**UNITEDSTATES**

** SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM10-Q**
| **x**                                             | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES  EXCHANGE ACT OF 1934**  |
|---------------------------------------------------|------------------------------------------------------------------------------------------------|
| ** **                                        | ** **                                                                                     |
| **For the  quarterly period ended June 30, 2007** |
| ** **                                        |
| **Or**                                            |
| ** **                                        |
| **o**                                             | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934** |

 

**Commissionfile number   333-109686**

**RockwoodSpecialties Group, Inc.**

(Exact name ofRegistrant 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 ofprincipal executive offices) (Zip Code)

**(609)514-0300**

(Registrant’stelephone number, including area code)

Indicate by check markwhether the Registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the Registrant wasrequired to file such reports), and (2) has been subject to such filing requirementsfor the past 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 Rule 12b-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 registrant’s common stock, par value $0.01 per share, is notpublicly traded. As of August 8, 2007, there were outstanding 382,000 shares ofcommon stock of the Registrant, all of which is held by our parent companyRockwood Specialties International, Inc.

 

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**TABLE OF CONTENTS**

**FORM 10-Q**
|         | PART I- FINANCIAL  INFORMATION                                                                              |
|---------|-------------------------------------------------------------------------------------------------------------|
| Item 1  | Financial Statements  (Unaudited)                                                                           |
|    | Condensed  Consolidated Statements of Operations for the three and six months ended June  30, 2007 and 2006 |
|    | Condensed  Consolidated Balance Sheets as of June 30, 2007 and December 31, 2006                            |
|    | Condensed  Consolidated Statements of Cash Flows for the six months ended June 30, 2007  and 2006           |
|    | Notes to  Condensed Consolidated Financial Statements                                                       |
| Item 2  | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                 |
| Item 3  | Quantitative  and Qualitative Disclosures about Market Risk                                                 |
| Item 4  | Controls and  Procedures                                                                                    |
|    |                                                                                                        |
|    | PART II- OTHER  INFORMATION                                                                                 |
| Item 1  | Legal Proceedings                                                                                           |
| Item 1A | Risk Factors                                                                                                |
| Item 2  | Unregistered  Sales of Equity Securities and Use of Proceeds                                                |
| Item 3  | Defaults  Upon Senior Securities                                                                            |
| Item 4  | Submission  of Matters to a Vote of Security Holders                                                        |
| Item 5  | Other Information                                                                                           |
| Item 6  | Exhibits                                                                                                    |
|    |                                                                                                        |
|    | Signatures                                                                                                  |

 

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**PART I – FINANCIAL INFORMATION**

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

**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

**(Dollarsin millions)**

**(Unaudited)**
| ** **                                                            | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|-----------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                            | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                                            | ** ** | **2007**                         | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net sales                                                             |       | $                                | 850.7      |                           | $          | 771.5 |   | $ | 1,646.8 |   | $ | 1,495.6 |   |
| Cost of products sold                                                 |       | 578.0                            |       | 528.6                          |       | 1,117.1 |   | 1,026.9 |   |
| Gross profit                                                          |       | 272.7                            |       | 242.9                          |       | 529.7 |   | 468.7 |   |
| Selling, general and  administrative expenses                         |       | 160.2                            |       | 148.3                          |       | 315.0 |   | 288.9 |   |
| Restructuring charges,  net                                           |       | 1.5                              |       | 1.0                            |       | 6.0 |   | 2.2 |   |
| (Gain) loss on sale of  assets                                        |       | (0.4                             | )          | 0.1                            |       | (5.2 | ) | (0.4 | ) |
| Operating income                                                      |       | 111.4                            |       | 93.5                           |       | 213.9 |   | 178.0 |   |
| Other income  (expenses):                                             |       |                             |       |                           |       |   |   |   |   |
| Interest expense                                                      |       | (47.0                            | )          | (47.7                          | )          | (101.7 | ) | (87.5 | ) |
| Interest income                                                       |       | 4.0                              |       | 1.1                            |       | 9.1 |   | 2.5 |   |
| Loss on early  extinguishment of debt                                 |       | (19.4                            | )          | —                         |       | (19.4 | ) | — |   |
| Refinancing expenses                                                  |       | —                           |       | —                         |       | (0.9 | ) | — |   |
| Foreign exchange gain,  net                                           |       | 3.3                              |       | 5.1                            |       | 3.7 |   | 2.2 |   |
| Other, net                                                            |       | —                           |       | 0.2                            |       | (0.1 | ) | 1.8 |   |
| Other income  (expenses), net                                         |       | (59.1                            | )          | (41.3                          | )          | (109.3 | ) | (81.0 | ) |
| Income from continuing  operations before taxes and minority interest |       | 52.3                             |       | 52.2                           |       | 104.6 |   | 97.0 |   |
| Income tax provision                                                  |       | 22.0                             |       | 22.0                           |       | 44.0 |   | 40.3 |   |
| Income from continuing  operations before minority interest           |       | 30.3                             |       | 30.2                           |       | 60.6 |   | 56.7 |   |
| Minority interest in  continuing operations                           |       | (2.3                             | )          | —                         |       | (3.4 | ) | — |   |
| Net income from  continuing operations                                |       | 28.0                             |       | 30.2                           |       | 57.2 |   | 56.7 |   |
| Income from  discontinued operations, net of tax                      |       | —                           |       | 8.1                            |       | 0.5 |   | 24.6 |   |
| Gain on sale of  discontinued operations, net of tax                  |       | —                           |       | —                         |       | 115.7 |   | — |   |
| Minority interest in  discontinued operations                         |       | —                           |       | (1.2                           | )          | (0.1 | ) | (4.2 | ) |
| Net income                                                            |       | $                                | 28.0       |                           | $          | 37.1 |   | $ | 173.3 |   | $ | 77.1 |   |

 

See accompanying notes to condensed consolidatedfinancial statements.

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**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(Dollarsin millions, except per share amounts)**

**(Unaudited)**
| ** **                                                                                           | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                           | ** ** | **2007**          | ** ** | **2006**              | ** ** |
| **ASSETS**                                                                                           | ** ** | ** **        | ** ** | ** **            | ** ** |
| Current assets:                                                                                      |       |              |       |                  |       |
| Cash and cash  equivalents                                                                           |       | $                 | 191.5      |                  | $          | 25.9 |   |
| Accounts  receivable, net                                                                            |       | 531.0             |       | 463.4                 |       |
| Inventories                                                                                          |       | 445.7             |       | 445.4                 |       |
| Deferred income  taxes                                                                               |       | 16.4              |       | 15.1                  |       |
| Prepaid expenses  and other current assets                                                           |       | 54.0              |       | 40.8                  |       |
| Assets of  discontinued operations                                                                   |       | —            |       | 490.6                 |       |
| Total current assets                                                                                 |       | 1,238.6           |       | 1,481.2               |       |
| Property, plant  and equipment, net                                                                  |       | 1,405.5           |       | 1,374.9               |       |
| Goodwill                                                                                             |       | 1,754.0           |       | 1,717.7               |       |
| Other intangible  assets, net                                                                        |       | 637.0             |       | 539.6                 |       |
| Deferred debt  issuance costs, net of accumulated amortization of $25.0 and $25.4,  respectively     |       | 42.9              |       | 51.6                  |       |
| Deferred income  taxes                                                                               |       | 21.2              |       | —                |       |
| Other assets                                                                                         |       | 56.6              |       | 56.1                  |       |
| Total assets                                                                                         |       | $                 | 5,155.8    |                  | $          | 5,221.1 |   |
| **LIABILITIES  AND STOCKHOLDER'S EQUITY**                                                            | ** ** | ** **        | ** ** | ** **            | ** ** |
| Current  liabilities:                                                                                |       |              |       |                  |       |
| Accounts payable                                                                                     |       | $                 | 261.2      |                  | $          | 290.3 |   |
| Income taxes  payable                                                                                |       | 3.1               |       | 0.2                   |       |
| Accrued  compensation                                                                                |       | 73.2              |       | 85.9                  |       |
| Restructuring  liability                                                                             |       | 10.7              |       | 8.5                   |       |
| Accrued expenses  and other current liabilities                                                      |       | 172.3             |       | 178.5                 |       |
| Deferred income  taxes                                                                               |       | 4.3               |       | —                |       |
| Senior secured  revolving credit facility                                                            |       | —            |       | 37.0                  |       |
| Long-term debt,  current portion                                                                     |       | 89.6              |       | 80.8                  |       |
| Liabilities of  discontinued operations                                                              |       | —            |       | 171.1                 |       |
| Total current liabilities                                                                            |       | 614.4             |       | 852.3                 |       |
| Long-term debt                                                                                       |       | 2,437.2           |       | 2,720.9               |       |
| Pension and  related liabilities                                                                     |       | 365.0             |       | 353.0                 |       |
| Deferred income  taxes                                                                               |       | 84.4              |       | 48.5                  |       |
| Other  liabilities                                                                                   |       | 143.2             |       | 94.2                  |       |
| Total liabilities                                                                                    |       | 3,644.2           |       | 4,068.9               |       |
| Minority  interest                                                                                   |       | 178.4             |       | 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                                                              |       | 285.4             |       | 236.7                 |       |
| Retained  earnings (deficit)                                                                         |       | 42.4              |       | (123.5                | )          |
| Total stockholder's equity                                                                           |       | 1,333.2           |       | 1,118.6               |       |
| Total liabilities and stockholder's equity                                                           |       | $                 | 5,155.8    |                  | $          | 5,221.1 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

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**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Dollarsin millions)**

**(Unaudited)**
| ** **                                                                                                                                                          | ** ** | **Six months ended** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                                                                                                          | ** ** | **June 30,**              | ** ** |
| ** **                                                                                                                                                          | ** ** | **2007**                       | ** ** | **2006** | ** ** |
| **CASH  FLOWS FROM OPERATING ACTIVITIES:**                                                                                                                          | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Net income                                                                                                                                                          |       | $                              | 173.3      |   | $ | 77.1 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities:                                                                                  |       |                           |       |   |   |
| Income from discontinued operations, net of tax                                                                                                                     |       | (0.5                           | )          | (24.6 | ) |
| Gain on sale of discontinued operations, net of tax                                                                                                                 |       | (115.7                         | )          | — |   |
| Minority interest in discontinued operations                                                                                                                        |       | 0.1                            |       | 4.2 |   |
| Depreciation and amortization                                                                                                                                       |       | 108.4                          |       | 93.0 |   |
| Deferred financing costs amortization                                                                                                                               |       | 4.7                            |       | 4.7 |   |
| Loss on early extinguishment of debt (including $4.9  million of noncash write-offs on deferred financing costs)                                                    |       | 19.4                           |       | — |   |
| Foreign exchange gain                                                                                                                                               |       | (3.7                           | )          | (2.2 | ) |
| Fair value adjustment of derivatives                                                                                                                                |       | 2.0                            |       | (15.3 | ) |
| Bad debt provision                                                                                                                                                  |       | 1.2                            |       | 0.5 |   |
| Stock-based compensation                                                                                                                                            |       | 0.7                            |       | — |   |
| Deferred income taxes                                                                                                                                               |       | 20.0                           |       | 16.2 |   |
| Gain on sale of assets                                                                                                                                              |       | (5.2                           | )          | (0.4 | ) |
| Minority interest in continuing operations                                                                                                                          |       | 3.4                            |       | — |   |
| Changes in  assets and liabilities, net of the effect of foreign currency translation and  acquisitions:                                                            |       |                           |       |   |   |
| Accounts receivable                                                                                                                                                 |       | (57.9                          | )          | (53.0 | ) |
| Inventories, including inventory write-up reversal                                                                                                                  |       | 5.6                            |       | 0.2 |   |
| Prepaid expenses and other assets                                                                                                                                   |       | (7.1                           | )          | 7.6 |   |
| Accounts payable                                                                                                                                                    |       | (15.2                          | )          | (24.7 | ) |
| Income taxes payable                                                                                                                                                |       | 1.7                            |       | 11.1 |   |
| Accrued expenses and other liabilities (including  intercompany transactions with discontinued operations of $51.3 million for  the six months ended June 30, 2006) |       | 11.5                           |       | (45.5 | ) |
| Net cash  provided by operating activities of continuing operations                                                                                                 |       | 146.7                          |       | 48.9 |   |
| Net cash provided by operating activities of  discontinued operations                                                                                               |       | 1.6                            |       | 56.5 |   |
| **Net cash provided by operating activities**                                                                                                                       |       | 148.3                          |       | 105.4 |   |
| ** **                                                                                                                                                          |       |                           |       |   |   |
| **CASH  FLOWS FROM INVESTING ACTIVITIES:**                                                                                                                          | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Acquisitions,  including transaction fees paid, net of cash acquired                                                                                                |       | (33.4                          | )          | (13.4 | ) |
| Capital  expenditures, excluding capital leases                                                                                                                     |       | (93.8                          | )          | (71.2 | ) |
| Proceeds from  formation of Viance joint venture                                                                                                                    |       | 76.6                           |       | — |   |
| Proceeds from  sale of discontinued operations                                                                                                                      |       | 421.4                          |       | — |   |
| Proceeds on sale  of assets                                                                                                                                         |       | 10.0                           |       | 2.4 |   |
| Net cash  provided by (used in) investing activities of continuing operations                                                                                       |       | 380.8                          |       | (82.2 | ) |
| Net cash used in investing activities of  discontinued operations                                                                                                   |       | —                         |       | (18.9 | ) |
| **Net cash provided by (used in) investing activities**                                                                                                             |       | 380.8                          |       | (101.1 | ) |
| ** **                                                                                                                                                          |       |                           |       |   |   |
| **CASH  FLOWS FROM FINANCING ACTIVITIES:**                                                                                                                          | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Proceeds from  senior secured credit facilities                                                                                                                     |       | —                         |       | 103.1 |   |
| Repayment of  2011 Notes                                                                                                                                            |       | (273.4                         | )          | — |   |
| Repayment of  senior secured credit facilities                                                                                                                      |       | (64.9                          | )          | (129.2 | ) |
| Payments on other  long-term debt                                                                                                                                   |       | (4.1                           | )          | (2.8 | ) |
| Payments related  to early extinguishment of debt                                                                                                                   |       | (14.5                          | )          | — |   |
| Net cash used in  financing activities of continuing operations                                                                                                     |       | (356.9                         | )          | (28.9 | ) |
| Net cash used in financing activities of  discontinued operations                                                                                                   |       | —                         |       | (37.8 | ) |
| **Net cash used in financing activities**                                                                                                                           |       | (356.9                         | )          | (66.7 | ) |
|                                                                                                                                                                |       |                           |       |   |   |
| Effect of  exchange rate changes on cash and cash equivalents                                                                                                       |       | (5.0                           | )          | (3.4 | ) |
| Net increase (decrease) in cash and cash equivalents                                                                                                                |       | 167.2                          |       | (65.8 | ) |
| Less (increase)  decrease in cash and cash equivalents from discontinued operations                                                                                 |       | (1.6                           | )          | 0.1 |   |
| Increase  (decrease) in cash and cash equivalents from continuing operations                                                                                        |       | 165.6                          |       | (65.7 | ) |
| Cash and cash  equivalents of continuing operations, beginning of period                                                                                            |       | 25.9                           |       | 96.4 |   |
| Cash and cash equivalents of continuing operations,  end of period                                                                                                  |       | $                              | 191.5      |   | $ | 30.7 |   |
| Supplemental  disclosures of cash flow information:                                                                                                                 |       |                           |       |   |   |
| Interest paid,  net                                                                                                                                                 |       | $                              | 90.4       |   | $ | 84.7 |   |
| Income taxes  paid, net of refunds                                                                                                                                  |       | $                              | 22.3       |   | $ | 12.6 |   |
| Non-cash  investing activities:                                                                                                                                     |       |                           |       |   |   |
| Acquisition of  equipment under capital leases                                                                                                                      |       | $                              | 0.3        |   | $ | — |   |
| Decrease in liabilities  for property, plant and equipment                                                                                                          |       | $                              | (14.8      | ) | $ | (12.0 | ) |

 

See accompanying notes tocondensed consolidated financial statements.

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**ROCKWOODSPECIALTIES GROUP, INC. AND SUBSIDIARIES**

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

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

***Business Description, Background***—Rockwood Specialties Group, Inc. and Subsidiaries (“Rockwood” or the “Company”)is a global 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 businessesacquired focused 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.

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 Form 10-K. In the opinion of management, thisinformation contains all adjustments necessary, consisting of normal andrecurring accruals, for a fair presentation of the results for the periodspresented.

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 further details. In the condensed consolidated balance sheet, the minority interestbalance as of December 31, 2006 relates to the former Groupe Novasep segmentthat was sold in January 2007.

***Nature of Operations/Segment Reporting***—TheCompany is a global developer, manufacturer and marketer of high value-addedspecialty chemicals and advanced materials. The Company operates in variousbusiness lines within its six reportable segments consisting of: (1) SpecialtyChemicals, which includes lithium compounds and chemicals, metal surfacetreatment chemicals, and synthetic metal sulfides, (2) Performance Additives,which includes color pigments and services, timber treatment chemicals,clay-based additives, and water treatment chemicals, (3) Titanium DioxidePigments, 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 

6

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of goodwill as well asproperty, plant and equipment and other intangible assets, the accrual ofenvironmental and legal reserves and the useful lives of tangible andintangible assets, among others. Actual results could differ fromthose estimates. Such estimates also include the fair value of assetsacquired and liabilities assumed allocated to the purchase price of businesscombinations 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 DLJMerchant Banking Partners III, L.P. (“DLJMB”) and affiliates ofeach. Information concerning certain transactions is included in theRockwood Holdings, Inc. 2006 Form 10-K in Item 13, “Certain Relationships andRelated Transactions, and Director Independence.” There have been nosignificant changes to our related party transactions for the period ended June30, 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  euro-denominateddebt that is designated as a net investment hedge of the Company’seuro-denominated investments and gains or losses on certain intercompany loansthat are of a long-term nature for which settlement is not planned oranticipated in the foreseeable future which are reported and accumulated in thesame manner as translation adjustments. These loans are all related tointercompany debt arrangements. As of June 30, 2007, the amount of intercompanydebt arrangements deemed to be of a long-term investment nature for whichsettlement is not planned or anticipated in the foreseeable future is €519.4million ($703.4 million using the Friday, June 29, 2007 exchange rate of €1.00= $1.3542).

***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 Benefits Other Than Pensions*  and SFAS 158,*  Employers’ Accounting for Defined BenefitPension and Other Postretirement Plans, an amendment of FASB Statements No. 87,88, 106 and 132 (R).* Postemployment benefit costs and liabilitieshave been determined in accordance with SFAS 112,*Employers’ Accounting for Postemployment Benefits.*

***Income Taxes***—Income taxes aredetermined in accordance with SFAS 109,*Accounting for Income Taxes*andFinancial Accounting Standards Board (“FASB”) Interpretation (“FIN”) No. 48, *Accounting for Uncertainty in Income Taxes — AnInterpretation of FASB Statement No. 109*. Deferred tax assetsand liabilities are recognized for future tax consequences attributable todifferences between the financial statement carrying amounts and thecorresponding tax carrying amounts of assets and liabilities. Deferred taxassets are also recognized for tax loss and tax credit carryforwards. Avaluation allowance is recorded to reduce deferred tax assets when it is morelikely than not that a tax benefit will not be realized based on availableevidence weighted toward evidence that is objectively verifiable. Deferredtaxes are not provided on the undistributed earnings of subsidiaries as suchamounts are considered to be 

7

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permanently invested orcould be 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 foreign currency loan transactions that are of a long-terminvestment nature as well as minimum pension liability adjustments that arerecorded directly into a separate section of stockholder’s equity in thebalance sheets. Also included are the net investment hedges discussed below.Foreign currency translation amounts are not adjusted for income taxes sincethey relate to indefinite length investments in non-U.S. subsidiaries andcertain intercompany debt.

Comprehensive income issummarized as follows:
|                                                  | ** ** | **Three months ended  June 30, ** | ** ** | **Six months ended  June 30, ** | ** ** |
|--------------------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **($ in millions)**                    | ** ** | **2007**                                              | ** ** | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net income                                       |       | $                                                     | 28.0       |                                                | $          | 37.1 |   | $ | 173.3 |   | $ | 77.1 |   |
| Pension related  adjustments, net of tax         |       | (0.4                                                  | )          | —                                              |       | 0.1 |   | 4.6 |   |
| Foreign currency  translation                    |       | 24.6                                                  |       | 93.6                                                |       | 61.4 |   | 119.0 |   |
| Intercompany  foreign currency loan transactions |       | 9.5                                                   |       | 34.9                                                |       | 11.6 |   | 66.5 |   |
| Net investment  hedge, net of tax                |       | (14.0                                                 | )          | (57.9                                               | )          | (24.4 | ) | (83.2 | ) |
| Total  comprehensive income                      |       | $                                                     | 47.7       |                                                | $          | 107.7 |   | $ | 222.0 |   | $ | 184.0 |   |

 

In November 2004,the Company completed the sale of €375.0 million aggregate principalamount of 7.625% senior subordinated notes and $200.0 million aggregateprincipal amount of 7.500% senior subordinated notes, both due in 2014 (“2014Notes”). In connection with the 2014 Notes, the Company entered into a cross-currencyswap with a five-year term and a notional amount of €155.6 million thateffectively converted the U.S. dollar fixed-rate debt in respect of the dollarnotes sold into euro fixed-rate debt. The Company has designated this contractas a hedge of the foreign currency exposure of its net investment in itseuro-denominated operations. There was no ineffective portion of the netinvestment hedge as of June 30, 2007. The Company does not expect any of theloss on the net investment hedge residing in comprehensive income at June 30,2007 to be reclassified 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 $922.1million based on the Friday, June 29, 2007 exchange rate of €1.00 = $1.3542).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 June 30, 2007. The Company does notexpect any of the loss on the net investment hedge residing in comprehensiveincome at June 30, 2007 to be reclassified into earnings during the subsequenttwelve months.

***Accounting for Environmental Liabilities***—Inthe ordinary course of business, Rockwood is subject to extensive and changingfederal, state, local and foreign environmental laws and regulations, and hasmade provisions for the estimated financial impact of environmental cleanuprelated costs. Rockwood’s policy has been to accrue costs of a non-capitalnature related to environmental clean-up when those costs are believed to beprobable and can be reasonably estimated. If the aggregate amount of theobligation and the amount and timing of the cash payments for a site are fixedor reliably determinable, the liability is discounted. Expenditures that extendthe life of the related property or mitigate or prevent future environmentalcontamination are capitalized and expenditures related to existing conditionsresulting from past or present operations and from which no current or futurebenefit is discernible are immediately expensed. The quantification ofenvironmental exposures requires an assessment of many factors, includingchanging laws and regulations, advancements in environmental technologies, thequality of information available related to specific sites, the assessmentstage of each site investigation and the length of time involved in remediationor settlement. In some matters, Rockwood may share costs with other parties.Rockwood does not include anticipated recoveries from insurance carriers orother third parties in its accruals for environmental 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,**

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*Share-BasedPayment*, and related interpretations and began expensing thegrant-date fair value of stock 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 Holdings first filed itsregistration statement with the Securities and Exchange Commission (“SEC”). Thecompensation cost for stock options and restricted stock units recorded underthe Plan caused income from continuing operations before taxes and minorityinterest to decrease by $0.7 million and less than $0.1 million for the threemonths ended June 30, 2007 and 2006, respectively, and to decrease by $0.8million and less than $0.1 million for the six months ended June 30, 2007 and2006, respectively.

As discussed in Note 10, “Stock-BasedCompensation,” Holdings granted additional stock options and performancerestricted stock units in the second quarter of 2007 to certain employees ofRockwood Corporate Headquarters and its business units.  The performance restricted stock unitscontain a provision in which the units shall immediately vest and becomeconverted into the right to receive a cash payment upon a change in control as definedin the equity agreement. As the provisions for redemption are outside thecontrol of the Company, the fair value of these units as of June 30, 2007 havebeen recorded as mezzanine equity (outside of permanent equity) in theCondensed Consolidated Balance Sheets of Holdings.

***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 Customers and Remitted toGovernmental Authorities Should Be Presented in the Income Statement (That Is,Gross Versus Net Presentation).* The scope of this Issue includes anytax assessed 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 from revenues)basis and that this is an accounting policy decision that should be disclosedpursuant to APB Opinion No. 22. In addition, if such taxes are significant andreported on a gross basis, the amounts of those taxes should be disclosed ininterim and annual financial statements. The Company adopted this EITF in thefirst quarter of 2007 and has adopted an accounting policy that requires taxescollected from customers and remitted to governmental authorities to bereported on a net basis (excluded from revenues). The adoption of this EITF didnot have a material impact on the Company’s financial statements.

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.  See Note 9, “Income Taxes,” for the impact ofadopting this interpretation. In May 2007, the FASB issued Staff Position (“FSP”)FIN 48-1, *Definition of Settlement in FASB Interpretation No.48.* This FSP amends FIN 48 to provide guidance on how an enterpriseshould determine whether a tax provision is effectively settled for the purposeof recognizing previously unrecognized tax benefits.

In September 2006, theFASB issued FSP No. AUG AIR-1,*Accountingfor Planned Major Maintenance Activities*. This FSP prohibits the useof the accrue-in-advance method of accounting for planned major maintenanceactivities in annual and interim financial reporting periods. It continues topermit the application of three alternative methods of accounting for plannedmaintenance activities: direct expense, built-in-overhaul and deferral methods.In addition, this FSP requires disclosure of the method of accounting forplanned maintenance activities selected. The Company adopted this FSP in thefirst quarter of 2007 and has adopted an accounting policy that requiresplanned major maintenance activities to be accounted for under thedirect-expense method. The adoption of this FSP did not have a material impacton 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*was issued. This standard permits an entity to choose to measuremany financial instruments and certain other items at fair value and permitsall entities 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 have onits financial statements.

9

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**2.    DISCONTINUEDOPERATIONS:**

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.* The Company’s financial statements reflect theGroupe Novasep subsidiary as a discontinued operation for all periodspresented.

