection with this repayment, redemption premiums of$14.5 million and accrued and unpaid interest of $14.5 million to theredemption date were paid. We entered into the fourth amendment of our seniorsecured credit agreement on March 23, 2007 to, among other things, permit thisredemption without a concurrent term loan repayment. As a result of theredemption, the Indenture, dated as of July 23, 2003, among RockwoodSpecialties, the Guarantors named herein and The Bank of New York, as Trustee,as supplemented by the Supplemental Indenture, dated as of July 31, 2004,among Rockwood Specialties, the Guarantors named herein and The Bank of NewYork, as Trustee (collectively, the “Indenture”), governing the 2011 Notes, wasterminated.

We expect the interest savings associated with the reduction of debt tolargely offset the historic cash flow from the Groupe Novasep subsidiary.

·                    On February12, 2007, we completed the sale of our United States Wafer Reclaim business forapproximately $11.0 million in cash and long-term notes receivable. Theproceeds were used for general corporate purposes.

Our primary liquidityrequirements are working capital, debt service, capital expenditures and acquisitions.Our debt service requirements and other contractual obligations and commitmentsover the next several years are significant and are substantially higher thanhistorical amounts. We believe that our currently available sources ofliquidity will be sufficient for these needs. Furthermore, any future majoracquisitions, business combinations or similar transactions will likely requireadditional capital resources. If our present operating performance and currentmarket conditions continue, we believe that such resources will be available tous for certain transactions. We would need access to alternative sources ofliquidity for larger acquisitions such as through additional borrowings orother sources, and we may not have access to these sources for a variety ofreasons. See Item 1, “Business,” and Item1A, “Risk Factors” in our 2006 Form10-K.

We believe that based oncurrent and anticipated levels of operations and conditions in our industry andmarkets, cash flows from operations and borrowings available under ourrevolving credit facility will be adequate for 2007 and the foreseeable futureto make required payments of principal and interest on our debt and fund ourworking capital and capital expenditure requirements. We are taking actions to reducecosts and exit unprofitable businesses, in part to improve our long-termliquidity.  We expect this to further improve our short and long-termliquidity. If our cash flow from operations and borrowings under our revolvingcredit facility are insufficient to fund our currently existing liquidityrequirements, we may be forced to use other means available to us, such asreduce or delay capital expenditures and seek additional capital. We may nothave adequate capital for future acquisitions, business combinations or similartransactions.

40

----

As of March 31, 2007, wehad actual total indebtedness of $2,785.5 million.  As of March 31, 2007,the revolving credit facility under the senior secured credit facilitiesprovided for additional borrowings of up to $222.7 million, after giving effectto $27.3 million of letters of credit issued on our behalf. As of March 31,2007, there were no outstanding borrowings under the revolving credit facility.

As of March 31, 2007, wehad cash and cash equivalents of $491.4 million primarily from the net cashproceeds received from the sale of Groupe Novasep in January 2007.

*Seniorsecured credit facilities*. The senior secured creditfacilities, as amended, consist of:

·                    tranche A-1term loans in an aggregate principal amount of €32.3 million (or $43.1million at March 31, 2007) and tranche A-2 term loans in an aggregate principalamount of €140.6 million (or $187.7 million at March 31, 2007), each maturingon July 30, 2011 and bearing interest at Adjusted EURIBOR plus 2.25%;

·                    tranche E termloans in an aggregate principal amount of $1,122.1 million at March 31, 2007,maturing on July 30, 2012 and bearing interest at the Company’s option ofeither (i) Adjusted LIBOR plus 2.00% or (ii) ABR plus 0.75%;

·                    tranche G termloans in an aggregate principal amount of €269.3 million (or $359.6 million atMarch 31, 2007) maturing on July 30, 2012 and bearing interest of AdjustedLIBOR plus 2.25%; and

·                    a revolvingcredit facility in an aggregate principal amount of $250.0 million maturing onJuly 30, 2010, bearing interest at the Company’s option of either (i)Adjusted LIBOR plus 2.25% or (ii) ABR plus 1.00%. As of March 31, 2007, we hadno borrowings outstanding under this facility and had outstanding letters ofcredit of $27.3 million that reduced our availability under the creditfacility.

