** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 

| **x** | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|-------|------------|---------------------------------------------------------------------------------------------------------|

 

**Forthe quarterly period ended June 30, 2008**

 

**Or**

 

| **o** | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|-------|------------|----------------------------------------------------------------------------------------------------------|

 

**Commissionfile number   001-32609**

 

**RockwoodHoldings, Inc.**

(Exact name ofRegistrant as specified in its charter)

 

| **Delaware**                     | ** ** | **52-2277366**       |
|----------------------------------|------------|----------------------|
| (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 by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the Registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days. xYes o No

 

Indicate by check markwhether the Registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer or a smaller reporting company. See definitions of “largeaccelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2of the Exchange Act.

 
| Large accelerated filer   x     |   | Accelerated filer  o          |
|------------------------------------------------|--------|-----------------------------------------|
| Non-accelerated filer    o |   | Smaller reporting  company  o |
| (Do not check if a  smaller reporting company) |   |                                    |

 

Indicate by check markwhether the Registrant is a shell company (as defined in Rule 12b-2 of theExchange Act). o Yes  xNo

 

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

 

As of August 1,2008, there were 74,036,089 outstanding shares of common stock, par value $0.01per share, of the Registrant.

 

 

 

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**TABLEOF 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,  2008 and 2007 |
|    | Condensed Consolidated  Balance Sheets as of June 30, 2008 and December 31, 2007                       |
|    | Condensed Consolidated  Statements of Cash Flows for the six months ended June 30, 2008 and 2007            |
|    | 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                                                                                                       |

 

2

----

 

**PART I — FINANCIAL INFORMATION**

 

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

 

**ROCKWOODHOLDINGS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS**

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

**sharesin thousands)**

**(Unaudited)**

 
| ** **                                                            | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|-----------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                            | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                                            | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net sales                                                             |       | $                                | 945.5      |                           | $          | 802.7 |   | $ | 1,799.5 |   | $ | 1,550.4 |   |
| Cost of products  sold                                                |       | 656.0                            |       | 542.1                          |       | 1,235.1 |   | 1,045.7 |   |
| Gross profit                                                          |       | 289.5                            |       | 260.6                          |       | 564.4 |   | 504.7 |   |
| Selling, general  and administrative expenses                         |       | 179.1                            |       | 152.6                          |       | 349.2 |   | 299.8 |   |
| Restructuring  charges, net                                           |       | 1.5                              |       | 2.0                            |       | 2.3 |   | 6.0 |   |
| Loss (gain) on  sale of assets and other                              |       | 0.8                              |       | (0.4                           | )          | 0.9 |   | (5.2 | ) |
| Operating income                                                      |       | 108.1                            |       | 106.4                          |       | 212.0 |   | 204.1 |   |
| Other income  (expenses):                                             |       |                             |       |                           |       |   |   |   |   |
| Interest expense  (a)                                                 |       | (9.7                             | )          | (47.0                          | )          | (83.4 | ) | (101.7 | ) |
| Interest income                                                       |       | 1.4                              |       | 3.6                            |       | 3.6 |   | 8.4 |   |
| Loss on early  extinguishment of debt                                 |       | —                           |       | (19.1                          | )          | — |   | (19.1 | ) |
| Refinancing  expenses                                                 |       | —                           |       | —                         |       | — |   | (0.9 | ) |
| Foreign exchange  (loss) gain, net                                    |       | (0.8                             | )          | 3.4                            |       | 14.3 |   | 3.5 |   |
| Other, net                                                            |       | 0.1                              |       | 0.1                            |       | 0.5 |   | — |   |
| Other income  (expenses), net                                         |       | (9.0                             | )          | (59.0                          | )          | (65.0 | ) | (109.8 | ) |
| Income from  continuing operations before taxes and minority interest |       | 99.1                             |       | 47.4                           |       | 147.0 |   | 94.3 |   |
| Income tax  provision                                                 |       | 21.1                             |       | 20.9                           |       | 40.7 |   | 41.7 |   |
| Income from  continuing operations before minority interest           |       | 78.0                             |       | 26.5                           |       | 106.3 |   | 52.6 |   |
| Minority  interest in continuing operations, net of tax               |       | —                           |       | (2.3                           | )          | (0.6 | ) | (3.4 | ) |
| Net income from  continuing operations                                |       | 78.0                             |       | 24.2                           |       | 105.7 |   | 49.2 |   |
| Income from  discontinued operations, net of tax                      |       | —                           |       | 3.8                            |       | — |   | 8.5 |   |
| Gain on sale of  discontinued operations, net of tax                  |       | —                           |       | —                         |       | — |   | 115.7 |   |
| Minority  interest in discontinued operations, net of tax             |       | —                           |       | —                         |       | — |   | (0.1 | ) |
| Net income                                                            |       | $                                | 78.0       |                           | $          | 28.0 |   | $ | 105.7 |   | $ | 173.3 |   |
|                                                                  |       |                             |       |                           |       |   |   |   |   |
| Basic earnings  per share:                                            |       |                             |       |                           |       |   |   |   |   |
| Earnings from  continuing operations                                  |       | $                                | 1.06       |                           | $          | 0.33 |   | $ | 1.43 |   | $ | 0.67 |   |
| Earnings from  discontinued operations, net of tax                    |       | —                           |       | 0.05                           |       | — |   | 1.68 |   |
| Basic earnings  per share                                             |       | $                                | 1.06       |                           | $          | 0.38 |   | $ | 1.43 |   | $ | 2.35 |   |
|                                                                  |       |                             |       |                           |       |   |   |   |   |
| Diluted earnings  per share:                                          |       |                             |       |                           |       |   |   |   |   |
| Earnings from  continuing operations                                  |       | $                                | 1.01       |                           | $          | 0.32 |   | $ | 1.38 |   | $ | 0.65 |   |
| Earnings from  discontinued operations, net of tax                    |       | —                           |       | 0.05                           |       | — |   | 1.63 |   |
| Diluted earnings  per share                                           |       | $                                | 1.01       |                           | $          | 0.37 |   | $ | 1.38 |   | $ | 2.28 |   |
|                                                                  |       |                             |       |                           |       |   |   |   |   |
| Weighted average  number of basic shares outstanding                  |       | 73,933                           |       | 73,796                         |       | 73,916 |   | 73,791 |   |
| Weighted average  number of diluted shares outstanding                |       | 77,019                           |       | 76,371                         |       | 76,870 |   | 76,150 |   |

 

----

| (a) Interest  expense includes:                  |   |   |   |   |   |   |   |   |   |
|-------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
| Interest expense  on debt                             |   | $      | (41.3  | )      | $      | (45.5  | )      | $      | (81.9  | ) | $ | (95.0 | ) |
| Mark-to-market  gains (losses) on interest rate swaps |   | 34.0   |   | 0.8    |   | 3.2    |   | (2.0   | )      |
| Deferred  financing costs                             |   | (2.4   | )      | (2.3   | )      | (4.7   | )      | (4.7   | )      |
| Total                                                 |   | $      | (9.7   | )      | $      | (47.0  | )      | $      | (83.4  | ) | $ | (101.7 | ) |

 

See accompanyingnotes to condensed consolidated financial statements.

 

3

----

 

**ROCKWOODHOLDINGS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

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

**sharesin thousands)**

**(Unaudited)**

 
| ** **                                                                                                                                                                                                                                          | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                          | ** ** | **2008**          | ** ** | **2007**              | ** ** |
| **ASSETS**                                                                                                                                                                                                                                          |       |              |       |                  |       |
| Current assets:                                                                                                                                                                                                                                     |       |              |       |                  |       |
| Cash and cash  equivalents                                                                                                                                                                                                                          |       | $                 | 341.5      |                  | $          | 350.1 |   |
| Accounts  receivable, net                                                                                                                                                                                                                           |       | 594.9             |       | 483.7                 |       |
| Inventories                                                                                                                                                                                                                                         |       | 578.3             |       | 535.4                 |       |
| Deferred income  taxes                                                                                                                                                                                                                              |       | 19.3              |       | 22.6                  |       |
| Prepaid expenses  and other current assets                                                                                                                                                                                                          |       | 58.7              |       | 70.7                  |       |
| Total current  assets                                                                                                                                                                                                                               |       | 1,592.7           |       | 1,462.5               |       |
| Property, plant  and equipment, net                                                                                                                                                                                                                 |       | 1,594.6           |       | 1,512.8               |       |
| Goodwill                                                                                                                                                                                                                                            |       | 1,826.6           |       | 1,767.0               |       |
| Other intangible  assets, net                                                                                                                                                                                                                       |       | 693.2             |       | 676.8                 |       |
| Deferred debt  issuance costs, net of accumulated amortization   of $38.1 and $31.2, respectively                                                                                                                                                   |       | 42.1              |       | 41.1                  |       |
| Deferred income  taxes                                                                                                                                                                                                                              |       | 15.9              |       | 15.5                  |       |
| Other assets                                                                                                                                                                                                                                        |       | 56.4              |       | 39.2                  |       |
| Total assets                                                                                                                                                                                                                                        |       | $                 | 5,821.5    |                  | $          | 5,514.9 |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                                      |       |              |       |                  |       |
| Current  liabilities:                                                                                                                                                                                                                               |       |              |       |                  |       |
| Accounts payable                                                                                                                                                                                                                                    |       | $                 | 277.4      |                  | $          | 293.2 |   |
| Income taxes  payable                                                                                                                                                                                                                               |       | 13.0              |       | 12.7                  |       |
| Accrued  compensation                                                                                                                                                                                                                               |       | 76.7              |       | 83.1                  |       |
| Restructuring  liability                                                                                                                                                                                                                            |       | 9.7               |       | 14.0                  |       |
| Accrued expenses  and other current liabilities                                                                                                                                                                                                     |       | 180.1             |       | 165.8                 |       |
| Deferred income  taxes                                                                                                                                                                                                                              |       | 8.6               |       | 7.2                   |       |
| Long-term debt,  current portion                                                                                                                                                                                                                    |       | 105.5             |       | 107.4                 |       |
| Total current  liabilities                                                                                                                                                                                                                          |       | 671.0             |       | 683.4                 |       |
| Long-term debt                                                                                                                                                                                                                                      |       | 2,533.9           |       | 2,474.0               |       |
| Pension and  related liabilities                                                                                                                                                                                                                    |       | 353.6             |       | 327.5                 |       |
| Deferred income  taxes                                                                                                                                                                                                                              |       | 126.0             |       | 112.5                 |       |
| Other  liabilities                                                                                                                                                                                                                                  |       | 191.8             |       | 168.8                 |       |
| Total  liabilities                                                                                                                                                                                                                                  |       | 3,876.3           |       | 3,766.2               |       |
| Minority  interest                                                                                                                                                                                                                                  |       | 173.0             |       | 175.3                 |       |
| Performance  restricted stock units                                                                                                                                                                                                                 |       | 3.9               |       | 1.8                   |       |
|                                                                                                                                                                                                                                                |       |              |       |                  |       |
| Stockholders’  equity:                                                                                                                                                                                                                         |       |              |       |                  |       |
| Common stock  ($0.01 par value, 400,000 shares authorized, 74,090   shares issued and 73,996 shares outstanding at June 30, 2008;   400,000 shares authorized, 73,989 shares issued and 73,895   shares outstanding at December 31, 2007) |       | 0.7               |       | 0.7                   |       |
| Paid-in capital                                                                                                                                                                                                                                     |       | 1,159.6           |       | 1,156.2               |       |
| Accumulated  other comprehensive income                                                                                                                                                                                                             |       | 458.6             |       | 371.0                 |       |
| Retained  earnings                                                                                                                                                                                                                                  |       | 150.8             |       | 45.1                  |       |
| Treasury stock,  at cost                                                                                                                                                                                                                            |       | (1.4              | )          | (1.4                  | )          |
| Total  stockholders’ equity                                                                                                                                                                                                                    |       | 1,768.3           |       | 1,571.6               |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                                                                    |       | $                 | 5,821.5    |                  | $          | 5,514.9 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

 

4

----

 

**ROCKWOODHOLDINGS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OFCASH FLOWS**

**(Dollarsin millions)**

**(Unaudited)**

 
| ** **                                                                                                                                                      | ** ** | **Six months ended** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                                                                                                      | ** ** | **June 30,**              | ** ** |
| ** **                                                                                                                                                      | ** ** | **2008**                       | ** ** | **2007** | ** ** |
| **CASH  FLOWS FROM OPERATING ACTIVITIES:**                                                                                                                      |       |                           |       |   |   |
| Net income                                                                                                                                                      |       | $                              | 105.7      |   | $ | 173.3 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities:                                                                              |       |                           |       |   |   |
| Income from  discontinued operations, net of tax                                                                                                                |       | —                         |       | (8.5 | ) |
| Gain on sale of  discontinued operations, net of tax                                                                                                            |       | —                         |       | (115.7 | ) |
| Minority  interest in discontinued operations                                                                                                                   |       | —                         |       | 0.1 |   |
| Depreciation and  amortization                                                                                                                                  |       | 125.6                          |       | 100.5 |   |
| Deferred  financing costs amortization                                                                                                                          |       | 4.7                            |       | 4.7 |   |
| Loss on early  extinguishment of debt (including $4.6 of non-cash write-offs   on deferred financing costs)                                                     |       | —                         |       | 19.1 |   |
| Foreign exchange  gain                                                                                                                                          |       | (14.3                          | )          | (3.5 | ) |
| Fair value  adjustment of derivatives                                                                                                                           |       | (3.2                           | )          | 2.0 |   |
| Bad debt  provision                                                                                                                                             |       | 1.0                            |       | 0.9 |   |
| Stock-based  compensation                                                                                                                                       |       | 4.1                            |       | 0.7 |   |
| Deferred income  taxes                                                                                                                                          |       | 16.7                           |       | 20.0 |   |
| Loss (gain) on  sale of assets and other                                                                                                                        |       | 0.4                            |       | (5.2 | ) |
| Minority  interest in continuing operations                                                                                                                     |       | 0.6                            |       | 3.4 |   |
| Changes in  assets and liabilities, net of the effect of foreign currency translation and  acquisitions:                                                        |       |                           |       |   |   |
| Accounts  receivable                                                                                                                                            |       | (87.4                          | )          | (58.1 | ) |
| Inventories,  including inventory write-up reversal                                                                                                             |       | (17.2                          | )          | 7.3 |   |
| Prepaid expenses  and other assets                                                                                                                              |       | 7.9                            |       | (6.8 | ) |
| Accounts payable                                                                                                                                                |       | (11.7                          | )          | (13.1 | ) |
| Income taxes  payable                                                                                                                                           |       | 0.2                            |       | 0.6 |   |
| Accrued expenses  and other liabilities                                                                                                                         |       | (9.4                           | )          | 14.6 |   |
| Net cash  provided by operating activities of continuing operations                                                                                             |       | 123.7                          |       | 136.3 |   |
| Net cash  provided by operating activities of discontinued operations                                                                                           |       | —                         |       | 12.0 |   |
| **Net  cash provided by operating activities**                                                                                                                  |       | 123.7                          |       | 148.3 |   |
| **CASH  FLOWS FROM INVESTING ACTIVITIES:**                                                                                                                      |       |                           |       |   |   |
| Acquisitions,  including transaction fees paid, net of cash acquired                                                                                            |       | (11.4                          | )          | (33.4 | ) |
| Post closing  purchase price consideration                                                                                                                      |       | 29.1                           |       | — |   |
| Capital  expenditures, excluding capital leases                                                                                                                 |       | (104.8                         | )          | (90.7 | ) |
| Proceeds from  formation of Viance joint venture, net                                                                                                           |       | —                         |       | 76.6 |   |
| Proceeds on sale  of assets                                                                                                                                     |       | 2.9                            |       | 10.0 |   |
| Net cash used in  investing activities of continuing operations                                                                                                 |       | (84.2                          | )          | (37.5 | ) |
| Net cash (used  in) provided by investing activities of discontinued operations, including  sale proceeds of $421.4 for the six months ended June 30, 2007 |       | (4.3                           | )          | 418.3 |   |
| **Net  cash (used in) provided by investing activities**                                                                                                        |       | (88.5                          | )          | 380.8 |   |
| **CASH  FLOWS FROM FINANCING ACTIVITIES:**                                                                                                                      |       |                           |       |   |   |
| Issuance of  common stock, net of fees                                                                                                                          |       | 1.4                            |       | 0.2 |   |
| Repayment of  2011 Notes                                                                                                                                        |       | —                         |       | (273.4 | ) |
| Repayment of senior  secured credit facilities                                                                                                                  |       | (33.5                          | )          | (27.9 | ) |
| Repayment of  senior secured credit facilities revolver                                                                                                         |       | —                         |       | (37.0 | ) |
| Payments on  other long-term debt                                                                                                                               |       | (5.6                           | )          | (4.1 | ) |
| Financing costs                                                                                                                                                 |       | (3.0                           | )          | — |   |
| Payments related  to early extinquishment of debt                                                                                                               |       | —                         |       | (14.5 | ) |
| Distribution to  minority shareholder                                                                                                                           |       | (2.9                           | )          | — |   |
| Net cash used in  financing activities of continuing operations                                                                                                 |       | (43.6                          | )          | (356.7 | ) |
| Net cash used in  financing activities of discontinued operations                                                                                               |       | —                         |       | — |   |
| **Net  cash used in financing activities**                                                                                                                      |       | (43.6                          | )          | (356.7 | ) |
| Effect of  exchange rate changes on cash and cash equivalents                                                                                                   |       | (0.2                           | )          | (5.0 | ) |
| Net (decrease)  increase in cash and cash equivalents                                                                                                           |       | (8.6                           | )          | 167.4 |   |
| Less increase in  cash and cash equivalents from discontinued operations, net (a)                                                                               |       | —                         |       | (1.6 | ) |
| (Decrease)  increase in cash and cash equivalents from continuing operations                                                                                    |       | (8.6                           | )          | 165.8 |   |
| Cash and cash  equivalents of continuing operations, beginning of period                                                                                        |       | 350.1                          |       | 27.7 |   |
| Cash and cash  equivalents of continuing operations, end of period                                                                                              |       | $                              | 341.5      |   | $ | 193.5 |   |

 

----

| (a) - | Excludes $4.3 of sale-related cash outflows, net for  the six months ended June 30, 2008. Excludes sale proceeds of $421.4 and  intercompany transfers of $7.3 for the six months ended June 30, 2007. |
|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 
| Supplemental  disclosures of cash flow information: |   |   |   |   |   |
|-----------------------------------------------------|--------|--------|--------|--------|--------|
| Interest paid                                       |   | $      | 82.8   |   | $      | 98.4 |   |
| Income taxes  paid, net of refunds                  |   | $      | 23.7   |   | $      | 20.3 |   |
| Non-cash  investing activities:                     |   |   |   |   |   |
| Acquisition of  capital equipment                   |   | $      | 8.4    |   | $      | 9.1 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

 

5

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**ROCKWOODHOLDINGS, INC. AND SUBSIDIARIES**

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

 

**1.             DESCRIPTION OF BUSINESS AND SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES:**

 

***Business Description, Background***—Rockwood Holdings, Inc. and Subsidiaries is a global developer,manufacturer and marketer of high value-added specialty chemicals and advancedmaterials used for industrial and commercial purposes. Unless otherwiseindicated, any references to “we,” “our,” “us,” the “Company” or “Rockwood” referto Rockwood Holdings, Inc. and its consolidated subsidiaries.