Operating results of thediscontinued operations are as follows:
|                                               | ** ** | **Three months ended  June 30, ** | ** ** | **Six months ended  June 30, ** | ** ** |
|-----------------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **($ in millions)**                 | ** ** | **2007**                                              | ** ** | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net sales                                     |       | $                                                     | —     |                                                | $          | 84.3 |   | $ | 8.9 |   | $ | 172.8 |   |
| Cost of products  sold                        |       | —                                                |       | 58.3                                                |       | 7.0 |   | 122.9 |   |
| Gross profit                                  |       | —                                                |       | 26.0                                                |       | 1.9 |   | 49.9 |   |
| Selling, general  and administrative expenses |       | —                                                |       | 14.0                                                |       | 1.0 |   | 30.4 |   |
| (Gain) loss on  sale of business/assets       |       | —                                                |       | (0.1                                                | )          | (117.7 | ) | 11.9 |   |
| Operating income                              |       | —                                                |       | 12.1                                                |       | 118.6 |   | 7.6 |   |
| Other income  (expenses):                     |       |                                                  |       |                                                |       |   |   |   |   |
| Interest  expense, net                        |       | —                                                |       | (1.2                                                | )          | (0.3 | ) | (1.9 | ) |
| Foreign exchange  gain, net                   |       | —                                                |       | 0.4                                                 |       | — |   | 0.7 |   |
| Net                                           |       | —                                                |       | (0.8                                                | )          | (0.3 | ) | (1.2 | ) |
| Income before  taxes and minority interest    |       | —                                                |       | 11.3                                                |       | 118.3 |   | 6.4 |   |
| Income tax  provision (benefit)               |       | —                                                |       | 3.2                                                 |       | 2.1 |   | (18.2 | ) |
| Net income before minority interest           |       | —                                                |       | 8.1                                                 |       | 116.2 |   | 24.6 |   |
| Minority  interest                            |       | —                                                |       | (1.2                                                | )          | (0.1 | ) | (4.2 | ) |
| Net income                                    |       | $                                                     | —     |                                                | $          | 6.9 |   | $ | 116.1 |   | $ | 20.4 |   |

 

The Company received netcash proceeds of $421.4 million in 2007 from the sale of Groupe Novasep. Thenet gain on the sale recorded in the first quarter of 2007 is $115.7 million(net of $2.0 million of 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 JOINT VENTURE:**

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 woodtreatment technologies and services to the global wood treatment industry.Viance is jointly-owned by CSI and Rohm and Haas and was formed through thecontribution by CSI and its related subsidiaries of their wood protectionchemicals business and the contribution by Rohm and Haas of its wood biocidesbusiness and cash of $76.6 million. The assets contributed by Rohm and Haaswere recorded at fair values whereas the assets contributed by CSI wererecorded at book value. The Company was assisted in determining fair value byindependent appraisers. In accordance with the consolidation principles of FIN46 (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.

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 June 30, 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.    SEGMENTINFORMATION:**

Rockwood operates in sixreportable segments according to the nature and economic characteristics of itsproducts and services as 

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well as the manner inwhich the information is used internally by the Company’s key decision maker,the Company’s Chief Executive Officer. The six segments are: (1) SpecialtyChemicals, which consists of the surface treatment and fine chemicals businesslines; (2) Performance Additives, which consists of color pigments andservices, timber treatment chemicals (including Viance, LLC), clay-basedadditives and water treatment chemicals business lines; (3) Titanium DioxidePigments; (4) Advanced Ceramics; (5) Specialty Compounds; and (6) Electronics,which consists of electronic chemicals 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 or taxconsiderations). The primary components of corporate loss, in addition to operatingloss, are interest expense on external debt (including the amortization ofdeferred financing costs), foreign exchange losses or gains, and mark-to-marketgains or losses on derivatives.

Major corporatecomponents within the reconciliation of income (loss) from continuingoperations before taxes and minority interest (described more fully below) include systems/organization establishmentexpenses such as outside consulting costs for Sarbanes-Oxley initial documentationand fees relating to the implementation of a new consolidation software system,interest expense on external debt, interest income, foreign exchange losses orgains and refinancing expenses related to external debt. Corporate identifiableassets primarily represent deferred financing costs that have been capitalizedin connection with corporate external debt financing, deferred income taxassets and cash balances maintained in accordance with centralized cashmanagement techniques. 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:
| ** **                            | ** ** | **Specialty** | ** ** | **Performance**                                   | ** ** | **Titanium  Dioxide** | ** ** | **Advanced** | ** ** | **Specialty** | ** ** | ** **      | ** ** | ** **    | ** ** | ** **                | ** ** |
|---------------------------------------|------------|---------------|------------|---------------------------------------------------|------------|-----------------------|------------|--------------|------------|---------------|------------|-----------------|------------|---------------|------------|---------------------------|------------|
| **($ in millions)**         | ** ** | **Chemicals** | ** ** | **   Additives   ** | ** ** | **Pigments**          | ** ** | **Ceramics** | ** ** | **Compounds** | ** ** | **Electronics** | ** ** | **Corporate** | ** ** | **Consolidated (a)** | ** ** |
| **Three  months ended June 30, 2007** |       |          |       |                                              |       |                  |       |         |       |          |       |            |       |          |       |                      |       |
| Net sales                             |       | $             | 270.9      |                                              | $          | 216.2                 |       | $            | 123.3      |          | $          | 118.6           |       | $             | 70.8       |                      | $          | 50.9 |   | $ | — |   | $ | 850.7 |   |
| Total Adjusted EBITDA                 |       | 66.3          |       | 45.5                                              |       | 21.0                  |       | 32.7         |       | 9.5           |       | 8.7             |       | (14.7         | )          | 169.0                     |       |
| **Three  months ended June 30, 2006** |       |          |       |                                              |       |                  |       |         |       |          |       |            |       |          |       |                      |       |
| Net sales                             |       | $             | 232.0      |                                              | $          | 212.8                 |       | $            | 111.0      |          | $          | 98.0            |       | $             | 66.1       |                      | $          | 51.6 |   | $ | — |   | $ | 771.5 |   |
| Total Adjusted EBITDA                 |       | 50.7          |       | 42.8                                              |       | 21.8                  |       | 25.6         |       | 8.6           |       | 9.7             |       | (12.8         | )          | 146.4                     |       |
| **Six  months ended June 30, 2007**   |       |          |       |                                              |       |                  |       |         |       |          |       |            |       |          |       |                      |       |
| Net sales                             |       | $             | 538.8      |                                              | $          | 401.0                 |       | $            | 239.4      |          | $          | 224.1           |       | $             | 140.4      |                      | $          | 103.1 |   | $ | — |   | $ | 1,646.8 |   |
| Total Adjusted EBITDA                 |       | 134.6         |       | 78.1                                              |       | 43.4                  |       | 61.5         |       | 17.6          |       | 18.1            |       | (28.1         | )          | 325.2                     |       |
| **Six  months ended June 30, 2006**   |       |          |       |                                              |       |                  |       |         |       |          |       |            |       |          |       |                      |       |
| Net sales                             |       | $             | 460.1      |                                              | $          | 395.3                 |       | $            | 219.2      |          | $          | 190.7           |       | $             | 129.3      |                      | $          | 101.0 |   | $ | — |   | $ | 1,495.6 |   |
| Total Adjusted  EBITDA                |       | 102.1         |       | 76.1                                              |       | 42.7                  |       | 49.2         |       | 15.9          |       | 18.3            |       | (25.1         | )          | 279.2                     |       |

 
| ** **                  | ** ** | **Specialty ** | ** ** | **Performance**                                   | ** ** | **Titanium  Dioxide ** | ** ** | **Advanced ** | ** ** | **Specialty ** | ** ** | ** **      | ** ** | ** **             | ** ** | ** **                | ** ** | ** **                | ** ** |
|-----------------------------|------------|---------------------|------------|---------------------------------------------------|------------|-----------------------------|------------|--------------------|------------|---------------------|------------|-----------------|------------|------------------------|------------|---------------------------|------------|---------------------------|------------|
| ** **                  | ** ** | **Chemicals**       | ** ** | **   Additives   ** | ** ** | **Pigments**                | ** ** | **Ceramics**       | ** ** | **Compounds**       | ** ** | **Electronics** | ** ** | **Corporate (b)** | ** ** | **Eliminations (c)** | ** ** | **Consolidated (d)** | ** ** |
| Identifiable  assets as of: |       |                |       |                                              |       |                        |       |               |       |                |       |            |       |                   |       |                      |       |                      |       |
| June 30, 2007               |       | $                   | 1,704.1    |                                              | $          | 1,207.8                     |       | $                  | 728.6      |                | $          | 807.8           |       | $                      | 290.3      |                      | $          | 281.2                     |       | $ | 292.5 |   | $ | (156.5 | ) | $ | 5,155.8 |   |
| December 31, 2006           |       | 1,624.8             |       | 1,041.8                                           |       | 738.2                       |       | 749.5              |       | 272.2               |       | 306.3           |       | 134.3                  |       | (136.6                    | )          | 4,730.5                   |       |
|                             |            |                     |            |                                                   |            |                             |            |                    |            |                     |            |                 |            |                        |            |                           |            |                           |            |  |  |  |  |  |  |  |  |  |

 

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(a)  Thisamount does not include $19.8 million for the three months ended June 30, 2006and $1.8 million and $35.7 million for the six months ended June 30, 2007 and2006, respectively, of Adjusted EBITDA from the former Groupe Novasep segmentwhich was sold on January 9, 2007.

(b)  Thisamount includes $43.1 million and $41.0 million of assets from the legacybusinesses formerly belonging to Dynamit Nobel at June 30, 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 $5,221.1 million atDecember 31, 2006.

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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 (which was terminated when the 2011 Notes were redeemed in May 2007)and the 2014 Notes exclude certain adjustments permitted under the seniorcredit agreement. Senior management uses Adjusted EBITDA on a segment basis asthe primary measure to evaluate the ongoing performance of the Company’sbusiness segments and reporting units. See Note 8, “Long-term Debt,” forinformation regarding the redemption of the 2011 Notes.

The Company uses Adjusted EBITDA on a segment basis to assess itsoperating performance. Because the Company views Adjusted EBITDA on a segmentbasis as an operating performance measure, the Company uses income (loss) fromcontinuing operations before taxes and minority interest as the most comparableGAAP measure.

 

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The following tablepresents a reconciliation of income (loss) from continuing operations beforetaxes and minority interest to Adjusted EBITDA on a segment GAAP basis:
| ** **                                                                   | ** ** | **Specialty ** | ** ** | **Performance** | ** ** | **Titanium  Dioxide ** | ** ** | **Advanced ** | ** ** | **Specialty ** | ** ** | ** **      | ** ** | ** **    | ** ** | ** **       | ** ** |
|------------------------------------------------------------------------------|------------|---------------------|------------|-----------------|------------|-----------------------------|------------|--------------------|------------|---------------------|------------|-----------------|------------|---------------|------------|------------------|------------|
| **($ in millions)**                                                | ** ** | **Chemicals**       | ** ** | **Additives**   | ** ** | **Pigments**                | ** ** | **Ceramics**       | ** ** | **Compounds**       | ** ** | **Electronics** | ** ** | **Corporate** | ** ** | **Consolidated** | ** ** |
| **Three  months ended June 30, 2007**                                        | ** ** | ** **          | ** ** | ** **      | ** ** | ** **                  | ** ** | ** **         | ** ** | ** **          | ** ** | ** **      | ** ** | ** **    | ** ** | ** **       | ** ** |
| Income (loss) from continuing operations before taxes  and minority interest |       | $              | 43.9       |            | $     | 27.8                        |       | $             | 1.9        |                | $     | 13.1            |       | $        | 3.0        |             | $     | 4.6 |   | $  | (42.0 | ) | $  | 52.3 |   |
| Interest expense (a)                                                         |       | 9.6                 |       | 2.9             |       | 8.0                         |       | 8.7                |       | 2.3                 |       | —          |       | 15.5          |       | 47.0             |       |
| Interest income                                                              |       | (0.9                | )          | (0.3            | )          | (0.1                        | )          | (0.2               | )          | —              |       | (0.4            | )          | (2.1          | )          | (4.0             | )          |
| Depreciation and amortization                                                |       | 13.6                |       | 12.9            |       | 10.5                        |       | 10.1               |       | 2.8                 |       | 4.0             |       | 1.3           |       | 55.2             |       |
| Restructuring charges, net                                                   |       | 0.3                 |       | 0.3             |       | —                      |       | 0.6                |       | —              |       | —          |       | 0.3           |       | 1.5              |       |
| CCA litigation defense costs                                                 |       | —              |       | 0.2             |       | —                      |       | —             |       | —              |       | —          |       | —        |       | 0.2              |       |
| Systems/organization establishment expenses                                  |       | (0.4                | )          | —          |       | —                      |       | 0.4                |       | 0.3                 |       | —          |       | —        |       | 0.3              |       |
| Cancelled acquisition and disposal costs                                     |       | 0.1                 |       | —          |       | 0.7                         |       | —             |       | —              |       | —          |       | (0.1          | )          | 0.7              |       |
| Inventory write-up reversal                                                  |       | —              |       | —          |       | —                      |       | 0.1                |       | —              |       | —          |       | —        |       | 0.1              |       |
| Loss on ear1ly extinguishment of debt                                        |       | —              |       | 1.9             |       | —                      |       | —             |       | 1.1                 |       | 0.3             |       | 16.1          |       | 19.4             |       |
| Loss (gain) on sale of assets                                                |       | —              |       | —          |       | —                      |       | —             |       | —              |       | 0.1             |       | (0.5          | )          | (0.4             | )          |
| Foreign exchange loss (gain), net                                            |       | 0.1                 |       | (0.1            | )          | —                      |       | (0.1               | )          | —              |       | 0.1             |       | (3.3          | )          | (3.3             | )          |
| Other                                                                        |       | —              |       | (0.1            | )          | —                      |       | —             |       | —              |       | —          |       | 0.1           |       | —           |       |
| Total Adjusted EBITDA                                                        |       | $                   | 66.3       |            | $          | 45.5                        |       | $                  | 21.0       |                | $          | 32.7            |       | $             | 9.5        |             | $          | 8.7 |   | $ | (14.7 | ) | $ | 169.0 |   |
| **Three  months ended June 30, 2006**                                        | ** ** | ** **          | ** ** | ** **      | ** ** | ** **                  | ** ** | ** **         | ** ** | ** **          | ** ** | ** **      | ** ** | ** **    | ** ** | ** **       | ** ** |
| Income (loss) from continuing operations before taxes  and minority interest |       | $              | 25.1       |            | $     | 25.8                        |       | $             | 5.3        |                | $     | 8.8             |       | $        | 6.3        |             | $     | 5.3 |   | $  | (24.4 | ) | $  | 52.2 |   |
| Interest expense (a)                                                         |       | 15.0                |       | 3.6             |       | 7.3                         |       | 8.2                |       | —              |       | 0.7             |       | 12.9          |       | 47.7             |       |
| Interest income                                                              |       | (1.8                | )          | —          |       | (0.1                        | )          | (0.1               | )          | —              |       | (0.7            | )          | 1.6           |       | (1.1             | )          |
| Depreciation and amortization                                                |       | 11.7                |       | 12.2            |       | 9.3                         |       | 8.2                |       | 2.3                 |       | 4.4             |       | 1.2           |       | 49.3             |       |
| Restructuring charges, net                                                   |       | 0.3                 |       | 0.6             |       | —                      |       | —             |       | —              |       | 0.1             |       | —        |       | 1.0              |       |
| CCA litigation defense costs                                                 |       | —              |       | 0.2             |       | —                      |       | —             |       | —              |       | —          |       | —        |       | 0.2              |       |
| Systems/organization establishment expenses                                  |       | 0.1                 |       | 0.4             |       | —                      |       | 0.3                |       | —              |       | —          |       | 1.4           |       | 2.2              |       |
| Cancelled acquisition and disposal costs                                     |       | 0.3                 |       | —          |       | —                      |       | —             |       | —              |       | —          |       | —        |       | 0.3              |       |
| Inventory write-up reversal                                                  |       | —              |       | —          |       | —                      |       | 0.1                |       | —              |       | —          |       | —        |       | 0.1              |       |
| Loss on sale of assets                                                       |       | —              |       | —          |       | —                      |       | 0.1                |       | —              |       | —          |       | —        |       | 0.1              |       |
| Foreign exchange loss (gain), net                                            |       | 0.3                 |       | —          |       | —                      |       | —             |       | —              |       | (0.1            | )          | (5.3          | )          | (5.1             | )          |
| Other                                                                        |       | (0.3                | )          | —          |       | —                      |       | —             |       | —              |       | —          |       | (0.2          | )          | (0.5             | )          |
| Total Adjusted EBITDA (b)                                                    |       | $                   | 50.7       |            | $          | 42.8                        |       | $                  | 21.8       |                | $          | 25.6            |       | $             | 8.6        |             | $          | 9.7 |   | $ | (12.8 | ) | $ | 146.4 |   |
| **Six  months ended June 30, 2007**                                          | ** ** | ** **          | ** ** | ** **      | ** ** | ** **                  | ** ** | ** **         | ** ** | ** **          | ** ** | ** **      | ** ** | ** **    | ** ** | ** **       | ** ** |
| Income (loss) from continuing operations before taxes  and minority interest |       | $              | 90.7       |            | $     | 43.8                        |       | $             | 6.1        |                | $     | 23.9            |       | $        | 6.0        |             | $     | 11.6 |   | $  | (77.5 | ) | $  | 104.6 |   |
| Interest expense (a)                                                         |       | 19.0                |       | 6.2             |       | 15.9                        |       | 16.6               |       | 4.7                 |       | 0.1             |       | 39.2          |       | 101.7            |       |
| Interest income                                                              |       | (1.7                | )          | (0.5            | )          | (0.1                        | )          | —             |       | (0.2                | )          | (0.7            | )          | (5.9          | )          | (9.1             | )          |
| Depreciation and amortization                                                |       | 26.4                |       | 25.5            |       | 20.8                        |       | 19.7               |       | 5.5                 |       | 8.0             |       | 2.5           |       | 108.4            |       |
| Restructuring charges, net                                                   |       | 0.5                 |       | 0.3             |       | —                      |       | 0.7                |       | —              |       | 3.7             |       | 0.8           |       | 6.0              |       |
| CCA litigation defense costs                                                 |       | —              |       | 0.3             |       | —                      |       | —             |       | —              |       | —          |       | —        |       | 0.3              |       |
| Systems/organization establishment expenses                                  |       | (0.4                | )          | 0.5             |       | —                      |       | 0.6                |       | 0.5                 |       | —          |       | —        |       | 1.2              |       |
| Cancelled acquisition and disposal costs                                     |       | 0.1                 |       | —          |       | 0.7                         |       | —             |       | —              |       | —          |       | —        |       | 0.8              |       |
| Inventory write-up reversal                                                  |       | —              |       | —          |       | —                      |       | 0.1                |       | —              |       | —          |       | —        |       | 0.1              |       |
| Costs incurred related to debt modifications                                 |       | —              |       | —          |       | —                      |       | —             |       | —              |       | —          |       | 0.9           |       | 0.9              |       |
| Loss on early extinguishment of debt                                         |       | —              |       | 1.9             |       | —                      |       | —             |       | 1.1                 |       | 0.3             |       | 16.1          |       | 19.4             |       |
| Loss (gain) on sale of assets                                                |       | —              |       | 0.1             |       | —                      |       | —             |       | —              |       | (4.7            | )          | (0.6          | )          | (5.2             | )          |
| Foreign exchange loss (gain), net                                            |       | 0.3                 |       | —          |       | —                      |       | (0.1               | )          | —              |       | (0.2            | )          | (3.7          | )          | (3.7             | )          |
| Other                                                                        |       | (0.3                | )          | —          |       | —                      |       | —             |       | —              |       | —          |       | 0.1           |       | (0.2             | )          |
| Total Adjusted EBITDA (b)                                                    |       | $                   | 134.6      |            | $          | 78.1                        |       | $                  | 43.4       |                | $          | 61.5            |       | $             | 17.6       |             | $          | 18.1 |   | $ | (28.1 | ) | $ | 325.2 |   |
| **Six  months ended June 30, 2006**                                          | ** ** | ** **          | ** ** | ** **      | ** ** | ** **                  | ** ** | ** **         | ** ** | ** **          | ** ** | ** **      | ** ** | ** **    | ** ** | ** **       | ** ** |
| Income (loss) from continuing operations before taxes  and minority interest |       | $              | 55.2       |            | $     | 45.8                        |       | $             | 11.8       |                | $     | 16.4            |       | $        | 11.7       |             | $     | 7.7 |   | $  | (51.6 | ) | $  | 97.0 |   |
| Interest expense (a)                                                         |       | 25.6                |       | 7.6             |       | 14.3                        |       | 15.6               |       | —              |       | 1.9             |       | 22.5          |       | 87.5             |       |
| Interest income                                                              |       | (3.2                | )          | —          |       | (0.1                        | )          | (0.1               | )          | (0.1                | )          | (1.1            | )          | 2.1           |       | (2.5             | )          |
| Depreciation and amortization                                                |       | 23.1                |       | 20.3            |       | 18.3                        |       | 16.4               |       | 4.3                 |       | 8.6             |       | 2.0           |       | 93.0             |       |
| Restructuring charges, net                                                   |       | 0.5                 |       | 0.8             |       | —                      |       | —             |       | —              |       | 0.9             |       | —        |       | 2.2              |       |
| CCA litigation defense costs                                                 |       | —              |       | 0.5             |       | —                      |       | —             |       | —              |       | —          |       | —        |       | 0.5              |       |
| Systems/organization establishment expenses                                  |       | 0.1                 |       | 0.4             |       | —                      |       | 0.3                |       | —              |       | —          |       | 3.3           |       | 4.1              |       |
| Cancelled acquisition and disposal costs                                     |       | 0.9                 |       | —          |       | —                      |       | —             |       | —              |       | —          |       | —        |       | 0.9              |       |
| Inventory write-up reversal                                                  |       | —              |       | 0.8             |       | —                      |       | 0.1                |       | —              |       | —          |       | —        |       | 0.9              |       |
| (Gain) loss on sale of assets                                                |       | —              |       | (0.1            | )          | —                      |       | 0.1                |       | —              |       | —          |       | (0.4          | )          | (0.4             | )          |
| Foreign exchange loss (gain), net                                            |       | 0.2                 |       | 0.1             |       | —                      |       | —             |       | —              |       | 0.3             |       | (2.8          | )          | (2.2             | )          |
| Other                                                                        |       | (0.3                | )          | (0.1            | )          | (1.6                        | )          | 0.4                |       | —              |       | —          |       | (0.2          | )          | (1.8             | )          |
| Total Adjusted  EBITDA (b)                                                   |       | $                   | 102.1      |            | $          | 76.1                        |       | $                  | 42.7       |                | $          | 49.2            |       | $             | 15.9       |             | $          | 18.3 |   | $ | (25.1 | ) | $ | 279.2 |   |

 

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(a)   Includesgains of $0.8 million and $4.6 million for the three months ended June 30, 2007and 2006, respectively, and losses of $2.0 million and gains of $15.3 millionfor the six months ended June 30, 2007 and 2006, respectively, representing themovement in the mark-to-market valuation of the Company’s interest rate andcross-currency hedging instruments.

(b)   Thisamount does not include $19.8 million for the three months ended June 30, 2006and $1.8 million and $35.7 million for the six months ended June 30, 2007 and2006, respectively, of Adjusted EBITDA from the former Groupe Novasep segmentwhich was 

13

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sold on January 9, 2007.

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 $1.5 million and $1.0 million were recorded in thethree months ended June 30, 2007 and 2006, respectively, while $6.0 million and$2.2 million were recorded in the six months ended June 30, 2007 and 2006,respectively, for miscellaneous restructuring activities, including headcountreductions and facility closures (see Note 12, “Restructuring Liability,” forfurther details).

·                  *Chromated copper arsenate* (*CCA) litigation defense costs*:  Costs of $0.2 million and $0.2 million wererecorded in the three months ended June 30, 2007 and 2006, respectively, while$0.3 million and $0.5 million were recorded in the six months ended June 30,2007 and 2006, respectively, primarily for attorney fees related to the Company’sTimber Treatment Chemicals business line of the Performance Additives segment.

·                  *Systems/organization establishment expenses*: For the three and six months ended June 30, 2007, expenses of $0.3 million and$1.2 million, respectively, were recorded. In the Advanced Ceramics andSpecialty Compounds segments, expenses were incurred related to the integrationof businesses acquired in 2007 and 2006. In the Performance Additives segment, expenses were incurred primarilyrelated to the integration of the Viance, LLC joint venture. For the three andsix months ended June 30, 2006, expenses of $2.2 million and $4.1 million,respectively, were recorded related to professional fees incurred regardingsystems and internal control documentation required 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 $0.7 million and $0.3 million were recorded for the three months endedJune 30, 2007 and 2006, respectively, and $0.8 million and $0.9 million wererecorded for the six months ended June 30, 2007 and 2006, respectively, inconnection with non-consummated acquisitions and dispositions.

·                  *Loss on early extinguishment of debt:*  In the second quarter of 2007, the Companypaid a redemption premium of $14.5 million and wrote off $4.9 million ofdeferred financing costs associated with the redemption of the 2011 Notes onMay 15, 2007 (see Note 8, “Long-Term Debt,” for further details).

·                  *Costs 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 Sud-Chemie businesses in 2005 and acquisitions in theAdvanced Ceramics segment in 2006 and 2007, the Company allocated a portion ofthe total purchase price to inventory to reflect manufacturing profit ininventory at the date of the acquisitions. This resulted in a consequentialreduction in gross profit, including currency effects, of $0.1 million in theAdvanced Ceramics segment for the three and six months ended June 30, 2007;$0.1 million in the Advanced Ceramics segment for the three months ended June30, 2006; and $0.9 million in the Performance Additives and Advanced Ceramicssegments for the six months ended June 30, 2006 as the inventory was sold inthe normal course of business.

·                  *Gain on sale of assets*:  For thethree months ended June 30, 2007 and 2006, the Company recorded gains of $0.4million and losses of $0.1 million, respectively, related to the sale ofassets.  For the six months ended June30, 2007 and 2006, the Company recorded gains of $5.2 million and $0.4 million,respectively, related to the sale of assets. The gain recorded in the six months ended June 30, 2007 primarily relatesto the sale of the U.S. Wafer Reclaim business in the Electronics segment.