The U.S. dollarequivalents of term loans denominated in euros are shown based on the exchangerate on Friday, March 30, 2007 of €1.00= $1.3354. In each case, the interestrates per year are subject to step-downs determined by reference to aperformance test. Adjusted LIBOR is the London inter-bank offered rate adjustedfor statutory reserves. ABR is the alternate base rate, which is the highest ofCredit Suisse’s prime rate and the federal funds effective rate plus 0.5%.Tranche A-1 and A-2 term loans are payable in January and July of eachyear at escalating percentages of the original principal amount. Tranche E andtranche G term loans are payable in January and July of each year at amountsequal to 0.5% of the principal amount of the former tranche D term loans andtranche F term loans, respectively, with the remainder due at the finalmaturity date.

The Company’s borrowings andthe borrowings of Rockwood Specialties Limited under the senior secured creditfacilities are guaranteed and secured by assets and pledges of capital stock.

In addition to thefinancial covenants described below under “Covenant Compliance,” the Company’ssenior secured credit facilities contain various affirmative and restrictivecovenants. The restrictive covenants limit our ability to, among other things,incur indebtedness and other liabilities; create liens; merge or consolidate;dispose of assets; make investments; pay dividends and make payments toshareholders; make payments on certain indebtedness or to amend documentsrelated to certain indebtedness and to enter into sale leaseback transactions.In connection with the fourth amendment of our senior secured credit agreement,substantially all of the baskets relating to the above restrictions were reset.

*2011Notes and 2014 Notes*. The Company’s 2011 Notes had anaggregate principal amount of $273.4 million at March 31, 2007, and mature onMay 15, 2011 and the 2014 Notes have an aggregate principal amount of€375.0 million ($500.8 million at March 31, 2007) in the case of the Euro notesand $200.0 million in the case of the U.S. Dollar notes, and mature on November 15,2014. In connection with the IPO, $101.6 million, or 27%, of the 2011 Noteswere redeemed. Interest on both the 2011 Notes and 2014 Notes is payablesemi-annually on May 15 and November 15. Interest on the 2011 Notesaccrues at the rate of 10.625% per year, and interest on the 2014 Notes accruesat the rate of 7.625% in the case of Euro notes and 7.500% in the case of U.S.Dollar notes. Certain of our domestic subsidiaries guarantee the 2011 Notes and2014 Notes on a senior subordinated unsecured basis.  As noted above, wehave redeemed our outstanding 2011 Notes on May 15, 2007.

The 2011 Notes and 2014Notes contain various affirmative and restrictive covenants. The restrictivecovenants limit our ability, and the ability of our restricted subsidiaries,to, among other things, incur or guarantee additional indebtedness (asdescribed below under “Covenant Compliance”), pay dividends or make otherequity distributions or repurchase capital stock, make investments or otherrestricted payments, create liens, transfer or sell assets, restrict dividendsor other payments to us, engage in transactions with affiliates, and merge orconsolidate with other companies or sell substantially all of our assets.

*Covenantcompliance.* In addition to the affirmative and restrictivecovenants, the senior secured credit agreement contains the following financialcovenants that are determined based on our Adjusted EBITDA, which reflectsmanagement’s interpretations thereof:

·                    a maximumtotal leverage ratio: for the twelve-month period ended March 31, 2007, net debt(total debt plus capital lease obligations, minus cash up to a maximum of$100.0 million) to Adjusted EBITDA must be less than 5.75 to 1; for suchperiod, our ratio equaled 4.58 to 1; and

41

----

·                    a minimuminterest coverage ratio: for the twelve-month period ended March 31, 2007,Adjusted EBITDA to cash interest expense (interest expense, net excludingdeferred debt issuance cost amortization and the movements in the mark-tomarket value of our interest rate and cross-currency interest rate derivatives)must be at least 1.75 to 1; for such period, our ratio equaled 3.02 to 1.