 

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”). Thebusinesses acquired focused on specialty compounds, iron-oxide pigments,timber-treatment chemicals, clay-based additives and pool and spa chemicals.

 

On July 31, 2004,the Company completed the acquisition of certain businesses of Dynamit Nobelfrom mg technologies ag, now known as GEA Group Aktiengesellschaft (“GEA Group”).The businesses acquired are focused on highly specialized markets and consistof surface treatment and lithium chemicals; advanced ceramics and titaniumdioxide pigments.

 

On January 9, 2007,the Company completed the sale of its Groupe Novasep segment and on December 31,2007, the Company completed the sale of its Electronics business, excluding itsEuropean wafer reclaim business.

 

On May 21, 2008, theCompany entered into a definitive agreement with Kemira Oyj (“Kemira”) to forma joint venture that will focus on specialty titanium dioxide pigments. Thejoint venture will combine the Company’s titanium dioxide pigments andfunctional additives businesses, which are part of the Titanium DioxidePigments segment, including its production facility in Duisburg, Germany, andKemira’s titanium dioxide business, including Kemira’s titanium dioxide plantin Pori, Finland. The Company will retain ownership of its water treatmentbusiness which represents the remaining portion of the Titanium DioxidePigments segment. The Company expects to own approximately 61% of the jointventure with Kemira owning the remaining portion.  It is expected that the joint venture willacquire the shares of the Rockwood and Kemira entities in part with borrowingsunder a term loan of up to €300 million. In addition, the joint venture expectsto enter into a €30 million revolving credit facility to finance itsoperations.  The contributed net assetsof Kemira include notes payable of approximately €25.0 million.  The Company expects to receive a cash paymentfunded from the term loan borrowings based on its ownership percentage.  Prior to the closing of this transaction, theCompany and Kemira may develop an alternative capital structure, contributecash to the joint venture, reduce the amount of indebtedness incurred by thejoint venture and/or revise the ownership structure of the joint venture.  In addition, the Company expects, based oninformation currently available, that it will consolidate the joint venture andreport Kemira’s interest as minority interest in the consolidated financialstatements. The closing of this transaction is expected to occur in the thirdquarter of 2008, subject to regulatory approval.

 

On June 17, 2008,funds affiliated with KKR, DLJ Merchant Banking Partners III, L.P. (“DLJMB”)and certain management stockholders sold an aggregate of 10 million shares ofthe Company’s common stock.

 

***Basis of Presentation***—The accompanyingcondensed financial statements of Rockwood are presented on a consolidatedbasis. All significant intercompany accounts and transactions have beeneliminated in consolidation. Certain prior period amounts related to reportingthe sale of the Groupe Novasep segment and the Electronics business, excludingthe wafer reclaim business, as discontinued operations, have been reclassifiedto conform to current-year classification. The Groupe Novasep segment and theElectronics business, including the wafer reclaim business, represented two ofour reportable segments.

 

The interim financialstatements included herein are unaudited. The results of operations for theinterim periods are not necessarily indicative of the results of operations forthe full year. The condensed consolidated financial statements arepresented based upon accounting principles generally accepted in the UnitedStates of America (“U.S. GAAP”), except that certain information and footnotedisclosures, normally included in financial statements prepared in accordancewith U.S. GAAP, have been condensed or omitted. The accompanying condensedconsolidated financial statements should be read in conjunction with theconsolidated financial statements and the notes thereto contained in theCompany’s 2007 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 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. On January 2, 2007, Chemicals Specialties, Inc.(“CSI”), a wholly-owned subsidiary of the Company within the Timber TreatmentChemicals business of the Performance Additives segment, and Rohm and HaasCompany completed the formation of Viance, LLC, a joint venture company thatprovides an extensive range of advanced wood treatment technologies andservices to the global wood treatment industry. In accordance with theconsolidation principles of FIN 46 (R),*Consolidation of Variable Interest Entities – An Interpretation of ARB No. 51*,the Company has concluded that Rockwood is the primary beneficiary of the jointventure and as such has consolidated the joint venture.

 

Unless otherwise noted, allamounts which are denominated in currencies other than the U.S. dollar areconverted at the June 30,2008  exchange rate of €1.00 = $1.5755.

 

6

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***Nature of Operations/Segment Reporting***—TheCompany is a global developer, manufacturer and marketer of high value-addedspecialty chemicals and advanced materials. The Company currently operates invarious business lines within its five reportable segments consisting of: (1) SpecialtyChemicals, which includes lithium compounds and chemicals, metal surfacetreatment chemicals, and synthetic metal sulfides, (2) PerformanceAdditives, which includes color pigments and services, timber treatmentchemicals, clay-based additives, and water treatment chemicals, (3) TitaniumDioxide Pigments, which consists of titanium dioxide pigments, and zinc- andbarium-based compounds, (4) Advanced Ceramics, which includesceramic-on-ceramic ball head and liner components used in hip-joint prosthesessystems, ceramic cutting tools and a range of other ceramic components and (5) SpecialtyCompounds, which consists of plastic compounds. As discussed above, theCompany sold its Electronics business, excluding its European wafer reclaimbusiness, in December 2007. As a result, the European wafer reclaimbusiness is included within “Corporate and other” for all periods presented(See Note 3, “Segment Information,” for further details).

 

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 3, “Segment Information,” forfurther segment reporting information.

 

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

 

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

 

***Related Party Transactions***—Rockwoodhas engaged in transactions with certain related parties including KKR andDLJMB and affiliates of each. Information concerning certain transactionsis included in the Company’s 2007 Form 10-K.  Credit Suisse Securities (USA) LLC, anaffiliate of DLJMB, served as an underwriter in the secondary offering of theCompany’s stock by certain stockholders in June 2008.  The Company did not receive any proceeds inthat offering or pay any commissions.  Except for the aforementioned secondary offering, there have not beenadditional related party transactions for the period ended June 30, 2008.

 

***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 net sales in 2007, is realized when the service is performed.Liabilities for product warranties are less than 1% of consolidated net salesas of June 30, 2008 and December 31, 2007.

 

***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), includingintercompany financing arrangements for which settlement is planned oranticipated, are included in determining net income for the period in whichexchange rates change. Gains or losses on certain intercompany loans that areof a long-term investment nature for which settlement is not planned oranticipated in the foreseeable future and gains or losses on euro-denominateddebt that is designated as a net investment hedge of the Company’seuro-denominated investments are reported and accumulated in the same manner astranslation adjustments. These loans are all related to intercompany debtarrangements. As of June 30, 2008, intercompany debt arrangements deemedto be of a long-term investment nature for which settlement is not planned oranticipated in the foreseeable future is predominantly related to €519.4million (or $818.3 million at June 30, 2008) of intercompany loans.

 

***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

 

7

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Note 1 for the impact ofthe Company’s net investment hedges. The Company does not enter into derivativecontracts for trading purposes nor does it use leveraged or complexinstruments.

 

***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 costsand liabilities have been determined in accordance with SFAS 106,*Employers’ Accounting for Postretirement BenefitsOther Than Pensions* and SFAS 158. Postemployment benefit costs andliabilities have 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* and Financial Accounting Standards Board(“FASB”) Interpretation (“FIN”) No. 48,*Accounting for Uncertainty in Income Taxes – An Interpretation of FASBStatement No. 109*. The Company’s U.S. operations areincluded in a consolidated federal income tax return. The amount of current anddeferred tax expense is computed on a separate entity basis for each member ofthe group based on applying the principles of SFAS 109. Deferred taxassets and liabilities are recognized for future tax consequences attributableto differences 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 permanently invested or could be distributed tothe parent company in a tax free manner.

 

FIN 48 clarifies theaccounting for uncertainty in income taxes recognized in an entity’s financialstatements in accordance with FASB Statement No. 109,*Accounting for Income Taxes* andprescribes a recognition threshold and measurement attribute for financialstatement disclosure of tax positions taken or expected to be taken on a taxreturn. Under FIN 48, the impact of an uncertain income tax position on theincome tax return must be recognized at the largest amount that ismore-likely-than-not to not be sustained upon audit by the relevant authority.An uncertain income tax position will not be recognized if it has less than a50% likelihood of being sustained. Additionally, FIN 48 provides guidance onderecognizing, classification, interest and penalties, accounting in interimperiods, disclosure and transition.

 

***Comprehensive Income***—Comprehensiveincome includes net income and the other comprehensive income components whichinclude unrealized gains and losses from foreign currency translation and fromcertain intercompany transactions that are of a long-term investment nature,pension-related adjustments that are recorded directly into a separate sectionof stockholders’ equity in the balance sheets and net investment hedges.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** | ** ** | **Six months ended** | ** ** |
|------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                               | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| **($ in millions)**            | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net income                               |       | $                                | 78.0       |                           | $          | 28.0 |   | $ | 105.7 |   | $ | 173.3 |   |
| Pension related  adjustments, net of tax |       | (0.1                             | )          | (0.4                           | )          | 0.4 |   | 0.1 |   |
| Foreign currency  translation            |       | 2.7                              |       | 24.6                           |       | 119.5 |   | 61.4 |   |
| Intercompany  foreign currency loans     |       | (1.3                             | )          | 9.5                            |       | 61.5 |   | 11.6 |   |
| Net investment  hedge, net of tax        |       | 3.0                              |       | (14.0                          | )          | (93.8 | ) | (24.4 | ) |
| Total  comprehensive income              |       | $                                | 82.3       |                           | $          | 47.7 |   | $ | 193.3 |   | $ | 222.0 |   |

 

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 across-currency swap with a five-year term and a notional amount of€155.6 million that effectively converted the U.S. dollar fixed-rate debtin respect of the dollar notes sold into euro fixed-rate debt. The Company hasdesignated this contract as a hedge of the foreign currency exposure of its netinvestment in its euro-denominated operations. There was no ineffective portionof the net investment hedge as of June 30, 2008. The Company does notexpect any of the loss on the net investment hedge residing in comprehensiveincome at June 30, 2008 to be reclassified into earnings during thesubsequent twelve months.

 

In addition, the Company designated the remaining portion of theeuro-denominated debt that is recorded on the U.S. books as a net investmenthedge of our euro-denominated investments as of October 1, 2005(euro-denominated debt of €667.7 million or $1,052.0 million at June 30,2008). As a result, effective October 1, 2005, any foreign currencygains and losses resulting from the euro-denominated debt discussed above areaccounted for as a component of accumulated other comprehensive income. Therewas no ineffective portion of the net investment hedge as of June 30,2008. The Company does not expect any of the loss on the net investment hedgeresiding in comprehensive income at June 30, 2008 to be reclassified intoearnings during the subsequent twelve months.

 

8

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***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***—The Companyhas in place the 2005 Amended and Restated Stock Purchase and Option Plan ofRockwood Holdings, Inc. and Subsidiaries (the “Plan”). Under the Plan, theCompany may grant stock options, restricted stock and other stock-based awardsto the Company’s employees and directors and allow employees and directors topurchase shares of its common stock. There are 10,000,000 authorized sharesavailable for grant under the Plan. Effective January 1, 2006, the Companyadopted SFAS No. 123R,*Share-BasedPayment*, and related interpretations and began expensing thegrant-date fair value of stock options.

 

The compensation cost forstock options, restricted stock units and Board of Director stock grants recordedunder the Plan resulted in a decrease to income from continuing operationsbefore taxes and minority interest of $2.2 million and $0.7 million for thethree months ended June 30, 2008 and 2007, respectively, and $4.1 millionand $0.8 million for the six months ended June 30, 2008 and 2007,respectively. See Note 10, “Stock-Based Compensation,” for furtherdetails.

 

The Company grantedadditional stock options and performance restricted stock units in 2007 tocertain employees of Rockwood Corporate Headquarters and its business units.The performance restricted stock units contain a provision in which the unitsshall immediately vest and become converted into the right to receive a cashpayment upon a change in control as defined in the equity agreement. Asthe provisions for redemption are outside the control of the Company, the fairvalue of these units as of June 30, 2008 have been recorded as mezzanineequity (outside of permanent equity) in the Condensed Consolidated BalanceSheets.

 

***Recent Accounting Pronouncements***—Thefollowing represents the impact of recently issued accounting pronouncements:

 

In September 2006,SFAS No. 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. Certain disclosure provisions of thisstandard were effective for the Company as of January 1, 2008 and aredisclosed in Note 14, “Fair Value Measurements.” The adoption of SFAS No. 157did not have a material impact on the Company’s financial statements.

 

In February 2008,the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position(FSP) Financial Accounting Standard (FAS) 157-1,*Application of FASB Statement No. 157 to FASB Statement No. 13and Its Related Interpretive Accounting Pronouncements That Address LeasingTransactions,* and FSP FAS 157-2,*Effective Date of FASB Statement No. 157*. FSP FAS 157-1 removes leasing from the scope of SFAS No. 157. FSPFAS 157-2 delays the effective date of SFAS No. 157 from 2008 to 2009 forall nonfinancial assets and nonfinancial liabilities, except those that arerecognized or disclosed at fair value in the financial statements on arecurring basis (at least annually). The Company will apply the provisionsof FSP 157-2 on January 1, 2009 and does not expect this FSP to have amaterial impact on its financial statements.

 

In February 2007,SFAS No. 159,*The Fair Value Option forFinancial Assets and Financial Liabilities*—*Including an Amendment of FASB Statement No. 115,*was issued. This statement permits an entity to choose to measure manyfinancial instruments and certain other items at fair value and permits allentities to choose to measure eligible items at fair value at specifiedelection dates. This statement is effective for the Company as of January 1,2008. The Company adopted this standard on January 1, 2008. However,the Company has elected not to measure any instruments at fair value under SFASNo. 159.

 

In December 2007,SFAS No. 141 (revised 2007),*BusinessCombinations* (“FAS 141R”) was issued, which replaces FASB Statement No. 141,*Business Combinations.* FAS 141Restablishes principles and requirements for how the acquirer recognizes andmeasures in its financial statements the identifiable assets acquired, theliabilities assumed, any noncontrolling interest in the acquiree and thegoodwill acquired. This statement also establishes disclosure requirements toenable users of financial statements to evaluate the nature and financialeffects of the business combination. This statement is effective for theCompany as of January 1, 2009.

 

In December 2007,SFAS No. 160,*Noncontrolling Interestsin Consolidated Financial Statements, an amendment of ARB No. 51,*was 

 

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issued. Per thisstatement, the accounting and reporting for minority interests will berecharacterized as noncontrolling interests and classified as a component ofequity (but separate from parent’s equity). This statement also establishesreporting requirements that provide sufficient disclosures that clearlyidentify and distinguish between the interests of the parent and the interestsof the noncontrolling owners. This statement also applies to entities thatprepare consolidated financial statements, except not-for-profit organizations,but will affect only those entities that have an outstanding noncontrollinginterest in one or more subsidiaries or that deconsolidate a subsidiary. Thisstatement is effective for the Company as of January 1, 2009. The Companyis currently evaluating the impact this statement will have on its financialstatements primarily relating to its Viance, LLC joint venture and its titaniumdioxide pigments joint venture, as discussed above, which is expected to closein the third quarter of 2008.