·                  *Foreign exchange gain (loss), net*: During the periods presented, the Company recorded foreign exchange gains and

14

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(losses) related to our long-term debt and other non-operatingtransactions. These amounts primarily reflect the non-cash translation impacton our euro-denominated debt resulting from the strengthening or weakening ofthe euro against the U.S. dollar and/or the British pound. For the threemonths ended June 30, 2007 and 2006, gains of $3.3 million and $5.1 million,respectively, were recorded. For the six months ended June 30, 2007 and2006, gains of $3.7 million and $2.2 million, respectively, were recorded.

·      *Other*:  In thesix months ended June 30, 2006, the Company recorded $1.6 million of incomerelated to the correction of an immaterial error reported in the first quarterof 2006 related to a previously unrecorded asset in the Titanium DioxidePigments segment.

**5.    INVENTORIES:**

Inventories are comprisedof the following:
|                               | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------|------------|-------------------|------------|-----------------------|------------|
| **($ in millions)** | ** ** | **2007**          | ** ** | **2006**              | ** ** |
| Raw materials                 |       | $                 | 144.1      |                  | $          | 160.1 |   |
| Work-in-process               |       | 52.7              |       | 53.3                  |       |
| Finished goods                |       | 242.5             |       | 226.4                 |       |
| Packaging  materials          |       | 6.4               |       | 5.6                   |       |
|                          |       | $                 | 445.7      |                  | $          | 445.4 |   |

 

**6.    GOODWILL:**

Below are goodwillbalances and activity by segment:
| ** **                      | ** ** | **Specialty** | ** ** | **Performance** | ** ** | **Titanium  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 |   |
| Acquisitions                    |       | —        |       | —          |       | —                |       | 14.3         |       | —        |       | —          |       | 14.3       |       |
| FIN 48 tax adjustments  (a)     |       | (6.1          | )          | —          |       | (1.6                  | )          | (2.2         | )          | —        |       | —          |       | (9.9       | )          |
| Other tax adjustments           |       | (3.0          | )          | —          |       | —                |       | —       |       | (1.5          | )          | —          |       | (4.5       | )          |
| Foreign exchange and  other (b) |       | 15.9          |       | 6.2             |       | 4.4                   |       | 6.2          |       | 3.0           |       | 0.7             |       | 36.4       |       |
| Balance, June 30, 2007          |       | $             | 604.4      |            | $          | 487.0                 |       | $            | 175.4      |          | $          | 241.5           |       | $          | 120.0      |   | $ | 125.7 |   | $ | 1,754.0 |   |

 

----

(a)   SeeNote 9, “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 of $1.4 million related to the Viance, LLC jointventure formed in January 2007.

**7.    OTHERINTANGIBLE ASSETS:**

Other intangible assets,net consist of:
| ** **                               | ** ** | **As of June 30, 2007** | ** ** | **As of December 31, 2006** | ** ** |
|------------------------------------------|------------|---------------------------------------------|------------|-------------------------------------------------|------------|
| **($ in millions)**            | ** ** | **Gross  Carrying  Amount (a)**        | ** ** | **Accumulated  Amortization**                   | ** ** | **Net** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** |
| Patents and other  intellectual property |       | $                                           | 363.7      |                                            | $          | (96.3 | ) | $ | 267.4 |   | $ | 311.1 |   | $ | (82.0 | ) | $ | 229.1 |   |
| Trade names and  trademarks              |       | 135.7                                       |       | (18.6                                           | )          | 117.1 |   | 132.7 |   | (15.2 | ) | 117.5 |   |
| Customer relationships                   |       | 244.0                                       |       | (44.3                                           | )          | 199.7 |   | 191.3 |   | (32.6 | ) | 158.7 |   |
| Supply agreements                        |       | 28.6                                        |       | (1.7                                            | )          | 26.9 |   | 6.5 |   | (0.6 | ) | 5.9 |   |
| Other                                    |       | 47.3                                        |       | (21.4                                           | )          | 25.9 |   | 46.4 |   | (18.0 | ) | 28.4 |   |
| Total                                    |       | $                                           | 819.3      |                                            | $          | (182.3 | ) | $ | 637.0 |   | $ | 688.0 |   | $ | (148.4 | ) | $ | 539.6 |   |

 

----

(a)   Theincrease since December 31, 2006 is primarily related to other intangibleassets acquired in the Viance joint venture completed in January 2007. See Note3, “Viance, LLC Joint Venture,” for further details.

15

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Amortization of otherintangible assets was $16.2 million and $13.6 million for the three monthsended June 30, 2007 and 2006, respectively and $31.4 million and $24.2 millionfor the six months ended June 30, 2007 and 2006, respectively. Estimatedaggregate amortization expense for each of the five succeeding years is asfollows:
|                               | ** ** | **Amortization** | ** ** |
|-------------------------------|------------|------------------|------------|
| **($ in millions)** | ** ** | **Expense**      | ** ** |
| **Year  ended**               |       |             |       |
| 2007                          |       | $                | 62.4       |   |
| 2008                          |       | 60.9             |       |
| 2009                          |       | 53.5             |       |
| 2010                          |       | 52.0             |       |
| 2011                          |       | 50.5             |       |
|                               |            |                  |            |  |

 

**8.    LONG-TERMDEBT**

Long-term debt and loanspayable are summarized as follows:
|                                                                                         | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| **($, € and £ in millions)**                         | ** ** | **2007**          | ** ** | **2006**              | ** ** |
| Senior secured  credit facilities:                                                      |       |              |       |                  |       |
| Tranche A-1 term loans (€32.3 and €35.2,  respectively)                       |       | $                 | 43.7       |                  | $          | 46.5 |   |
| Tranche A-2 term loans (€140.6 and €153.4,  respectively)                     |       | 190.4             |       | 202.4                 |       |
| Tranche E term loans                                                                    |       | 1,122.1           |       | 1,127.8               |       |
| Tranche F term loans (€270.7 as of December 31,  2006) (refinanced March 23, 2007) |       | —            |       | 357.3                 |       |
| Tranche G term loans (€269.3 as of June 30, 2007)                                  |       | 364.7             |       | —                |       |
| Revolving short-term loans                                                              |       | —            |       | 37.0                  |       |
| 2011 Notes  (repaid May 15, 2007)                                                       |       | —            |       | 273.4                 |       |
| 2014 Notes (€375.0  and $200.0 as of June 30, 2007 and December 31, 2006)          |       | 707.8             |       | 695.0                 |       |
| Other term loan  facilities                                                             |       | 10.9              |       | 12.9                  |       |
| Capitalized  lease obligations (€34.2 and €35.3, respectively)                |       | 46.3              |       | 46.6                  |       |
| Preferred stock  of subsidiary (£12.0 as of June 30, 2007 and December 31, 2006)   |       | 24.1              |       | 23.5                  |       |
| Other (€12.4 as  of June 30, 2007 and December 31, 2006)                           |       | 16.8              |       | 16.3                  |       |
|                                                                                    |       | 2,526.8           |       | 2,838.7               |       |
| Less current  maturities                                                                |       | (89.6             | )          | (117.8                | )          |
|                                                                                    |       | $                 | 2,437.2    |                  | $          | 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 repay its outstanding 10 5/8% Senior Subordinated Notes due 2011 (“2011Notes”) any time on or after May 15, 2007 without a corresponding repayment ofterm loans under the Credit Agreement, and (iii) resets substantially all ofthe baskets contained in the restrictive covenants and elsewhere in the CreditAgreement. The refinancing of the tranche F loans with the new tranche G loanseffectively reduced the interest rate on the tranche G term loans by 50 basispoints. The Company did not incur any additional borrowings under the FourthCredit Amendment. In March 2007, the Company expensed $0.9 million related tothe fourth amendment of the senior secured credit agreement.

On May 15, 2007, theCompany redeemed its outstanding 10 5/8% Senior Subordinated Notes due 2011 inthe aggregate principal amount of $273.4 million. In connection with this debtrepayment, redemption premiums of $14.5 million were paid and deferredfinancing costs of $4.9 million were written off in the second quarter of 2007.These amounts are reported in “loss on early extinguishment of debt” in theCondensed Consolidated Statements of Operations.

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 June 30, 2007, the Companyhad approximately $58.8 million of letters of credit and other bank guarantees,of which $9.7 million will expire in less than one year, $6.9 million willexpire in 2-3 years, $11.4 million will expire 

16

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in 4-5 years and $30.8million will expire after five years. This amount includes outstanding lettersof credit of $27.9 million that reduced our availability under the seniorsecured credit facility. In the opinion of management, such obligations willnot significantly affect the Company’s financial position, results ofoperations or cash flows as the Company anticipates fulfilling its performanceobligations.

**9.    INCOMETAXES:**

Income tax expense hasbeen computed based on the projected effective tax rate for the year. Theeffective tax rate for the first six months of 2007 and 2006 was 42.1% and41.5%, respectively. The 2007 effective tax rate is primarily a function of theimpact of the valuation allowance on domestic earnings and foreign ratedifferentials. During the first half of 2007, a tax provision of $44.0 millionwas recorded related to pre-tax book income of $104.6 million. The Companyrecorded an income tax provision of $40.3 million in the first half of 2006 ona pre-tax book income of $97.0 million.

In the six months endedJune 30, 2007, the Company increased its worldwide valuation allowances by$16.3 million related to U.S. net deferred tax assets. The change in thevaluation allowance for the first half of 2007 impacted the effective tax rateby $7.8 million. The following table reflects the activity in the valuationallowance for worldwide net operating losses and other deferred income taxassets:
|                                                      | ** ** | **Valuation** | ** ** |
|------------------------------------------------------|------------|---------------|------------|
| **($ in millions)**                        | ** ** | **Allowance** | ** ** |
| Balance as of  December 31, 2006                     |       | $             | 64.1       |   |
| Increase as  reflected in income tax expense         |       | 7.8           |       |
| Increase as  reflected in other comprehensive income |       | 8.5           |       |
| Balance as of  June 30, 2007                         |       | $             | 80.4       |   |

 

In the first half 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 six months of 2007, the Company’s net deferred tax assets andliabilities were maintained at a zero level, other than a noncurrent deferredtax liability relating to goodwill with an indefinite reversal period. It isthe Company’s policy that the valuation allowance is reversed in the periodmanagement determines it is more likely than not that the deferred tax assets,or a portion thereof, will be realized.

On July 13, 2006, theFASB issued FIN No. 48, *Accounting for Uncertaintyin Income Taxes*—*An Interpretation of FASBStatement No. 109*. FIN 48 clarifies the accounting for uncertaintyin income taxes recognized in an entity’s financial statements in accordancewith FASB Statement No. 109, *Accounting for IncomeTaxes* and prescribes a recognition threshold and measurementattribute for financial statement disclosure of tax positions taken or expectedto be taken on a tax return. Under FIN 48, the impact of an uncertain incometax position on the income tax return must be recognized at the largest amountthat is more-likely-than-not to not be sustained upon audit by the relevantauthority. An uncertain income tax position will not be recognized if it hasless than a 50% likelihood of being sustained. Additionally, FIN 48 provides guidanceon derecognizing, classification, interest and penalties, accounting in interimperiods, disclosure and transition. FIN 48 is effective for fiscal yearsbeginning after December 15, 2006.

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 June 30, 2007, the total amount of unrecognized tax benefitswas $44.6 million. As a result of the initial implementation of FIN 48, the Companyrecognized a $1.0 million increase in the liability for unrecognized taxbenefits which was accounted for as follows:
| ($ 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.

17

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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 the threeand six months ended June 30, 2007, the accrual for interest and penalties wasdecreased by $0.1 million and remained unchanged, respectively. As of June 30,2007, the Company had accrued a total of $3.3 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 $5.0 million.Audit outcomes and the timing of audit settlements are subject to significantuncertainty.

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.

In the second quarter of2007, the Company reclassified noncurrent deferred tax assets in certainjurisdictions previously netted in noncurrent deferred tax liabilities andreclassified current deferred tax liabilities in certain jurisdictionspreviously netted in current deferred tax assets. The noncurrent deferred taxreclassification relates to deferred tax assets in the U.K. of $21.2 millionand the current deferred tax reclassifications relate to deferred taxliabilities in Germany and Italy aggregating $4.3 million. As of December 31,2006, noncurrent deferred tax assets in certain jurisdictions of $20.9 wereincorrectly netted with noncurrent liabilities and current deferred taxliabilities in certain jurisdictions of $3.4 million were incorrectly nettedwith current deferred tax assets.  Theeffect of this to the Company’s Condensed Consolidated Balance Sheets as ofDecember 31, 2006 was not material.

It is anticipated thattax law changes in Germany and the U.K. will be enacted in 2007. The change inlaw and tax rates could have an impact on the existing deferred tax assets andliabilities recorded in those jurisdictions. The effective tax rate would beimpacted in the quarter that these tax laws are enacted.

**10.    STOCK-BASEDCOMPENSATION:**

Holdings has in place the2005 Amended and Restated Stock Purchase and Option Plan of Rockwood Holdings,Inc. and Subsidiaries (the “Plan”). Under the Plan, Holdings may grant stockoptions, restricted stock and other stock-based awards to its employees anddirectors and allow employees and directors to purchase shares of its commonstock. There are 10,000,000 authorized shares available for grant under thePlan.

***Restricted Stock***—Restricted stock ofHoldings can be granted with or without payment of consideration withrestrictions on the recipient’s right to transfer or sell the stock. In thesecond quarter of 2007, Holdings granted 225,208 performance restricted stockunits to management and key employees. These performance restricted stock unitswill vest on December 31, 2009 as long as the employee continues to be employedby the Company on this date and upon the achievement of certain performancetargets as approved by the Compensation Committee. The number of shares ofHoldings’ common stock ultimately awarded upon vesting is determined based on Holdings’achievement of specified performance criteria. Certain employees have “company-wideperformance targets,” for which vesting is based on the achievement ofspecified annualized Adjusted EBITDA and earnings per share growth levels,while others have “divisional performance targets” for which vesting is basedon a particular division’s achievement of annualized Adjusted EBITDA growth.Holdings granted a “target amount” of performance restricted stock units,whereby if the specified performance target is met, such shares of Holdings’common stock would be awarded upon vesting of these units. However, theseawards provide the employee with the possibility of vesting from 0% to 200% ofthe share targeted units granted based upon performance versus the target. Thecompensation cost related to restricted stock of Holdings caused net income andincome from continuing operations before taxes and minority interest todecrease by $0.3 million for the three and six months ended June 30, 2007. Theweighted average grant date fair value of the restricted shares granted in thesecond quarter of 2007 was $31.94 per stock unit. As of June 30, 2007, therewas $7.1 million of unrecognized compensation cost related to restricted stockunits determined in accordance with SFAS No. 123R, which is expected to berecognized over a weighted-average period of approximately 2.5 years.

***Stock Purchase***—Eligible employees anddirectors can purchase shares of Holdings’ common stock at prices as determinedby its board of directors.

***Board of Directors’ Stock Options***—Stockoptions granted to directors under this Plan shall have an exercise price atleast equal to the fair market value of Holdings’ common stock on the date ofgrant. Options available for grant under this Plan are time options which havea life of ten years from the date of grant and vest in three equal annualinstallments on each of the first three anniversaries of the grant date.  In the second quarter of 2007, Holdingsgranted 7,878 stock options to a new director under this Plan.

***Stock Options***—Stock options granted toemployees under the Plan shall have an exercise price at least equal to thefair market value of Holdings’ common stock on the date of grant. Holdings hasgranted two types of options under the Plan – time and performance options.Time options granted prior to 2007 have a life of ten years from the date ofgrant and vest as follows: time options granted prior to 2004 vest 10% in yearone, 10% year two, 25% year three, 25% year four and 30% year five; and timeoptions granted 

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between 2004 and 2006vest in installments of 20% on each of the first five anniversaries of thegrant date.  Time options granted in 2007have a life of seven years and vest in three annual installments on each of thefirst three anniversaries of December 31, 2006. In the second quarter of 2007, Holdings granted 515,819 time-based stockoptions to management and key employees under the Plan.

Performance options havea life of ten years and become exercisable with respect to 20% of the totalperformance options granted upon the achievement of certain performancetargets. Performance options become exercisable on the eighth anniversary ofthe grant date to the extent that the options have not become otherwiseexercisable or have not been terminated. In October 2004, the performancetargets were modified as a result of the Dynamit Nobel Acquisition. The changeto the applicable performance targets as a result of the Dynamit NobelAcquisition was a permitted change per the applicable stock option agreements;as such no modification occurred requiring a new measurement date calculation.Certain option holders have “company-wide performance targets,” for whichtargets are based on the achievement by Holdings of certain implied equityvalues. Other option holders have “divisional performance targets,” for whichtargets are based on a particular division’s achievement of annual orcumulative Adjusted EBITDA.

The Company recorded nocompensation cost in the historical statements of operations related to thePlan prior to 2006. The measurement date for determining compensation expense foreach option had been the option issuance date and at that time the market priceof the stock was equal to the exercise price in each case. The time optionshave been accounted for as a fixed plan. The performance options have beentreated similar to fixed stock option plans as the Company concluded thepredefined (non-accelerated) vesting schedule is substantive as it is deemed tobe more likely than not that the applicable individuals will remain employedwith the Company through that vesting date, particularly if the performancetrigger has not occurred. As such, the measurement date for these options isthe option grant date in accordance with APB Opinion 25.

The compensation costrelated to stock options of Holdings caused income from continuing operationsbefore taxes and minority interest to decrease by $0.4 million and less than$0.1 million in the three months ended June 30, 2007 and 2006, respectively.For the three months ended June 30, 2007, a tax benefit of $0.1 million wasrecorded. The compensation cost related to stock options of Holdings causedincome from continuing operations before taxes and minority interest todecrease by $0.5 million and less than $0.1 million in the six months endedJune 30, 2007 and 2006, respectively. For the six months ended June 30, 2007, atax benefit of $0.1 million was recorded. As noted in Note 1, “Description ofBusiness and Summary of Significant Accounting Policies,” the Company isrecording compensation cost for the unvested portion of awards issued afterFebruary 2005, which is the date Holdings first filed a registration statementwith the SEC.

The fair value of stockoptions granted in the three and six months ended June 30, 2007 and 2006 wereestimated on the date of grant using the Black-Scholes option pricing modelthat used the assumptions noted in the following table:
|                           | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|---------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                | ** ** | **2007**                         | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| Expected term  (in years) |       | 4.5                              |       | N/A                            |       | 4.5 |   | 6.0 |   |
| Expected volatility       |       | 30                               | %          | N/A                            |       | 30 | % | 35 | % |
| Risk-free rate            |       | 4.7                              | %          | N/A                            |       | 4.7 | % | 4.7 | % |
| Expected dividends        |       | N/A                              |       | N/A                            |       | N/A |   | N/A |   |

 

The expected termrepresents the period of time that options granted are expected to beoutstanding based on the simplified method for determining expected term of anemployee share option (in accordance with SAB No. 107). As Holdings became apublic company in August 2005, there is not a long period of history of itsshare price. As a result, Holdings’ expected volatility is based on theexpected volatilities of comparable peer companies that are publicly traded.The risk-free rate is based on the U.S. Treasury yield curve in effect at thetime of grant. Expected dividends are not applicable as Holdings currently doesnot pay and does not expect to pay a dividend on its shares.

As of June 30, 2007,there was $5.2 million of unrecognized compensation cost related to nonvestedstock options determined in accordance with SFAS No. 123R, which is expected tobe recognized over a weighted-average period of approximately 2.5 years. As ofJune 30, 2007 and December 31, 2006, the number of nonvested stock optionsdetermined in accordance with SFAS No. 123R was 566,349 and 47,814,respectively, and the weighted-average grant date fair value of nonvested stockoptions was $10.53 and $8.88, respectively.

The total intrinsic valueof stock options exercised during the six months ended June 30, 2007 was $0.2million. Cash received from option exercises during the six months ended June30, 2007 was $0.2 million. There was no tax benefit realized from optionsexercised in 2007. The total fair value of shares vested during the three andsix months ended June 30, 2007 was less than $0.1 million.

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A summary of the statusof the Holdings’ options granted pursuant to the Plan at June 30, 2007 andchanges during the period ended on that date is presented below:
|                                                                | ** ** | **Shares**      | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|---------------------------------------------------------------------|------------|-----------------|------------|----------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                          | ** ** | **(‘000)** | ** ** | ** **                             | ** ** | **(years)**                                         | ** ** | **($ in millions)**   | ** ** |
| Outstanding at  December 31, 2006                                   |       | 3,838           |       | $                                      | 14.69      |                                                |       |                            |       |   |
| Granted                                                             |       | 524             |       | 31.94                                  |       |                                                |       |                            |       |
| Exercised                                                           |       | (17             | )          | 14.61                                  |       |                                                |       |                            |       |
| Forfeited                                                           |       | (30             | )          | 14.61                                  |       |                                                |       |                            |       |
| Outstanding at  June 30, 2007                                       |       | 4,315           |       | $                                      | 16.79      |                                                | 5.90       |                            | $          | 85.3 |   |
|                                                                |       |            |       |                                   |       |                                                |       |                            |       |
| Options vested  at June 30, 2007 and expected to vest in the future |       | 3,646           |       | $                                      | 16.77      |                                                | 5.73       |                            | $          | 82.0 |   |
|                                                                |       |            |       |                                   |       |                                                |       |                            |       |
| Options vested  at June 30, 2007                                    |       | 2,028           |       | $                                      | 14.65      |                                                | 5.28       |                            | $          | 44.4 |   |
|                                                                |       |            |       |                                   |       |                                                |       |                            |       |
| Weighted-average fair  value of options granted during the year     |       | $               | 10.67      |                                   |       |                                                |       |                            |       |   |
|                                                                     |            |                 |            |                                        |            |                                                     |            |                                 |            |  |  |  |

 

**11.    EMPLOYEEBENEFIT 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** | ** ** | **Six months ended** | ** ** |
|---------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                            | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| **($ in millions)**         | ** ** | **2007**                         | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| Service cost                          |       | $                                | 2.2        |                           | $          | 2.3 |   | $ | 4.3 |   | $ | 4.5 |   |
| Interest cost                         |       | 6.1                              |       | 5.5                            |       | 12.1 |   | 10.7 |   |
| Expected return  on assets            |       | (2.4                             | )          | (2.0                           | )          | (4.8 | ) | (3.9 | ) |
| Net amortization  of actuarial losses |       | 0.1                              |       | 0.6                            |       | 0.3 |   | 1.2 |   |
| Total pension  cost                   |       | $                                | 6.0        |                           | $          | 6.4 |   | $ | 11.9 |   | $ | 12.5 |   |

 

**12.    RESTRUCTURINGLIABILITY:**

The Company recordedrestructuring charges of $1.5 million and $1.0 million for the three monthsended June 30, 2007 and 2006, respectively and $6.0 million and $2.2 million ofrestructuring charges for the six months ended June 30, 2007 and 2006,respectively.  The Company recordsrestructuring liabilities from time to time that represent charges incurred inconnection with consolidations and cessations of certain of its operations,including operations from acquisitions, as well as headcount reductionprograms. These charges consist primarily of write-offs of assets and severancecosts. Severance charges are based on various factors including the employee’slength of 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 six monthsended June 30, 2007, the Company expensed $6.0 million of restructuringcharges. In the Electronics segment, facility closure and severance costs of$3.7 million were recorded related to the restructuring of the Wafer Reclaimbusiness.  In addition, $0.8 million wasrecorded in Corporate and $0.3 million was recorded in the Performance Additivessegment for miscellaneous headcount reductions and facility closures.  In the Advanced Ceramics and SpecialtyChemicals segments, $0.7 million and $0.5 million, respectively, was recordedfor miscellaneous headcount reductions.

During the six monthsended June 30, 2006, the Company expensed $2.2 million of restructuring chargesfor miscellaneous restructuring actions, including $0.9 million for theannounced restructuring of the Wafer Reclaim business in the Electronics 

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segment. The Companyrecorded severance and related costs for employees in connection with theclosure of two Wafer Reclaim facilities (one each in the U.K. and U.S.). TheWafer Reclaim operating facility in the U.K. was closed in January 2006and one of the facilities in the U.S. was closed in March 2006. In addition,$0.5 million was recorded in the Specialty Chemicals segment and $0.8 millionwas recorded in the Performance Additives segment for miscellaneous headcountreductions and the announced closure of the Baulking, United Kingdom facilityfor our Clay-based Additives business in the Performance Additives segment.

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 business. The Company recorded severance and related costs foremployees in connection with the closure of the Wafer Reclaim facilities (oneeach in the U.K. and U.S.). In addition, miscellaneous headcount reductionswere recorded in the Specialty Chemicals, Performance Additives and AdvancedCeramics segments. Costs were also incurred in the Advanced Ceramics segmentrelated to the closure of a facility in Italy.

In  2004, upon the acquisition of the Dynamit Nobelbusinesses, the Company began to assess and formulate specific plans toinvoluntarily terminate or relocate certain employees and/or exit certainactivities of these businesses. For example, the Company closed the formercorporate office of Dynamit Nobel located in Troisdorf, Germany in the fourthquarter of 2004. The related restructuring provision included severance costsfor general and administrative personnel, the closure costs for this buildingand the relocation costs for the remaining employees who were relocated to theCompany’s new Frankfurt, Germany location. Also in 2004, as part of theacquisition of the Pigments and Dispersions business of Johnson Matthey, theCompany initiated a restructuring program and incurred severance costs forselling, general and administrative personnel.

Selected information forthe 2007 restructuring actions follows:
|                                       | ** ** | ** **    | ** ** | **Facility** | ** ** | ** ** | ** ** |
|---------------------------------------|------------|---------------|------------|--------------|------------|------------|------------|
| ** **                            | ** ** | **Severance** | ** ** | **Closure**  | ** ** | ** ** | ** ** |
| **($ in millions)**         | ** ** | **Costs**     | ** ** | **Costs**    | ** ** | **Total**  | ** ** |
| **2007**                              |       |          |       |         |       |       |       |
| Liability  balance, December 31, 2006 |       | $             | —     |         | $          | —     |       | $ | — |   |
| Restructuring  charge in 2007         |       | 1.4           |       | 0.5          |       | 1.9        |       |
| Utilized                              |       | (0.6          | )          | (0.5         | )          | (1.1       | )          |
| Foreign exchange  and other           |       | (0.1          | )          | 0.1          |       | —     |       |
| Liability balance, June  30, 2007     |       | $             | 0.7        |         | $          | 0.1        |       | $ | 0.8 |   |

 

These actions areexpected to be completed by the end of 2007.