Please see Item 2,Management’s Discussion and Analysis of Financial Condition and Results ofOperations—”Definition of Adjusted EBITDA,” for a discussion of the definitionof Adjusted EBITDA used in calculating our financial covenants.

These covenants arematerial terms of the senior secured credit agreement. Non-compliance withthese covenants or other defaults could result in a default under the seniorsecured credit agreement and the lenders could elect to declare all amountsborrowed immediately due and payable. Because the indentures governing the 2011Notes and the 2014 Notes define an event of default to include, among otherthings, a default under any other debt obligation in excess of $35.0 millionthat could cause the acceleration of such obligation, any acceleration underthe senior secured credit agreement would also result in a default under theindentures governing these notes, which could lead to the note holders electingto declare the principal, premium, if any, and interest on the then outstandingnotes immediately due and payable. The senior secured credit agreement containsa similar cross default provision for indebtedness in excess of $30.0 million,therefore, a default under the indentures governing the 2011 Notes and 2014Notes or other indebtedness may likewise cause the lenders to declare theprincipal and interest on the outstanding senior secured credit facilitiesimmediately due and payable.

The indentures governingthe 2011 Notes and 2014 Notes prohibit us from incurring additional debt,subject to certain permitted incurrences, unless the fixed charge coverageratio, which is the ratio of Adjusted EBITDA (as defined therein excludingcertain adjustments permitted under the senior secured credit agreement) tofixed charges (as defined therein), for the most recently ended four fiscalquarters is at least 2.00 to 1. In addition, the indentures prohibit us frommaking restricted payments (such as dividends or other equity distributions,repurchases of capital stock or restricted investments), subject to certainpermitted payments, unless, among other things, the fixed charge coverage ratiofor the most recently ended four fiscal quarters is at least 2.00 to 1. For thefour-fiscal quarter period ended March 31, 2007, the fixed charge coverageratio equaled 3.02 to 1. This covenant is a material term of the indenturesgoverning the 2011 Notes and 2014 Notes.

We were in compliancewith all of the above covenants as of March 31, 2007 and December31, 2006.

Given our use of AdjustedEBITDA (see “Special Note Regarding Non-GAAP Financial Measures” for thedefinition of Adjusted EBITDA and management’s uses of Adjusted EBITDA) as aliquidity measure, the following table presents a reconciliation of net cashprovided by operating activities to Adjusted EBITDA:
|                                                                                                                        | ** ** | **Three months ended** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                             | ** ** | **March 31,**               | ** ** |
| **($ in millions)**                                                                                          | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| Net cash  provided by operating activities from continuing operations                                                  |       | $                                | 69.1       |   | $ | (5.8 | ) |
| Changes in  assets and liabilities, net of the effect of foreign currency translation and  acquisitions                |       | 25.0                             |       | 78.5 |   |
| Current portion  of income tax provision                                                                               |       | 12.1                             |       | 10.9 |   |
| Interest  expense, net, excluding amortization of deferred financing costs and unrealized  losses/gains on derivatives |       | 44.4                             |       | 46.8 |   |
| Restructuring  and related charges                                                                                     |       | 4.5                              |       | 1.2 |   |
| CCA litigation  defense costs                                                                                          |       | 0.1                              |       | 0.3 |   |
| Systems/organization  establishment expenses                                                                           |       | 0.9                              |       | 1.9 |   |
| Cancelled  acquisition and disposal costs                                                                              |       | 0.1                              |       | 0.6 |   |
| Cost incurred  related to debt modifications                                                                           |       | 0.9                              |       | — |   |
| Inventory  write-up reversal                                                                                           |       | —                           |       | 0.8 |   |
| Bad debt  provision                                                                                                    |       | (0.6                             | )          | (0.6 | ) |
| Gain on sale of  assets                                                                                                |       | (0.1                             | )          | (0.5 | ) |
| Other                                                                                                                  |       | (0.2                             | )          | (1.3 | ) |
| Total Adjusted  EBITDA                                                                                                 |       | $                                | 156.2      |   | $ | 132.8 |   |