 

In December 2007,the SEC issued Staff Accounting Bulletin (“SAB”) No. 110, which providedinterpretive guidance regarding the use of a “simplified” method, as discussedin SAB No. 107, in developing an estimate of expected term of “plainvanilla” share options in accordance with SFAS No. 123R,*Share-Based Payment.* SAB 110 is effectivefor share options granted as of January 1, 2008. SAB 110 extended the useof the simplified method beyond December 31, 2007, under certaincircumstances, which included not having sufficient historical exercise data toprovide a reasonable basis upon which to estimate expected term due to thelimited period of time a company’s equity shares have been publicly traded. AsRockwood became a public company in August 2005, there is not sufficienthistorical exercise data available to estimate expected term. As a result, theCompany will continue to use the “simplified” method to estimate expected termfor share option grants until more relevant detailed information becomes widelyavailable.

 

In September 2006,SFAS No. 158,*Employers’ Accounting forDefined Benefit Pension and Other Postretirement Plans, an amendment of FASBStatements No. 87, 88, 106 and 132 (R),* was issued. The Companyadopted the recognition provisions of SFAS No. 158 and initially appliedthem to the funded status of its defined benefit postretirement plans as of December 31,2006. This statement also requires an employer to measure the funded status ofa plan as of the date of its year-end statement of financial position, withlimited exceptions. The requirement to measure plan assets and benefitobligations as of the date of the employer’s fiscal year-end statement offinancial position is effective for the Company for the 2008 fiscal year end.The Company currently measures its funded status as of the date of the Company’sfiscal year-end consolidated balance sheet for most of its plans. The Companydoes not expect a material impact on its financial statements as a result ofthis change in 2008.

 

In March 2008, SFAS No. 161,*Disclosures about Derivative Instruments and HedgingActivities - an Amendment of FASB Statement 133* was issued. This statement changes thedisclosure requirements for derivative instruments and hedging activities,including enhanced disclosures about (a) how and why an entity usesderivative instruments, (b) how derivative instruments and related hedgeditems are accounted for under SFAS No. 133,*Accounting for Derivative Instruments and Hedging Activities*and its related interpretations, and (c) how derivative instruments andrelated hedged items affect an entity’s financial position, financialperformance, and cash flows. SFAS No. 161 is effective for theCompany as of January 1, 2009. The Company does not expect this statementto have a material impact on its financial statements.

 

In April 2008, theFASB issued FSP No. 142-3, *Determination of theUseful Life of Intangible Assets*. This FSP amends the factors thatshould be considered in developing renewal or extension assumptions used todetermine the useful life of a recognized intangible asset under FASB StatementNo. 142, *Goodwill and Other Intangible Assets*.The intent of this FSP is to improve the consistency between the useful life ofa recognized intangible asset under Statement 142 and the period of expectedcash flows used to measure the fair value of the asset under FASB Statement No. 141(revised 2007), *Business Combinations*, and otherU.S. GAAP. This FSP is effective for the Company as of January 1, 2009.The Company is currently evaluating the impact this FSP will have on itsfinancial statements.

 

In May 2008, SFAS No. 162,*The Hierarchy of Generally Accepted AccountingPrinciples,* was issued.This statement identifies the sources of accounting principles and theframework for selecting the principles used in the preparation of financialstatements of nongovernmental entities that are presented in conformity withgenerally accepted accounting principles (GAAP) in the United States (the GAAPhierarchy). This Statement shall be effective 60 days following the SEC’sapproval of the Public Company Accounting Oversight Board amendments to AU Section 411,*The Meaning of Present Fairly in Conformity WithGenerally Accepted Accounting Principles.* The Company does notexpect this statement to have a material impact on its financial statements.

 

**2.        DISCONTINUED OPERATIONS:**

 

On January 9, 2007,the Company completed the sale of its Groupe Novasep segment. The transactionwas valued at approximately €425.0 million, which included the repayment ofthird party and intercompany indebtedness. In connection with SFAS No. 144,*Accounting for the Impairment or Disposal ofLong-Lived Assets*,the Company’s financial statements have been reclassified to reflect the GroupeNovasep segment as a discontinued operation for all periods presented.

 

On December 31,2007, the Company completed the sale of its Electronics business, excluding itsEuropean wafer reclaim business, for $315.6 million. In connection with SFAS No. 144,the Company’s financial statements have been reclassified to reflect theElectronics business sold as a discontinued operation for all periodspresented.

 

10

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Operating results of thediscontinued operations of the Electronics business sold for the three monthsended June 30, 2007 were as follows:

 
| ** **                                    | ** ** | **Electronics** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------------|------------|-----------------|------------|------------|------------|------------|
| **($ in millions)**                 | ** ** | **Business**    | ** ** | ** ** | ** ** | ** ** |
| Net sales                                     |       | $               | 48.0       |       |       |       |   |
| Cost of products  sold                        |       | 35.9            |       |       |       |       |
| Gross profit                                  |       | 12.1            |       |       |       |       |
| Selling, general  and administrative expenses |       | 7.6             |       |       |       |       |
| Restructuring  charges                        |       | (0.5            | )          |       |       |       |
| Operating income                              |       | 5.0             |       |       |       |       |
| Other income  (expenses):                     |       |            |       |       |       |       |
| Interest income                               |       | 0.4             |       |       |       |       |
| Loss on early  extinguishment of debt         |       | (0.3            | )          |       |       |       |
| Foreign exchange  loss, net                   |       | (0.1            | )          |       |       |       |
| Other, net                                    |       | (0.1            | )          |       |       |       |
| Other income  (expenses), net                 |       | (0.1            | )          |       |       |       |
| Income before  taxes                          |       | 4.9             |       |       |       |       |
| Income tax  provision                         |       | 1.1             |       |       |       |       |
| Net income                                    |       | $               | 3.8        |       |       |       |   |

 

Operating results of thediscontinued operations of Groupe Novasep and the Electronics business sold forthe six months ended June 30, 2007 were as follows:

 
| ** **                                    | ** ** | **Groupe**  | ** ** | **Electronics** | ** ** | ** ** | ** ** |
|-----------------------------------------------|------------|-------------|------------|-----------------|------------|------------|------------|
| **($ in millions)**                 | ** ** | **Novasep** | ** ** | **Business**    | ** ** | **Total**  | ** ** |
| Net sales                                     |       | $           | 8.9        |            | $          | 96.4       |       | $ | 105.3 |   |
| Cost of products  sold                        |       | 7.0         |       | 71.4            |       | 78.4       |       |
| Gross profit                                  |       | 1.9         |       | 25.0            |       | 26.9       |       |
| Selling, general  and administrative expenses |       | 1.0         |       | 15.2            |       | 16.2       |       |
| Restructuring  charges                        |       | —      |       | —          |       | —     |       |
| Gain on sale of  business/assets              |       | (117.7      | )          | —          |       | (117.7     | )          |
| Operating income                              |       | 118.6       |       | 9.8             |       | 128.4      |       |
| Other income  (expenses):                     |       |        |       |            |       |       |       |
| Interest expense                              |       | (0.3        | )          | —          |       | (0.3       | )          |
| Interest income                               |       | —      |       | 0.7             |       | 0.7        |       |
| Loss on early  extinguishment of debt         |       | —      |       | (0.3            | )          | (0.3       | )          |
| Foreign exchange  gain, net                   |       | —      |       | 0.2             |       | 0.2        |       |
| Other, net                                    |       | —      |       | (0.1            | )          | (0.1       | )          |
| Other income  (expenses), net                 |       | (0.3        | )          | 0.5             |       | 0.2        |       |
| Income before  taxes and minority interest    |       | 118.3       |       | 10.3            |       | 128.6      |       |
| Income tax  provision                         |       | 2.1         |       | 2.3             |       | 4.4        |       |
| Net income  before minority interest          |       | 116.2       |       | 8.0             |       | 124.2      |       |
| Minority  interest, net of tax                |       | (0.1        | )          | —          |       | (0.1       | )          |
| Net income                                    |       | $           | 116.1      |            | $          | 8.0        |       | $ | 124.1 |   |

 

As of June 30, 2007,the Company had received net cash proceeds of $421.4 million from the sale ofGroupe Novasep. These proceeds were reported as net cash provided by investingactivities of discontinued operations for the six months ended June 30,2007 in the Company’s Condensed Consolidated Statements of Cash Flows. Net cashproceeds for the year ended December 31, 2007 from the sale of GroupeNovasep were $420.7 million. The net gain on the Groupe Novasep salerecorded in the first quarter of 2007 was $115.7 million (net of$2.0 million of German taxes).

 

**3.        SEGMENT INFORMATION:**

 

Rockwood operates in fivereportable segments according to the nature and economic characteristics of itsproducts and services as well as the manner in which the information is usedinternally by the Company’s key decision maker, who is the Company’s ChiefExecutive Officer. The five segments are: (1) Specialty Chemicals, whichconsists of the surface treatment and fine chemicals business lines; (2) PerformanceAdditives, which consists of color pigments and services, timber treatmentchemicals, clay-based additives and water treatment chemicals business lines; (3) TitaniumDioxide Pigments; (4) Advanced Ceramics; and (5) Specialty Compounds.

 

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Items that cannot bereadily attributed to individual segments have been classified as “Corporateand other.” Corporate and other operating loss primarily represents payroll,professional fees and other operating expenses of centralized functions such astreasury, tax, legal, internal audit and consolidation accounting as well asthe cost of operating our central offices (including some costs maintainedbased on legal or tax considerations). The primary components of Corporate andother loss, in addition to operating loss, are interest expense on externaldebt (including the amortization of deferred financing costs), foreign exchangelosses or gains, and mark-to-market gains or losses on derivatives. Majorcomponents within the reconciliation of income before taxes (described morefully below) include systems/organization establishment expenses, interestexpense on external debt, foreign exchange losses or gains, and refinancingexpenses related to external debt. Corporate and other identifiable assetsprimarily represent deferred financing costs that have been capitalized inconnection with corporate external debt financing, deferred income tax assetsand cash balances maintained in accordance with centralized cash managementtechniques. The Corporate and other classification also includes the results ofoperations, assets (primarily real estate) and liabilities (including pensionand environmental) of legacy businesses formerly belonging to Dynamit Nobel andthe wafer reclaim business. The European wafer reclaim business line is aprovider of semiconductor wafer refurbishment services with market positions inEurope. This business works with semiconductor manufacturers to refurbish usedtest wafers and return them to the manufacturer for reuse in test and processmonitor applications. In February 2007, the Company completed thesale of its U.S. wafer reclaim business. These operations are substantiallyunrelated by nature to businesses currently within the Company’s operatingsegments.

 

Summarized financialinformation for each of the reportable segments is provided in the followingtable:

 
| ** **                                 | ** ** | ** **    | ** ** | ** **      | ** ** | **Titanium** | ** ** | ** **   | ** ** | ** **    | ** ** | ** **         | ** ** | ** **       | ** ** |
|--------------------------------------------|------------|---------------|------------|-----------------|------------|--------------|------------|--------------|------------|---------------|------------|--------------------|------------|------------------|------------|
| ** **                                 | ** ** | **Specialty** | ** ** | **Performance** | ** ** | **Dioxide**  | ** ** | **Advanced** | ** ** | **Specialty** | ** ** | **Corporate**      | ** ** | ** **       | ** ** |
| **($ in millions)**              | ** ** | **Chemicals** | ** ** | **Additives**   | ** ** | **Pigments** | ** ** | **Ceramics** | ** ** | **Compounds** | ** ** | **and other** | ** ** | **Consolidated** | ** ** |
| **Three  months ended June 30, 2008** |       |          |       |            |       |         |       |         |       |          |       |               |       |             |       |
| Net sales                                  |       | $             | 335.5      |            | $          | 254.7        |       | $            | 134.2      |          | $          | 145.3              |       | $                | 73.2       |   | $ | 2.6 |   | $ | 945.5 |   |
| Total Adjusted  EBITDA                     |       | 82.1          |       | 39.1            |       | 15.4         |       | 44.9         |       | 10.1          |       | (13.3              | )          | 178.3            |       |
| **Three  months ended June 30, 2007** |       |          |       |            |       |         |       |         |       |          |       |               |       |             |       |
| Net sales                                  |       | $             | 270.9      |            | $          | 216.2        |       | $            | 123.3      |          | $          | 118.6              |       | $                | 70.8       |   | $ | 2.9 |   | $ | 802.7 |   |
| Total Adjusted  EBITDA (a)                 |       | 66.3          |       | 45.5            |       | 21.0         |       | 32.7         |       | 9.5           |       | (14.5              | )          | 160.5            |       |
| **Six  months ended June 30, 2008**   |       |          |       |            |       |         |       |         |       |          |       |               |       |             |       |
| Net sales                                  |       | $             | 647.2      |            | $          | 466.3        |       | $            | 260.0      |          | $          | 278.5              |       | $                | 142.2      |   | $ | 5.3 |   | $ | 1,799.5 |   |
| Total Adjusted  EBITDA                     |       | 162.6         |       | 70.3            |       | 39.3         |       | 83.4         |       | 18.8          |       | (27.7              | )          | 346.7            |       |
| **Six  months ended June 30, 2007**   |       |          |       |            |       |         |       |         |       |          |       |               |       |             |       |
| Net sales                                  |       | $             | 538.8      |            | $          | 401.0        |       | $            | 239.4      |          | $          | 224.1              |       | $                | 140.4      |   | $ | 6.7 |   | $ | 1,550.4 |   |
| Total Adjusted  EBITDA (a)                 |       | 134.6         |       | 78.1            |       | 43.4         |       | 61.5         |       | 17.6          |       | (27.7              | )          | 307.5            |       |

 
| ** **                  | ** ** | ** **    | ** ** | ** **      | ** ** | **Titanium** | ** ** | ** **   | ** ** | ** **    | ** ** | ** **                  | ** ** | ** **                | ** ** | ** **       | ** ** |
|-----------------------------|------------|---------------|------------|-----------------|------------|--------------|------------|--------------|------------|---------------|------------|-----------------------------|------------|---------------------------|------------|------------------|------------|
| ** **                  | ** ** | **Specialty** | ** ** | **Performance** | ** ** | **Dioxide**  | ** ** | **Advanced** | ** ** | **Specialty** | ** ** | **Corporate**               | ** ** | ** **                | ** ** | ** **       | ** ** |
| ** **                  | ** ** | **Chemicals** | ** ** | **Additives**   | ** ** | **Pigments** | ** ** | **Ceramics** | ** ** | **Compounds** | ** ** | **and other (b)** | ** ** | **Eliminations (c)** | ** ** | **Consolidated** | ** ** |
| Identifiable  assets as of: |       |          |       |            |       |         |       |         |       |          |       |                        |       |                      |       |             |       |
| June 30,  2008         |       | $             | 2,106.5    |            | $          | 1,404.4      |       | $            | 853.2      |          | $          | 920.3                       |       | $                         | 290.5      |             | $          | 463.3 |   | $ | (216.7 | ) | $ | 5,821.5 |   |
| December 31,  2007     |       | 1,900.1       |       | 1,384.4         |       | 801.4        |       | 843.6        |       | 281.8         |       | 462.7                       |       | (159.1                    | )          | 5,514.9          |       |
|                             |            |               |            |                 |            |              |            |              |            |               |            |                             |            |                           |            |                  |            |  |  |  |  |  |  |  |  |

 

----

(a)               This amount doesnot include $8.5 million and $17.7 million of Adjusted EBITDA for the three andsix months ended June 30, 2007, respectively, from the Electronicsbusiness sold on December 31, 2007 and $1.8 million of Adjusted EBITDA forthe six months ended June 30, 2007 from the former Groupe Novasep segmentsold on January 9, 2007.

 

(b)               This amountincludes $51.6 million and $47.4 million of assets from the legacy businessesformerly belonging to Dynamit Nobel at June 30, 2008 and December 31,2007, respectively.

 

(c)                Amounts containedin the “Eliminations” column represent the individual subsidiaries’ retainedinterest in their cumulative net cash balance (deposits less withdrawals)included in the corporate centralized cash system and within the identifiableassets of the respective segment. These amounts are eliminated as the corporatecentralized cash system is included in the Corporate segment’s identifiableassets.

 

Geographic informationregarding net sales based on seller’s location and long-lived assets aredescribed in Note 4, “Segment Information,” in the Company’s 2007 Form 10-K.