Selected information forthe 2006 restructuring actions follows:
|                                       | ** ** | ** **    | ** ** | **Facility** | ** ** | ** **     | ** ** | ** ** | ** ** |
|---------------------------------------|------------|---------------|------------|--------------|------------|----------------|------------|------------|------------|
| ** **                            | ** ** | **Severance** | ** ** | **Closure**  | ** ** | **Relocation** | ** ** | ** ** | ** ** |
| **($ in millions)**         | ** ** | **Costs**     | ** ** | **Costs**    | ** ** | **Costs**      | ** ** | **Total**  | ** ** |
| **2006**                              |       |          |       |         |       |           |       |       |       |
| Liability  balance, December 31, 2006 |       | $             | 4.4        |         | $          | 0.7            |       | $          | 0.7        |   | $ | 5.8 |   |
| Restructuring  charge in 2007         |       | 0.9           |       | 3.2          |       | —         |       | 4.1        |       |
| Utilized                              |       | (1.5          | )          | (0.5         | )          | —         |       | (2.0       | )          |
| Foreign exchange  and other           |       | 0.1           |       | 0.1          |       | —         |       | 0.2        |       |
| Liability balance, June  30, 2007     |       | $             | 3.9        |         | $          | 3.5            |       | $          | 0.7        |   | $ | 8.1 |   |

 

The majority of theseverance and relocation costs from this restructuring action consist of costsrelated to the consolidation in 2007 of several U.K. facilities resulting froman acquisition in 2006 by the Specialty Compounds segment. The severance andrelocation costs related to this action are expected to be completed during2008. The facility closure costs from this action primarily relate to therestructuring of the Wafer Reclaim business and the closure of two WaferReclaim facilities.  The facility closurecosts related to this action are expected to be completed when the leaseexpires in 2018.

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Selected information forthe 2005 restructuring actions follows:
|                                       | ** ** | ** **    | ** ** | **Facility** | ** ** | ** ** | ** ** |
|---------------------------------------|------------|---------------|------------|--------------|------------|------------|------------|
| ** **                            | ** ** | **Severance** | ** ** | **Closure**  | ** ** | ** ** | ** ** |
| **($ in millions)**         | ** ** | **Costs**     | ** ** | **Costs**    | ** ** | **Total**  | ** ** |
| **2005**                              | ** ** | ** **    | ** ** | ** **   | ** ** | ** ** | ** ** |
| Liability  balance, December 31, 2006 |       | $             | 0.2        |         | $          | 0.5        |       | $ | 0.7 |   |
| Utilized                              |       | —        |       | (0.2         | )          | (0.2       | )          |
| Foreign exchange  and other           |       | —        |       | (0.1         | )          | (0.1       | )          |
| Liability balance, June  30, 2007     |       | $             | 0.2        |         | $          | 0.2        |       | $ | 0.4 |   |

 

These actions areexpected to be completed by the end of 2007.

Selected information forthe 2004 restructuring actions follows:
|                                       | ** ** | ** **    | ** ** | **Facility** | ** ** | ** **     | ** ** | ** ** | ** ** |
|---------------------------------------|------------|---------------|------------|--------------|------------|----------------|------------|------------|------------|
| ** **                            | ** ** | **Severance** | ** ** | **Closure**  | ** ** | **Relocation** | ** ** | ** ** | ** ** |
| **($ in millions)**         | ** ** | **Costs**     | ** ** | **Costs**    | ** ** | **Costs**      | ** ** | **Total**  | ** ** |
| **2004**                              | ** ** | ** **    | ** ** | ** **   | ** ** | ** **     | ** ** | ** ** | ** ** |
| Liability  balance, December 31, 2006 |       | $             | 1.6        |         | $          | 0.1            |       | $          | 0.3        |   | $ | 2.0 |   |
| Utilized                              |       | (0.8          | )          | (0.1         | )          | —         |       | (0.9       | )          |
| Foreign exchange  and other           |       | 0.2           |       | —       |       | 0.1            |       | 0.3        |       |
| Liability balance, June  30, 2007     |       | $             | 1.0        |         | $          | —         |       | $          | 0.4        |   | $ | 1.4 |   |

 

These actions areexpected to be substantially completed by the end of 2007.

Restructuring reserves bysegment are as follows:
|                               | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------|------------|-------------------|------------|-----------------------|------------|
| **($ in millions)** | ** ** | **2007**          | ** ** | **2006**              | ** ** |
| Specialty  Chemicals          |       | $                 | 1.2        |                  | $          | 1.9 |   |
| Performance  Additives        |       | 0.7               |       | 0.6                   |       |
| Advanced  Ceramics            |       | 0.6               |       | 0.7                   |       |
| Specialty  Compounds          |       | 4.4               |       | 4.9                   |       |
| Electronics                   |       | 3.2               |       | 0.1                   |       |
| Corporate                     |       | 0.6               |       | 0.3                   |       |
|                          |       | $                 | 10.7       |                  | $          | 8.5 |   |

 

**13.    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 reasonably estimated.It is the Company’s policy to disclose such matters when there is at least areasonable possibility that a material loss may have been incurred.

In April 2005, HospiraIncorporated filed suit in Mecklenburg County, North Carolina Superior Court againstone of the Company’s wholly-owned subsidiaries in its Specialty Compoundssegment alleging claims for negligence, negligent misrepresentation, estoppel,fraud, third party beneficiary breach of contract and unfair trade practices asa result of the subsidiary providing PVC compound to its customer. Hospira isseeking damages of approximately $16.0 million for costs allegedly related toits recall and destruction of intravenous administration kits that incorporatedcomponents made with this compound, and further seeks treble damages ofapproximately $48.0 million, plus attorneys’ fees and interest, under the NorthCarolina unfair trade practice statute. The Court has dismissed Hospira’snegligence and estoppel claims, but denied the subsidiary’s motion to dismissthe other claims. Following discovery, the Company’s subsidiary filed a motionfor summary judgment to dismiss the remaining claims, which is currentlypending before the court. The Company will continue to vigorously defend thismatter. While the Company believes its subsidiary has meritorious defensesagainst Hospira’s claims and do not believe that resolution of this matter willhave a material adverse effect on its business or financial condition, theCompany cannot predict the outcome of this litigation and resolution of thisclaim may have a material adverse effect on its results of operations or cashflows in any quarterly or annual reporting period.

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Although the Companyexpects to continue to pay legal fees in connection with certain legal actionsrelated to chromated copper arsenate and other product liability matters, basedon currently available facts, the Company does not believe that these actionswill have a material effect on the financial condition, results of operationsor liquidity of the Company, except as discussed above. Reserves in connectionwith such product liability matters do not individually exceed $1.5 million andin the aggregate $4.0 million. The Company’s reserve estimates are based onavailable facts, including damage claims and input from its internal andexternal legal counsel, past experience, and, in some instances where defensecosts are being paid by its insurer, known insurance recoveries. The Company isunable to estimate the amount or range of any potential incremental chargesshould facts and circumstances change and may in the future revise itsestimates based on new information becoming available. Further, the Companycannot predict the outcome of any litigation or the potential for futurelitigation. See Part II, Item 1-Legal Proceedings, for additional informationregarding the Company’s legal matters.

***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.For example, as discussed below, the Company is required to indemnify the buyersof the Groupe Novasep subsidiary for certain known and unknown environmentalactions which may arise in the future that relate to the period prior to theclosing. In the opinion of management, and based upon information currentlyavailable, the ultimate resolution of any indemnification obligations owed tothe Company or by the Company will not have a material effect on the Company’sfinancial condition, 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 causecontamination or personal injury when released into the environment.Environmental laws are subject to change and have tended to become stricterover time. Such changes in environmental laws, or the enactment of newenvironmental laws, could result in materially increased capital, operating andcompliance 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,community neighbors and customers and minimize the production and emission ofwastes and other pollutants. Although SHE legal requirements are constantlychanging, these SHE management systems are designed to assist the Company inmeeting its compliance 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 June 2007, the UnitedStates Department of Homeland Security Agency’s regulation on Chemical PlantSecurity became effective. This rule seeks to regulate security at facilitiesthat store certain listed substances. The Company believes that 12 of itsfacilities in the

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United States may berequired to provide information necessary to complete the first step known asthe Top Screen. After gathering information during the Top Screen process,Homeland Security will develop four tiers of risk with Tier 1 being the highestrisk sites and Tier 4 representing the lowest. For national securityreasons, the Department will not publish the ranking criteria. The Companybelieves that following Top Screen, six of the Company’s locations may receivea ranking and be asked to undertake the second step of the regulation, which isto prepare a Site Vulnerability Analysis (which includes identification ofcritical assets, threat assessments, identification of potential securityvulnerabilities and analysis of countermeasures to a terrorist attack) and aSite Security Plan (which describes the security measures that will addresseach identified vulnerability). Each Site Vulnerability Analysis and SiteSecurity Plan must be reviewed and approved by the Department of HomelandSecurity. Although some security improvements may be required at certain of theCompany’s facilities, the Company does not expect compliance with thisregulation to have a material impact on its cash flows or results ofoperations.

On June 1, 2007 theRegistration, Evaluation and Authorization of Chemicals (“REACH”) becameeffective in the EU. The REACH legislation requires manufacturers and importersof certain chemicals to register those chemicals, perform health andenvironmental risk analyses of those chemicals, and in certain instances,obtain authorizations for the use of the chemicals. Covered substances must beregistered by December 31, 2008. Currently, REACH is expected to be implementedin three phases over the next eleven years based on known product hazardsand/or volume of product in commerce. Under REACH, where warranted by a riskassessment, specified uses of some hazardous substances may be restricted. As aspecialty chemicals company, it is possible that the Company is the onlymanufacturer of one or more substances to be regulated under REACH and thuscould potentially bear the full cost of compliance with REACH for some or allof the Company’s products. The Company estimates it has approximately 350products that might be subject to REACH. The Company is taking steps to complywith REACH and is evaluating the potential costs of compliance which itbelieves to be approximately $3.0 million per year over the next eleven years,although the Company may incur additional costs depending on the safetyassessments required. In addition, it is possible that REACH may affect rawmaterial supply, customer demand for certain products and the Company’sdecision to continue to manufacture and sell certain products.

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 ofcompliance with the IPPC permit program will not be material to its results ofoperations, 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, which becameeffective at the start of 2005. The regulations directly affect the Company’spower plants at the Duisburg and Langelsheim sites in Germany, as well as thepower plant being operated by a third party on one of the Company’s sites.Rockwood and such third party are required to purchase carbon dioxide credits,which could result in increased operating costs, and may be required to developadditional cost-effective methods to reduce carbon dioxide emissions, whichcould result in increased capital expenditures. The new regulation indirectlyaffects the Company’s other operations in the EU, which may experience higherenergy costs from third party providers. The Company continues to evaluateoptions in order to comply with the Protocol. However, the Company does notexpect this to have a material impact on its cash flow or results ofoperations.

***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.

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

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contamination is alsoknown to exist at the Company’s facilities at Freeport, Texas, Sudbury, U.K.,Sens, France, Dueneberg, Germany and Sumperk in Czech Republic; however, nofurther regulatory remedial actions are currently required for these facilitiesand any liabilities arising from such contamination is covered by indemnityobligations or the previous owners of these facilities with the exception ofFreeport, Dueneberg and Sens. The Company is currently operating groundwaterremediation systems at its Hainhausen, Stadeln, Oss, Valdosta, and Silver Peakfacilities. The Company also operates groundwater remediation and/or monitoringsystems at its Plochingen, Marktredwitz, Stadeln, Troisdorf, New Johnsonvilleand Laurens facilities, for which prior owners or insurers have assumedresponsibility. The Company also continues to monitor groundwater at theBeltsville and St. Cheron facilities, which were previously the subject of a soilremoval action. Groundwater is also monitored at the St. Fromond and Barrowfacilities due to prior spills and at the Harrisburg facility due to a landfillclosure. The Company believes that additional environmental studies, andpossibly environmental remediations, will be required at the Harrisburgfacility. The Company is also in the process of determining appropriateremedial actions with the regulatory authorities at the following locations:Duisburg, Langelsheim, Troisdorf, Turin, Louisville and La Mirada. Furthermore,as a result of facility closings, divestitures and offsite disposal activities,the Company is responsible for the following other matters: contaminationbeneath divested portions of the manufacturing facility in Troisdorf; a formerdisposal site in Laurel, Maryland; contamination at a closed SpecialtyChemicals facility in Houston, Texas; contamination at a former SpecialtyChemicals facility in Sunbright, Virginia; groundwater remediation at Stadeln;and former sites operated by Dynamit Nobel’s previously divested explosivesbusiness. 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 St. 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. The Company will be required to make capitalexpenditures of approximately $3.0 million in connection with this matter.

***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 of the sale. These obligations expire three yearsafter the closing; however, the Company’s liability for such obligations isreduced from 90 percent of any qualifying environmental liability claim to 70percent of such claims 15 months after the closing. In addition, the Company isrequired to indemnify the purchaser of the Company’s U.S. Wafer Reclaimbusiness for six years for any unknown environmental actions attributable tothe conduct of such business prior to the closing of the transaction inFebruary 2007. The business purchase agreement provides that the Company mustindemnify the buyer for 100% of claims related to contamination of the business’site or the migration of any hazardous substances from such site if notice ofany such claim is given within four years of the closing of the transaction inFebruary 2007, and 50% of such claims if notice is given after the fourth butbefore 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 our subsidiariesfor certain environmental matters that relate to the business as conductedprior to the closing of the KKR Acquisition. The environmental deed providesthat Degussa will indemnify the Company and its subsidiaries for claims forwhich 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 expenses incurred.

In addition, pursuant to the sale and purchase agreement entered intoin connection with the Dynamit Nobel Acquisition in April 2004,

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GEA Group and itssubsidiary, GEA North America, are required to indemnify the Company and itssubsidiaries for 50% of the excess amount of losses over the amount of therelated reserves (in the case of known claims) and 50% of claims (in the caseof unknown claims) related to the contamination of the Company or itssubsidiaries’ properties, if notified within ten years. If GEA Group’s and GEANorth America’s responsibility for contamination matters cannot be proven, asliding scale reduces the percentage further for each year during the five-yearperiod from year six to ten. GEA Group and GEA North America are also obligatedto indemnify 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 ($135,420 and $1,015,650using the Friday, June 29, 2007 exchange rate of €1.00=$1.3542) 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 the short term. In addition, the Company may berequired 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 hasestablished financial reserves relating to anticipated environmental cleanupobligations, site reclamation and remediation and closure costs, which arereviewed at least quarterly based on currently available information.Liabilities are recorded when potential liabilities are either known orbelieved to be probable and can be reasonably estimated. In the event that theCompany establishes a financial reserve in connection with site remediation costs,the Company records a reserve for the estimated cost of the remediation, eventhough the costs of the remediation will likely be spread out over many years.The Company does not include unasserted claims in its reserves.

The Company’s liabilityestimates are based upon available facts, existing technology, indemnities fromthird parties, past experience and, in some instances, insurance recoverieswhere the remediation costs are being paid directly by its insurers and aregenerated by several means, including State-mandated schedules, environmentalconsultants and internal experts, depending on the circumstances. On aconsolidated basis, the Company has accrued $35.0 million and $34.9 million forknown environmental liabilities as of June 30, 2007 and December 31, 2006,respectively, all of which are classified as other non-current liabilities inthe Condensed Consolidated Balance Sheets for such periods. Included in the$35.0 million as of June 30, 2007 is €6.8 million ($9.2 million using theFriday, June 29, 2007 exchange rate of €1.00=$1.3542) that is discounted usinga 5.0% discount rate (undiscounted amount equals $13.7 million), and €2.1million ($2.8 million) that is discounted using a 5.5% discount rate(undiscounted amount equals $3.8 million). Included in the $34.9 million as ofDecember 31, 2006 is €6.7 million ($8.8 million using the December 31, 2006exchange rate of €1.00=$1.3199) that is discounted using a 5.0% discount rate(undiscounted amount equals $13.8 million), and €1.9 million ($2.5 million)that is discounted using a 5.5% discount rate (undiscounted amount equals $3.2million). In certain cases, the Company’s remediation liabilities are payableover periods of up to 30 years. At June 30, 2007, the Company estimates thatthe potential range for such environmental matters is from $35.0 million to$50.0 million. In the six months ended June 30, 2007, the Company recordedcharges of $0.2 million to increase its environmental liabilities and madepayments of $0.7 million for clean-up and remediation costs, which reduced itsenvironmental liabilities. For the six months ended June 30, 2007, therecurring cost of managing hazardous substances for our ongoing operations is$26.0 million. At a number of the sites described above, the extent ofcontamination has not yet been fully investigated or the final scope ofremediation is not yet determinable and could potentially affect the rangeidentified above.

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

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facilities’ remaininglives are indefinite. Given the indeterminate useful life of these facilitiesand the corresponding indeterminate settlement date of any soil remediationobligations, the Company does not have sufficient information to estimate arange of potential settlement dates for its obligations. Consequently, theCompany cannot employ a present value technique to estimate fair value and,accordingly, has not accrued for any environmental related costs to remediatesoil 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 would have a material effect on its results of operations orfinancial condition, but may have a material effect on the results ofoperations or cash flow in any given quarterly or annual reporting period. TheCompany does not believe that any known individual environmental matter wouldhave a material effect on its results of operations or financial condition. TheCompany is unable to estimate the amount or range of any potential incrementalcharges should facts and circumstances change and may in the future revise itsestimates based on new information becoming available.

**14.****                    CONSOLIDATINGFINANCIAL INFORMATION:**

As described in Note 8, “Long-termDebt,” the Company issued the 2014 Notes in November 2004. The followingconsolidating financial statements present the results of operations, financialcondition and cash flows, in separate columns, of the parent company (RockwoodSpecialties Group, Inc.), which is the issuer of the 2014 Notes, guarantorsubsidiaries, non-guarantor subsidiaries, elimination adjustments andconsolidated totals.

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

**CONSOLIDATED STATEMENT OF OPERATIONS**

**THREE MONTHS ENDED JUNE 30, 2007**

**(Dollars in millions)**
| ** **                                                                   | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** |
|------------------------------------------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|
| ** **                                                                   | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Consolidated** | ** ** |
| Net sales                                                                    |       | $           | —     |             | $          | 205.0             |       | $                | 645.7      |   | $ | 850.7 |   |
| Cost of products  sold                                                       |       | —      |       | 140.0            |       | 438.0             |       | 578.0            |       |
| Gross profit                                                                 |       | —      |       | 65.0             |       | 207.7             |       | 272.7            |       |
| Selling, general  and administrative expenses                                |       | —      |       | 41.9             |       | 118.3             |       | 160.2            |       |
| Restructuring  charges, net                                                  |       | —      |       | 0.3              |       | 1.2               |       | 1.5              |       |
| Loss (gain) on  sale of assets                                               |       | —      |       | 0.1              |       | (0.5              | )          | (0.4             | )          |
| Operating income                                                             |       | —      |       | 22.7             |       | 88.7              |       | 111.4            |       |
| Other income  (expenses):                                                    |       |        |       |             |       |              |       |             |       |
| Intergroup  interest, net                                                    |       | 18.3        |       | (5.0             | )          | (13.3             | )          | —           |       |
| Interest expense                                                             |       | (40.2       | )          | (0.6             | )          | (6.2              | )          | (47.0            | )          |
| Interest income                                                              |       | 5.8         |       | 0.3              |       | (2.1              | )          | 4.0              |       |
| Intergroup  other, net                                                       |       | 17.3        |       | 4.5              |       | (21.8             | )          | —           |       |
| Loss on early  extinguishment of debt                                        |       | (15.6       | )          | (3.2             | )          | (0.6              | )          | (19.4            | )          |
| Foreign exchange  gain (loss), net                                           |       | 2.1         |       | (0.2             | )          | 1.4               |       | 3.3              |       |
| Other, net                                                                   |       | 0.3         |       | (0.3             | )          | —            |       | —           |       |
| Other income (expenses), net                                                 |       | (12.0       | )          | (4.5             | )          | (42.6             | )          | (59.1            | )          |
| (Loss) income  from continuing operations before taxes and minority interest |       | (12.0       | )          | 18.2             |       | 46.1              |       | 52.3             |       |
| Income tax  provision                                                        |       | 0.2         |       | 0.5              |       | 21.3              |       | 22.0             |       |
| (Loss) income  from continuing operations before minority interest           |       | (12.2       | )          | 17.7             |       | 24.8              |       | 30.3             |       |
| Minority  interest in continuing operations                                  |       | —      |       | —           |       | (2.3              | )          | (2.3             | )          |
| Net (loss) income from continuing operations                                 |       | (12.2       | )          | 17.7             |       | 22.5              |       | 28.0             |       |
| (Loss) gain on  sale of discontinued operations, net of tax                  |       | —      |       | (9.1             | )          | 9.1               |       | —           |       |
| Net (loss)  income                                                           |       | $           | (12.2      | )                | $          | 8.6               |       | $                | 31.6       |   | $ | 28.0 |   |

 

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**ROCKWOOD SPECIALTIESGROUP, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENT OF OPERATIONS**

**THREE MONTHS ENDED JUNE 30, 2006**

**(Dollars in millions)**
| ** **                                             | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** |
|--------------------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|
| ** **                                             | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Consolidated** | ** ** |
| Net sales                                              |       | $           | —     |             | $          | 262.5             |       | $                | 509.0      |   | $ | 771.5 |   |
| Cost of products  sold                                 |       | —      |       | 190.4            |       | 338.2             |       | 528.6            |       |
| Gross profit                                           |       | —      |       | 72.1             |       | 170.8             |       | 242.9            |       |
| Selling, general  and administrative expenses          |       | 0.1         |       | 47.6             |       | 100.6             |       | 148.3            |       |
| Restructuring  charges, net                            |       | —      |       | —           |       | 1.0               |       | 1.0              |       |
| Gain on sale of  assets                                |       | —      |       | —           |       | 0.1               |       | 0.1              |       |
| Operating (loss) income                                |       | (0.1        | )          | 24.5             |       | 69.1              |       | 93.5             |       |
| Other income  (expenses):                              |       |        |       |             |       |              |       |             |       |
| Intergroup  interest, net                              |       | 28.5        |       | (5.9             | )          | (22.6             | )          | —           |       |
| Interest expense                                       |       | (39.1       | )          | (0.7             | )          | (7.9              | )          | (47.7            | )          |
| Interest income                                        |       | —      |       | —           |       | 1.1               |       | 1.1              |       |
| Intergroup  other, net                                 |       | 17.5        |       | (18.0            | )          | 0.5               |       | —           |       |
| Foreign exchange  gain (loss), net                     |       | 2.1         |       | (0.1             | )          | 3.1               |       | 5.1              |       |
| Other, net                                             |       | —      |       | —           |       | 0.2               |       | 0.2              |       |
| Other income (expenses), net                           |       | 9.0         |       | (24.7            | )          | (25.6             | )          | (41.3            | )          |
| Income (loss)  from continuing operations before taxes |       | 8.9         |       | (0.2             | )          | 43.5              |       | 52.2             |       |
| Income tax  provision                                  |       | 4.6         |       | 1.8              |       | 15.6              |       | 22.0             |       |
| Net income (loss) from continuing operations           |       | 4.3         |       | (2.0             | )          | 27.9              |       | 30.2             |       |
| Income from  discontinued operations, net of tax       |       | —      |       | —           |       | 8.1               |       | 8.1              |       |
| Minority  interest in discontinued operations          |       | —      |       | —           |       | (1.2              | )          | (1.2             | )          |
| Net income (loss)                                      |       | $           | 4.3        |             | $          | (2.0              | )          | $                | 34.8       |   | $ | 37.1 |   |

 

28

----

**ROCKWOOD SPECIALTIESGROUP, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENT OF OPERATIONS**

**SIX MONTHS ENDED JUNE 30, 2007**

**(Dollars in millions)**
| ** **                                                                   | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** |
|------------------------------------------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|
| ** **                                                                   | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Consolidated** | ** ** |
| Net sales                                                                    |       | $           | —     |             | $          | 393.8             |       | $                | 1,253.0    |   | $ | 1,646.8 |   |
| Cost of products  sold                                                       |       | —      |       | 274.2            |       | 842.9             |       | 1,117.1          |       |
| Gross profit                                                                 |       | —      |       | 119.6            |       | 410.1             |       | 529.7            |       |
| Selling, general  and administrative expenses                                |       | 0.1         |       | 84.8             |       | 230.1             |       | 315.0            |       |
| Restructuring  charges, net                                                  |       | —      |       | 0.8              |       | 5.2               |       | 6.0              |       |
| Loss (gain) on  sale of assets                                               |       | 0.1         |       | (4.2             | )          | (1.1              | )          | (5.2             | )          |
| Operating (loss) income                                                      |       | (0.2        | )          | 38.2             |       | 175.9             |       | 213.9            |       |
| Other income  (expenses):                                                    |       |        |       |             |       |              |       |             |       |
| Intergroup  interest, net                                                    |       | 36.6        |       | (10.5            | )          | (26.1             | )          | —           |       |
| Interest expense                                                             |       | (87.8       | )          | (1.3             | )          | (12.6             | )          | (101.7           | )          |
| Interest income                                                              |       | 13.4        |       | 0.3              |       | (4.6              | )          | 9.1              |       |
| Intergroup  other, net                                                       |       | 17.6        |       | 8.5              |       | (26.1             | )          | —           |       |
| Loss on early  extinguishment of debt                                        |       | (15.6       | )          | (3.2             | )          | (0.6              | )          | (19.4            | )          |
| Refinancing  expenses                                                        |       | (0.9        | )          | —           |       | —            |       | (0.9             | )          |
| Foreign exchange  gain (loss), net                                           |       | 3.4         |       | (0.3             | )          | 0.6               |       | 3.7              |       |
| Other, net                                                                   |       | 0.3         |       | (0.3             | )          | (0.1              | )          | (0.1             | )          |
| Other income (expenses), net                                                 |       | (33.0       | )          | (6.8             | )          | (69.5             | )          | (109.3           | )          |
| (Loss) income  from continuing operations before taxes and minority interest |       | (33.2       | )          | 31.4             |       | 106.4             |       | 104.6            |       |
| Income tax  provision                                                        |       | 0.6         |       | 4.2              |       | 39.2              |       | 44.0             |       |
| (Loss) income  from continuing operations before minority interest           |       | (33.8       | )          | 27.2             |       | 67.2              |       | 60.6             |       |
| Minority  interest in continuing operations                                  |       | —      |       | —           |       | (3.4              | )          | (3.4             | )          |
| Net (loss) income from continuing operations                                 |       | (33.8       | )          | 27.2             |       | 63.8              |       | 57.2             |       |
| Income from  discontinued operations, net of tax                             |       | —      |       | —           |       | 0.5               |       | 0.5              |       |
| (Loss) gain on  sale of discontinued operations, net of tax                  |       | —      |       | (9.1             | )          | 124.8             |       | 115.7            |       |
| Minority  interest in discontinued operations                                |       | —      |       | —           |       | (0.1              | )          | (0.1             | )          |
| Net (loss)  income                                                           |       | $           | (33.8      | )                | $          | 18.1              |       | $                | 189.0      |   | $ | 173.3 |   |