 

***Contractual Obligations***

The Company is obligatedto make future payments under various contracts such as debt agreements(including scheduled cash interest payments), operating lease agreements, andunconditional purchase obligations. A discussion of these contractualobligations is included in the Company’s 2006 Form10-K. As noted above, theCompany provided notice that it had elected to redeem its outstanding 2011Notes in the aggregate principal amount of $273.4 million, and as such theseNotes were redeemed on May 15, 2007. As a result, this amount has been 

42

----

classified as a currentliability as of March 31, 2007. In addition, the Company adopted FIN 48, “*Accounting for Uncertainty in Income Taxes—AnInterpretation of FASB Statement No. 109,*” in the first quarterof 2007. As a result of the implementation of FIN 48, the Companyrecognized a $1.0 million increase in the liability for unrecognized taxbenefits. The total amount of unrecognized tax benefits as of March 31,2007 was $44.7 million and have been classified as non-current income taxliabilities in the condensed consolidated balance sheets (see Note 9, “IncomeTaxes,” for further details). Except for the reclassification of the 2011 Notesand the adoption of FIN 48, there have been no other significant changesto these contractual obligations as of March 31, 2007.

***Capital Expenditures***

Rockwood’s capitalexpenditures in the first quarter of 2007 consisted primarily of replacementsof worn, obsolete or damaged equipment as well as investments in new equipment,mostly for our Advanced Ceramics, Specialty Chemicals and Titanium DioxidePigments segments.

For the three monthsended March 31, 2007 and 2006, our capital expenditures, excluding capitalleases, were $47.3 million and $37.2 million, respectively. Capitalexpenditures for each of our reporting segments is provided in the followingtable:
| ** **                              | ** ** | ** **    | ** ** | ** **      | ** ** | **Titanium** | ** ** | ** **   | ** ** | ** **    | ** ** | ** **      | ** ** | ** **    | ** ** | ** **       | ** ** |
|-----------------------------------------|------------|---------------|------------|-----------------|------------|--------------|------------|--------------|------------|---------------|------------|-----------------|------------|---------------|------------|------------------|------------|
| ** **                              | ** ** | **Specialty** | ** ** | **Performance** | ** ** | **Dioxide**  | ** ** | **Advanced** | ** ** | **Specialty** | ** ** | ** **      | ** ** | ** **    | ** ** | ** **       | ** ** |
| **($ in millions)**           | ** ** | **Chemicals** | ** ** | **Additives**   | ** ** | **Pigments** | ** ** | **Ceramics** | ** ** | **Compounds** | ** ** | **Electronics** | ** ** | **Corporate** | ** ** | **Consolidated** | ** ** |
| Three months  ended March 31, 2007 |       | $             | 15.4       |            | $          | 7.1          |       | $            | 12.3       |          | $          | 8.7             |       | $             | 1.4        |             | $          | 1.8 |   | $ | 0.6 |   | $ | 47.3 |   |
| Three months ended March 31,  2006 |       | 10.3          |       | 5.8             |       | 10.4         |       | 5.3          |       | 1.8           |       | 1.7             |       | 1.9           |       | 37.2             |       |
|                                         |            |               |            |                 |            |              |            |              |            |               |            |                 |            |               |            |                  |            |  |  |  |  |  |  |  |  |

 

We may incur future costsfor capital improvements and general compliance under Safety, Health andEnvironmental (“SHE”) laws. For the year ended December 31, 2006, our capitalexpenditures for SHE matters totaled approximately $35.3 million, excludingcosts to maintain and repair pollution control equipment. For 2007, we estimatecapital expenditures for compliance with SHE laws to be at similar levels;however, because capital expenditures for these matters are subject to changesin and new SHE laws, we cannot provide assurance that our recent expenditureswill be indicative of future amounts required to comply with these laws.