 

On a segment basis, the Companydefines Adjusted EBITDA as operating income excluding depreciation andamortization, certain non-cash gains and charges, certain other special gainsand charges deemed by senior management to be non-recurring gains and chargesand certain items deemed by senior management to have little or no bearing onthe day-to-day operating performance of its business segments and reportingunits. The adjustments made to operating income directly correlate with theadjustments to net income in calculating Adjusted EBITDA on a consolidatedbasis pursuant to the senior secured credit agreement, which reflectsmanagement’s interpretations thereof. The indenture governing the 2014 Notesexcludes certain adjustments permitted under the senior credit agreement.Senior management uses Adjusted EBITDA on a segment basis as the primarymeasure to evaluate the 

 

12

----

 

ongoing performance ofthe Company’s business segments and reporting units.

 

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

 

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

 
| ** **                                                                   | ** ** | ** **    | ** ** | ** **      | ** ** | **Titanium** | ** ** | ** **   | ** ** | ** **    | ** ** | ** **         | ** ** | ** **       | ** ** |
|------------------------------------------------------------------------------|------------|---------------|------------|-----------------|------------|--------------|------------|--------------|------------|---------------|------------|--------------------|------------|------------------|------------|
| ** **                                                                   | ** ** | **Specialty** | ** ** | **Performance** | ** ** | **Dioxide**  | ** ** | **Advanced** | ** ** | **Specialty** | ** ** | **Corporate**      | ** ** | ** **       | ** ** |
| **($ in millions)**                                                | ** ** | **Chemicals** | ** ** | **Additives**   | ** ** | **Pigments** | ** ** | **Ceramics** | ** ** | **Compounds** | ** ** | **and other** | ** ** | **Consolidated** | ** ** |
| **Three  months ended June 30, 2008**                                   |       |          |       |            |       |         |       |         |       |          |       |               |       |             |       |
| Income (loss)  from continuing operations before taxes and minority interest |       | $             | 51.5       |            | $          | 11.6         |       | $            | (7.8       | )             | $          | 24.1               |       | $                | 4.7        |   | $ | 15.0 |   | $ | 99.1 |   |
| Interest expense  (a)                                                        |       | 13.6          |       | 8.1             |       | 9.0          |       | 9.2          |       | 2.3           |       | (32.5              | )          | 9.7              |       |
| Interest income                                                              |       | (1.2          | )          | 0.1             |       | —       |       | (0.1         | )          | (0.1          | )          | (0.1               | )          | (1.4             | )          |
| Depreciation and  amortization                                               |       | 17.1          |       | 16.7            |       | 13.4         |       | 11.9         |       | 2.8           |       | 1.9                |       | 63.8             |       |
| Restructuring  charges, net                                                  |       | 0.2           |       | 1.0             |       | —       |       | 0.3          |       | —        |       | —             |       | 1.5              |       |
| Systems/organization  establishment expenses                                 |       | 0.5           |       | 1.5             |       | —       |       | 0.1          |       | 0.1           |       | —             |       | 2.2              |       |
| Cancelled  acquisition and disposal costs                                    |       | —        |       | —          |       | —       |       | —       |       | 0.3           |       | 0.4                |       | 0.7              |       |
| Inventory  write-up charges                                                  |       | 0.1           |       | —          |       | —       |       | —       |       | —        |       | —             |       | 0.1              |       |
| Loss on sale of  assets and other                                            |       | —        |       | —          |       | 0.8          |       | —       |       | —        |       | —             |       | 0.8              |       |
| Foreign exchange  loss (gain), net                                           |       | 0.3           |       | (0.2            | )          | —       |       | (0.6         | )          | —        |       | 1.3                |       | 0.8              |       |
| Other                                                                        |       | —        |       | 0.3             |       | —       |       | —       |       | —        |       | 0.7                |       | 1.0              |       |
| Total Adjusted  EBITDA                                                       |       | $             | 82.1       |            | $          | 39.1         |       | $            | 15.4       |          | $          | 44.9               |       | $                | 10.1       |   | $ | (13.3 | ) | $ | 178.3 |   |
| **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        |   | $ | (42.3 | ) | $ | 47.4 |   |
| 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         | )          | —        |       | (2.1               | )          | (3.6             | )          |
| Depreciation and  amortization                                               |       | 13.6          |       | 12.9            |       | 10.5         |       | 10.1         |       | 2.8           |       | 1.3                |       | 51.2             |       |
| Restructuring  charges, net                                                  |       | 0.3           |       | 0.3             |       | —       |       | 0.6          |       | —        |       | 0.8                |       | 2.0              |       |
| 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 charges                                                  |       | —        |       | —          |       | —       |       | 0.1          |       | —        |       | —             |       | 0.1              |       |
| Loss on early  extinguishment of debt                                        |       | —        |       | 1.9             |       | —       |       | —       |       | 1.1           |       | 16.1               |       | 19.1             |       |
| Gain on sale of  assets and other                                            |       | —        |       | —          |       | —       |       | —       |       | —        |       | (0.4               | )          | (0.4             | )          |
| Foreign exchange  loss (gain), net                                           |       | 0.1           |       | (0.1            | )          | —       |       | (0.1         | )          | —        |       | (3.3               | )          | (3.4             | )          |
| Other                                                                        |       | —        |       | 0.1             |       | —       |       | —       |       | —        |       | —             |       | 0.1              |       |
| Total Adjusted  EBITDA (b)                                                   |       | $             | 66.3       |            | $          | 45.5         |       | $            | 21.0       |          | $          | 32.7               |       | $                | 9.5        |   | $ | (14.5 | ) | $ | 160.5 |   |
| **Six  months ended June 30, 2008**                                     |       |          |       |            |       |         |       |         |       |          |       |               |       |             |       |
| Income (loss)  from continuing operations before taxes and minority interest |       | $             | 104.2      |            | $          | 16.8         |       | $            | (5.7       | )             | $          | 42.2               |       | $                | 8.3        |   | $ | (18.8 | ) | $ | 147.0 |   |
| Interest expense  (a)                                                        |       | 26.4          |       | 16.2            |       | 17.9         |       | 17.9         |       | 4.6           |       | 0.4                |       | 83.4             |       |
| Interest income                                                              |       | (1.9          | )          | 0.1             |       | —       |       | (0.2         | )          | (0.3          | )          | (1.3               | )          | (3.6             | )          |
| Depreciation and  amortization                                               |       | 33.2          |       | 33.2            |       | 26.3         |       | 23.8         |       | 5.7           |       | 3.4                |       | 125.6            |       |
| Restructuring  charges, net                                                  |       | 0.2           |       | 1.6             |       | —       |       | 0.5          |       | —        |       | —             |       | 2.3              |       |
| Systems/organization  establishment expenses                                 |       | 0.8           |       | 2.2             |       | —       |       | 0.2          |       | 0.2           |       | —             |       | 3.4              |       |
| Cancelled  acquisition and disposal costs                                    |       | —        |       | —          |       | —       |       | —       |       | 0.3           |       | 0.4                |       | 0.7              |       |
| Inventory  write-up charges                                                  |       | 0.5           |       | —          |       | —       |       | —       |       | —        |       | —             |       | 0.5              |       |
| Loss on sale of  assets and other                                            |       | —        |       | —          |       | 0.8          |       | 0.1          |       | —        |       | —             |       | 0.9              |       |
| Foreign exchange  gain, net                                                  |       | (0.3          | )          | (0.2            | )          | —       |       | (1.1         | )          | —        |       | (12.7              | )          | (14.3            | )          |
| Other                                                                        |       | (0.5          | )          | 0.4             |       | —       |       | —       |       | —        |       | 0.9                |       | 0.8              |       |
| Total Adjusted  EBITDA                                                       |       | $             | 162.6      |            | $          | 70.3         |       | $            | 39.3       |          | $          | 83.4               |       | $                | 18.8       |   | $ | (27.7 | ) | $ | 346.7 |   |
| **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        |   | $ | (76.2 | ) | $ | 94.3 |   |
| Interest expense  (a)                                                        |       | 19.0          |       | 6.2             |       | 15.9         |       | 16.6         |       | 4.7           |       | 39.3               |       | 101.7            |       |
| Interest income                                                              |       | (1.7          | )          | (0.5            | )          | (0.1         | )          | —       |       | (0.2          | )          | (5.9               | )          | (8.4             | )          |
| Depreciation and  amortization                                               |       | 26.4          |       | 25.5            |       | 20.8         |       | 19.7         |       | 5.5           |       | 2.6                |       | 100.5            |       |
| Restructuring  charges, net                                                  |       | 0.5           |       | 0.3             |       | —       |       | 0.7          |       | —        |       | 4.5                |       | 6.0              |       |
| 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 charges                                                  |       | —        |       | —          |       | —       |       | 0.1          |       | —        |       | —             |       | 0.1              |       |
| Loss on early  extinguishment of debt                                        |       | —        |       | 1.9             |       | —       |       | —       |       | 1.1           |       | 16.1               |       | 19.1             |       |
| Refinancing  expenses                                                        |       | —        |       | —          |       | —       |       | —       |       | —        |       | 0.9                |       | 0.9              |       |
| Loss (gain) on  sale of assets and other                                     |       | —        |       | 0.1             |       | —       |       | —       |       | —        |       | (5.3               | )          | (5.2             | )          |
| Foreign exchange  loss (gain), net                                           |       | 0.3           |       | —          |       | —       |       | (0.1         | )          | —        |       | (3.7               | )          | (3.5             | )          |
| Other                                                                        |       | (0.3          | )          | 0.3             |       | —       |       | —       |       | —        |       | —             |       | —           |       |
| Total Adjusted  EBITDA (b)                                                   |       | $             | 134.6      |            | $          | 78.1         |       | $            | 43.4       |          | $          | 61.5               |       | $                | 17.6       |   | $ | (27.7 | ) | $ | 307.5 |   |

 

----

(a)               Includes gains of$34.0 million and $0.8 million for the three months ended June 30, 2008and 2007, respectively, and gains of 

 

13

----

 

$3.2 million for the sixmonths ended June 30, 2008 and losses of $2.0 million for the six monthsended June 30 2007, representing the movement in the mark-to-marketvaluation of the Company’s interest rate and cross-currency hedginginstruments.

 

(b)               This amount doesnot include $8.5 million and $17.7 million of Adjusted EBITDA for the three andsix months ended June 30, 2007, respectively, from the Electronicsbusiness sold on December 31, 2007 and $1.8 million of Adjusted EBITDA forthe six months ended June 30, 2007 from the former Groupe Novasep segmentsold 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*

 

Certain items are addedto or subtracted 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 $2.0 million were recorded in the three months ended  June 30, 2008 and 2007, respectively, and $2.3 million and $6.0 million  were recorded in the six months ended June 30, 2008 and 2007,  respectively, for miscellaneous restructuring activities, including headcount  reductions and facility closures (see Note 13, “Restructuring Liability,” for  further details).                                                                                                                                                                                                                                                                                                                   |
|--------|----------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| · | * * | *Systems/organization  establishment expenses*:  For the three and six months  ended June 30, 2008, expenses of $2.2 million and $3.4 million,  respectively, were recorded related to the integration of businesses  acquired, primarily related to the acquisition of the Elementis plc business  in the Performance Additives segment in August 2007. For the three  and six months ended June 30, 2007, expenses of $0.3 million and $1.2  million, respectively, were recorded primarily in connection with the integration  of the Viance, LLC joint venture and the integration of businesses acquired  in 2006 in the Advanced Ceramics and Specialty Compounds segments.                                                                                                 |
|   |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| · | * * | *Cancelled  acquisition and disposal costs*:  Costs of $0.7 million  were recorded in the three months ended June 30, 2008 and 2007 and costs  of $0.7 million and $0.8 million were recorded for the six months ended  June 30, 2008 and 2007, respectively, in connection with non-consummated  acquisitions and dispositions.                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| · | * * | *Inventory  write-up**charges*:   Under SFAS 141,*Business Combinations*,  all inventories acquired in an acquisition must be revalued to “fair value.”  In connection with acquisitions, the Company allocates a portion of the total  purchase price to inventory to reflect manufacturing profit in inventory at  the date of the acquisitions. This resulted in a reduction of gross  profit of $0.1 million and $0.5 million for the three and six months ended June 30,  2008, respectively, in the Specialty Chemicals segment and $0.1 million for  the three and six months ended June 30, 2007 in the Advanced Ceramics  segment as the inventory was sold in the normal course of business.                                                                  |
|   |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| · | * * | *Loss on early extinguishment of  debt.*In the second quarter of 2007, the Company paid a  redemption premium of $14.5 million and wrote off $4.6 million of deferred  financing costs associated with the redemption of the 2011 Notes on  May 15, 2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| · | * * | *Refinancing  expenses: * In March 2007, the Company expensed  $0.9 million related to the fourth amendment of the senior secured credit  agreement to refinance all outstanding borrowings under the tranche F term  loans with new tranche G term loans.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| · | * * | *(Gain)  loss on sale of assets and other*:  The Company  recorded a charge of $0.8 million in the second quarter of 2008 related to  the liquidation of a joint venture in the Titanium Dioxide Pigments segment.  For the six months ended June 30, 2007, a gain of $5.2 million was  recorded primarily related to the sale of the U.S. wafer reclaim business.                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| · | * * | *Foreign  exchange (gain) loss, net*:  For the three months ended  June 30, 2008 and 2007, the Company recorded losses of $0.8 million and  gains of $3.4 million, respectively. The foreign exchange loss reported  in the second quarter of 2008 is due to the impact of the slightly weaker  euro as of June 30, 2008 versus March 31, 2008 related to  non-operating euro-denominated transactions and intercompany financing  arrangements. For the six months ended June 30, 2008 and 2007, gains of  $14.3 million and $3.5 million, respectively, were recorded. The increase in  foreign exchange gains is due to the impact of the stronger euro as of  June 30, 2008 versus December 31, 2007, related to non-operating  euro-denominated transactions. |

 

14

----

** **

**4.****             ACQUISITIONS:**

 

Pursuant to the Company’sbusiness strategy of achieving profitable growth through selectiveacquisitions, the Company has acquired several businesses in recent years. Inaccordance with SFAS No. 142,*Goodwilland Other Intangible Assets,* any goodwill resulting fromacquisitions is tested for impairment at least annually.

 

**Elementisplc Global Color Pigments Business**

 

On August 31, 2007,the Company completed the acquisition of the global color pigments business ofElementis plc for a purchase price of approximately $140.0 million. Thisacquisition includes facilities in North America, Europe and China and is beingintegrated into the Color Pigments and Services business, which is part of thePerformance Additives segment. The financial position of the business acquiredis included in the Consolidated Balance Sheet as of December 31, 2007 and June 30,2008. The results of operations and cash flows of the business acquired for theperiods after August 31, 2007 are included for the three and six monthsended June 30, 2008. The excess of the total purchase price over theestimated fair value of the net assets acquired at closing has been allocatedto goodwill and is estimated to be $23.0 million as of June 30, 2008.Certain environmental matters were assumed in the acquisition. The Companyestimates that the potential exposure range for these items is from $3.6million to $10.4 million. At June 30, 2008, $3.6 million of relatedreserves are recorded. The allocation of the purchase price to the identifiableassets acquired and the environmental liabilities assumed are preliminary andare subject to change upon the finalization of purchase accounting which isexpected to be completed during 2008.

 

In addition to theacquisition described above, the Company has completed other smalleracquisitions in 2007 and in the first six months of 2008. Depending on thetiming and complexity involved, the purchase price allocation to the net assetsacquired for certain acquisitions completed within the last year waspreliminary as of June 30, 2008.

 

The above acquisitionswere not material on an individual basis, or in the aggregate.

 

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

 

Inventories are comprisedof the following:

 
| ** **                    | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------|------------|-------------------|------------|-----------------------|------------|
| **($ in millions)** | ** ** | **2008**          | ** ** | **2007**              | ** ** |
| Raw materials                 |       | $                 | 191.3      |                  | $          | 186.9 |   |
| Work-in-process               |       | 68.7              |       | 61.0                  |       |
| Finished goods                |       | 311.5             |       | 281.4                 |       |
| Packaging  materials          |       | 6.8               |       | 6.1                   |       |
| Total                         |       | $                 | 578.3      |                  | $          | 535.4 |   |

 

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

 

Below are goodwillbalances and activity by segment:

 
| ** **                                  | ** ** | ** **    | ** ** | ** **      | ** ** | **Titanium** | ** ** | ** **   | ** ** | ** **    | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|---------------|------------|-----------------|------------|--------------|------------|--------------|------------|---------------|------------|------------|------------|
| ** **                                  | ** ** | **Specialty** | ** ** | **Performance** | ** ** | **Dioxide**  | ** ** | **Advanced** | ** ** | **Specialty** | ** ** | ** ** | ** ** |
| **($ in millions)**               | ** ** | **Chemicals** | ** ** | **Additives**   | ** ** | **Pigments** | ** ** | **Ceramics** | ** ** | **Compounds** | ** ** | **Total**  | ** ** |
| Balance,  December 31, 2007            |       | $             | 684.1      |            | $          | 515.4        |       | $            | 187.8      |          | $          | 258.5      |       | $ | 121.2 |   | $ | 1,767.0 |   |
| Post closing  purchase price adjustment (a) |       | (18.2         | )          | —          |       | (6.0         | )          | (4.9         | )          | —        |       | (29.1      | )          |
| Acquisitions (b)                            |       | (9.9          | )          | —          |       | —       |       | —       |       | —        |       | (9.9       | )          |
| Foreign exchange  and other (c)             |       | 53.1          |       | 8.0             |       | 14.9         |       | 21.6         |       | 1.0           |       | 98.6       |       |
| Balance,  June 30, 2008                |       | $             | 709.1      |            | $          | 523.4        |       | $            | 196.7      |          | $          | 275.2      |       | $ | 122.2 |   | $ | 1,826.6 |   |

 

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(a)     Under the terms of the saleand purchase agreement entered into in connection with the Dynamit NobelAcquisition in April 2004, GEA Group and its subsidiary, GEA North AmericaInc. (“GEA North America”), were obligated to indemnify the Company for certainlegal, tax and environmental liabilities and obligations that relate to theperiod prior to the closing, subject to certain limits and exclusions. In March 2008,the Company entered into an agreement with GEA Group and GEA North America tosettle all existing and future non-tax related claims in consideration ofpayment to the Company of €18.8 million ($29.1 million) which was received on March 28,2008. This payment was considered an adjustment to the purchase price per theclaims settlement agreement between the Company and GEA Group and itssubsidiary. As a result, the Company has reported this as an adjustment to thepurchase price with a credit to goodwill in the first quarter of 2008. SeeNote 15, “Commitments and Contingencies,” for further details.