 

29

----

**ROCKWOOD SPECIALTIESGROUP, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENT OF OPERATIONS**

**SIX MONTHS ENDED JUNE 30, 2006**

**(Dollars in millions)**
| ** **                                       | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** |
|--------------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|
| ** **                                       | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Consolidated** | ** ** |
| Net sales                                        |       | $           | —     |             | $          | 501.2             |       | $                | 994.4      |   | $ | 1,495.6 |   |
| Cost of products  sold                           |       | —      |       | 363.8            |       | 663.1             |       | 1,026.9          |       |
| Gross profit                                     |       | —      |       | 137.4            |       | 331.3             |       | 468.7            |       |
| Selling, general  and administrative expenses    |       | 0.1         |       | 94.0             |       | 194.8             |       | 288.9            |       |
| Restructuring  charges, net                      |       | —      |       | 0.1              |       | 2.1               |       | 2.2              |       |
| Gain on sale of  assets                          |       | —      |       | —           |       | (0.4              | )          | (0.4             | )          |
| Operating (loss) income                          |       | (0.1        | )          | 43.3             |       | 134.8             |       | 178.0            |       |
| Other income  (expenses):                        |       |        |       |             |       |              |       |             |       |
| Intergroup  interest, net                        |       | 54.8        |       | (13.4            | )          | (41.4             | )          | —           |       |
| Interest expense                                 |       | (72.7       | )          | (0.9             | )          | (13.9             | )          | (87.5            | )          |
| Interest income                                  |       | —      |       | —           |       | 2.5               |       | 2.5              |       |
| Intergroup  other, net                           |       | 17.5        |       | (18.7            | )          | 1.2               |       | —           |       |
| Foreign exchange  gain (loss), net               |       | 2.5         |       | —           |       | (0.3              | )          | 2.2              |       |
| Other, net                                       |       | —      |       | —           |       | 1.8               |       | 1.8              |       |
| Other income (expenses), net                     |       | 2.1         |       | (33.0            | )          | (50.1             | )          | (81.0            | )          |
| Income from  continuing operations before taxes  |       | 2.0         |       | 10.3             |       | 84.7              |       | 97.0             |       |
| Income tax  provision                            |       | 4.6         |       | 4.4              |       | 31.3              |       | 40.3             |       |
| Net (loss) income from continuing operations     |       | (2.6        | )          | 5.9              |       | 53.4              |       | 56.7             |       |
| Income from  discontinued operations, net of tax |       | —      |       | —           |       | 24.6              |       | 24.6             |       |
| Minority  interest in discontinued operations    |       | —      |       | —           |       | (4.2              | )          | (4.2             | )          |
| Net (loss)  income                               |       | $           | (2.6       | )                | $          | 5.9               |       | $                | 73.8       |   | $ | 77.1 |   |

 

30

----

**ROCKWOOD SPECIALTIESGROUP, INC. AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEET**

**JUNE 30, 2007**

**(Dollars in millions)**
| ** **                                      | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** | ** **       | ** ** |
|-------------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|------------------|------------|
| ** **                                      | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                      | ** ** | ** **  | ** ** | ** **       | ** ** | ** **        | ** ** | ** **       | ** ** | ** **       | ** ** |
| Current assets:                                 |       |        |       |             |       |              |       |             |       |             |       |
| Cash and cash  equivalents                      |       | $           | 490.2      |             | $          | (127.2            | )          | $                | (171.5     | )                | $          | — |   | $ | 191.5 |   |
| Accounts  receivable, net                       |       | —      |       | 120.3            |       | 410.7             |       | —           |       | 531.0            |       |
| Inventories                                     |       | —      |       | 106.7            |       | 339.0             |       | —           |       | 445.7            |       |
| Deferred income  taxes                          |       | (6.4        | )          | 17.9             |       | 4.9               |       | —           |       | 16.4             |       |
| Prepaid expenses  and other current assets      |       | 1.8         |       | 9.4              |       | 42.8              |       | —           |       | 54.0             |       |
| Total current assets                            |       | 485.6       |       | 127.1            |       | 625.9             |       | —           |       | 1,238.6          |       |
| Property, plant  and equipment, net             |       | —      |       | 225.6            |       | 1,179.9           |       | —           |       | 1,405.5          |       |
| Investment in  subsidiary                       |       | 1,688.7     |       | 96.8             |       | —            |       | (1,785.5         | )          | —           |       |
| Goodwill                                        |       | —      |       | 346.3            |       | 1,407.7           |       | —           |       | 1,754.0          |       |
| Intergroup  receivable                          |       | 1,531.7     |       | 371.7            |       | 3,616.9           |       | (5,520.3         | )          | —           |       |
| Other intangible  assets, net                   |       | —      |       | 52.5             |       | 584.5             |       | —           |       | 637.0            |       |
| Deferred debt  issuance costs, net              |       | 2.4         |       | 4.6              |       | 35.9              |       | —           |       | 42.9             |       |
| Deferred income  taxes                          |       | —      |       | —           |       | 21.2              |       | —           |       | 21.2             |       |
| Other assets                                    |       | 14.7        |       | 8.0              |       | 33.9              |       | —           |       | 56.6             |       |
| Total assets                                    |       | $           | 3,723.1    |             | $          | 1,232.6           |       | $                | 7,505.9    |             | $          | (7,305.8 | ) | $ | 5,155.8 |   |
| **LIABILITIES  AND STOCKHOLDER'S EQUITY**       | ** ** | ** **  | ** ** | ** **       | ** ** | ** **        | ** ** | ** **       | ** ** | ** **       | ** ** |
| Current  liabilities:                           |       |        |       |             |       |              |       |             |       |             |       |
| Accounts payable                                |       | $           | —     |             | $          | 69.3              |       | $                | 191.9      |             | $          | — |   | $ | 261.2 |   |
| Income taxes  payable                           |       | 4.5         |       | (5.8             | )          | 4.4               |       | —           |       | 3.1              |       |
| Accrued  compensation                           |       | —      |       | 13.3             |       | 59.9              |       | —           |       | 73.2             |       |
| Restructuring  liability                        |       | —      |       | 0.9              |       | 9.8               |       | —           |       | 10.7             |       |
| Accrued expenses  and other current liabilities |       | 25.7        |       | 36.4             |       | 110.2             |       | —           |       | 172.3            |       |
| Deferred income  taxes                          |       | —      |       | —           |       | 4.3               |       | —           |       | 4.3              |       |
| Long-term debt,  current portion                |       | 23.6        |       | —           |       | 66.0              |       | —           |       | 89.6             |       |
| Total current liabilities                       |       | 53.8        |       | 114.1            |       | 446.5             |       | —           |       | 614.4            |       |
| Long-term debt                                  |       | 2,214.8     |       | —           |       | 222.4             |       | —           |       | 2,437.2          |       |
| Pension and  related liabilities                |       | —      |       | 9.1              |       | 355.9             |       | —           |       | 365.0            |       |
| Intergroup  payable                             |       | 418.4       |       | 756.1            |       | 4,345.8           |       | (5,520.3         | )          | —           |       |
| Deferred income  taxes                          |       | (17.6       | )          | 27.1             |       | 74.9              |       | —           |       | 84.4             |       |
| Other  liabilities                              |       | 24.6        |       | 31.6             |       | 87.0              |       | —           |       | 143.2            |       |
| Total liabilities                               |       | 2,694.0     |       | 938.0            |       | 5,532.5           |       | (5,520.3         | )          | 3,644.2          |       |
| Minority  interest                              |       | —      |       | —           |       | 178.4             |       | —           |       | 178.4            |       |
| Stockholder's  equity:                          |       |        |       |             |       |              |       |             |       |             |       |
| Common stock                                    |       | —      |       | 190.6            |       | 164.7             |       | (355.3           | )          | —           |       |
| Paid-in capital                                 |       | 1,005.4     |       | 299.9            |       | 1,130.3           |       | (1,430.2         | )          | 1,005.4          |       |
| Accumulated  other comprehensive income         |       | 45.8        |       | (1.2             | )          | 240.8             |       | —           |       | 285.4            |       |
| Retained  (deficit) earnings                    |       | (22.1       | )          | (194.7           | )          | 259.2             |       | —           |       | 42.4             |       |
| Total stockholder's equity                      |       | 1,029.1     |       | 294.6            |       | 1,795.0           |       | (1,785.5         | )          | 1,333.2          |       |
| Total  liabilities and stockholder's equity     |       | $           | 3,723.1    |             | $          | 1,232.6           |       | $                | 7,505.9    |             | $          | (7,305.8 | ) | $ | 5,155.8 |   |

 

31

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**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              |       | 36.3              |       | —           |       | 56.1             |       |
| Total assets                                    |       | $           | 3,650.8    |             | $          | 1,492.4           |       | $                | 7,880.3    |             | $          | (7,802.4 | ) | $ | 5,221.1 |   |
| **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             |       | 64.9              |       | —           |       | 94.2             |       |
| Total liabilities                               |       | 2,574.3     |       | 1,218.0          |       | 6,306.5           |       | (6,029.9         | )          | 4,068.9          |       |
| 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           |       | $                | 7,880.3    |             | $          | (7,802.4 | ) | $ | 5,221.1 |   |

 

32

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**ROCKWOOD SPECIALTIESGROUP, INC. AND SUBSIDIARIES**

**CONSOLIDATING STATEMENT OF CASH FLOWS**

**SIX MONTHS ENDED JUNE 30, 2007**

**(Dollars in millions)**
| ** **                                                                                                       | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|
| ** **                                                                                                       | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Consolidated** | ** ** |
| **CASH  FLOWS FROM OPERATING ACTIVITIES:**                                                                       | ** ** | ** **  | ** ** | ** **       | ** ** | ** **        | ** ** | ** **       | ** ** |
| Net (loss) income                                                                                                |       | $           | (33.8      | )                | $          | 18.1              |       | $                | 189.0      |   | $ | 173.3 |   |
| 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                                                                          |       | —      |       | —           |       | (115.7            | )          | (115.7           | )          |
| Minority interest in discontinued operations                                                                     |       | —      |       | —           |       | 0.1               |       | 0.1              |       |
| Depreciation and amortization                                                                                    |       | —      |       | 18.4             |       | 90.0              |       | 108.4            |       |
| Deferred financing costs amortization                                                                            |       | 0.3         |       | 0.8              |       | 3.6               |       | 4.7              |       |
| Loss on early extinguishment of debt (including $4.9  million of noncash write-offs on deferred financing costs) |       | 15.5        |       | 3.2              |       | 0.7               |       | 19.4             |       |
| Foreign exchange (gain) loss                                                                                     |       | (3.4        | )          | 0.3              |       | (0.6              | )          | (3.7             | )          |
| Fair value adjustment of derivatives                                                                             |       | 1.7         |       | —           |       | 0.3               |       | 2.0              |       |
| Bad debt provision                                                                                               |       | —      |       | 0.3              |       | 0.9               |       | 1.2              |       |
| Stock-based compensation                                                                                         |       | —      |       | 0.5              |       | 0.2               |       | 0.7              |       |
| Deferred income taxes                                                                                            |       | 0.3         |       | 0.7              |       | 19.0              |       | 20.0             |       |
| Gain on sale of assets                                                                                           |       | 0.1         |       | (0.3             | )          | (5.0              | )          | (5.2             | )          |
| Minority interest in continuing operations                                                                       |       | —      |       | —           |       | 3.4               |       | 3.4              |       |
| Changes in  assets and liabilities, net of the effect of foreign currency translation and  acquisitions:         |       |        |       |             |       |              |       |             |       |
| Accounts receivable                                                                                              |       | —      |       | (2.5             | )          | (55.4             | )          | (57.9            | )          |
| Inventories, including inventory write-up reversal                                                               |       | —      |       | (3.8             | )          | 9.4               |       | 5.6              |       |
| Prepaid expenses and other assets                                                                                |       | (1.0        | )          | (4.3             | )          | (1.8              | )          | (7.1             | )          |
| Accounts payable                                                                                                 |       | —      |       | 7.1              |       | (22.3             | )          | (15.2            | )          |
| Income taxes payable                                                                                             |       | 0.3         |       | 0.6              |       | 0.8               |       | 1.7              |       |
| Accrued expenses and other liabilities                                                                           |       | (3.8        | )          | 6.3              |       | 9.0               |       | 11.5             |       |
| Intercompany operating activities, net                                                                           |       | 20.9        |       | (33.7            | )          | 12.8              |       | —           |       |
| Net cash (used  in) provided by operating activities of continuing operations                                    |       | (2.9        | )          | 11.7             |       | 137.9             |       | 146.7            |       |
| Net cash provided by operating activities of  discontinued operations                                            |       | —      |       | —           |       | 1.6               |       | 1.6              |       |
| **Net cash (used in) provided by operating  activities**                                                         |       | (2.9        | )          | 11.7             |       | 139.5             |       | 148.3            |       |
| **CASH  FLOWS FROM INVESTING ACTIVITIES:**                                                                       | ** ** | ** **  | ** ** | ** **       | ** ** | ** **        | ** ** | ** **       | ** ** |
| Acquisitions,  including transaction fees paid, net of cash acquired                                             |       | —      |       | —           |       | (33.4             | )          | (33.4            | )          |
| Acquisitions,  related intercompany                                                                              |       | (35.5       | )          | —           |       | 35.5              |       | —           |       |
| Capital  expenditures, excluding capital leases                                                                  |       | —      |       | (13.1            | )          | (80.7             | )          | (93.8            | )          |
| Proceeds from  formation of Viance joint venture                                                                 |       | —      |       | 46.1             |       | 30.5              |       | 76.6             |       |
| Proceeds from  sale of discontinued operations                                                                   |       | —      |       | (3.9             | )          | 425.3             |       | 421.4            |       |
| Proceeds on sale  of property, plant and equipment                                                               |       | (0.1        | )          | 6.6              |       | 3.5               |       | 10.0             |       |
| Net cash (used  in) provided by investing activities of continuing operations                                    |       | (35.6       | )          | 35.7             |       | 380.7             |       | 380.8            |       |
| Net cash used in investing activities of  discontinued operations                                                |       | —      |       | —           |       | —            |       | —           |       |
| **Net cash (used in) provided by investing  activities**                                                         |       | (35.6       | )          | 35.7             |       | 380.7             |       | 380.8            |       |
| **CASH  FLOWS FROM FINANCING ACTIVITIES:**                                                                       | ** ** | ** **  | ** ** | ** **       | ** ** | ** **        | ** ** | ** **       | ** ** |
| Repayment of  2011 Notes                                                                                         |       | (273.4      | )          | —           |       | —            |       | (273.4           | )          |
| Repayment of  senior secured credit facilities                                                                   |       | (48.3       | )          | —           |       | (16.6             | )          | (64.9            | )          |
| Payments on  other long-term debt                                                                                |       | —      |       | —           |       | (4.1              | )          | (4.1             | )          |
| Costs related to  early extinguishment of debt                                                                   |       | (14.5       | )          | —           |       | —            |       | (14.5            | )          |
| Intercompany  debt related activity                                                                              |       | 398.7       |       | (6.0             | )          | (392.7            | )          | —           |       |
| Net cash  provided by (used in) financing activities of continuing operations                                    |       | 62.5        |       | (6.0             | )          | (413.4            | )          | (356.9           | )          |
| Net cash used in financing activities of  discontinued operations                                                |       | —      |       | —           |       | —            |       | —           |       |
| **Net cash provided by (used in) financing  activities**                                                         |       | 62.5        |       | (6.0             | )          | (413.4            | )          | (356.9           | )          |
| Effect of  exchange rate changes on cash and cash equivalents                                                    |       | 2.5         |       | (0.2             | )          | (7.3              | )          | (5.0             | )          |
| Net increase in cash and cash equivalents                                                                        |       | 26.5        |       | 41.2             |       | 99.5              |       | 167.2            |       |
| Less increase in  cash and cash equivalents from discontinued operations                                         |       | —      |       | —           |       | (1.6              | )          | (1.6             | )          |
| Increase in cash and cash equivalents from  continuing operations                                                |       | 26.5        |       | 41.2             |       | 97.9              |       | 165.6            |       |
| Cash and cash  equivalents of continuing operations, beginning of period                                         |       | 463.7       |       | (168.4           | )          | (269.4            | )          | 25.9             |       |
| Cash and cash  equivalents of continuing operations, end of period                                               |       | $           | 490.2      |             | $          | (127.2            | )          | $                | (171.5     | ) | $ | 191.5 |   |

 

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

**CONSOLIDATING STATEMENT OF CASH FLOWS**

**SIX MONTHS ENDED JUNE 30, 2006**

**(Dollars in millions)**
| ** **                                                                                                                       | ** ** | **Parent**  | ** ** | **Guarantor**    | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------|------------|-------------|------------|------------------|------------|-------------------|------------|------------------|------------|
| ** **                                                                                                                       | ** ** | **Company** | ** ** | **Subsidiaries** | ** ** | **Subsidiaries**  | ** ** | **Consolidated** | ** ** |
| **CASH  FLOWS FROM OPERATING ACTIVITIES:**                                                                                       | ** ** | ** **  | ** ** | ** **       | ** ** | ** **        | ** ** | ** **       | ** ** |
| Net (loss) income                                                                                                                |       | $           | (2.6       | )                | $          | 5.9               |       | $                | 73.8       |   | $ | 77.1 |   |
| Adjustments to  reconcile net (loss) income to net cash provided by (used in) operating  activities:                             |       |        |       |             |       |              |       |             |       |
| Income from discontinued operations, net of tax                                                                                  |       | —      |       | —           |       | (24.6             | )          | (24.6            | )          |
| Minority interest in discontinued operations                                                                                     |       | —      |       | —           |       | 4.2               |       | 4.2              |       |
| Depreciation and amortization                                                                                                    |       | —      |       | 17.9             |       | 75.1              |       | 93.0             |       |
| Deferred financing costs amortization                                                                                            |       | 0.3         |       | 1.0              |       | 3.4               |       | 4.7              |       |
| Foreign exchange gain                                                                                                            |       | (1.1        | )          | —           |       | (1.1              | )          | (2.2             | )          |
| Fair value adjustment of derivatives                                                                                             |       | (14.0       | )          | —           |       | (1.3              | )          | (15.3            | )          |
| Bad debt provision                                                                                                               |       | —      |       | 0.3              |       | 0.2               |       | 0.5              |       |
| Deferred income taxes                                                                                                            |       | 9.4         |       | (1.6             | )          | 8.4               |       | 16.2             |       |
| Gain on sale of assets                                                                                                           |       | —      |       | —           |       | (0.4              | )          | (0.4             | )          |
| Changes in  assets and liabilities, net of the effect of foreign currency translation and  acquisitions:                         |       |        |       |             |       |              |       |             |       |
| Accounts receivable                                                                                                              |       | —      |       | (17.2            | )          | (35.8             | )          | (53.0            | )          |
| Inventories, including inventory write-up reversal                                                                               |       | —      |       | (3.4             | )          | 3.6               |       | 0.2              |       |
| Prepaid expenses and other assets                                                                                                |       | (1.5        | )          | 1.5              |       | 7.6               |       | 7.6              |       |
| Accounts payable                                                                                                                 |       | (4.8        | )          | 6.0              |       | (25.9             | )          | (24.7            | )          |
| Income taxes payable                                                                                                             |       | —      |       | 5.0              |       | 6.1               |       | 11.1             |       |
| Accrued expenses and other liabilities (including  intercompany transactions with discontinued operations of $51.3 million) |       | 12.9        |       | 0.4              |       | (58.8             | )          | (45.5            | )          |
| Intercompany operating activities, net                                                                                           |       | 49.7        |       | (53.6            | )          | 3.9               |       | —           |       |
| Net cash  provided by (used in) operating activities of continuing operations                                                    |       | 48.3        |       | (37.8            | )          | 38.4              |       | 48.9             |       |
| Net cash provided by operating activities of  discontinued operations                                                            |       | —      |       | —           |       | 56.5              |       | 56.5             |       |
| **Net cash provided by (used in) operating  activities**                                                                         |       | 48.3        |       | (37.8            | )          | 94.9              |       | 105.4            |       |
| **CASH  FLOWS FROM INVESTING ACTIVITIES:**                                                                                       | ** ** | ** **  | ** ** | ** **       | ** ** | ** **        | ** ** | ** **       | ** ** |
| Acquisitions,  net of cash acquired                                                                                              |       | —      |       | —           |       | (13.4             | )          | (13.4            | )          |
| Acquisitions,  related intercompany                                                                                              |       | 12.5        |       | (12.5            | )          | —            |       | —           |       |
| Capital  expenditures, excluding capital leases                                                                                  |       | —      |       | (15.1            | )          | (56.1             | )          | (71.2            | )          |
| Proceeds from  sale of assets                                                                                                    |       | —      |       | —           |       | 2.4               |       | 2.4              |       |
| Net cash  provided by (used in) investing activities of continuing operations                                                    |       | 12.5        |       | (27.6            | )          | (67.1             | )          | (82.2            | )          |
| Net cash used in investing activities of  discontinued operations                                                                |       | —      |       | —           |       | (18.9             | )          | (18.9            | )          |
| **Net cash provided by (used in) investing  activities**                                                                         |       | 12.5        |       | (27.6            | )          | (86.0             | )          | (101.1           | )          |
| **CASH  FLOWS FROM FINANCING ACTIVITIES:**                                                                                       | ** ** | ** **  | ** ** | ** **       | ** ** | ** **        | ** ** | ** **       | ** ** |
| Proceeds from  senior secured credit facilities                                                                                  |       | 28.0        |       | —           |       | 75.1              |       | 103.1            |       |
| Repayment of  senior secured credit facilities                                                                                   |       | (67.7       | )          | —           |       | (61.5             | )          | (129.2           | )          |
| Payments on  other long-term debt                                                                                                |       | —      |       | —           |       | (2.8              | )          | (2.8             | )          |
| Intercompany  debt related                                                                                                       |       | 72.3        |       | (57.0            | )          | (15.3             | )          | —           |       |
| Net cash  provided by (used in) financing activities of continuing operations                                                    |       | 32.6        |       | (57.0            | )          | (4.5              | )          | (28.9            | )          |
| Net cash used in financing activities of  discontinued operations                                                                |       | —      |       | —           |       | (37.8             | )          | (37.8            | )          |
| **Net cash provided by (used in) financing  activities**                                                                         |       | 32.6        |       | (57.0            | )          | (42.3             | )          | (66.7            | )          |
| Effect of  exchange rate changes on cash and cash equivalents                                                                    |       | 2.1         |       | —           |       | (5.5              | )          | (3.4             | )          |
| Net increase (decrease) in cash and cash equivalents                                                                             |       | 95.5        |       | (122.4           | )          | (38.9             | )          | (65.8            | )          |
| Less decrease in  cash and cash equivalents from discontinued operations                                                         |       | —      |       | —           |       | 0.1               |       | 0.1              |       |
| Increase (decrease) in cash and cash equivalents  from continuing operations                                                     |       | 95.5        |       | (122.4           | )          | (38.8             | )          | (65.7            | )          |
| Cash and cash  equivalents of continuing operations, beginning of period                                                         |       | 109.4       |       | (26.5            | )          | 13.5              |       | 96.4             |       |
| Cash and cash  equivalents of continuing operations, end of period                                                               |       | $           | 204.9      |             | $          | (148.9            | )          | $                | (25.3      | ) | $ | 30.7 |   |

 

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**Item 2.       Management’sDiscussion and Analysis of Financial Condition and Results of Operations.**

*The following discussion containsforward-looking statements that involve numerous risks and uncertainties. Ouractual results could differ materially from those discussed in theforward-looking statements as a result of these risks and uncertainties,including those set forth in “Forward-Looking Statements” at the end of thisManagement Discussion and Analysis section and the risk factors section of theCompany’s 2006 Form 10-K. You should read the following discussion andanalysis together with our condensed consolidated financial statements and thenotes to those statements that appear elsewhere in this Quarterly Report.Amounts may not recalculate due to rounding differences.*

*OnJanuary 9, 2007, we completed the sale of our Groupe Novasep segment.  As a result, our condensed consolidatedfinancial statements have been reclassified to reflect the Groupe Novasepsegment as a discontinued operation for 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 proportionalto volume 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 the 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 completed thesale 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 half of 2007 in mostmarkets and regions served, especially in the European automotive, generalindustrial and aerospace industries, as price and volume increases more thanoffset raw

35

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                        material cost increases. Weexpect the Surface Treatment business to continue to grow in the remainder of2007 in all markets as price and volume increases are expected to offset rawmaterial cost increases and higher personnel costs to support the continuinggrowth of the business.

·                  Demand for ourlithium products in the Fine Chemicals business line of our Specialty Chemicalssegment is generally driven by demand for lithium carbonate in industrialapplications, the aluminum business, glass ceramics, cement and the generaldemand in China. Sales of lithium products specifically used in life scienceapplications depend on the trends in drug development and growth inpharmaceuticals markets as well as generic competition.  Growth in the Fine Chemicals businessoccurred in 2006 and continued in the first half of 2007 in most marketsegments, especially driven by lithium salt applications through priceincreases and strong demand for lithium applications, particularly sales oflithium specialty products to the pharmaceutical industry and lithiumcompounds.  Growth in the Fine Chemicalsbusiness was also supported by higher volumes and prices in the Metals Sulfidesbusiness.  Growth in the Fine Chemicalsbusiness is expected in all market segments in the remainder of 2007,particularly driven by lithium salt applications through price increases andhigher demand for lithium specialties.