***Foreign currency related transactions***

As of March 31, 2007,based on the Friday, March 30, 2007 exchange rate of €1.00= $1.3354, $1,164.0million of the debt outstanding is denominated in euros.

**RecentAccounting Pronouncements**

See Note 1, “Descriptionof Business and Summary of Significant Accounting Policies,” for a discussionof recent accounting pronouncements.

**Off-BalanceSheet Arrangements**

See Note 8, “Long-TermDebt,” for guarantees related to contract completion, regulatory compliance andproduct performance.

**Commitmentsand Contingencies**

See Note 12, “Commitmentsand Contingencies,” for a discussion of the Company’s Commitments andContingencies.

**CriticalAccounting Policies and Estimates**

Our discussion andanalysis of our financial condition and results of operations are based uponour condensed consolidated financial statements, which have been prepared inaccordance with U.S. GAAP. The preparation of these financial statementsrequires us to make estimates and judgments that affect the reported amounts ofassets, liabilities, revenues and expenses, and the related disclosure ofcontingent assets and liabilities. These estimates include assessing, amongother things:

·                    the fairvalues of assets acquired and liabilities assumed in business combinations;

·                    the use andrecoverability of inventory;

·                    the valuationof deferred tax assets;

·                    the amount ofunrecognized tax benefits in accordance with FIN 48;

·                    impairment ofgoodwill, property, plant and equipment and other intangible assets; and

·                    the usefullives of tangible and intangible assets.

43

----

We evaluate our estimateson an ongoing basis, based on historical experience and various otherassumptions that we believe to be reasonable under the circumstances, theresults of which form the basis for making judgments about the carrying valuesof assets and liabilities that are not readily apparent from other sources.Actual results may differ from these estimates under different assumptions orconditions.

The significantaccounting policies of the Company are described in Note 1,”Description ofBusiness and Summary of Significant Accounting Policies,” to the unauditedcondensed consolidated financial statements and the critical accountingpolicies and estimates are described in the “Management’s Discussion andAnalysis of Financial Condition and Results of Operations” section in theCompany’s 2006 Form 10-K. There have been no significant changes to thesecritical accounting policies and estimates as of March 31, 2007.

**Forward-LookingStatements**

This document containsforward-looking statements. Forward-looking statements are not statements ofhistorical fact and may involve a number of risks and uncertainties.Forward-looking statements give our current expectations or forecasts of futureevents and estimates of amounts not yet determinable. We have used the words “anticipate,”“estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “predict,” “could,”“may” and other words and terms of similar meaning, including references toassumptions, in this report to identify forward-looking statements. Theseforward-looking statements are made based on expectations and beliefsconcerning future events affecting us and are subject to uncertainties andfactors relating to our operations and business environment, all of which aredifficult to predict and many of which are beyond our control, that could causeour actual results to differ materially from those expressed in or implied bythese forward-looking statements. In particular, these factors include, amongother things:

·                    our businessstrategy;

·                    competitivepricing or product development activities affecting demand for our products;

·                    fluctuationsin interest rates, exchange rates and currency values;

·                    availabilityand pricing of raw materials;

·                    fluctuationsin energy prices;

·                    changes in theend-use markets in which our products are sold;

·                    changes in thegeneral economic conditions in North America and Europe and in other locationsin which we currently do business;

·                    technologicalchanges affecting production of our materials;

·                    our high levelof indebtedness;

·                    governmentaland environmental regulations and changes in those regulations;

·                    hazardsassociated with chemicals manufacturing;

·                    risksassociated with negotiating, consummating and integrating acquisitions;

·                    risksassociated with competition and the introduction of new competing products,especially in the Asia-Pacific region; and

·                    risksassociated with international sales and operations.

You should keep in mindthat any forward-looking statements made by us in this document or elsewherespeak only as of the date on which we make them. New risks and uncertaintiescome up from time to time, and it is impossible for us to predict these eventsor how they may affect us. We disclaim any obligation to update or revise anyforward-looking statements, whether as a result of new information, futureevents or otherwise.