 

(b)     Primarily related to anadjustment to goodwill from a bolt-on acquisition made in December 2007.

 

(c)     Consists primarily of foreigncurrency changes.

 

15

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**7.****             OTHER INTANGIBLEASSETS:**

 

Other intangible assets,net consist of:

 
| ** **                               | ** ** | **As of June 30, 2008** | ** ** | **As of December 31, 2007** | ** ** |
|------------------------------------------|------------|---------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                               | ** ** | **Gross**                                   | ** ** | ** **                                      | ** ** | ** ** | ** ** | **Gross** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                               | ** ** | **Carrying**                                | ** ** | **Accumulated**                                 | ** ** | ** ** | ** ** | **Carrying** | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
| **($ in millions)**            | ** ** | **Amount (a)**                         | ** ** | **Amortization**                                | ** ** | **Net** | ** ** | **Amount** | ** ** | **Amortization** | ** ** | **Net** | ** ** |
| Patents and  other intellectual property |       | $                                           | 427.5      |                                            | $          | (141.9 | ) | $ | 285.6 |   | $ | 395.6 |   | $ | (116.7 | ) | $ | 278.9 |   |
| Trade names and  trademarks              |       | 147.2                                       |       | (27.5                                           | )          | 119.7 |   | 147.2 |   | (23.0 | ) | 124.2 |   |
| Customer  relationships                  |       | 307.9                                       |       | (73.7                                           | )          | 234.2 |   | 273.3 |   | (57.3 | ) | 216.0 |   |
| Supply  agreements                       |       | 32.6                                        |       | (4.6                                            | )          | 28.0 |   | 29.6 |   | (2.9 | ) | 26.7 |   |
| Other                                    |       | 58.3                                        |       | (32.6                                           | )          | 25.7 |   | 57.7 |   | (26.7 | ) | 31.0 |   |
| Total                                    |       | $                                           | 973.5      |                                            | $          | (280.3 | ) | $ | 693.2 |   | $ | 903.4 |   | $ | (226.6 | ) | $ | 676.8 |   |

 

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(a)     The increase from December 31,2007 is primarily related to the impact of currency changes and additions fromacquisitions.

 

Amortization of otherintangible assets was $19.9 million and $16.2 million for the three monthsended June 30, 2008 and 2007, respectively and $38.6 million and $31.3million for the six months ended June 30, 2008 and 2007, respectively.

 

Estimated amortizationexpense for each of the five succeeding fiscal years is as follows:

 
| **($ in millions)** | ** ** | **Amortization** | ** ** |
|-------------------------------|------------|------------------|------------|
| **Year ended**           | ** ** | **Expense**      | ** ** |
| 2008                          |       | $                | 76.6       |   |
| 2009                          |       | 68.0             |       |
| 2010                          |       | 65.8             |       |
| 2011                          |       | 62.7             |       |
| 2012                          |       | 60.6             |       |
|                               |            |                  |            |  |

 

**8.****             LONG-TERM DEBT**

 

Long-term debt and loanspayable are summarized as follows:

 
| ** **                                                                                      | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| **($ , € and £ in millions)**                           | ** ** | **2008**          | ** ** | **2007**              | ** ** |
| Senior secured  credit facilities:                                                              |       |              |       |                  |       |
| Tranche A-1 term  loans (€26.1 and €29.3, respectively)                               |       | $                 | 41.1       |                  | $          | 42.8 |   |
| Tranche A-2 term  loans (€113.6 and €127.8, respectively)                             |       | 179.0             |       | 186.5                 |       |
| Tranche E term  loans                                                                           |       | 1,110.7           |       | 1,116.4               |       |
| Tranche G term  loans (€266.6 and €267.9, respectively)                               |       | 420.0             |       | 390.9                 |       |
| 2014 Notes  (€375.0 and $200.0 as of June 30, 2008 and December 31, 2007)        |       | 790.8             |       | 747.1                 |       |
| Other term loan  facilities                                                                     |       | 22.1              |       | 24.2                  |       |
| Capitalized  lease obligations (€32.9 and €34.1, respectively)                        |       | 51.8              |       | 49.7                  |       |
| Preferred stock  of subsidiary (£12.0 as of June 30, 2008 and December 31, 2007) |       | 23.9              |       | 23.8                  |       |
|                                                                                            |       | 2,639.4           |       | 2,581.4               |       |
| Less current  maturities                                                                        |       | (105.5            | )          | (107.4                | )          |
|                                                                                            |       | $                 | 2,533.9    |                  | $          | 2,474.0 |   |

 

**9.****             INCOME TAXES:**

 

Income tax expense hasbeen computed based on the projected effective tax rate for the year. Theeffective tax rate for the six months ended June 30, 2008 and 2007 was27.7% and 44.2%, respectively. The effective tax rate is lower in 2008 comparedto 2007 primarily as a result of lower statutory rates in various Europeancountries, geographic mix and domestic income which is not tax effected as aresult of a full valuation allowance for federal and certain state taxes. Thedifference between the effective tax rate and the U.S. federal statutory rateof 35.0% is primarily a function of favorable foreign rate differentials andthe impact of the valuation allowance on domestic earnings.

 

In the six months ended June 30,2008, the Company increased its worldwide valuation allowances by $33.3million. The increase in the valuation allowance was primarily due to adecrease of $2.1 million in deferred tax assets generally associated with theCompany’s domestic earnings, an increase of $37.3 million in other comprehensiveincome and a decrease of $1.9 million due to the offset of net 

 

16

----

 

operating losses againstuncertain tax benefit liabilities. The change in the valuation allowance forthe six months ended June 30, 2008 increased the tax provision by $2.1million. The following table reflects the activity in the valuation allowancefor worldwide net operating losses and other deferred income tax assets:

 
| ** **                                                                                     | ** ** | **Valuation** | ** ** |
|------------------------------------------------------------------------------------------------|------------|---------------|------------|
| **($ in millions)**                                                                  | ** ** | **Allowance** | ** ** |
| Balance as of  December 31, 2007                                                          |       | $             | 100.8      |   |
| Decrease as  reflected in income tax expense                                                   |       | (2.1          | )          |
| Increase as  reflected in other comprehensive income (a)                                       |       | 37.3          |       |
| Decrease due to  the offset of net operating losses against uncertain tax position liabilities |       | (1.9          | )          |
| Balance as of  June 30, 2008                                                              |       | $             | 134.1      |   |

 

----

(a)     Primarily related to netinvestment hedge losses, as well as the mark-to-market of the Company’sEuro-denominated debt, recorded in accumulated other comprehensive income inthe Condensed Consolidated Balance Sheets.

 

In the six months ended June 30,2008, based on the Company’s policy and review of available information,including the Company’s steady-state analysis, it was determined that there wasnot sufficient positive evidence of future taxable income in order to releasethe U.S. valuation allowance that has been recorded. During the six monthsended June 30, 2008, the Company’s net deferred tax assets and liabilitieswere maintained at a zero level, other than a noncurrent deferred tax liabilityrelating to goodwill with an indefinite reversal period and a noncurrentdeferred tax asset relating to a Federal AMT Credit. It is the Company’s policythat the valuation allowance is reversed in the year management determines itis more likely than not that the deferred tax assets will be realized.

 

In the second quarter of2008, the Company determined that it was necessary to establish a valuationallowance for certain state deferred tax assets. This resulted in a $0.4million increase in the tax provision related to the beginning of perioddeferred tax balance.

 

Unrecognized tax benefitsat June 30, 2008 were $27.6 million. This includes $24.9 million of taxbenefits that, if recognized, would affect the effective tax rate, $2.2 millionof tax benefits that if recognized, would result in a decrease to goodwillrecorded in purchase business combinations and $0.5 million of tax benefitsthat, if recognized, would result in an adjustment to other tax accounts.

 

The Company recognizesinterest and penalties related to unrecognized tax benefits in its income taxprovision. The Company had accrued $4.3 million for interest and penalties at December 31,2007. During the six months ended June 30, 2008, the accrual for interestand penalties was increased by $1.5 million. As of June 30, 2008, theCompany had accrued a total of $5.8 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 $22.0million. Audit outcomes and the timing of audit settlements are subject tosignificant uncertainty.

 

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

 

**10.****         STOCK-BASED COMPENSATION:**

 

The Company has in placethe 2005 Amended and Restated Stock Purchase and Option Plan of RockwoodHoldings, Inc. and Subsidiaries (the “Plan”). Under the Plan, the Companymay 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.

 

In December 2007,the Company awarded 167,951 performance restricted stock units to managementand key employees which will vest on December 31, 2010 as long as theemployee continues to be employed by the Company on this date and upon theachievement of certain performance targets. The number of shares of the Company’scommon stock ultimately awarded upon vesting is determined based on theachievement of specified performance criteria over the period January 1,2008 through December 31, 2010. However, in accordance with SFAS No. 123R,the Company did not recognize any compensation cost in 2007 for this issuancebecause the performance measures that form the basis for vesting of theserestricted stock units were not known as of December 31, 2007. Theseperformance measures were established on February 29, 2008, when theCompany’s financial statements for 2007 were filed with the Securities andExchange Commission. The weighted average grant date fair value of theserestricted stock units was $30.69 per stock unit.

 

The compensation cost forstock options, restricted stock units and Board of Director stock grantsrecorded under the Plan resulted in a decrease to income from continuingoperations before taxes and minority interest of $2.2 million and $0.7 millionfor the three months ended June 30, 2008 and 2007, respectively, and $4.1million and $0.8 million for the six months ended June 30, 2008 and 2007,respectively.  The total tax benefitrecognized related to stock options was $0.2 million and $0.1 million for thethree months ended June 30, 2008 and 2007, respectively, and $0.4 millionand $0.1 million for the six months ended June 30, 2008 and 2007,respectively.

 

17

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**11.****          EMPLOYEE BENEFIT PLANS:**

 

The following tablerepresents the net periodic benefit costs and related components in accordancewith SFAS 158,*Employers’ Accounting forDefined Benefit Pension and Other Postretirement Plans, an amendment of FASBStatements No. 87, 88, 106 and 132 (R)*:

 
| ** **                            | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|---------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                            | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| **($ in millions)**         | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| Service cost                          |       | $                                | 1.9        |                           | $          | 1.9 |   | $ | 3.7 |   | $ | 3.8 |   |
| Interest cost                         |       | 7.3                              |       | 5.8                            |       | 14.3 |   | 11.5 |   |
| Expected return  on assets            |       | (2.8                             | )          | (2.1                           | )          | (5.5 | ) | (4.2 | ) |
| Net amortization  of actuarial losses |       | (0.1                             | )          | 0.1                            |       | (0.1 | ) | 0.2 |   |
| Total pension  cost                   |       | $                                | 6.3        |                           | $          | 5.7 |   | $ | 12.4 |   | $ | 11.3 |   |

 

**12.****          EARNINGS PER COMMONSHARE:**

 

Basic and dilutedearnings per common share (“EPS”) were computed using the following commonshare data:

 
| ** **                                                                                                      | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                                                      | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| **($ in millions, except per share amounts; shares in thousands)** | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| **EPS  Numerator - Basic:**                                                                                     |       |                             |       |                           |       |   |   |   |   |
| Net income from  continuing operations                                                                          |       | $                                | 78.0       |                           | $          | 24.2 |   | $ | 105.7 |   | $ | 49.2 |   |
| Income from  discontinued operations, net of tax                                                                |       | —                           |       | 3.8                            |       | — |   | 8.5 |   |
| Gain on sale of  discontinued operations, net of tax                                                            |       | —                           |       | —                         |       | — |   | 115.7 |   |
| Minority  interest in discontinued operations, net of tax                                                       |       | —                           |       | —                         |       | — |   | (0.1 | ) |
| Net income                                                                                                      |       | $                                | 78.0       |                           | $          | 28.0 |   | $ | 105.7 |   | $ | 173.3 |   |
|                                                                                                            |       |                             |       |                           |       |   |   |   |   |
| **EPS  Denominator - Basic:**                                                                                   |       |                             |       |                           |       |   |   |   |   |
| Weighted average  number of common shares outstanding                                                           |       | 73,933                           |       | 73,796                         |       | 73,916 |   | 73,791 |   |
|                                                                                                            |       |                             |       |                           |       |   |   |   |   |
| **Basic  earnings per common share:**                                                                           |       |                             |       |                           |       |   |   |   |   |
| Earnings from  continuing operations                                                                            |       | $                                | 1.06       |                           | $          | 0.33 |   | $ | 1.43 |   | $ | 0.67 |   |
| Earnings from  discontinued operations, net of tax                                                              |       | —                           |       | 0.05                           |       | — |   | 1.68 |   |
| Basic earnings  per common share                                                                                |       | $                                | 1.06       |                           | $          | 0.38 |   | $ | 1.43 |   | $ | 2.35 |   |
|                                                                                                            |       |                             |       |                           |       |   |   |   |   |
| **EPS  Numerator - Diluted:**                                                                                   |       |                             |       |                           |       |   |   |   |   |
| Net income from  continuing operations                                                                          |       | $                                | 78.0       |                           | $          | 24.2 |   | $ | 105.7 |   | $ | 49.2 |   |
| Income from  discontinued operations, net of tax                                                                |       | —                           |       | 3.8                            |       | — |   | 8.5 |   |
| Gain on sale of  discontinued operations, net of tax                                                            |       | —                           |       | —                         |       | — |   | 115.7 |   |
| Minority  interest in discontinued operations, net of tax                                                       |       | —                           |       | —                         |       | — |   | (0.1 | ) |
| Net income                                                                                                      |       | $                                | 78.0       |                           | $          | 28.0 |   | $ | 105.7 |   | $ | 173.3 |   |
|                                                                                                            |       |                             |       |                           |       |   |   |   |   |
| **EPS  Denominator - Diluted:**                                                                                 |       |                             |       |                           |       |   |   |   |   |
| Weighted average  number of common shares outstanding                                                           |       | 73,933                           |       | 73,796                         |       | 73,916 |   | 73,791 |   |
| Effect of  dilutive stock options and other incentives                                                          |       | 3,086                            |       | 2,575                          |       | 2,954 |   | 2,359 |   |
| Weighted average  number of common shares outstanding and common stock equivalents                              |       | 77,019                           |       | 76,371                         |       | 76,870 |   | 76,150 |   |
|                                                                                                            |       |                             |       |                           |       |   |   |   |   |
| **Diluted  earnings per common share:**                                                                         |       |                             |       |                           |       |   |   |   |   |
| Earnings from  continuing operations                                                                            |       | $                                | 1.01       |                           | $          | 0.32 |   | $ | 1.38 |   | $ | 0.65 |   |
| Earnings from  discontinued operations, net of tax                                                              |       | —                           |       | 0.05                           |       | — |   | 1.63 |   |
| Diluted earnings  per common share                                                                              |       | $                                | 1.01       |                           | $          | 0.37 |   | $ | 1.38 |   | $ | 2.28 |   |

 

Stock options underemployee compensation plans representing common stock of 1,031,258 shares and1,031,444 shares were outstanding during the three and six months ended June 30,2008, respectively, and 523,697 shares were outstanding during the three andsix months ended June 30, 2007, but were not included in the computationof diluted earnings per common share because their inclusion would have had ananti-dilutive effect.

 

**13.****          RESTRUCTURING LIABILITY:**

 

The Company recordedrestructuring charges of $1.5 million and $2.0 million for the three monthsended June 30, 2008 and 2007, respectively and $2.3 million and $6.0million of restructuring charges for the six months ended June 30, 2008and 2007, respectively. The Company records restructuring liabilities thatrepresent charges incurred in connection with consolidations and 

 

18

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cessations of certain ofits operations, including operations from acquisitions, as well as headcountreduction programs. These charges consist primarily of write-offs of assets andseverance costs. Severance charges are based on various factors including theemployee’s length of service, contract provisions, salary levels and localgovernmental legislation. At the time a related charge is recorded, the Companycalculates its best estimate based upon detailed analysis. Although significantchanges are not expected, actual costs may differ from these estimates.