***Performance Additives***

·                  Sales in ourColor Pigments and Services business in North America increased in 2006 onhigher construction volumes and selling price increases helping to recover rawmaterial and energy cost increases. Generally, a continuing trend towards theincreased use of colored concrete products in the North American constructionmarket has had a positive effect on our Color Pigments and Services businessline. However, in the first half of 2007, construction sales in North Americawere down on lower volumes due to the general slowdown in the constructionmarket.

·                  We experienced adecrease in European construction volumes in our Color Pigments and Servicesbusiness in 2006 due to lower demand. However, European construction sales inour Color Pigments and Services business increased in the first half of 2007 onhigher volumes and are expected to continue to improve in the remainder of 2007on increased volumes resulting from a stronger European economy.

·                  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 half of 2007 by customer losses, competitivepricing pressure and the increasing use of wood substitutes. The expiration ofthe ACQ patent in May 2007 could also have a negative impact on our results ofoperations. We expect our Timber Treatment Chemicals business to commercializethe next generation timber treatment preservatives from our joint venture withRohm and Haas Company in late 2007.

·                  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 the first half of2007 was from oilfield sales and this is expected to continue for the remainderof the year.

·                  Raw materialcosts have increased in general in the Performance Additives segment since 2004and continue to trend upward. In the Color Pigments and Services and Clay-basedAdditives businesses, selling price increases were initiated in 2006 andcontinued in 2007 to partially offset the increases in raw material and energycosts, specifically quaternary amine (“quat”) for Clay-based Additives. In2006, the Timber Treatment Chemicals business experienced record high costs forcopper, a primary component in ACQ, and was unable to pass on these increasedmaterial costs to customers in 2006. However, selling price increases were implemented in 2007 to partiallyoffset raw material cost increases. Further increases may occur in 2007 to offset additional increases inraw material and energy costs.  However,our ability to pass on additional selling price increases is uncertain in thesebusinesses.

***Titanium Dioxide Pigments***

·                  Demand for ourtitanium dioxide products in anatase grade is driven mainly by demand in thesynthetic fiber industry, while demand for titanium dioxide products in rutilegrade and our functional additives is driven by demand in the coatings, paperand plastics industries.  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. While volumes and selling prices in the fiber anatase business increasedin 2006, volumes and selling prices were lower in the first half of 2007 andare expected to be down slightly for the remainder of 2007.  Sales of titanium dioxide products in rutilegrade were down slightly in 2006 as lower volumes were partially offset byhigher selling prices.  Sales of titaniumdioxide products in rutile grade were up in the first half of 2007 on increasedvolumes,

36

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                        partially offset by lowerselling prices.  We expect sales of theserutile grade products to continue to be up in 2007 on higher volumes.  Our functional additives business increasedin 2006 on higher selling prices and volumes. In the first half of 2007, our functional additives business was upprimarily from higher selling prices and slightly higher volumes.  Growth in this business is expected in 2007on higher selling prices.

***Advanced Ceramics***

·                  Demand for ourceramic medical devices is mainly tied to the aging population in Europe andthe United States.  Although the volumeof our products used in medical device applications sold experienceddouble-digit growth each year from 2001 through 2005, in 2006 some customers inthe U.S. reduced their demand due to high inventory levels and delayedapprovals resulting in lower volumes. However, growth of our medical device applications has increased in thefirst half of 2007 on higher volumes and is expected to continue to increasethroughout the remainder of the year.

·                  Sales of ceramicproducts for use in cutting tool products and mechanical systems were higher in2006 as volume increases were partially offset by the negative impact ofpricing pressure from Asian competitors. Growth of ceramic products for use incutting tool products and mechanical systems increased in 2006 and continued inthe first half of 2007.  This growth isexpected to continue throughout 2007 on higher volumes and increased marketshare. Selling prices in our electronic products business as well as for somePiezo applications were lower in 2006. In the first half of 2007, sales of ourelectronics products business were lower primarily on decreased volumes andthis is expected to continue throughout the remainder of the year.  Sales of our Piezo applications were higherin the first half of 2007 from increased volumes and are expected to continueto increase throughout the remainder of 2007.

***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 half of 2007 dueto the acquisition of the Megolon division of Scapa Group, plc.  Net sales for wire and cable products isexpected to continue throughout 2007 primarily due to the acquisition ofMegolon.  Newly developed non-halogenproducts for wire and cable data communication, military and other applicationshave expanded business in North America and created opportunities inEurope.  However, the wire and cablebusiness has been impacted from a general downturn in the wire and cablemarket.

·                  Most of theother end-use markets for which Specialty Compounds’ products are used generallytrack growth of gross domestic product, but many are also application specific,such as automotive. Our net sales in regulated packaging andconsumer/industrial thermoplastic elastomers were up in 2006 and the first halfof 2007 and we expect continued growth in these markets for the remainder of2007. We are focusing more of our efforts towards increasing high marginspecialty products, in particular, thermoplastic elastomers, and less of ourefforts in automotive 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 from 2004 through 2006. As a result, selling price increases were successfully initiated in 2005and 2006 to help offset the raw materials price increase.  However, raw material prices were lower inthe first half of 2007 and are not expected to be as volatile for the remainderof the year.

***Electronics***

·                  Demand for ourElectronics products generally follows the activity levels of semiconductor andprinted 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 half of 2007 due to demandfor consumer electronics, including cell phones and PC’s. The printed circuitboard industry in the United States and Europe improved in 2006, while themarket in Asia experienced significant growth during this period.  Volumes in our electronic chemicals businessincreased in 2006 and the first half of 2007, particularly in Asia, whichprovides nearly half of the global market.

·                  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 continuethroughout this year.

·                  We expect demandin our Electronics segment to be relatively flat overall for the remainder of2007.

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**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.

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 June 30, 2007 and the six month period ended June30, 2007, the average exchange rate of the euro against the U.S. dollar washigher compared to the same periods in 2006. As a result, our net sales, grossprofit and operating income were positively impacted. Historically, however,our operating margins have not been significantly impacted by currencyfluctuations because, in general, sales and costs of products sold aregenerated or incurred in the same currency, subject to 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 six months of 2007. We cannot accurately predict theimpact of any future price increases for raw materials or any raw materialshortages on our business as a whole or in specific geographic regions. Inaddition, we may not be able to pass on raw material price increases to ourcustomers.

**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 six months 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 six months of 2007.

**IncomeTaxes**

The effective tax ratefor the second quarter of 2007 was 42.1% which is primarily a function of thevaluation allowance related to domestic earnings and foreign rate differentialsand their impact on the effective rate.  In the second quarter of 2007,the worldwide valuation allowance increased by $9.0 million. The increase inthe valuation allowance was primarily due to an increase of $4.1 million indeferred tax assets associated with the Company’s domestic losses and $4.9million in other comprehensive income. The $4.1 million increase in thevaluation allowance for the second quarter of 2007 impacted the effective taxrate.

**Acquisitions**

In May 2007, we announcedthat we have entered into a definitive agreement to acquire the global colorpigments business of Elementis plc for approximately $140 million.  Thistransaction includes facilities in the United States, the United Kingdom andChina. We expect to incorporate the business into our Color Pigments andServices business unit, which is part of our Performance Additives segment. Thetransaction is subject to approval by appropriate regulatory 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 and six monthsended June 30, 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

38

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U.S. GAAP measure. Fromtime to time in this management’s discussion and analysis, we disclose non-GAAPfinancial measures, primarily Adjusted EBITDA, 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:

·                  interestexpense;

·                  depreciationexpense;

·                  amortizationexpense, including amortization of deferred financing fees;

·                  extraordinarylosses and non-recurring charges;

·                  non-cashcharges;

·                  losseson asset sales;

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

·                  expensespaid by 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;

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

·                  anyfees and expenses related to permitted acquisitions;

·                  anydeduction for minority interest expense; and

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

less:

 

·                  extraordinarygains and non-recurring gains;

·                  non-cashgains; and

·                  gains on assetsales,

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. Management has determined that stock-based compensation costs, whichare non-cash charges, will not be an adjustment in calculating Adjusted EBITDAas these costs will be an ongoing recurring cost to the Company. Specifically,calculation of Adjusted EBITDA according to the indenture underlying our 2014Notes excludes certain adjustments prescribed within the senior secured creditagreement. Given that borrowings under the senior secured credit agreement aresecured by most of our assets and given that the calculation does notmaterially differ from the calculation of Adjusted EBITDA for performancemeasurement purposes, we believe this is the most appropriate computation ofAdjusted 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 to AdjustedEBITDA 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 indenture governingthe 2014 Notes contain financial covenants that are determined based onAdjusted EBITDA. These covenants are material terms of these agreements,because they govern substantially all of our long-term debt, which in turnrepresents a substantial portion of our capitalization. Non-compliance withthese 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 2014 Notes. In addition, if we cannot satisfythese financial covenants in the indenture governing the 2014 Notes, we cannotengage in certain activities, such as incurring additional indebtedness ormaking certain payments. Consequently, Adjusted EBITDA is critical to ourassessment of our liquidity.

39

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We also use AdjustedEBITDA on a segment basis as the primary measure used by our chief operatingdecision maker, our Chief Executive Officer, to evaluate the ongoingperformance of our business segments and reporting units. On a segment basis,we define Adjusted EBITDA as operating income excluding depreciation andamortization, certain non-cash gains and charges, certain other special gainsand charges determined by our senior management to be non-recurring gains andcharges and certain items deemed by our senior management to have little or nobearing on the day-to-day operating performance of our 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, which reflectsmanagement’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 cash portionof interest expense, net, income tax provision (benefit), and restructuring aswell as non-recurring charges related to securities issuance, acquisitionactivities, and systems/organization establishment, generally represent charges(gains) which may significantly affect funds available to use in 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 morecomplete understanding 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 and six months ended June 30, 2007 and2006), including as a percentage of net sales, for the periods presented. SeeNote 4, “Segment Information,” for segment information and a reconciliation toincome (loss) from continuing operations before taxes and minority interest toAdjusted EBITDA on a segment basis.

40

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| ** **                                                            | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|-----------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                            | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| **($ in millions)**                                         | ** ** | **2007**                         | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Statement  of operations data:**                                    | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net  sales:**                                                       | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Specialty  Chemicals                                                  |       | $                                | 270.9      |                           | $          | 232.0 |   | $ | 538.8 |   | $ | 460.1 |   |
| Performance  Additives                                                |       | 216.2                            |       | 212.8                          |       | 401.0 |   | 395.3 |   |
| Titanium Dioxide  Pigments                                            |       | 123.3                            |       | 111.0                          |       | 239.4 |   | 219.2 |   |
| Advanced  Ceramics                                                    |       | 118.6                            |       | 98.0                           |       | 224.1 |   | 190.7 |   |
| Specialty  Compounds                                                  |       | 70.8                             |       | 66.1                           |       | 140.4 |   | 129.3 |   |
| Electronics                                                           |       | 50.9                             |       | 51.6                           |       | 103.1 |   | 101.0 |   |
| Total net sales                                                       |       | 850.7                            |       | 771.5                          |       | 1,646.8 |   | 1,495.6 |   |
|                                                                  |       |                             |       |                           |       |   |   |   |   |
| Gross profit                                                          |       | 272.7                            |       | 242.9                          |       | 529.7 |   | 468.7 |   |
|                                                                  |       | 32.1                             | %          | 31.5                           | %          | 32.2 | % | 31.3 | % |
| Selling, general  and administrative expenses                         |       | 160.2                            |       | 148.3                          |       | 315.0 |   | 288.9 |   |
|                                                                  |       | 18.8                             | %          | 19.2                           | %          | 19.1 | % | 19.3 | % |
| Restructuring  charges, net                                           |       | 1.5                              |       | 1.0                            |       | 6.0 |   | 2.2 |   |
| (Gain) loss on  sale of assets                                        |       | (0.4                             | )          | 0.1                            |       | (5.2 | ) | (0.4 | ) |
| **Operating  income (loss):**                                         | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Specialty  Chemicals                                                  |       | 52.7                             |       | 38.7                           |       | 108.3 |   | 77.9 |   |
|                                                                  |       | 19.5                             | %          | 16.7                           | %          | 20.1 | % | 16.9 | % |
| Performance  Additives                                                |       | 32.1                             |       | 29.5                           |       | 51.4 |   | 53.6 |   |
|                                                                  |       | 14.8                             | %          | 13.9                           | %          | 12.8 | % | 13.6 | % |
| Titanium Dioxide  Pigments                                            |       | 9.8                              |       | 12.5                           |       | 21.9 |   | 24.4 |   |
|                                                                  |       | 7.9                              | %          | 11.3                           | %          | 9.1 | % | 11.1 | % |
| Advanced  Ceramics                                                    |       | 21.5                             |       | 16.7                           |       | 40.4 |   | 31.8 |   |
|                                                                  |       | 18.1                             | %          | 17.0                           | %          | 18.0 | % | 16.7 | % |
| Specialty  Compounds                                                  |       | 6.5                              |       | 6.3                            |       | 11.6 |   | 11.6 |   |
|                                                                  |       | 9.2                              | %          | 9.5                            | %          | 8.3 | % | 9.0 | % |
| Electronics                                                           |       | 4.6                              |       | 5.3                            |       | 11.1 |   | 8.8 |   |
|                                                                  |       | 9.0                              | %          | 10.3                           | %          | 10.8 | % | 8.7 | % |
| Corporate costs                                                       |       | (15.8                            | )          | (15.5                          | )          | (30.8 | ) | (30.1 | ) |
| Total operating income                                                |       | 111.4                            |       | 93.5                           |       | 213.9 |   | 178.0 |   |
| **Other  income (expenses):**                                         | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest expense                                                      |       | (47.0                            | )          | (47.7                          | )          | (101.7 | ) | (87.5 | ) |
| Interest income                                                       |       | 4.0                              |       | 1.1                            |       | 9.1 |   | 2.5 |   |
| Loss on early  extinguishment of debt                                 |       | (19.4                            | )          | —                         |       | (19.4 | ) | — |   |
| Refinancing  expenses                                                 |       | —                           |       | —                         |       | (0.9 | ) | — |   |
| Foreign exchange  gain, net                                           |       | 3.3                              |       | 5.1                            |       | 3.7 |   | 2.2 |   |
| Other, net                                                            |       | —                           |       | 0.2                            |       | (0.1 | ) | 1.8 |   |
| Other income (expenses), net                                          |       | (59.1                            | )          | (41.3                          | )          | (109.3 | ) | (81.0 | ) |
| Income from  continuing operations before taxes and minority interest |       | 52.3                             |       | 52.2                           |       | 104.6 |   | 97.0 |   |
| Income tax  provision                                                 |       | 22.0                             |       | 22.0                           |       | 44.0 |   | 40.3 |   |
| Income from  continuing operations before minority interest           |       | 30.3                             |       | 30.2                           |       | 60.6 |   | 56.7 |   |
| Minority  interest in continuing operations                           |       | (2.3                             | )          | —                         |       | (3.4 | ) | — |   |
| Net income from  continuing operations                                |       | 28.0                             |       | 30.2                           |       | 57.2 |   | 56.7 |   |
| Income from  discontinued operations, net of tax                      |       | —                           |       | 8.1                            |       | 0.5 |   | 24.6 |   |
| Gain on sale of  discontinued operations, net of tax                  |       | —                           |       | —                         |       | 115.7 |   | — |   |
| Minority  interest in discontinued operations                         |       | —                           |       | (1.2                           | )          | (0.1 | ) | (4.2 | ) |
| Net income                                                            |       | $                                | 28.0       |                           | $          | 37.1 |   | $ | 173.3 |   | $ | 77.1 |   |
| **Adjusted  EBITDA:**                                                 | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Specialty  Chemicals                                                  |       | $                                | 66.3       |                           | $          | 50.7 |   | $ | 134.6 |   | $ | 102.1 |   |
|                                                                  |       | 24.5                             | %          | 21.9                           | %          | 25.0 | % | 22.2 | % |
| Performance  Additives                                                |       | 45.5                             |       | 42.8                           |       | 78.1 |   | 76.1 |   |
|                                                                  |       | 21.0                             | %          | 20.1                           | %          | 19.5 | % | 19.3 | % |
| Titanium Dioxide  Pigments                                            |       | 21.0                             |       | 21.8                           |       | 43.4 |   | 42.7 |   |
|                                                                  |       | 17.0                             | %          | 19.6                           | %          | 18.1 | % | 19.5 | % |
| Advanced  Ceramics                                                    |       | 32.7                             |       | 25.6                           |       | 61.5 |   | 49.2 |   |
|                                                                  |       | 27.6                             | %          | 26.1                           | %          | 27.4 | % | 25.8 | % |
| Specialty  Compounds                                                  |       | 9.5                              |       | 8.6                            |       | 17.6 |   | 15.9 |   |
|                                                                  |       | 13.4                             | %          | 13.0                           | %          | 12.5 | % | 12.3 | % |
| Electronics                                                           |       | 8.7                              |       | 9.7                            |       | 18.1 |   | 18.3 |   |
|                                                                  |       | 17.1                             | %          | 18.8                           | %          | 17.6 | % | 18.1 | % |
| Corporate costs                                                       |       | (14.7                            | )          | (12.8                          | )          | (28.1 | ) | (25.1 | ) |
| Total Adjusted  EBITDA (a)                                            |       | $                                | 169.0      |                           | $          | 146.4 |   | $ | 325.2 |   | $ | 279.2 |   |

 

----

(a)     This amount does not include $19.8 millionfor the three months ended June 30, 2006 and $1.8 million and $35.7 million forthe six months ended June 30, 2007 and 2006, respectively, of Adjusted EBITDAfrom the former Groupe Novasep segment which was sold on January 9, 2007.

41

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The following tablepresents the changes in the major components of our operations on a historicalbasis in dollars and percentages:
| ** **                                                                | ** ** | **Change: Three months ended  June 30, 2007 versus 2006 ** | ** ** | **Change: Six months ended  June 30, 2007 versus 2006** | ** ** |
|---------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------|------------|
| ** **                                                                | ** ** | ** **                                                                                         | ** ** | **%**                                                                                      | ** ** | **FX** | ** ** | ** ** | ** ** | ** ** | ** ** | **%** | ** ** | **FX** | ** ** | ** ** | ** ** |
| **($ in millions)**                                             | ** ** | **Total**                                                                                          | ** ** | **Change**                                                                                 | ** ** | **Effect (a)** | ** ** | **Organic** | ** ** | **Total** | ** ** | **Change** | ** ** | **Effect (a)** | ** ** | **Organic** | ** ** |
| **Statement  of operations data:**                                        | ** ** | ** **                                                                                         | ** ** | ** **                                                                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net  sales:**                                                           | ** ** | ** **                                                                                         | ** ** | ** **                                                                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Specialty  Chemicals                                                      |       | $                                                                                                  | 38.9       |                                                                                       | 16.8       | % | $ | 12.2 |   | $ | 26.7 |   | $ | 78.7 |   | 17.1 | % | $ | 25.8 |   | $ | 52.9 |   |
| Performance  Additives                                                    |       | 3.4                                                                                                |       | 1.6                                                                                        |       | 4.7 |   | (1.3 | ) | 5.7 |   | 1.4 |   | 10.4 |   | (4.7 | ) |
| Titanium Dioxide  Pigments                                                |       | 12.3                                                                                               |       | 11.1                                                                                       |       | 8.3 |   | 4.0 |   | 20.2 |   | 9.2 |   | 17.9 |   | 2.3 |   |
| Advanced  Ceramics                                                        |       | 20.6                                                                                               |       | 21.0                                                                                       |       | 7.4 |   | 13.2 |   | 33.4 |   | 17.5 |   | 15.3 |   | 18.1 |   |
| Specialty  Compounds                                                      |       | 4.7                                                                                                |       | 7.1                                                                                        |       | 2.2 |   | 2.5 |   | 11.1 |   | 8.6 |   | 4.7 |   | 6.4 |   |
| Electronics                                                               |       | (0.7                                                                                               | )          | (1.4                                                                                       | )          | 1.3 |   | (2.0 | ) | 2.1 |   | 2.1 |   | 3.2 |   | (1.1 | ) |
| Total net sales                                                           |       | 79.2                                                                                               |       | 10.3                                                                                       |       | 36.1 |   | 43.1 |   | 151.2 |   | 10.1 |   | 77.3 |   | 73.9 |   |
| Gross profit                                                              |       | 29.8                                                                                               |       | 12.3                                                                                       |       | 11.4 |   | 18.4 |   | 61.0 |   | 13.0 |   | 24.8 |   | 36.2 |   |
| Selling, general  and administrative expenses                             |       | 11.9                                                                                               |       | 8.0                                                                                        |       | 7.2 |   | 4.7 |   | 26.1 |   | 9.0 |   | 15.2 |   | 10.9 |   |
| Restructuring  charges                                                    |       | 0.5                                                                                                |       |                                                                                       |       |   |   | 0.5 |   | 3.8 |   |   |   |   |   | 3.8 |   |
| (Gain) loss on  sale of assets                                            |       | (0.5                                                                                               | )          |                                                                                       |       |   |   | (0.5 | ) | (4.8 | ) |   |   |   |   | (4.8 | ) |
| Total operating  expenses                                                 |       | 11.9                                                                                               |       | 8.0                                                                                        |       | 7.2 |   | 4.7 |   | 25.1 |   | 8.6 |   | 15.2 |   | 9.9 |   |
| **Operating  income (loss):**                                             | ** ** | ** **                                                                                         | ** ** | ** **                                                                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Specialty  Chemicals                                                      |       | 14.0                                                                                               |       | 36.2                                                                                       |       | 1.8 |   | 12.2 |   | 30.4 |   | 39.0 |   | 4.4 |   | 26.0 |   |
| Performance  Additives                                                    |       | 2.6                                                                                                |       | 8.8                                                                                        |       | 0.4 |   | 2.2 |   | (2.2 | ) | (4.1 | ) | 0.8 |   | (3.0 | ) |
| Titanium Dioxide  Pigments                                                |       | (2.7                                                                                               | )          | (21.6                                                                                      | )          | 0.6 |   | (3.3 | ) | (2.5 | ) | (10.2 | ) | 1.6 |   | (4.1 | ) |
| Advanced  Ceramics                                                        |       | 4.8                                                                                                |       | 28.7                                                                                       |       | 1.5 |   | 3.3 |   | 8.6 |   | 27.0 |   | 3.1 |   | 5.5 |   |
| Specialty  Compounds                                                      |       | 0.2                                                                                                |       | 3.2                                                                                        |       | 0.1 |   | 0.1 |   | — |   | — |   | 0.1 |   | (0.1 | ) |
| Electronics                                                               |       | (0.7                                                                                               | )          | (13.2                                                                                      | )          | — |   | (0.7 | ) | 2.3 |   | 26.1 |   | 0.1 |   | 2.2 |   |
| Corporate costs                                                           |       | (0.3                                                                                               | )          | (1.9                                                                                       | )          | (0.2 | ) | (0.1 | ) | (0.7 | ) | (2.3 | ) | (0.5 | ) | (0.2 | ) |
| Total                                                                     |       | 17.9                                                                                               |       | 19.1                                                                                       |       | 4.2 |   | 13.7 |   | 35.9 |   | 20.2 |   | 9.6 |   | 26.3 |   |
| **Other  income (expenses):**                                             | ** ** | ** **                                                                                         | ** ** | ** **                                                                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest expense                                                          |       | 0.7                                                                                                |       | (1.5                                                                                       | )          | (1.1 | ) | 1.8 |   | (14.2 | ) | 16.2 |   | (3.0 | ) | (11.2 | ) |
| Interest income                                                           |       | 2.9                                                                                                |       | 263.6                                                                                      |       | (0.2 | ) | 3.1 |   | 6.6 |   | 264.0 |   | (0.5 | ) | 7.1 |   |
| Loss on early  extinguishment of debt                                     |       | (19.4                                                                                              | )          |                                                                                       |       |   |   |   |   | (19.4 | ) |   |   |   |   |   |   |
| Refinancing  expenses                                                     |       | —                                                                                             |       |                                                                                       |       |   |   |   |   | (0.9 | ) |   |   |   |   |   |   |
| Foreign exchange  gain, net                                               |       | (1.8                                                                                               | )          |                                                                                       |       |   |   |   |   | 1.5 |   |   |   |   |   |   |   |
| Other, net                                                                |       | (0.2                                                                                               | )          |                                                                                       |       |   |   |   |   | (1.9 | ) |   |   |   |   |   |   |
| **Income  from continuing operations before taxes and minority interest** | ** ** | ** **                                                                                         | ** ** | ** **                                                                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Specialty  Chemicals                                                      |       | 18.8                                                                                               |       |                                                                                       |       |   |   |   |   | 35.5 |   |   |   |   |   |   |   |
| Performance  Additives                                                    |       | 2.0                                                                                                |       |                                                                                       |       |   |   |   |   | (2.0 | ) |   |   |   |   |   |   |
| Titanium Dioxide  Pigments                                                |       | (3.4                                                                                               | )          |                                                                                       |       |   |   |   |   | (5.7 | ) |   |   |   |   |   |   |
| Advanced  Ceramics                                                        |       | 4.3                                                                                                |       |                                                                                       |       |   |   |   |   | 7.5 |   |   |   |   |   |   |   |
| Specialty  Compounds                                                      |       | (3.3                                                                                               | )          |                                                                                       |       |   |   |   |   | (5.7 | ) |   |   |   |   |   |   |
| Electronics                                                               |       | (0.7                                                                                               | )          |                                                                                       |       |   |   |   |   | 3.9 |   |   |   |   |   |   |   |
| Corporate costs                                                           |       | (17.6                                                                                              | )          |                                                                                       |       |   |   |   |   | (25.9 | ) |   |   |   |   |   |   |
| Total                                                                     |       | 0.1                                                                                                |       |                                                                                       |       |   |   |   |   | 7.6 |   |   |   |   |   |   |   |
| Income tax  provision                                                     |       | —                                                                                             |       |                                                                                       |       |   |   |   |   | 3.7 |   |   |   |   |   |   |   |
| Income from  continuing operations before minority interest               |       | 0.1                                                                                                |       |                                                                                       |       |   |   |   |   | 3.9 |   |   |   |   |   |   |   |
| Minority  interest in continuing operations                               |       | (2.3                                                                                               | )          |                                                                                       |       |   |   |   |   | (3.4 | ) |   |   |   |   |   |   |
| Net income from  continuing operations                                    |       | (2.2                                                                                               | )          |                                                                                       |       |   |   |   |   | 0.5 |   |   |   |   |   |   |   |
| Income from  discontinued operations, net of tax                          |       | (8.1                                                                                               | )          |                                                                                       |       |   |   |   |   | (24.1 | ) |   |   |   |   |   |   |
| Gain on sale of  discontinued operations, net of tax                      |       | —                                                                                             |       |                                                                                       |       |   |   |   |   | 115.7 |   |   |   |   |   |   |   |
| Minority  interest in discontinued operations                             |       | 1.2                                                                                                |       |                                                                                       |       |   |   |   |   | 4.1 |   |   |   |   |   |   |   |
| Net income                                                                |       | $                                                                                                  | (9.1       | )                                                                                          |       |   |   |   |   |   | $ | 96.2 |   |   |   |   |   |   |   |
| **Adjusted  EBITDA:**                                                     | ** ** | ** **                                                                                         | ** ** | ** **                                                                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Specialty  Chemicals                                                      |       | $                                                                                                  | 15.6       |                                                                                       | 30.8       | % | $ | 2.6 |   | $ | 13.0 |   | $ | 32.5 |   | 31.8 | % | $ | 5.8 |   | $ | 26.7 |   |
| Performance  Additives                                                    |       | 2.7                                                                                                |       | 6.3                                                                                        |       | 1.0 |   | 1.7 |   | 2.0 |   | 2.6 |   | 2.0 |   | — |   |
| Titanium Dioxide  Pigments                                                |       | (0.8                                                                                               | )          | (3.7                                                                                       | )          | 1.3 |   | (2.1 | ) | 0.7 |   | 1.6 |   | 3.2 |   | (2.5 | ) |
| Advanced  Ceramics                                                        |       | 7.1                                                                                                |       | 27.7                                                                                       |       | 2.1 |   | 5.0 |   | 12.3 |   | 25.0 |   | 4.5 |   | 7.8 |   |
| Specialty  Compounds                                                      |       | 0.9                                                                                                |       | 10.5                                                                                       |       | 0.3 |   | 0.6 |   | 1.7 |   | 10.7 |   | 0.5 |   | 1.2 |   |
| Electronics                                                               |       | (1.0                                                                                               | )          | (10.3                                                                                      | )          | 0.3 |   | (1.3 | ) | (0.2 | ) | (1.1 | ) | 0.6 |   | (0.8 | ) |
| Corporate costs  and eliminations                                         |       | (1.9                                                                                               | )          | (14.8                                                                                      | )          | (0.2 | ) | (1.7 | ) | (3.0 | ) | (12.0 | ) | (0.5 | ) | (2.5 | ) |
| Total Adjusted  EBITDA                                                    |       | $                                                                                                  | 22.6       |                                                                                       | 15.4       | % | $ | 7.4 |   | $ | 15.2 |   | $ | 46.0 |   | 16.5 | % | $ | 16.1 |   | $ | 29.9 |   |

 

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

***Three months ended June 30, 2007 compared to three monthsended June 30, 2006***

**Overview**

Net sales increased $79.2million in the second quarter of 2007 compared with the same period in theprior year as a result of increased sales in most segments from higher volumes,increased selling prices and the positive impact of currency changes.  See

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further discussion bysegment below.