**Item3. Quantitative and Qualitative Disclosures About Market Risk.**

We are exposed to marketrisk from changes in interest rates, foreign currency exchange rates andcommodity prices. We manage our exposure to these market risks through regularoperating and financing activities and through the use of derivatives. Whenused, derivatives are employed as risk management tools and not for tradingpurposes.  A discussion and analysis of the Company’s market risk isincluded in the Company’s 2006 Form 10-K. There have been no significantchanges to these market risks as of March 31, 2007.

44

----

**Item4. Controls and Procedures**

Our management, with theparticipation of our Chief Executive Officer and Chief Financial Officer,evaluated the effectiveness of the design and operation of our disclosurecontrols and procedures as of March 31, 2007 and concluded that our disclosurecontrols and procedures are effective. In connection with this evaluation, ourmanagement did not identify any change in our internal control over financialreporting that has materially affected, or is reasonably likely to materially affect,our internal control over financial reporting during our first quarter of 2007.

45

----

**PART II – OTHER INFORMATION**

**Item1. Legal Proceedings.**

We are involved invarious legal proceedings, including commercial, product liability,intellectual property and environmental matters of a nature considered normalto our business. However, we do not believe that there is any individual legalproceeding that is likely to have a material adverse effect on our business orfinancial condition. We cannot predict the outcome of any litigation or thepotential for future litigation.

**Item1A. Risk Factors.**

A discussion of theCompany’s risk factors is included in the Company’s 2006 Form 10-K. There havebeen no significant changes to these risk factors as of March 31, 2007.

**Item2. Unregistered Sales of Equity Securities and Use of Proceeds.**

None.

**Item3. Defaults upon Senior Securities.**

None.

**Item4. Submission of Matters to a Vote of Security Holders.**

None.

**Item5. Other Information.**

None.

**Item6. Exhibits.**
| Exhibit No. | ** ** | **Description of Exhibit**                                                                                                                                                                                                                                                                                                   |
|-------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |       |                                                                                                                                                                                                                                                                                                                         |
| 31.1        |       | Rule 13a-14(a)/15d-14(a) Certification of Chief  Executive Officer.                                                                                                                                                                                                                                                          |
|        |       |                                                                                                                                                                                                                                                                                                                         |
| 31.2        |       | Rule 13a-14(a)/15d-14(a) Certification of Chief  Financial Officer.                                                                                                                                                                                                                                                          |
|        |       |                                                                                                                                                                                                                                                                                                                         |
| 32.1        |       | Section 1350 Certification of Chief Executive  Officer. This certification accompanies this report pursuant to Section 906  of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Company  for purposes of Section 18 or any other provision of the Securities  Exchange Act of 1934, as amended. |
|        |       |                                                                                                                                                                                                                                                                                                                         |
| 32.2        |       | Section 1350 Certification of Chief Financial  Officer. This certification accompanies this report pursuant to Section 906  of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Company  for purposes of Section 18 or any other provision of the Securities  Exchange Act of 1934, as amended. |

 

46

----

**SIGNATURES**

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.
|        | ROCKWOOD SPECIALTIES GROUP, INC. |
|--------|----------------------------------|
|   |                             |   |
|   |                             |   |
|   | By:                              | /s/ SEIFI GHASEMI |   |
|   |                             | Seifi Ghasemi |
|   |                             | Chairman of the Board and Chief Executive Officer |
|   |                             | Date: May 21, 2007 |
|   |                             |   |
|   |                             |   |
|   | ROCKWOOD SPECIALTIES GROUP, INC. |
|   |                             |   |
|   |                             |   |
|   | By:                              | /s/ ROBERT J. ZATTA |   |
|   |                             | Robert J. Zatta |
|   |                             | Senior Vice President and Chief Financial Officer |
|   |                             | Date: May 21, 2007 |
|        |                                  |  |  |  |

 

47

----