 

During the six monthsended June 30, 2008, the Company expensed $2.3 million of restructuringcharges. In the Performance Additives segment, the Company implemented arestructuring plan in its Color Pigments and Services business in connectionwith the integration of the business acquired from Elementis plc which includesthe reorganization and relocation of its North American Finance and IT servicesand the closure of three manufacturing facilities by the end of 2008. For thesix months ended June 30, 2008, the Company recorded $1.6 million ofseverance costs related to this restructuring plan and expects to recordapproximately $0.5 million of additional costs during the remainder of 2008. Inthe Advanced Ceramics and Specialty Chemicals segments, $0.5 million and $0.2million, respectively, were recorded in 2008 for miscellaneous headcountreductions.

 

During the six monthsended June 30, 2007, the Company expensed $6.0 million of restructuringcharges. In the Corporate and other segment, facility closure and severancecosts of $4.5 million were recorded primarily related to the restructuring ofthe wafer reclaim business. In addition, $0.5 million was recorded in theSpecialty Chemicals segment and $0.7 million was recorded in the AdvancedCeramics segment for miscellaneous headcount reductions. In the PerformanceAdditives segment, $0.3 million was recorded for miscellaneous headcountreductions and facility closures.

 

In 2006, the Companyrecorded restructuring charges for miscellaneous restructuring items, includingmiscellaneous headcount reductions and the closure of an administrative officein the Specialty Chemicals segment. In the Corporate and other segment, chargeswere recorded primarily related to the restructuring of the wafer reclaimbusiness. This included severance and related costs for employees in connectionwith the closure of two wafer reclaim facilities. The Company closed a waferreclaim facility in the U.K. in January 2006 and one of the facilities inthe U.S. in March 2006. In addition, charges were recorded in thePerformance Additives and Advanced Ceramics segments primarily formiscellaneous headcount reductions.

 

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.

 

In 2004, the Companyrecorded restructuring charges to involuntarily terminate or relocate certainemployees and/or exit certain activities as a result of the Dynamit NobelAcquisition. As a result, the Company closed the former corporate office ofDyanmit Nobel and recorded charges related to this closure including severancecosts for personnel, the closure costs on the building and the relocation costsof the remaining employees who were relocated to the Company’s new location.Also, as part of the acquisition of the Pigments and Dispersions business ofJohnson Matthey, the Company enacted a restructuring program and eliminatedcertain positions.

 

Selected information forthe 2008 restructuring actions follows:

 
| **($ in millions)**              | ** ** | ** **    | ** ** | **Facility** | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|---------------|------------|--------------|------------|------------|------------|
| **2008**                                   | ** ** | **Severance** | ** ** | **Closure**  | ** ** | **Total**  | ** ** |
| Liability  balance, December 31, 2007 |       | $             | —     |         | $          | —     |       | $ | — |   |
| Restructuring  charge in 2008              |       | 2.3           |       | 0.1          |       | 2.4        |       |
| Utilized in 2008                           |       | (1.8          | )          | (0.1         | )          | (1.9       | )          |
| Liability  balance, June 30, 2008     |       | $             | 0.5        |         | $          | —     |       | $ | 0.5 |   |

 

These actions areexpected to be completed during 2008.

 

Selected information forthe 2007 restructuring actions follows:

 
| **($ in millions)**              | ** ** | ** **    | ** ** | **Facility** | ** ** | ** **     | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|---------------|------------|--------------|------------|----------------|------------|------------|------------|
| **2007**                                   | ** ** | **Severance** | ** ** | **Closure**  | ** ** | **Relocation** | ** ** | **Total**  | ** ** |
| Liability  balance, December 31, 2007 |       | $             | 6.1        |         | $          | 0.3            |       | $          | 0.3        |   | $ | 6.7 |   |
| Utilized in 2008                           |       | (1.0          | )          | (0.1         | )          | —         |       | (1.1       | )          |
| Foreign exchange  and other                |       | (2.8          | )          | 2.6          |       | —         |       | (0.2       | )          |
| Liability  balance, June 30, 2008     |       | $             | 2.3        |         | $          | 2.8            |       | $          | 0.3        |   | $ | 5.4 |   |

 

These actions are expected to be completed during 2008 and 2009.

 

19

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Selected information forthe 2006 restructuring actions follows:

 
| **($ in millions)**              | ** ** | ** **    | ** ** | **Facility** | ** ** | ** **     | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|---------------|------------|--------------|------------|----------------|------------|------------|------------|
| **2006**                                   | ** ** | **Severance** | ** ** | **Closure**  | ** ** | **Relocation** | ** ** | **Total**  | ** ** |
| Liability  balance, December 31, 2007 |       | $             | 1.3        |         | $          | 4.1            |       | $          | 0.1        |   | $ | 5.5 |   |
| Utilized in 2008                           |       | (1.5          | )          | (1.1         | )          | —         |       | (2.6       | )          |
| Foreign exchange  and other                |       | 0.3           |       | (0.3         | )          | —         |       | —     |       |
| Liability  balance, June 30, 2008     |       | $             | 0.1        |         | $          | 2.7            |       | $          | 0.1        |   | $ | 2.9 |   |

 

The severance andrelocation costs related to the acquisition in the Specialty Compounds segmentare expected to be completed during 2008. The facility closure costs from the2006 restructuring actions primarily relate to the restructuring of the waferreclaim business and the closure of two wafer reclaim facilities. Thefacility closure costs are expected to be completed when the lease expires in2018.

 

Selected information forthe 2005 restructuring actions follows:

 
| **($ in millions)**              | ** ** | ** **    | ** ** | **Facility** | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|---------------|------------|--------------|------------|------------|------------|
| **2005**                                   | ** ** | **Severance** | ** ** | **Closure**  | ** ** | **Total**  | ** ** |
| Liability  balance, December 31, 2007 |       | $             | 0.2        |         | $          | 0.2        |       | $ | 0.4 |   |
| Foreign exchange  and other                |       | (0.2          | )          | —       |       | (0.2       | )          |
| Liability  balance, June 30, 2008     |       | $             | —     |         | $          | 0.2        |       | $ | 0.2 |   |

 

These actions areexpected to be completed in 2008.

 

Selected information forthe 2004 restructuring actions follows:

 
| **($ in millions)**              | ** ** | ** **    | ** ** | **Facility** | ** ** | ** **     | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|---------------|------------|--------------|------------|----------------|------------|------------|------------|
| **2004**                                   | ** ** | **Severance** | ** ** | **Closure**  | ** ** | **Relocation** | ** ** | **Total**  | ** ** |
| Liability  balance, December 31, 2007 |       | $             | 0.8        |         | $          | 0.2            |       | $          | 0.4        |   | $ | 1.4 |   |
| Restructuring  charge in 2008              |       | (0.1          | )          | —       |       | —         |       | (0.1       | )          |
| Utilized in 2008                           |       | (0.1          | )          | (0.1         | )          | —         |       | (0.2       | )          |
| Foreign exchange  and other                |       | —        |       | —       |       | (0.4           | )          | (0.4       | )          |
| Liability  balance, June 30, 2008     |       | $             | 0.6        |         | $          | 0.1            |       | $          | —     |   | $ | 0.7 |   |

 

These actions areexpected to be substantially completed by the end of 2008.

 

Restructuring reserves bysegment are as follows:

 
| ** **                    | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------|------------|-------------------|------------|-----------------------|------------|
| **($ in millions)** | ** ** | **2008**          | ** ** | **2007**              | ** ** |
| Specialty  Chemicals          |       | $                 | 1.9        |                  | $          | 3.4 |   |
| Performance  Additives        |       | 4.3               |       | 4.6                   |       |
| Advanced  Ceramics            |       | 0.4               |       | 0.8                   |       |
| Specialty  Compounds          |       | 0.4               |       | 2.4                   |       |
| Corporate and  other          |       | 2.7               |       | 2.8                   |       |
|                          |       | $                 | 9.7        |                  | $          | 14.0 |   |

 

**14.****          FAIR VALUE MEASUREMENTS:**

 

As discussed in Note 1, “Descriptionof Business and Summary of Significant Accounting Policies,” SFAS No. 157,*Fair Value Measurements*, was issued in September 2006.This statement defines fair value, establishes a framework for measuring fairvalue in GAAP, and creates a fair value hierarchy in order to increase theconsistency and comparability of fair value measurements and the relateddisclosures. This statement does not require any new fair value measurements,but requires disclosure of how the fair values of any assets and liabilitiesthat are measured at fair value on a recurring basis are determined. Certainprovisions of this standard were effective for the Company as of January 1,2008 and are disclosed below. However, the FASB has deferred theimplementation of SFAS No. 157 by one year for non-financial assets andliabilities. Under SFAS No. 159, *TheFair Value Option for Financial Assets*

 

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*andFinancial Liabilities* —*Including an Amendment of FASB Statement No. 115,* entities arepermitted to choose whether to measure many financial instruments and certainother items at fair value. The Company has elected not to measure anyinstruments at fair value under SFAS No. 159.

 

As of June 30, 2008,the only assets and liabilities that the Company currently measures at fairvalue on a recurring basis are derivatives and marketable securities. TheCompany’s financial assets and liabilities are measured using inputs from thethree levels of the fair value hierarchy. The three levels are as follows:

 

Level1 – Inputs are unadjusted quoted market prices in active markets for identicalassets or liabilities that the Company has the ability to access at the measurementdate.

 

Level2 – Inputs are directly or indirectly observable, which include quoted pricesfor similar assets and liabilities in active markets, quoted prices foridentical or similar assets or liabilities in markets that are not active,inputs other than quoted prices that are observable for the asset or liabilityand inputs that are derived principally from or corroborated by observablemarket data by correlation or other means.

 

Level3 – Inputs are unobservable inputs that are used to measure fair value to theextent observable inputs are not available. The Company does not have anyfinancial assets or liabilities that are classified as Level 3 inputs as of June 30,2008.

 

In accordance with thefair value hierarchy, the following table provides the fair value of theCompany’s financial assets and liabilities that are required to be measured atfair value as of June 30, 2008:

 
| ** **                                                     | ** ** | **As of**              | ** ** | **Fair Value Measurements** | ** ** |
|----------------------------------------------------------------|------------|-----------------------------|------------|---------------------------------------|------------|
| ** **                                                     | ** ** | **June 30, 2008** | ** ** | **Level 1**                      | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
| Assets                                                         | ** ** | ** **                  | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Marketable  securities (a)                                     |       | $                           | 191.1      |                                  | $          | 191.1 |   | $ | — |   | $ | — |   |
| Interest rate  swaps (b)                                       |       | 13.5                        |       | —                                |       | 13.5 |   | — |   |
| Total assets at  fair value                                    |       | $                           | 204.6      |                                  | $          | 191.1 |   | $ | 13.5 |   | $ | — |   |
|                                                           |       |                        |       |                                  |       |   |   |   |   |
| Liabilities                                                    | ** ** | ** **                  | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest rate  swaps (b)                                       |       | $                           | 20.4       |                                  | $          | — |   | $ | 20.4 |   | $ | — |   |
| Cross-currency  interest rate swaps (c)                        |       | 8.3                         |       | —                                |       | 8.3 |   | — |   |
| Cross-currency  interest rate swaps - net investment hedge (d) |       | 41.6                        |       | —                                |       | 41.6 |   | — |   |
| Raw material  purchase hedge (e)                               |       | 0.7                         |       | —                                |       | 0.7 |   | — |   |
| Total  liabilities at fair value                               |       | $                           | 71.0       |                                  | $          | — |   | $ | 71.0 |   | $ | — |   |

 

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(a)     These primarily representmoney market funds with an original maturity of three months or less.

 

(b)     The Company has historicallyentered into interest rate swaps to manage its exposure to changes in interestrates related to variable rate debt. As of June 30, 2008, these contractscover notional amounts of $725.0 million (at an interest rate of 4.499%) and€405.8 million (at interest rates ranging from 2.498% to 4.529%). Thesederivative contracts effectively convert the senior secured credit obligationsto fixed rate obligations. These hedges expired in July 2008 and wereeffectively replaced by swaps that will mature between November 2009 and July 2012.The Company has elected not to apply hedge accounting for these interest rateswaps and has recorded the mark-to-market of these derivatives as a componentof interest expense in the Condensed Consolidated Statements of Operations.

 

(c)     The Company entered intocross-currency interest rate swaps with current notional amounts of $19.4million and €17.1 million that effectively convert U.S. dollar borrowings intoeuro-based obligations at an effective interest rate of EURIBOR plus 4%. Thesecontracts have final maturity dates of July 2010. The Company has electednot to apply hedge accounting for these interest rate swaps and has recordedthe mark-to-market of these derivatives as a component of interest expense inthe Condensed Consolidated Statements of Operations.

 

(d)     In connection with theoffering of the 2014 Notes, the Company entered into a cross-currency interestrate swap in November 2004 with a notional amount of €155.6 million thateffectively converts the U.S. dollar fixed rate debt in respect of the 2014dollar-denominated notes sold into euro fixed rate debt. This swap has a finalmaturity date of November 2009. The Company designated this contract as ahedge of the foreign currency exposure of its net investment in itseuro-denominated operations. As a result, any foreign currency gains and lossesresulting from the translation of this euro-denominated debt is accounted foras a component of accumulated other comprehensive income for as long as thehedge remains effective.

 

(e)     In March 2008, theTitanium Dioxide Pigments segment entered into a derivative contract to protecta portion of its exposure to movements in certain raw material prices. TheCompany has elected not to apply hedge accounting for this derivative contract 

 

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and has recorded themark-to-market of this derivative in cost of products sold in the CondensedConsolidated Statements of Operations.

 

The fair values ofmarketable securities are based on unadjusted quoted market prices from variousfinancial information service providers and securities exchanges. The fairvalues of derivatives are based on quoted market prices from various banks forsimilar instruments.

 

**15.****          COMMITMENTS ANDCONTINGENCIES:**

 

***Legal Proceedings***—The Company isinvolved in various legal proceedings, including commercial, intellectualproperty, product liability and environmental matters of a nature considerednormal to its business. It is the Company’s policy to accrue for amountsrelated to these matters in accordance with SFAS No. 5,*Accounting for Contingencies*, if it isprobable that a liability has been incurred and an amount can be reasonablyestimated. It is the Company’s policy to disclose such matters when there is atleast a reasonable possibility that a material loss may have been incurred.

 

In April 2005,Hospira Incorporated filed suit in Mecklenburg County, North Carolina SuperiorCourt against one of the Company’s wholly-owned subsidiaries in its SpecialtyCompounds segment alleging claims for negligence, negligent misrepresentation,estoppel, fraud, third party beneficiary breach of contract and unfair tradepractices as a result of the subsidiary providing PVC compound to its customer.Hospira is seeking damages of approximately $16.0 million for costs allegedlyrelated to its recall and destruction of intravenous administration kits thatincorporated components made with this compound, and further seeks trebledamages of approximately $48.0 million, plus attorneys’ fees and interest,under the North Carolina unfair trade practice statute. The Court dismissedHospira’s negligence and estoppel claims, but initially denied the subsidiary’smotion to dismiss the other claims. Following discovery, the Company’ssubsidiary filed a motion for summary judgment to dismiss the remaining claimsand, on November 9, 2007, the trial court granted the Company’s motion forsummary judgment and dismissed all of the plaintiff’s claims. The plaintiff hasappealed this decision and the Company cannot predict how this decision willimpact the ultimate resolution of the case; however, the Company will continueto vigorously defend this matter. While the Company believes its subsidiary hasmeritorious defenses against Hospira’s claims and does not believe thatresolution of this matter will have a material adverse effect on its businessor financial condition, the Company cannot predict the ultimate outcome of thislitigation and resolution of this claim may have a material adverse effect onits results of operations or cash flows in any quarterly or annual reportingperiod.

 

In addition, a subsidiaryin the Specialty Chemicals segment that formerly manufactured sealants forinsulating glass and resins for laminated glass prior to and after the sale ofthis business has been named as a defendant in several lawsuits relating toalleged negligent manufacturing of those products. Pursuant to the sale andpurchase agreement with respect to the divested “glass” business, thissubsidiary may be required to pay indemnity claims related to these lawsuits.Although the Company expects its subsidiary to have coverage under its productliability insurance policies should damages ultimately be awarded or agreed to,in such an event, its insurance may not cover such claims and, if not, itssubsidiary may not have sufficient cash flow to pay these claims. Although theCompany does not believe that resolution of these matters will have a materialadverse effect on its business or financial condition, the Company cannotpredict the ultimate outcome of this litigation, and the resolution of one ormore of these claims may have a material adverse effect on its results ofoperations or cash flows in any quarterly or annual reporting period.

 

Although the Companyexpects to continue to pay legal fees in connection with the above matters andother legal actions related to chromated copper arsenate and other productliability matters, based on currently available facts, the Company does notbelieve that these actions will have a material effect on the financialcondition, results of operations or liquidity of the Company.