We also had increasedoperating income and Adjusted EBITDA in the second quarter of 2007 comparedwith the same period in the prior year primarily due to the sales increasesnoted above. Operating income and Adjusted EBITDA were negatively impacted byhigher raw material costs in most businesses, particularly from the impact ofhigher copper costs in our Timber Treatment Chemicals business in ourPerformance Additives segment, higher zinc, and other raw material costs in ourSpecialty Chemicals segment and higher zinc and other raw material costs in ourTitanium Dioxide Pigments segment. In addition, higher selling, general andadministrative expenses primarily related to increased sales volumes had anunfavorable effect on operating income and Adjusted EBITDA.

Net income fromcontinuing operations of $28.0 million in the second quarter of 2007, whichincluded $19.4 million of costs to redeem our 2011 Notes, decreased $2.2million compared with the same period in the prior year. This decrease waspartially offset by increased sales and additional interest income related tointerest earned on the net cash proceeds received from the sale of GroupeNovasep in January 2007.

Income from discontinuedoperations, net of tax and minority interest, decreased $6.9 million in thesecond quarter of 2007 compared with the same period in the prior year due toincome from operating Groupe Novasep in the second quarter of 2006.

Net income of $28.0million in the second quarter of 2007, which included $19.4 million of costs toredeem our 2011 Notes, decreased $9.1 million compared with the same period inthe prior year. This decrease was partially offset by increased sales andadditional interest income related to interest earned on the net cash proceedsreceived from the sale of Groupe Novasep in January 2007 (as noted above).

**Netsales**

*SpecialtyChemicals*.   Net sales increased $38.9 million overthe prior year, primarily on higher volumes and selling prices and the positiveimpact of currency changes of $12.2 million. Net sales in the Surface Treatmentbusiness were favorably impacted by higher selling prices and growth in mostmarkets, particularly in European automotive and general industrialapplications. In the Fine Chemicals business, higher selling prices of lithiumproducts and metal sulfides, as well as increased volumes had a favorableimpact on net sales.

*PerformanceAdditives*.   Net sales increased $3.4 million overthe prior year due to the positive impact of currency changes of $4.7 million,as well as higher selling prices of $7.6 million primarily related to ACQproducts in our Timber Treatment Chemicals business. Higher constructionvolumes in Europe in our Color Pigments and Services business also had afavorable impact on net sales. The increase in net sales was partially offsetby lower volumes of ACQ products in our Timber Treatment Chemicals business,lower volumes to the carbonless paper markets in our Clay-based Additivesbusiness, lower construction volumes in North America in our Color Pigments andServices business and lower volumes to the pool and spa chemicals markets inour Water Treatment Chemicals business.

*TitaniumDioxide Pigments*.   Net sales increased $12.3million over the prior year due to the positive impact of currency changes of$8.3 million, as well as higher selling prices for functional additives andhigher volumes of titanium dioxide products in rutile grade.  This was partially offset by lower volumes oftitanium dioxide products in anatase grade.

*AdvancedCeramics*.   Net sales increased $20.6 million overthe prior year primarily due to the positive impact of currency changes of $7.4million and increased volumes in most businesses, particularly in medical,mechanical systems and Piezo applications, partially offset by lower sellingprices of $1.5 million.  The impact ofbolt-on acquisitions made in May 2006 and April 2007 also had a favorableimpact on net sales.

*SpecialtyCompounds*.   Net sales increased $4.7 million overthe prior year primarily due to higher volumes resulting from an acquisitionmade in October 2006 in the wire and cable business and the positive impact ofcurrency changes of $2.2 million, partially offset by lower volumes resultingfrom a general downturn in the wire and cable market and a reduction incustomer inventory levels.

*Electronics*.  Net sales decreased $0.7 million over the prior year primarily from thedivestiture of our U.S Wafer Reclaim business in the first quarter of 2007, aswell as lower selling prices of $0.9 million (primarily high puritychemicals).  This was partially offset bythe positive impact of currency changes of $1.3 million and increased volumesin our Electronic Chemicals businesses on sales to the printed circuit boardand semiconductor markets.

**Grossprofit**

Gross profit increased$29.8 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 $11.4 million. This was partially offsetby raw material cost increases, particularly from the impact of higher coppercosts in our Timber Treatment Chemicals business in the

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Performance Additivessegment, higher zinc and other raw material costs in the Titanium Dioxidesegment, and higher zinc and other raw material costs in the SpecialtyChemicals segment. Gross profit as a percentage of net sales was 32.1% in thesecond quarter of 2007 versus 31.5% in the second quarter of 2006.

**Selling,general and administrative expenses**

Selling, general andadministrative expenses, or SG&A, increased $11.9 million over the prioryear primarily due to the impact of currency changes of $7.2 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 was18.8% in the second quarter of 2007 versus 19.2% in the second quarter of 2006,primarily impacted by selling price increases.

**Restructuringcharges, net**

We recorded $1.5 millionof restructuring charges in the second quarter of 2007 for miscellaneousrestructuring actions in the Specialty Chemicals, Performance Additives,Advanced Ceramics and Corporate segments for miscellaneous headcount reductionsand facility closures.  We recorded $1.0million of restructuring charges in the second quarter of 2006 formiscellaneous restructuring actions in the Specialty Chemicals, PerformanceAdditives and Electronics segments for miscellaneous headcount reductions andfacility closures. See Note 12, “Restructuring Liability,” for further details.

**Gain onsale of assets**

We recorded a gain of$0.4 million and a loss of $0.1 million for the three months ended June 30,2007 and 2006, respectively, related to asset sales.

**Operatingincome**

*SpecialtyChemicals*.   Operating income increased $14.0million primarily due to higher sales in both the Surface Treatment and FineChemicals businesses and the positive impact of currency changes of $1.8million. This increase was partially offset by higher raw material costs of$6.9 million primarily related to zinc and other raw materials and higherselling, general and administrative expenses of $1.8 million primarily relatedto the increased sales volumes.

*PerformanceAdditives*.   Operating income increased $2.6million over the prior year primarily from the selling price increases of ACQproducts in our Timber Treatment Chemicals business and higher constructionvolumes in Europe in our Color Pigments and Services business.  This was partially offset by higher rawmaterial costs of $1.9 million, particularly copper costs in the TimberTreatment Chemicals business, higher depreciation and amortization costs of$0.7 million primarily due to the Viance, LLC joint venture formed in January2007 and the lower sales volumes noted above.

*TitaniumDioxide Pigments*.   Operating income decreased $2.7million over the prior year due to higher raw material and energy costs of $1.8million and $0.5 million, respectively, an unfavorable mix and lower sellingprices of titanium dioxide products, higher maintenance costs related to aplanned shutdown and higher depreciation and amortization costs of $1.2million.  This decrease was partiallyoffset by the sales increases noted above and the positive impact of currencychanges of $0.6 million.

*AdvancedCeramics*.   Operating income increased $4.8 millionover the prior year primarily due to productivity improvements, increased salesin most businesses, particularly from increased volumes in medical, mechanicaland piezo applications and the positive impact of currency changes of $1.5million. This increase was partially offset by lower selling prices of $1.5million, increased depreciation and amortization costs of $1.9 million relatedto acquisitions made in May 2006 and April 2007 and increased restructuringcosts of $0.6 million.

*SpecialtyCompounds*.   Operating income increased $0.2 millionprimarily due to higher sales volumes resulting from an acquisition made inOctober 2006, partially offset by increased depreciation and amortization costsof $0.5 million and higher costs associated with the acquisition made inOctober 2006.

*Electronics*.  Operating income decreased $0.7 million over the prior year primarily from thedivestiture of our U.S. Wafer Reclaim business, as well as lower sellingprices. This was partially offset by lower depreciation and amortization costsof $0.4 million and increased volumes in our Electronic Chemicals businesses onsales to the printed circuit board and semiconductor markets.

**Otherincome (expenses)**

*Interestexpense*.  Interest expense decreased $0.7 millionin the second quarter of 2007 compared to the same period in the prior year.The second quarter of 2007 and 2006 included gains of $0.8 million and $4.6million, respectively, representing the movement in the mark-to-marketvaluation of our interest rate hedging instruments.  Excluding the impact of these gains, interestexpense decreased $4.5 million primarily due to lower interest expense relatedto the redemption on May 15, 2007 of the 2011 Notes.

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*Interest income*.  Interestincome increased $2.9 million in the second quarter of 2007 compared to the sameperiod in the prior year primarily related to interest earned on the net cashproceeds received from the sale of Groupe Novasep in January 2007.

 

*Foreignexchange gain, net*.   In the second quarter of2007, we had foreign exchange gains of $3.3 million compared to foreignexchange gains of $5.1 million recorded in the same period in the prioryear.  The change from the prior year isprimarily related to lower euro-denominated debt levels at our U.K.subsidiaries.

*Loss on early extinguishment ofdebt. *In the secondquarter of 2007, the Company paid a redemption premium of $14.5 million andwrote off $4.9 million of deferred financing costs associated with theredemption of the 2011 Notes on May 15, 2007.

**Provisionfor income taxes**

The effective income taxrate for the second quarter of 2007 was 42.1%. We recorded an income taxprovision of $22.0 million for the second 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 offset byforeign rate differentials. The effective income tax rate for the secondquarter of 2006 of 42.1% was impacted by foreign rate differentials offset bythe U.S. valuation allowance.

**Minority interest in continuingoperations**

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 second quarter of 2007 was $28.0 million ascompared to net income from continuing operations of $30.2 million for thesecond quarter of 2006 for the reasons described above.

**Incomefrom discontinued operations, net of tax**

Income from discontinuedoperations, net of tax decreased by $8.1 million due to income earned from theGroupe Novasep segment in the second quarter of 2006. As noted above, theGroupe Novasep segment was sold on January 9, 2007.

**Minorityinterest in discontinued operations**

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

**Netincome**

Net income for the secondquarter of 2007 was $28.0 million as compared to net income of $37.1 millionfor the second quarter of 2006 for the reasons described above.

**AdjustedEBITDA**

*SpecialtyChemicals*.   Adjusted EBITDA increased $15.6million over the prior year primarily due to higher sales in both the Surface Treatmentand Fine Chemicals businesses and the positive impact of currency changes of$2.6 million. This increase was partially offset by higher raw material costsand higher selling, general and administrative expenses as discussed above inoperating income.

*PerformanceAdditives*.   Adjusted EBITDA increased $2.7 millionover the prior year primarily from the selling price increases of ACQ productsin our Timber Treatment Chemicals business and higher construction volumes inEurope in our Color Pigments and Services business. This was partially offsetby higher raw material costs, particularly copper costs in the Timber TreatmentChemicals business, and the lower sales volumes noted above.

*TitaniumDioxide Pigments*.   Adjusted EBITDA decreased $0.8million over the prior year due to higher raw material and energy costs, anunfavorable mix and lower selling prices of titanium dioxide products andhigher maintenance costs related to a planned shutdown. This decrease waspartially offset by the sales increases noted above and the positive impact ofcurrency changes of $1.3 million. See discussion above in operating income forfurther details.

*AdvancedCeramics*.   Adjusted EBITDA increased $7.1 millionover the prior year primarily due to productivity improvements, increased salesin most businesses and the positive impact of currency changes of $2.1 million.This increase was partially offset by lower selling prices. See discussionabove in operating income for further details.

*SpecialtyCompounds*.   Adjusted EBITDA increased $0.9 millionprimarily due to higher sales volumes, partially offset by higher

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costs associated with theacquisition made in October 2006.

*Electronics*.  Adjusted EBITDA decreased $1.0 million over the prior year primarily from thedivestiture of our U.S. Wafer Reclaim business, as well as lower sellingprices. This was partially offset by increased volumes in our ElectronicChemicals businesses on sales to the printed circuit board and semiconductormarkets.

*Corporate*.  Adjusted EBITDA loss at Corporate increased $1.9 million over the prior yearprimarily due to higher legal accruals and the recording of additional stockcompensation expense in the second quarter of 2007 related to the May 2007equity grant (see Note 10, “Stock-Based Compensation,” for further details).

*Discontinued operations. *Adjusted EBITDA fromdiscontinued operations decreased $19.8 million over the prior year due toincome from operating Groupe Novasep in the second quarter of 2006.

***Six months ended June 30, 2007 compared to six months endedJune 30, 2006***

**Overview**

Net sales increased$151.2 million in the first six months of 2007 compared with the same period inthe prior year driven by strong demand in a number of our segments,particularly in our Specialty Chemicals segment, and the positive impact ofcurrency changes of $77.3 million.  Seefurther discussion by segment below.

We also had increasedoperating income and Adjusted EBITDA in the first six months of 2007 comparedwith the same period in the prior year primarily due to the sales increasesnoted above. Operating income and Adjusted EBITDA were negatively impacted byhigher raw material costs in most businesses, particularly from the impact ofhigher copper costs in our Timber Treatment Chemicals business in ourPerformance Additives segment, higher zinc and other raw material costs in ourSpecialty Chemicals segment and higher zinc and other raw material costs in ourTitanium Dioxide Pigments segment. In addition, higher selling, general andadministrative expenses primarily related to increased sales volumes and higherenergy costs had an unfavorable effect on operating income and Adjusted EBITDA.

Net income fromcontinuing operations increased $0.5 million in the first six months of 2007compared with the same period in the prior year primarily due to the reasonsnoted above. This was partially offset by costs of $19.4 million incurred inthe second quarter of 2007 to redeem our 2011 Notes and higher interest expenserecorded in the first six months of 2007 compared to the same period in theprior year due to a decrease in mark-to-market gains on our interest ratehedging instruments.

Income from discontinuedoperations, net of tax and minority interest, increased $95.7 million in thefirst six months of 2007 compared with the same period in the prior yearprimarily due to the recording of a gain of $115.7 million (net of taxes) onthe sale of Groupe Novasep in the first quarter of 2007, partially offset byincome from operating the business and the tax benefit recorded in the firstquarter of 2006 related to the favorable treatment on the sale of Rohner AG.

Net income increased$96.2 million in the first six months of 2007 compared with the same period inthe prior year primarily due to the reasons noted above.

**Netsales**

*SpecialtyChemicals*.   Net sales increased $78.7 million overthe prior year, primarily on higher volumes and selling prices and the positiveimpact of currency changes of $25.8 million. Net sales in the Surface Treatmentbusiness were favorably impacted by growth in most markets, particularly inEuropean automotive, general industrial and aerospace applications. In the FineChemicals business, increased volumes of lithium products and metal sulfideshad a favorable impact on sales.

*PerformanceAdditives*.   Net sales increased $5.7 million overthe prior year due to the positive impact of currency changes of $10.4 million,as well as higher selling prices of $13.7 million primarily related to ACQproducts in our Timber Treatment Chemicals business. Higher constructionvolumes in Europe in our Color Pigments and Services business also had afavorable impact on net sales. The increase in net sales were partially offsetby lower volumes of ACQ products in our Timber Treatment Chemicals business,lower construction volumes in North America in our Color Pigments and Servicesbusiness, lower volumes to the carbonless paper markets in our Clay-basedAdditives segment and lower volumes to the pool and spa chemicals markets inour Water Treatment Chemicals business.

*TitaniumDioxide Pigments*.   Net sales increased $20.2million over the prior year due to the positive impact of currency changes of$17.9 million, as well as higher selling prices for functional additives andhigher volumes of titanium dioxide products.

*AdvancedCeramics*.   Net sales increased $33.4 million overthe prior year primarily due to the positive impact of currency changes of$15.3 million and increased volumes. The increased volumes were due to highervolumes in most businesses, particularly in medical,

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mechanical systems,cutting tools and Piezo applications, partially offset by lower selling pricesof $3.7 million.  The impact of bolt-onacquisitions made in May 2006 and April 2007 also had a favorable impact on netsales.

*SpecialtyCompounds*.   Net sales increased $11.1 million overthe prior year primarily due to higher volumes resulting from an acquisitionmade in October 2006 in the wire and cable business and the positive impact ofcurrency changes of $4.7 million. This was partially offset by lower sellingprices of $1.5 million.

*Electronics*.  Net sales increased $2.1 million over the prior year primarily due to thepositive impact of currency changes of $3.2 million and increased volumes inour Electronic Chemicals businesses on sales to the printed circuit board andsemiconductor markets.  This waspartially offset by the divestiture of our U.S. Wafer Reclaim business, as wellas lower selling prices of $1.0 million (primarily high purity chemicals).

**Grossprofit**

Gross profit increased$61.0 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 $24.8 million. This was partially offsetby raw material cost increases, particularly from the impact of higher coppercosts in our Timber Treatment Chemicals business in the Performance Additivessegment, higher zinc and other raw material costs in the Titanium Dioxidesegment, and higher zinc and other raw material costs in the SpecialtyChemicals segment, and higher energy costs. Gross profit as a percentage of netsales was 32.2% in the first six months of 2007 compared to 31.3% in the firstsix months of 2006.

**Selling,general and administrative expenses**

Selling, general andadministrative expenses, or SG&A, increased $26.1 million over the prioryear primarily due to the impact of currency changes of $15.2 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 was19.1% in the first six months of 2007 compared to 19.3% in the first six monthsof 2006, primarily impacted by selling price increases.

**Restructuringcharges, net**

We recorded $6.0 millionof restructuring charges in the first six months of 2007 primarily related tofacility closure costs in the Electronics segment. We recorded $2.2 million ofrestructuring charges in the first six months of 2006 for miscellaneousrestructuring actions in the Specialty Chemicals, Performance Additives andElectronics segments for miscellaneous headcount reductions and facilityclosures. See Note 12, “Restructuring Liability,” for further details.

**Gain onsale of assets**

We recorded gains of $5.2million and $0.4 million for the six months ended June 30, 2007 and 2006,respectively, related to asset sales.  Inthe first quarter of 2007, we sold our U.S. Wafer Reclaim business and reporteda gain of $4.3 million.

**Operatingincome**

*SpecialtyChemicals*.   Operating income increased $30.4 millionprimarily due to higher sales in both the Surface Treatment and Fine Chemicalsbusinesses and the positive impact of currency changes of $4.4 million. Thisincrease was partially offset by higher raw material costs of $13.3 millionprimarily related to zinc and other raw materials, higher selling, general andadministrative expenses of $5.0 million primarily related to the increasedsales volumes and higher depreciation and amortization costs of $3.3 million.

*PerformanceAdditives*.   Operating income decreased $2.2million over the prior year primarily from higher raw material costs of $7.2million, particularly copper costs in the Timber Treatment Chemicals business,higher depreciation and amortization costs of $5.2 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 partially offset byincreased construction volumes in Europe in our Color Pigments and Servicesbusiness, higher selling prices and an inventory write-up reversal charge of$0.8 million recorded in the second quarter of 2006.

*TitaniumDioxide Pigments*.   Operating income decreased $2.5million over the prior year due to higher raw material and energy costs of $2.7million and $1.7 million, respectively, an unfavorable mix and lower sellingprices of titanium dioxide products, higher maintenance costs related to aplanned shutdown and higher depreciation and amortization costs of $2.5million.  This decrease was partiallyoffset by the sales increases noted above and the positive impact of currencychanges of $1.6 million.

*AdvancedCeramics*.   Operating income increased $8.6 millionover the prior year primarily due to productivity improvements and increasedsales in most businesses, particularly from increased volumes in medical,mechanical systems, cutting tools and piezo applications. Currency changes of$3.1 million also had a favorable impact on operating income. This increase waspartially offset by lower selling prices of $3.7 million, increaseddepreciation and amortization costs of $3.3 million related to acquisitionsmade in May 2006 and April 2007 and increased restructuring costs of $0.7million.

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*SpecialtyCompounds*.   Operating income was flat as highervolumes resulting from an acquisition made in October 2006 in the wire andcable business and a favorable product mix were offset by lower selling pricesof $1.5 million, higher depreciation and amortization costs of $1.2 million andhigher costs associated with the acquisition.

*Electronics*.  Operating income increased $2.3 million over the prior year primarily due tohigher volumes in our Electronic Chemicals businesses on sales to the printedcircuit board and semiconductor markets and gains on asset sales of $4.8million recorded in the first quarter of 2007 primarily from the divestiture ofour U.S. Wafer Reclaim business These increases were partially by higherrestructuring costs of $2.8 million primarily related to facility closure costsand lower selling prices of $1.0 million (primarily high purity chemicals).

**Otherincome (expenses)**

*Interestexpense*.  Interest expense increased $14.2 millionin the first six months of 2007 compared to the same period in the prior year.The first six months of 2007 and 2006 included losses of $2.0 million and gainsof $15.3 million, respectively, representing the movement in the mark-to-marketvaluation of our interest rate hedging instruments. The remaining decrease of$3.1 million was primarily due to lower interest expense related to theredemption of the 2011 Notes.

*Interestincome*.  Interest income increased $6.6 million inthe first six months of 2007 compared to the same period in the prior yearprimarily related to interest earned on the net cash proceeds received from thesale of Groupe Novasep in January 2007.

*Loss on early extinguishment ofdebt. *In May 2007, theCompany paid a redemption premium of $14.5 million and wrote off $4.9 millionof deferred financing costs associated with the redemption of the 2011 Notes onMay 15, 2007.

*Refinancingexpenses*.   In March 2007, we expensed $0.9 millionrelated to the fourth amendment of the senior secured credit agreementresulting in a 50 basis point reduction on our new tranche G term loans.

*Foreignexchange gain, net*.   For the first six monthsended June 30, 2007 and 2006, we had foreign exchange gains of $3.7 million and$2.2 million, respectively.  The changefrom the prior year is primarily related to the impact that the stronger eurohad on our euro-denominated assets.

*Other,net*.   For the first six months of 2006, werecorded $1.6 million of income in connection with the correction of animmaterial error related to a previously unrecorded asset in the TitaniumDioxide Pigments segment.

**Provisionfor income taxes**

The effective income taxrate for the first six months of 2007 was 42.1%. We recorded an income taxprovision of $44.0 million for the first six months of 2007. The effectiveincome tax rate compared to the federal statutory rate was negatively impactedby an increase in the valuation allowance related to U.S. operations offset byforeign rate differentials. The effective income tax rate for the first sixmonths of 2006 of 41.5% was impacted by foreign rate differentials offset bythe U.S. valuation allowance.

**Minority interest in continuingoperations**

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 six months of 2007 was $57.2 million ascompared to net income from continuing operations of $56.7 million for thesecond 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 six months of2007 compared to income of $24.6 million for the first six months of 2006 dueto income earned from the segment in the first six months of 2006 and the taxbenefit recorded in the first quarter of 2006 related to the favorabletreatment on the sale of Rohner AG. As noted above, the Groupe Novasep segmentwas sold on January 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 six monthsof 2007 as a result of the sale of Groupe Novasep.