 

Reserves in connectionwith product liability matters do not individually exceed $3.0 million and inthe aggregate $8.0 million as of June 30, 2008. The Company’s reserveestimates are based on available facts, including damage claims and input fromits internal and external legal counsel, past experience, and, in someinstances where defense costs are being paid by its insurer, known insurancerecoveries. The Company is unable to estimate the amount or range of anypotential incremental charges should facts and circumstances change and may inthe future revise its estimates based on new information becoming available.Further, the Company cannot predict the outcome of any litigation or thepotential for future litigation.

 

***Indemnity Matters***—Under the terms ofthe Business and Share Sale and Purchase Agreement, the Deed of Tax Covenantand the Environmental Deed entered into in connection with the KKR Acquisition,Degussa U.K. Holdings Ltd., as successor to Laporte Plc, is obligated toindemnify the Company for certain legal, tax and environmental liabilities andobligations that relate to the period prior to the closing of the KKRAcquisition. Under the terms of the sale and purchase agreement with mgtechnologies ag (now known as GEA Group Aktiengesellschaft (“GEA Group”)) andits subsidiary MG North America Holdings, Inc. (now known as GEA NorthAmerica Inc. (“GEA North America”)) were obligated to indemnify the Company forcertain legal, tax and environmental liabilities and obligations that relate tothe period prior to the closing, subject to certain limits and exclusions.Pursuant to these agreements, the Company has various claims forindemnification with Evonik Degussa and GEA Group. However, in March 2008,the Company entered into an agreement with GEA Group and GEA North America tosettle all existing and future non tax-related indemnities under the sale andpurchase agreement relating to the Dynamit Nobel Acquisition in considerationof payment to the Company of €18.8 million ($29.1 million), which was receivedon March 28, 2008. These indemnities primarily relate to environmentalmatters.

 

In addition, the Companymay be subject to indemnity claims relating to properties or businesses itdivested. For example, as 

 

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discussed below, theCompany is required to indemnify the buyer of its Electronics business forcertain known and unknown environmental actions which may arise in the futurethat relate to the period prior to the closing. In the opinion of management,and based upon information currently available, the ultimate resolution of anyindemnification obligations owed to the Company or by the Company will not havea material effect on the Company’s financial condition, results of operationsor 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 Management Systems***

 

The Company is committedto achieving and maintaining compliance with all applicable safety, health andenvironmental (“SHE”) legal requirements. 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, 2007, the capital expenditures for SHEmatters totaled $29.6 million, excluding costs to maintain and repair pollutioncontrol equipment. For 2008, the Company estimates capital expenditures forcompliance with SHE laws to be at similar levels; however, because capitalexpenditures for these matters are subject to changes in existing and new SHElaws, the Company cannot provide assurance that its recent expenditures will beindicative of future amounts required to comply with these laws.

 

***Regulatory Developments***

 

In June 2007, theUnited States Department of Homeland Security Agency’s regulation on ChemicalPlant Security became effective. This rule seeks to regulate security atfacilities that store certain listed substances. Twelve of the Company’sfacilities in the United States have provided the information necessary tocomplete the first step known as the Top Screen. After gathering informationduring the Top Screen process, Homeland Security will develop four tiers ofrisk with Tier 1 being the highest risk sites and Tier 4 representing thelowest. For national security reasons, the Department will not publish theranking criteria. The Company believes that following Top Screen, several ofthe Company’s locations may receive a ranking and be asked to undertake thesecond step of the regulation, which is to prepare a Site VulnerabilityAnalysis (which includes identification of critical assets, threat assessments,identification of potential security vulnerabilities and analysis ofcountermeasures to a terrorist attack) and a Site Security Plan (whichdescribes the security measures that will address each identifiedvulnerability). Each Site Vulnerability Analysis and Site Security Planmust be reviewed and approved by the Department of Homeland Security. Althoughsome security improvements may be required at certain of the Company’s facilities,the Company does not expect compliance with this regulation to have a materialimpact on its cash flows or results of operations.

 

On June 1, 2007, theRegistration, Evaluation and Authorization of Chemicals (“REACH”) legislationbecame effective in the EU. REACH requires manufacturers and importers ofcertain chemicals to register those chemicals, perform health and environmentalrisk analyses of those chemicals, and in certain instances, obtainauthorizations for the use of the chemicals. Covered substances must bepre-registered by December 31, 2008. Currently, REACH is expected to beimplemented in three phases over the next eleven years based on known producthazards and/or volume of product in commerce. Under REACH, where warranted by arisk assessment, specified uses of some hazardous substances may be restricted.As a specialty 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. The Companydoes not believe these costs will have a material impact on its financialstatements. In addition, it is possible that REACH may affect raw materialsupply, customer demand for certain products and the Company’s decision tocontinue to manufacture and sell certain products.

 

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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 140countries that have ratified it. The EU, including Germany and other countrieswhere the Company has interests, ratified the Kyoto Protocol in 2002 and, indoing so, have enacted regulations that reduce the emission of greenhouse gasesand have established a trading system covering carbon dioxide emissions, whichbecame effective at the start of 2005. The regulations directly affect theCompany’s power plants at the Duisburg and Langelsheim sites in Germany, aswell as the power plant being operated by a third party on one of the Company’ssites. Rockwood and such third party are required to purchase carbon dioxidecredits, which could result in increased operating costs, and may be requiredto develop additional cost-effective methods to reduce carbon dioxideemissions, which could result in increased capital expenditures. The newregulation indirectly affects the Company’s other operations in the EU, whichmay experience higher energy costs from third party providers. The Companycontinues to evaluate options in order to comply with the Protocol. However,the Company does not expect this to have a material impact on its cash flow orresults of operations.

 

***Remediation Liabilities***

 

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

 

The following tableprovides a list of the Company’s present and former facilities withenvironmental contamination for which we have reserved for at June 30,2008:

 
| **Country**     | ** ** | **Location**                     | ** ** | **(a)** | ** ** | **(b)** | ** ** | **(c)** | ** ** | **(d)** | ** ** | **(e)** |
|-----------------|------------|----------------------------------|------------|---------|------------|---------|------------|---------|------------|---------|------------|---------|
| Brazil          |       | Diadema                          |       |    |       |    |       | X       |       |    |       |    |
| China           |       | Shenzhen                         |       |    |       |    |       | X       |       |    |       |    |
| Germany         |       | Duisburg                         |       | X       |       |    |       |    |       | X       |       |    |
|            |       | Hainhausen                       |       | X       |       |    |       |    |       |    |       |    |
|            |       | Ibbenburen                       |       |    |       |    |       |    |       | X       |       |    |
|            |       | Marktredwitz                     |       |    |       | X       |       |    |       |    |       |    |
|            |       | Plochingen                       |       |    |       | X       |       |    |       |    |       |    |
|            |       | Stadeln                          |       | X       |       |    |       |    |       |    |       |    |
|            |       | Troisdorf                        |       | X       |       |    |       | X       |       |    |       |    |
| Italy           |       | Turin                            |       |    |       |    |       | X       |       |    |       |    |
| The Netherlands |       | Oss                              |       | X       |       |    |       |    |       |    |       |    |
| United Kingdom  |       | Barrow-in  Furness               |       | X       |       |    |       |    |       |    |       |    |
|            |       | Birtley                          |       |    |       |    |       | X       |       |    |       |    |
|            |       | Kidsgrove                        |       |    |       |    |       | X       |       |    |       |    |
| United States   |       | Beltsville, MD                   |       | X       |       |    |       | X       |       |    |       |    |
|            |       | East St. Louis,  IL              |       |    |       |    |       | X       |       |    |       |    |
|            |       | Easton, PA                       |       | X       |       |    |       |    |       |    |       |    |
|            |       | Gonzales, TX                     |       |    |       |    |       |    |       | X       |       |    |
|            |       | Harrisburg, NC                   |       | X       |       |    |       | X       |       |    |       |    |
|            |       | La Mirada, CA                    |       |    |       |    |       | X       |       |    |       |    |
|            |       | Laurens, SC                      |       |    |       | X       |       |    |       |    |       |    |
|            |       | Middletown, NY  (formerly owned) |       |    |       |    |       | X       |       |    |       | X       |
|            |       | New  Johnsonville, TN            |       |    |       | X       |       |    |       |    |       |    |
|            |       | Silver Peak, NV                  |       | X       |       |    |       |    |       | X       |       |    |
|            |       | Sunbright, VA  (facility closed) |       | X       |       |    |       |    |       |    |       | X       |
|            |       | Valdosta, GA                     |       | X       |       |    |       |    |       |    |       |    |

 

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(a)     The Company is currentlyoperating groundwater monitoring and/or remediation systems at these locations.

 

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(b)     The Company is currentlyoperating groundwater monitoring and/or remediation systems at these locationsfor which prior owners or insurers have assumed responsibility.

 

(c)     The Company is currentlyconducting investigations into additional possible soil and/or groundwatercontamination at these locations.

 

(d)     The Company has landrestoration obligations relating to landfill activities or surface mining atthese locations.

 

(e)     The Company is responsiblefor liabilities related to environmental matters at these closed facilities.

 

The Company is alsoresponsible for environmental matters at some of its former off-site disposallocations owned by third parties. These sites are considered Superfund sites asdefined by the EPA or state regulatory authority. The Company is a potentiallyresponsible party or*de minimis*participant at the following Superfund locations: Casmalia, CA; Laurel, MD;Niagara Falls, NY; South Gate, CA; and Whittier, CA and has reserves for thesematters totaling $0.2 million at June 30, 2008.

 

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 or its predecessor’s former and presentproperties and/or at sites where 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 December 31,2008. The Company will be required to make capital expenditures of up to $3.0million in connection with this matter.

 

***Environmental Indemnity Obligations***

 

Pursuant to the sharepurchase agreement entered into in connection with the sale of the GroupeNovasep segment, the Company agreed to indemnify the buyers for certain knownand unknown environmental actions which may arise in the future related toperiods prior to closing of the sale. These obligations expire three yearsafter the closing; however, the Company’s liability for such obligations wasreduced from 90% of any qualifying environmental liability claim to 70% of suchclaims 15 months after the closing. In addition, the Company is required toindemnify the purchaser of the Company’s U.S. wafer reclaim business for sixyears for any unknown environmental actions attributable to the conduct of suchbusiness prior to the closing of the transaction in February 2007. Thebusiness purchase agreement provides that the Company must indemnify the buyerfor 100% of claims related to contamination of the business’ site or themigration of any hazardous substances from such site if notice of any suchclaim is given within four years of the closing of the transaction and 50% ofsuch claims if notice is given after the fourth but before the sixthanniversary of the closing.

 

Likewise, pursuant to thestock purchase agreement entered into in connection with the sale of theElectronics business, the Company agreed to indemnify the buyer for certainknown and unknown environmental actions which may arise in the future relatedto periods prior to the closing of the sale. The obligation to indemnify thebuyer for environmental liabilities arising at the former Electronics business’sites expires five years after the closing, while the obligation to indemnifyfor off-site matters survives for a period of seven years following theclosing. The Company also agreed to indemnify the buyer for any environmentalactions at sites formerly owned or operated by the business resulting from thebusiness’ prior activities.

 

***Environmental Indemnities***

 

Pursuant to theenvironmental deed entered into in connection with the KKR Acquisition, EvonikDegussa, as successor to Laporte, is required to indemnify the Company and itssubsidiaries for certain environmental matters that relate to the business asconducted prior to the closing of the KKR Acquisition. The environmental deedprovides that Evonik Degussa will indemnify the Company and its subsidiariesfor claims relating to properties that were formerly owned, occupied or used asof November 20, 2000, as well as properties owned by third parties(inclusive of disposal of waste and certain other identified issues prior to November 20,2000). The environmental deed provides that in this instance, Evonik Degussawill be responsible for reasonable costs and expenses incurred.

 

In addition, pursuant tothe sale and purchase agreement entered into in connection with the DynamitNobel Acquisition in April 2004, GEA Group and its subsidiary, GEA NorthAmerica, were required to indemnify the Company and its subsidiaries for 50% ofthe excess amount of losses over the amount of the related reserves (in thecase of known claims) and 50% of claims (in the case of unknown claims) relatedto the contamination of the Company or its subsidiaries’ properties and certainenvironmental damage claims unknown at closing, if notified within ten yearsfrom closing (which occurred on July 31, 2004). GEA Group and GEA NorthAmerica 

 

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were also obligated toindemnify the Company for 85% of claims related to legacy site matters, ifnotified within ten years from closing, and for 50% of the excess amount oflosses over the amount of the related reserves for operational compliancematters for which the Company provided notice by December 31, 2006. However,as discussed above, the Company entered into an agreement with GEA Group andGEA North America in March 2008 to settle all environmental indemnitiesunder the sale and purchase agreement.

 

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 Evonik Degussa or any other party who mayhave obligations to indemnify the Company will adhere to their obligations andthe Company may have to resort to legal action to enforce its rights under theindemnities. In cases where the Company’s indemnification claims to third partiesare uncontested, the Company expects to realize recoveries within the shortterm. In addition, the Company may be required to make indemnity payments inconnection with certain environmental matters. However, the Company does notbelieve that resolution of the known environmental matters subject toindemnification obligations owed to the Company will have a material adverseeffect on its business or financial condition, but may have a material adverseeffect on the Company’s results of operations or cash flow in any quarterly orannual 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 remediationcosts, the Company records a reserve for the estimated cost of the remediation,even though the costs of the remediation will likely be spread out over manyyears. 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 $42.9 million and $40.7 million forknown environmental liabilities as of June 30, 2008 and December 31,2007, respectively, all of which were classified as other non-currentliabilities in the Consolidated Balance Sheets. The environmental liabilitiesassumed are subject to change upon the finalization of purchase accounting.Included in the $42.9 million as of June 30, 2008 is $22.8 million that isdiscounted using discount rates ranging from 5.0% to 7.5%, with theundiscounted amount of these reserves equaling $32.9 million. Included in the$40.7 million as of December 31, 2007 is $15.8 million that is discountedusing discount rates ranging from 5.0% to 7.0%, with the undiscounted amount ofthese reserves equaling $22.5 million. In certain cases, the Company’sremediation liabilities are payable over periods of up to 30 years. The Companyestimates that the potential range for such environmental matters as of June30, 2008 is from $42.9 million to $63.8 million. For the six months ended June 30,2008, the Company recorded charges of $2.3 million to increase its environmentalliabilities and made payments of $1.4 million for clean-up and remediationcosts, which reduced its environmental liabilities. For the six months ended June 30,2008, the recurring cost of managing hazardous substances for ongoingoperations is $27.7 million. At a number of the sites described above, theextent of contamination has not yet been fully investigated or the final scopeof remediation 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 facilities’ remaining lives are indefinite. Giventhe indeterminate useful life of these facilities and the correspondingindeterminate settlement date of any soil remediation obligations, the Companydoes not have sufficient information to estimate a range of potential settlementdates for its obligations. Consequently, the Company cannot employ a presentvalue technique to estimate fair value and, accordingly, has not accrued forany environmental related costs to remediate soil at these facilities.

 

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

 

**16.****          SUBSEQUENT EVENTS:**

 

On July 21, 2008,the Company announced that it entered into an agreement with Yule Catto &Co. plc to purchase Holliday Pigments, the leading global manufacturer oftechnical grade ultramarine blue and manganese violet pigments. The purchaseprice is approximately €46.0 million. Holliday Pigments manufactures inorganicultramarine pigments for a wide range of applications, 

 

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including plastics,cosmetics, coatings and inks. Holliday Pigments will be incorporated into theColor Pigments and Services business, which is part of the PerformanceAdditives segment. This transaction is subject to regulatory approval and isexpected to close in the third quarter of 2008.

 

On July 25, 2008,the Company announced that it entered into an agreement with Nalco Holdings, Inc.(“Nalco”) to acquire Nalco’s Finishing Technologies business. The purchaseprice is approximately $75.0 million. Nalco’s Finishing Technologies businessprovides chemicals and services for pre-treating of metal and will become partof the Chemetall Americas surface treatment business which is part of theSpecialty Chemicals segment. In addition, Nalco’s Finishing Technologies plantin Jackson, Michigan is included in the transaction. The transaction is subjectto regulatory approval and is expected to close in the third quarter of 2008.

 

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

 

*In2007, we completed the sale of our Groupe Novasep and Electronics segments,excluding our European wafer reclaim business. As a result, our condensedconsolidated financial statements have been reclassified to reflect thesesegments as discontinued operations. See Note 2, “Discontinued Operations,” forfurther details. The European wafer reclaim business retained has been reportedin the “Corporate and other” category for segment reporting purposes for allperiods presented.*

 

*Thefollowing discussion contains forward-looking statements that involve numerousrisks and uncertainties. Our actual results could differ materially from thosediscussed in the forward-looking statements as a result of these risks anduncertainties, including those set forth in “Forward-Looking Statements” at theend of this Management Discussion and Analysis section and the risk factorssection of the Company’s 2007 Form 10-K. You should read the followingdiscussion and analysis together with our condensed consolidated financialstatements and the notes to those statements that appear elsewhere in thisQuarterly Report. Amounts may not recalculate due to rounding differences.*

 

*Unless otherwise noted, allamounts which are denominated in currencies other than the U.S. dollar areconverted at the June 30,2008 exchange rate of €1.00 = $1.5755.*

 

**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 five business segments: (1) Specialty Chemicals; (2) PerformanceAdditives; (3) Titanium Dioxide Pigments; (4) Advanced Ceramics; and (5) SpecialtyCompounds.