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**Minorityinterest in discontinued operations**

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

**Netincome**

Net income for the firstsix months of 2007 was $173.3 million as compared to net income of $77.1million for the first six months of 2006 for the reasons described above.

**AdjustedEBITDA**

*SpecialtyChemicals*.   Adjusted EBITDA increased $32.5million primarily due to higher sales in both the Surface Treatment and FineChemicals businesses and the positive impact of currency changes of $5.8 million.This increase was partially offset by higher raw material costs and higherselling, general and administrative expenses as discussed above in operatingincome.

*PerformanceAdditives*.   Adjusted EBITDA increased $2.0 millionover the prior year primarily from increased construction volumes in Europe inour Color Pigments and Services business, higher selling prices and thepositive impact of currency changes of $2.0 million.  This was partially offset by higher rawmaterial costs and the lower sales volumes noted above.  See discussion above in operating income forfurther details.

*TitaniumDioxide Pigments*.   Adjusted EBITDA increased $0.7million over the prior year due to the sales increases noted above and thepositive impact of currency changes of $3.2 million.  This was partially offset by higher rawmaterial and energy costs, an unfavorable mix and lower selling prices oftitanium dioxide products and higher maintenance costs related to a plannedshutdown.  See discussion above inoperating income for further details.

*AdvancedCeramics*.   Adjusted EBITDA increased $12.3 millionover the prior year primarily due to productivity improvements and increasedsales in most businesses.  Currencychanges of $4.5 million also had a favorable impact on Adjusted EBITDA. Thisincrease was partially offset by lower selling prices.  See discussion above in operating income forfurther details.

*SpecialtyCompounds*.   Adjusted EBITDA increased $1.7 millionprimarily due to higher volumes resulting from an acquisition made in October2006 in the wire and cable business and a favorable product mix. This waspartially offset by lower selling prices. See discussion above in operating income for further details.

*Electronics*.  Adjusted EBITDA decreased $0.2 million over the prior year primarily due to thedivestiture of our U.S. Wafer Reclaim business, as well as lower selling pricesof $1.0 million (primarily high purity chemicals). This was partially offset byhigher volumes in our Electronic Chemicals businesses to the printed circuitboard and semiconductor markets and the positive impact of currency changes of$0.6 million.

*Corporate*.  Adjusted EBITDA loss at Corporate increased $3.0 million primarily due tohigher legal accruals and the recording of additional stock compensationexpense in the second quarter of 2007 related to the May 2007 equity grant (seeNote 10, “Stock-Based Compensation,” for further details).

*Discontinuedoperations*.   AdjustedEBITDA from discontinued operations decreased $33.9 million over the prior yearprimarily due to the sale of the Groupe Novasep segment on January 9, 2007.

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

Because we view Adjusted EBITDA on both a consolidated basis andsegment basis as an operating performance measure, we use net income as themost comparable U.S. GAAP measure on a consolidated basis. The following table,which sets forth the applicable components of Adjusted EBITDA, presents areconciliation of net income to Adjusted EBITDA on a consolidated basis:

 

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| ** **                                                            | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|-----------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                            | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| **($ in millions)**                                         | ** ** | **2007**                         | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net income                                                            |       | $                                | 28.0       |                           | $          | 37.1 |   | $ | 173.3 |   | $ | 77.1 |   |
| Income from  discontinued operations, net of tax                      |       | —                           |       | (8.1                           | )          | (0.5 | ) | (24.6 | ) |
| Gain on sale of  discontinued operations, net of tax                  |       | —                           |       | —                         |       | (115.7 | ) | — |   |
| Minority  interest in discontinued operations                         |       | —                           |       | 1.2                            |       | 0.1 |   | 4.2 |   |
| Net income from  continuing operations                                |       | 28.0                             |       | 30.2                           |       | 57.2 |   | 56.7 |   |
| Income tax  provision                                                 |       | 22.0                             |       | 22.0                           |       | 44.0 |   | 40.3 |   |
| Minority  interest in continuing operations                           |       | 2.3                              |       | —                         |       | 3.4 |   | — |   |
| Income from continuing operations before taxes and minority  interest |       | 52.3                             |       | 52.2                           |       | 104.6 |   | 97.0 |   |
| Interest expense  (a)                                                 |       | 47.0                             |       | 47.7                           |       | 101.7 |   | 87.5 |   |
| Interest income                                                       |       | (4.0                             | )          | (1.1                           | )          | (9.1 | ) | (2.5 | ) |
| Depreciation and  amortization                                        |       | 55.2                             |       | 49.3                           |       | 108.4 |   | 93.0 |   |
| Restructuring  charges, net                                           |       | 1.5                              |       | 1.0                            |       | 6.0 |   | 2.2 |   |
| CCA litigation  defense costs                                         |       | 0.2                              |       | 0.2                            |       | 0.3 |   | 0.5 |   |
| Systems/organization  establishment expenses                          |       | 0.3                              |       | 2.2                            |       | 1.2 |   | 4.1 |   |
| Cancelled  acquisition and disposal costs                             |       | 0.7                              |       | 0.3                            |       | 0.8 |   | 0.9 |   |
| Inventory write-up  reversal                                          |       | 0.1                              |       | 0.1                            |       | 0.1 |   | 0.9 |   |
| Costs incurred  related to debt modifications                         |       | —                           |       | —                         |       | 0.9 |   | — |   |
| Loss on early  extinguishment of debt                                 |       | 19.4                             |       | —                         |       | 19.4 |   | — |   |
| (Gain) loss on  sale of assets                                        |       | (0.4                             | )          | 0.1                            |       | (5.2 | ) | (0.4 | ) |
| Foreign exchange  gain, net                                           |       | (3.3                             | )          | (5.1                           | )          | (3.7 | ) | (2.2 | ) |
| Other                                                                 |       | —                           |       | (0.5                           | )          | (0.2 | ) | (1.8 | ) |
| Total Adjusted  EBITDA (b)                                            |       | $                                | 169.0      |                           | $          | 146.4 |   | $ | 325.2 |   | $ | 279.2 |   |

 

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(a)    Includes gains of $0.8 million and $4.6 million for the three months ended June30, 2007 and 2006, respectively, and losses of $2.0 million and gains of $15.3million for the six months ended June 30, 2007 and 2006, respectively,representing the movement in the mark-to-market valuation of the Company’sinterest rate and cross-currency hedging instruments.

(b)     This amount does not include $19.8 millionfor the three months ended June 30, 2006 and $1.8 million and $35.7 million forthe six months ended June 30, 2007 and 2006, respectively, of Adjusted EBITDAfrom the former Groupe Novasep segment which was sold on January 9, 2007.

**Liquidityand Capital Resources**

**CashFlows**

*Unlessotherwise noted, all amounts below which are denominated in currencies otherthan the U.S. dollar are converted at the Friday, June 29, 2007 exchange rateof**€1.00=$1.3542.*

*OperatingActivities*.   Net cash provided by operatingactivities was $148.3 million and $105.4 million for the six months ended June30, 2007 and 2006, respectively. Net cash from operating activities increasedin 2007 primarily from lower use of operating cash from working capitalchanges, higher operating income and lower cash interest expense, partiallyoffset by the lack of operating cash flows due to the Groupe Novasepdivestiture.

*InvestingActivities*.  Net cash provided by investingactivities was $380.8 million for the six months ended June 30, 2007. Net cashused in investing activities was $101.1 million for the six months ended June30, 2006. Net cash from investing activities increased in 2007 primarily due tothe proceeds from the sale of the Groupe Novasep segment and the proceedsreceived from the formation of the Viance, LLC joint venture in the PerformanceAdditives segment.

*FinancingActivities*.   Net cash used in financing activitieswas $356.9 million and $66.7 million for the six months ended June 30, 2007 and2006, respectively and was comprised of scheduled payments for long-term debtfor both periods provided.  For the sixmonths ended June 30, 2007, net cash used in financing activities included thepayment of our 10 5/8% Senior Subordinated Notes due in 2011 in the aggregateprincipal amount of $273.4 million and related redemption premiums of $14.5million.

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**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 and received net cash proceeds of$421.4 million.

·                  OnFebruary 12, 2007, we completed the sale of our U.S. Wafer Reclaim business forapproximately $11.0 million in cash and long-term notes receivable. Theproceeds were used for general corporate purposes.

·                  On May 15, 2007,we redeemed our outstanding 10 5/8% Senior Subordinated Notes due 2011 in theaggregate principal amount of $273.4 million. In connection with thisrepayment, redemption premiums of $14.5 million and accrued and unpaid interestof $14.5 million to the redemption date were paid. In addition, $4.9 million ofdeferred financing costs were written off in the second quarter of 2007. Weexpect the interest savings associated with the reduction of debt to largelyoffset the historic cash flow from the Groupe Novasep subsidiary.

Our primary liquidityrequirements are working capital, debt service, capital expenditures andacquisitions. Our debt service requirements and other contractual obligationsand commitments over the next several years are significant and aresubstantially higher than historical amounts. We believe that our currentlyavailable sources of liquidity will be sufficient for these needs. Furthermore,any future major acquisitions, business combinations or similar transactionswill likely require additional capital resources. If our present operatingperformance and current market conditions continue, we believe that suchresources will be available to us for certain transactions. We would needaccess to alternative sources of liquidity for larger acquisitions such asthrough additional borrowings or other sources, and we may not have access tothese sources for a variety of reasons. See Item 1, “Business,” andItem 1A, “Risk Factors” in our 2006 Form 10-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 toreduce costs and exit unprofitable businesses, in part to improve our long-termliquidity. We expect this to further improve our short and long-term liquidity.If our cash flow from operations and borrowings under our revolving creditfacility are insufficient to fund our currently existing liquidityrequirements, we may be forced to use other means available to us, such as toreduce or delay capital expenditures and seek additional capital. We may nothave adequate capital for future acquisitions, business combinations or similartransactions.

As of June 30, 2007, wehad actual total indebtedness of $2,526.8 million. As of June 30, 2007, therevolving credit facility under the senior secured credit facilities providedfor additional borrowings of up to $222.1 million, after giving effect to $27.9million of letters of credit issued on our behalf. As of June 30, 2007, therewere no outstanding borrowings under the revolving credit facility.

As of June 30, 2007, wehad cash and cash equivalents of $191.5 million primarily from the net cashproceeds received from the sale of Groupe Novasep in January 2007 less cashused for the redemption of the 2011 Notes.

*Seniorsecured credit facilities*.  The senior securedcredit facilities, as amended, consist of the following as of June 30, 2007:

·                  tranche A-1 termloans in an aggregate principal amount of €32.3 million (or $43.7 millionat June 30, 2007) and tranche A-2 term loans in an aggregate principal amountof €140.6 million (or $190.4 million at June 30, 2007), each maturing onJuly 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 June 30, 2007,maturing on July 30, 2012 and bearing interest at the Company’s option ofeither (i) Adjusted LIBOR plus 1.75% or (ii) ABR plus 0.75%;

·                  tranche G termloans in an aggregate principal amount of €269.3 million (or $364.7 million atJune 30, 2007) maturing on July 30, 2012 and bearing interest of AdjustedLIBOR plus 2.00%; and

·                  a revolvingcredit facility in an aggregate principal amount of $250.0 millionmaturing on July 30, 2010, bearing interest at the Company’s option ofeither (i) Adjusted LIBOR plus 2.25% or (ii) ABR plus 1.00%. As ofJune 30, 2007, we had no

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                        borrowings outstanding underthis facility and had outstanding letters of credit of $27.9 million thatreduced our availability under the credit facility.

Our leverage ratio forthe twelve-month period ended June 30, 2007 was 3.98 (see further detailsbelow). In accordance with the terms of our credit agreement, the status levelswhich determine interest expense will be reduced, effective July 1, 2007. As aresult, our tranche A-1 term loans will bear interest at Adjusted EURIBOR plus1.75%, our tranche E term loans will bear interest at the Company’s option ofeither (i) Adjusted Libor plus 1.50% or (ii) ABR plus 0.75%, and our tranche Gterm loans will bear interest at Adjusted LIBOR plus 1.75%. These lowerinterest rates are expected to reduce annualized interest expense byapproximately $5.0 million.

The U.S. dollarequivalents of term loans denominated in euros are shown based on the exchangerate on Friday, June 29, 2007 of €1.00 = $1.3542. In each case, theinterest rates 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 Eand tranche G term loans are payable in January and July of each year atamounts equal to 0.5% of the principal amount of the former tranche D termloans and tranche F term loans, respectively, with the remainder due atthe final maturity date.

The Company’s borrowingsand the borrowings of Rockwood Specialties Limited under the senior securedcredit facilities are guaranteed and secured by assets and pledges of capitalstock.

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, incurindebtedness and other liabilities; create liens; merge or consolidate; disposeof assets; make investments; pay dividends and make payments to shareholders;make payments on certain indebtedness or to amend documents related to certainindebtedness and to enter into sale leaseback transactions. In connection withthe fourth amendment of our senior secured credit agreement, substantially allof the baskets relating to the above restrictions were reset.

*2014Notes*.   The 2014 Notes have an aggregate principalamount of €375.0 million ($507.8 million at June 30, 2007) in the case of theEuro notes and $200.0 million in the case of the U.S. Dollar notes, and matureon November 15, 2014. Interest on the 2014 Notes is payable semi-annuallyon May 15 and November 15. Interest on the 2014 Notes accrues at therate of 7.625% in the case of Euro notes and 7.500% in the case of U.S. Dollarnotes. Certain of our domestic subsidiaries guarantee the 2014 Notes on asenior subordinated unsecured basis. As mentioned above, the Company redeemedits 2011 Notes on May 15, 2007.

The 2014 Notes containvarious affirmative and restrictive covenants. The restrictive covenants limitour ability, and the ability of our restricted subsidiaries, to, among otherthings, incur or guarantee additional indebtedness (as described below under “CovenantCompliance”), pay dividends or make other equity distributions or repurchasecapital stock, make investments or other restricted payments, create liens,transfer or sell assets, restrict dividends or other payments to us, engage intransactions with affiliates, and merge or consolidate with other companies orsell substantially all of our assets.

*Covenantcompliance.*   In addition to the affirmative andrestrictive covenants, the senior secured credit agreement contains thefollowing financial covenants that are determined based on our Adjusted EBITDA,which reflects management’s interpretations thereof:

·                  a leverageratio: for the twelve-month period ended June 30, 2007, net debt (total debtplus capital lease obligations, minus cash up to a maximum of $100.0 million)to Adjusted EBITDA must be less than 5.50 to 1; for such period, our ratioequaled 3.98 to 1; and

·                  an interestcoverage ratio: for the twelve-month period ended June 30, 2007, AdjustedEBITDA to cash interest expense (interest expense, net excluding deferred debtissuance cost amortization and the movements in the mark-to market value of ourinterest rate and cross-currency interest rate derivatives) must be at least1.85 to 1; for such period, our ratio equaled 3.27 to 1.

Please see Item 2,Management’s Discussion and Analysis of Financial Condition and Results ofOperations – “Definitions of Adjusted EBITDA,” for a discussion of thedefinition of 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. Any such acceleration would also resultin a default under the indenture governing the 2014 Notes, which could lead tothe note holders electing to declare the principal, premium, if any, and intereston the then outstanding notes

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immediately due andpayable. Because the indenture governing the 2014 Notes defines an event ofdefault to include, among other things, a default under any other debtobligation in excess of $35.0 million that could cause the acceleration of suchobligation, any acceleration under the senior secured credit agreement wouldalso result in a default under the indenture governing these notes, which couldlead to the note holders electing to declare the principal, premium, if any,and interest on the then outstanding notes immediately due and payable. Thesenior secured credit agreement contains a similar cross default provision forindebtedness in excess of $30.0 million; therefore, a default under theindenture governing the 2014 Notes or other indebtedness may likewise cause thelenders to declare the principal and interest on the then outstanding seniorsecured credit facilities immediately due and payable.”

The indenture governingthe 2014 Notes prohibits us from incurring additional debt, subject to certainpermitted incurrences, unless the fixed charge coverage ratio, which is theratio of Adjusted EBITDA (as defined therein excluding certain adjustmentspermitted under the senior secured credit agreement) to fixed charges (asdefined therein), for the most recently ended four fiscal quarters is at least2.00 to 1. In addition, the indenture prohibits us from making restrictedpayments (such as dividends or other equity distributions, repurchases ofcapital stock or restricted investments), subject to certain permittedpayments, unless, among other things, the fixed charge coverage ratio for themost recently ended four fiscal quarters is at least 2.00 to 1. For the four-fiscalquarter period ended June 30, 2007, the fixed charge coverage ratio equaled3.27 to 1. This covenant is a material term of the indenture governing the 2014Notes.

We were in compliancewith all of the above covenants as of June 30, 2007 and December 31, 2006.

Given our use of Adjusted EBITDA (see “Special Note Regarding Non-GAAPFinancial Measures” for the definition of Adjusted EBITDA and management’s usesof Adjusted EBITDA) as a liquidity measure, the following table presents areconciliation of net cash provided by operating activities to Adjusted EBITDA:

 
|                                                                                                                        | ** ** | **Six months ended** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                                                             | ** ** | **June 30,**              | ** ** |
| **($ in millions)**                                                                                          | ** ** | **2007**                       | ** ** | **2006** | ** ** |
| Net cash  provided by operating activities from continuing operations                                                  |       | $                         | 146.7      |   | $  | 48.9 |   |
| Changes in  assets and liabilities, net of the effect of foreign currency translation and  acquisitions                |       | 65.9                           |       | 104.5 |   |
| Current portion  of income tax provision                                                                               |       | 24.0                           |       | 24.1 |   |
| Interest  expense, net, excluding amortization of deferred financing costs and  unrealized losses/gains on derivatives |       | 85.9                           |       | 95.8 |   |
| Restructuring  and related charges                                                                                     |       | 6.0                            |       | 2.2 |   |
| CCA litigation  defense costs                                                                                          |       | 0.3                            |       | 0.5 |   |
| Systems/organization  establishment expenses                                                                           |       | 1.2                            |       | 4.1 |   |
| Cancelled  acquisition and disposal costs                                                                              |       | 0.8                            |       | 0.9 |   |
| Costs incurred  related to debt modifications                                                                          |       | 0.9                            |       | — |   |
| Inventory write-up  reversal                                                                                           |       | 0.1                            |       | 0.9 |   |
| Bad debt  provision                                                                                                    |       | (1.2                           | )          | (0.5 | ) |
| Gain on sale of  assets                                                                                                |       | (5.2                           | )          | (0.4 | ) |
| Other                                                                                                                  |       | (0.2                           | )          | (1.8 | ) |
| Total Adjusted  EBITDA                                                                                                 |       | $                              | 325.2      |   | $ | 279.2 |   |

 

***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 Form 10-K.  As noted above, we have redeemed our 2011Notes in the aggregate principal amount of $273.4 million in the second quarterof 2007.  In addition, we adopted FIN 48,*Accounting for Uncertainty in Income Taxes - AnInterpretation of FASB Statement No. 109*, in the first quarter of2007. As a result of the implementation of FIN 48, the Company recognized a$1.0 million increase in the liability for unrecognized tax benefits. The totalamount of unrecognized tax benefits as of June 30, 2007 was $44.6 million andhave been classified as non-current income tax liabilities in the condensedconsolidated balance sheets (see Note 9, “Income Taxes,” for further details).Except for redemption of the 2011 Notes and the adoption of FIN 48, there havebeen no other significant changes to these contractual obligations as of June30, 2007.

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***Capital Expenditures***

Rockwood’s capitalexpenditures in the first six months of 2007 consisted primarily ofreplacements of worn, obsolete or damaged equipment as well as investments innew equipment, mostly for our Specialty Chemicals, Performance Additives,Titanium Dioxide Pigments and Advanced Ceramics segments.

For the six months endedJune 30, 2007 and 2006, our capital expenditures, excluding capital leases,were $93.8 million and $71.2 million, respectively. Capital expenditures foreach of our reporting segments is provided in the following table:
| ** **                           | ** ** | ** **    | ** ** | ** **      | ** ** | **Titanium** | ** ** | ** **   | ** ** | ** **    | ** ** | ** **      | ** ** | ** **    | ** ** | ** **       | ** ** |
|--------------------------------------|------------|---------------|------------|-----------------|------------|--------------|------------|--------------|------------|---------------|------------|-----------------|------------|---------------|------------|------------------|------------|
| ** **                           | ** ** | **Specialty** | ** ** | **Performance** | ** ** | **Dioxide**  | ** ** | **Advanced** | ** ** | **Specialty** | ** ** | ** **      | ** ** | ** **    | ** ** | ** **       | ** ** |
| **($ in millions)**        | ** ** | **Chemicals** | ** ** | **Additives**   | ** ** | **Pigments** | ** ** | **Ceramics** | ** ** | **Compounds** | ** ** | **Electronics** | ** ** | **Corporate** | ** ** | **Consolidated** | ** ** |
| Six months ended  June 30, 2007 |       | $             | 26.5       |            | $          | 14.8         |       | $            | 20.2       |          | $          | 14.4            |       | $             | 12.6       |             | $          | 3.3 |   | $ | 2.0 |   | $ | 93.8 |   |
| Six months ended June 30,  2006 |       | 19.7          |       | 11.1            |       | 16.7         |       | 12.2         |       | 2.8           |       | 3.8             |       | 4.9           |       | 71.2             |       |
|                                      |            |               |            |                 |            |              |            |              |            |               |            |                 |            |               |            |                  |            |  |  |  |  |  |  |  |  |

 

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 June 30, 2007,based on the Friday, June 29, 2007 exchange rate of €1.00 = $1.3542,$1,179.0 million 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 13, “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 fair valuesof assets acquired and liabilities assumed in business combinations;

·                  the use andrecoverability of inventory;

·                  the valuation ofdeferred tax assets;

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

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

·                  the useful livesof tangible and intangible assets.

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

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or conditions.

The significantaccounting policies of the Company are described in Note 1, “Descriptionof Business 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 June 30, 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-lookingstatements give our current expectations or forecasts of future events andestimates 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:

·                  ourbusiness strategy;

·                  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;

·                  changesin the end-use markets in which our products are sold;

·                  changesin the general economic conditions in North America and Europe and in otherlocations in which we currently do business;

·                  technologicalchanges affecting production of our materials;

·                  governmentaland environmental regulations and changes in those regulations;

·                  hazardsassociated with chemicals manufacturing;

·                  ourhigh level of indebtedness;

·                  risksassociated with negotiating, consummating and integrating acquisitions;

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

·                  risks associatedwith international sales and operations.

You should keep in mindthat any forward-looking statements made by us in this document or elsewhere speakonly as of the date on which we make them. New risks and uncertainties come upfrom time to time, and it is impossible for us to predict these events or howthey may affect us. We disclaim any obligation to update or revise any forward-lookingstatements, whether as a result of new information, future events 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 theCompany’s market risk is included in the Company’s 2006 Form 10-K. There havebeen no significant changes to these market risks as of June 30, 2007.

**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 June 30, 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 materiallyaffect, our internal control over financial reporting during the second quarterof 2007.

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**PART II – OTHER INFORMATION**

**Item1.  Legal Proceedings.**

In April 2005, HospiraIncorporated filed suit in Mecklenburg County, North Carolina Superior Courtagainst one of our wholly-owned subsidiaries in our Specialty Compounds segmentalleging claims for negligence, negligent misrepresentation, estoppel, fraud,third party beneficiary breach of contract and unfair trade practices as aresult of our subsidiary providing PVC compound to its customer. Hospira isseeking damages of approximately $16.0 million for costs allegedly related toits recall and destruction of intravenous administration kits that incorporatedcomponents made with this compound, and further seeks treble damages ofapproximately $48.0 million, plus attorneys’ fees and interest, under the NorthCarolina unfair trade practice statute. The Court has dismissed Hospira’snegligence and estoppel claims, but denied our subsidiary’s motion to dismissthe other claims. Following discovery, our subsidiary filed a motion forsummary judgment to dismiss the remaining claims, which is currently pendingbefore the court. We will continue to vigorously defend this matter. While webelieve our subsidiary has meritorious defenses against Hospira’s claims and donot believe that resolution of this matter will have a material adverse effecton our business or financial condition, we cannot predict the outcome of thislitigation and resolution of this claim may have a material adverse affect onour results of operations or cash flows in any quarterly or annual reportingperiod.

Further, a customer ofour Advanced Ceramics business has been named in a class action lawsuit in NewJersey relating to a prosthesis hip replacement system using ceramiccomponents. The lawsuit alleges a violation of the Consumer Fraud Act, designdefect, breach of warranty and negligence based on the customer’s design andmanufacture of hip implant systems. While our subsidiary has not been named inthis litigation, we cannot predict whether this action will effect our cashflows or results of operations.

In addition, we areinvolved in various legal proceedings, including commercial, product liability,intellectual property and environmental matters of a nature considered normalto our business. However, except as set forth above, we do not believe thatthere is any individual legal proceeding that may have a material adverseeffect on our business or financial condition. We cannot predict the outcome ofany litigation or the potential for future litigation.

**Item1A. Risk Factors.**

A discussion of theCompany’s risk factors is included in the Company’s 2006 Form 10-K.  Therehave been no significant changes to these risk factors as of June 30, 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**                                                        |
|-------------|------------|-----------------------------------------------------------------------------------|
|        |       |                                                                              |
| 10.1        |       | Form of Rockwood Holdings, Inc.’s Stock Option  Agreement (A)                |
|        |       |                                                                              |
| 10.2        |       | Form of Rockwood Holdings, Inc.’s Restricted Stock  Unit Award Agreement (A) |
|        |       |                                                                              |
| 31.1        |       | Rule 13a-14(a)/15d-14(a) Certification of Chief  Executive Officer.               |

 

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| 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. |

 

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(A)Incorporated by reference to Rockwood Holdings, Inc.’s Current Report on Form 8-Kfiled on May 22, 2007.

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**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: August 10, 2007 |
|   |                                  |
|   |                                  |
|   | ROCKWOOD SPECIALTIES GROUP, INC. |
|   |                                  |
|   |                                  |
|   | By:                                   | /s/ ROBERT J. ZATTA |
|   |                                  | Robert J. Zatta  Senior Vice President and Chief  Financial Officer  Date: August 10, 2007 |

 

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