 

Our net sales consist ofsales of our products, net of sales discounts, product returns and allowances.In addition, net sales include shipping and handling costs billed to customers.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, bolt-on acquisitions,divestment of non-core businesses and debt reduction. In connection with thisfocus, among other things:

 

·    Wehave cut costs, reduced overhead and eliminated duplicative positions in bothacquired and existing businesses. In 2007, we closed two U.K. facilitiesacquired in an October 2006 acquisition by our Specialty Compoundssegment. We also implemented other restructuring measures in our othersegments, including the closure of our Baulking, U.K. facility in ourClay-based Additives business;

 

·    Weacquired the global color pigments business of Elementis plc in August 2007which is being integrated into our Color Pigments and Service business withinour Performance Additives segment;

 

·    Wecompleted the sale of our Groupe Novasep segment in January 2007 and ourUnited States wafer reclaim business in February 2007. In December 2007,we completed the sale of our Electronics business, excluding our European waferreclaim business; and

 

·    InMarch 2008, we implemented a restructuring plan in our Color Pigments andServices business in connection with the business acquired from Elementis plcwhich includes the reorganization and relocation of its North American Financeand IT 

 

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services and the closureof three manufacturing facilities by the end of 2008.

 

**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***

 

·    Demandfor Surface Treatment products in our Specialty Chemicals segment generallyfollows the activity levels of metal processing manufacturers, including theautomotive supply, steel and aerospace industries. Sales growth in the SurfaceTreatment business occurred in 2007 and has continued in the first six monthsof 2008 in all markets and regions served, especially in the Europeanautomotive, general industrial and aerospace industries, as price and volumeincreases and the impact of a bolt-on acquisition made in December 2007more than offset raw material cost increases. We expect the Surface Treatmentbusiness to continue to grow in the remainder of 2008.

 

·    Demandfor our lithium products in the Fine Chemicals business line of our SpecialtyChemicals segment is generally driven by demand for lithium carbonate inindustrial applications, the aluminum business, glass ceramics, cement and thegeneral demand in China. Sales of lithium products specifically used in lifescience applications depend on the trends in drug development and growth in pharmaceuticalsmarkets as well as generic competition. Growth in the Fine Chemicalsbusiness occurred in 2007 and has continued in the first six months of 2008 inmost market segments, driven by higher sales volumes of lithium specialties andprice increases for lithium products, partially offset by lower demand forlithium carbonate. Growth in the Fine Chemicals business is expected tocontinue in most lithium applications for the remainder of 2008.

 

***Performance Additives***

 

·    Generally,a trend towards the increased use of colored concrete products in the NorthAmerican construction market has historically had a positive effect on ourColor Pigments and Services business line. However, a general slowdown inthe construction market negatively impacted North American construction salesin 2007. As a result of this continued slowdown, North American volumeswere lower in the first six months of 2008 and are expected to continue todecline throughout the year. However, sales in our Color Pigments and Servicesbusiness in North America were favorably impacted in the first six months of2008 by higher selling prices implemented to help recover raw material andenergy cost increases and the acquisition of the global color pigments businessof Elementis plc made in August 2007. We expect this trend to continue for the remainder of 2008.  Unlike North America, construction volumes inEurope in our Color Pigments and Services business increased slightly in 2007.However, weaker economic conditions in Europe have resulted in a reduction inEuropean construction volumes in the first six months of 2008 and we expectthis trend to continue throughout the remainder of 2008.

 

·    Thechange in the market to environmentally advanced wood treatment chemicalproducts, such as alkaline copper quaternary, or ACQ, and the phase out ofchromated copper arsenate, or CCA, for residential use previously had apositive impact on the Timber Treatment Chemicals business, which is a leadingsupplier of these higher margin products. However, the market position of ACQwas negatively impacted in 2007 and the first six months of 2008 by customerlosses, a general slowdown in the construction market and the increasing use ofwood substitutes. The expiration of the ACQ patent in May 2007 had anegative impact on our results of operations, as one new competitor has enteredthe market and others may follow. Although we commercialized the nextgeneration non-metallic timber treatment preservatives system (*Ecolife*) in the third quarter of 2007through our joint venture with Rohm and Haas, we do not expect this to have asignificant impact in 2008.

 

·    Inthe Clay-based Additives business, sales were up slightly in 2007 and continuedto increase in the first six months of 2008 as higher oilfield volumes andincreased selling prices for coatings and inks were partially offset by lowercarbonless applications. We expect sales growth to continue for the remainderof 2008 in oilfield applications.

 

·    Rawmaterial costs have increased in general in the Performance Additives segmentand continue to trend upward. In the Color Pigments and Services and Clay-basedAdditives businesses, selling price increases helped offset the increases inraw material and energy costs, specifically iron oxide for Color Pigments andServices and quaternary amine (“quat”) for Clay-basedAdditives. Continuing unfavorable foreign exchange rates are also expectedto result in substantial cost increases in Chinese manufactured raw materialsused in our Color Pigments and Services business. The Timber TreatmentChemicals business continues to experience high costs for copper, a primary componentin ACQ.  In addition, costs were higherfor monoethanolamine (“MEA”).  Sellingprice increases were implemented in 2007 and were essentially maintained in thefirst six months of 2008 to partially offset higher copper and MEA costs. Ourability to pass on additional selling price increases throughout 2008 isuncertain in these businesses.

 

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***Titanium Dioxide Pigments***

 

·    Demandfor our titanium dioxide products in anatase grade is driven mainly by demandin the synthetic fiber industry, while demand for titanium dioxide products inrutile grade and our functional additives is driven by demand in the coatings,paper and plastics industries. Volumes and selling prices in the fiberanatase business decreased in 2007 and continued to decline in the first sixmonths of 2008. We expect this trend to continue for the remainder of 2008.While sales of titanium dioxide products in rutile grade were up slightly in2007 on increased volumes, sales of these products were down in the first sixmonths of 2008 due to lower volumes and selling prices and are expected to belower for the remainder of 2008. Our functional additives business increased in2007 on higher selling prices and volumes, but was flat in the first six monthsof 2008 as higher selling prices were offset by lower volumes. We expect salesin the functional additives business to be up in 2008 as compared to 2007.

 

·    As discussed in Note 1, “Descriptionof Business and Summary of Significant Accounting Policies,” to the CondensedConsolidated Financial Statements, we entered into a definitive agreement withKemira Oyj (“Kemira”) on May 21, 2008 to form a joint venture that willfocus on specialty titanium dioxide pigments. The joint venture will focus onproducing and marketing specialty titanium dioxide pigments for the syntheticfiber, packaging inks, cosmetics, pharmaceutical and food industries.

 

***Advanced Ceramics***

 

·    Demandfor our ceramic medical devices is mainly tied to the aging population inEurope and the United States. Although the volume of our products used inmedical device applications sold experienced double-digit growth each year from2001 through 2005, in 2006 some customers in the U.S. reduced their demand dueto high inventory levels and delayed approvals resulting in lower volumes.However, sales of our medical device applications increased in 2007 on highervolumes and continued to increase in the first six months of 2008. We expectthis trend to continue throughout 2008.

 

·    Despitethe negative impact of pricing pressure from Asian competitors, sales ofceramic products for use in cutting tool products were higher in 2007 and inthe first six months of 2008 due to volume increases and new customer projects.This growth is expected to continue for the remainder of 2008. Sales ofmechanical systems and applications were up in 2007, but were lower in thefirst six months of 2008 on decreased volumes and are expected to continue tobe down throughout 2008. Sales in our electronic products business were lowerin 2007 primarily on decreased volumes and continued to decrease in the firstsix months of 2008 on lower selling prices and volumes. We expect this trend tocontinue throughout this year. Sales of our multi-functional applications werehigher in 2007 from increased volumes, but were down in the first six months of2008 from lower selling prices and are expected to be down for the remainder of2008 on lower volumes.

 

***Specialty Compounds***

 

·    Ourlargest product line in the Specialty Compounds segment is wire and cablecompounds. Sales within this product line are dependent upon thetelecommunications market and related sectors, specifically demand for high-endvoice and data communication wire and cable, for which our Specialty Compoundssegment is a significant provider of sheathing materials. Newly developednon-halogen products for wire and cable data communication, military and otherapplications have expanded business in North America for those applications andcreated opportunities in Europe. Although sales of wire and cable products wereup slightly in 2007, sales growth was due to the acquisition of the Megolondivision of Scapa Group, plc., while the wire and cable business was negativelyimpacted by a general downturn in the wire and cable market. Despite continuedweakness in the wire and cable market and relatively flat sales in the firstsix months of 2008, sales of wire and cable products are expected to be upslightly for the remainder of 2008.

 

·    Mostof the other end-use markets for which Specialty Compounds’ products are usedgenerally track growth of gross domestic product, but many are alsoapplication specific, such as automotive. We are focusing more of our effortstowards increasing high margin specialty products, in particular, thermoplasticelastomers, and less of our efforts in automotive and footwear. Our net salesin consumer/industrial thermoplastic elastomers were up in 2007 and in thefirst six months of 2008. We expect this trend to continue throughout 2008. Netsales of regulated packaging were lower in 2007 and the first six months of2008 and are expected to continue to decline for the remainder of 2008.

 

·    Rawmaterial prices for ammonium octamolybdate and polyvinyl chloride (“PVC”) resinand plasticizers, key raw materials used in the production of wire and cableproducts, were slightly lower in 2007, but were up in the first six months of2008 and are expected to be higher throughout the remainder of 2008.

 

**GlobalExposure**

 

We operate a geographicallydiverse business. Of our 2007 net sales, 52% were shipments to Europe, 31% toNorth America (predominantly the United States) and 17% to the rest of theworld. For a geographic description of the origin of our net sales and locationof our long-lived assets, see Note 4, “Segment Information” in our 2007 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 91 manufacturing facilities in 25countries. Consequently, we are exposed to global economic and politicalchanges, particularly currency fluctuations that could impact our profitabilityand demand for our products.

 

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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 and six months ended June 30, 2008, the average exchange rate ofthe euro against the U.S. dollar was higher compared to the same period in2007. As a result, our net sales, gross profit and operating income werepositively impacted. Historically, however, our operating margins have not beensignificantly impacted by currency fluctuations because, in general, sales andcosts of products sold are generated or incurred in the same currency, subjectto certain exceptions.

 

**RawMaterials**

 

Raw materials constitutedapproximately 54% of our 2007 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 2007. 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. We cannotaccurately predict the impact of any future price increases for raw materialsor any raw material shortages on our business as a whole or in specific geographicregions. In addition, we may not be able to pass on raw material priceincreases to our customers. See details of our ten most significant rawmaterials (in terms of dollars) in 2007 in Item 1, “Business — Raw Materials”in our 2007 Form 10-K.

 

**EnergyCosts**

 

In 2007, 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 in North America were relatively stablein 2007, but were higher during the first six months of 2008. Natural gasprices in Europe, where our Titanium Dioxide Pigments segment is located, havehistorically been relatively stable, although prices were higher in 2007 and inthe first six months of 2008.

 

**IncomeTaxes**

 

The effective tax ratefor the second quarter of 2008 was 21.3%. This rate was favorably impacted bydomestic income, including gains on mark-to-market swaps, which was not taxeffected due to the Company’s valuation allowance position, favorable Europeanrate changes and geographic earnings mix. In the second quarter of 2008, theworldwide valuation allowance decreased by $11.2 million. The decrease in thevaluation allowance was primarily due to a decrease of $8.2 million in deferredtax assets associated with the Company’s domestic earnings, a decrease of $1.1million in other comprehensive income and a decrease of $1.9 million due to theoffset of net operating losses against uncertain tax benefit liabilities. Ofthe $11.2 million decrease in the valuation allowance for the second quarter of2008, $8.2 million impacted the tax provision.

 

**Acquisitions**

 

During the periodspresented, we made acquisitions pursuant to our business strategy of achievingprofitable growth. See Note 4, “Acquisitions,” for further details.  In addition, see Note 16, “Subsequent Events,”for a discussion of the agreements entered into in July 2008 to purchaseHolliday Pigments and Nalco’s Finishing Technologies business.

 

**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 charges. See “Itemsexcluded from Adjusted EBITDA” section in Note 3, “Segment Information,” for adiscussion of special charges and credits recorded in the three and six monthsended June 30, 2008 and 2007.

 

**SpecialNote Regarding Non-GAAP Financial Measures**

 

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

 

**Definitionof Adjusted EBITDA**

 

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

 

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excluding extraordinaryitems) 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);

·    expenses paid by us or any of our subsidiaries inconnection with the Dynamit Nobel Acquisition, the senior secured creditagreement, the granting of liens under the security documents (as such term is definedin the senior secured credit agreement), the indenture governing the 2014 Notesand the offering of the 2014 Notes 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

·    itemsarising in connection with CCA litigation related to our Timber TreatmentChemicals business of our Performance Additives segment;

 

less:

 

·    extraordinarygains and non-recurring gains;

·    non-cashgains; and

·    gains on asset sales,

 

in all cases, subject tocertain exclusions.

 

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

 

**Management’sUses**

 

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

 

We also use AdjustedEBITDA on a consolidated basis as a liquidity measure. We believe thisfinancial measure on a consolidated basis is important in analyzing our liquiditybecause our senior secured credit agreement and indenture governing the 2014Notes contain financial covenants that are determined based on Adjusted EBITDA.These covenants are material terms of these agreements, because they governsubstantially all of our long-term debt, which in turn represents a substantialportion of our capitalization. Non-compliance with these financial covenantsunder our senior secured credit facilities—our maximum total leverage ratio andour minimum interest coverage ratio, in particular—could result in the lendersrequiring us to immediately repay all amounts borrowed. Any such accelerationcould also lead to the noteholders accelerating the maturity of the 2014 Notes.In addition, if we cannot satisfy these financial covenants in the indenturegoverning the 2014 Notes, we cannot engage in certain activities, such asincurring additional indebtedness or making certain payments. Consequently,Adjusted EBITDA is critical to our assessment of our liquidity.

 

We also use AdjustedEBITDA on a segment basis as the primary measure used by our chief operatingdecision maker, our Chief 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 a consolidatedbasis pursuant to the senior secured credit agreement, which reflectsmanagement’s interpretations thereof.

 

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**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 measure ascompared to the most directly comparable U.S. GAAP financial measures, include:

 

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

 

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

 

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

 

An investor or potentialinvestor may find any one or all of these items important in evaluating ourperformance, results of operations, financial position and liquidity.Management compensates for the limitations of using non-GAAP financial measuresby using them only to supplement our U.S. GAAP results to provide a 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 U.S. GAAP financial measures and other financialinformation, in each case included elsewhere in this Annual Report. We alsostrongly urge you not to rely on any single financial measure to evaluate ourbusiness. Our measure of Adjusted EBITDA may not be comparable to those ofother 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, 2008and 2007), including as a percentage of net sales, for the periods presented.See Note 3, “Segment Information,” for segment information and a reconciliationto income from continuing operations before taxes and minority interest toAdjusted EBITDA on a segment basis.

 

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| ** **                                                                | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|---------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| **($ in millions)**                                             | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Statement  of operations data:**                                        |       |                             |       |                           |       |   |   |   |   |
| **Net  sales:**                                                           |       |                             |       |                           |       |   |   |   |   |
| Specialty  Chemicals                                                      |       | $                                | 335.5      |                           | $          | 270.9 |   | $ | 647.2 |   | $ | 538.8 |   |
| Performance  Additives                                                    |       | 254.7                            |       | 216.2                          |       | 466.3 |   | 401.0 |   |
| Titanium Dioxide  Pigments                                                |       | 134.2                            |       | 123.3                          |       | 260.0 |   | 239.4 |   |
| Advanced  Ceramics                                                        |       | 145.3                            |       | 118.6                          |       | 278.5 |   | 224.1 |   |
| Specialty  Compounds                                                      |       | 73.2                             |       | 70.8                           |       | 142.2 |   | 140.4 |   |
| Corporate and  other                                                      |       | 2.6                              |       | 2.9                            |       | 5.3 |   | 6.7 |   |
| Total net sales                                                           |       | 945.5                            |       | 802.7                          |       | 1,799.5 |   | 1,550.4 |   |
|                                                                      |       |                             |       |                           |       |   |   |   |   |
| Gross profit                                                              |       | 289.5                            |       | 260.6                          |       | 564.4 |   | 504.7 |   |
|                                                                      |       | 30.6                             | %          | 32.5                           | %          | 31.4 | % | 32.6 | % |
| Selling, general  and administrative expenses                             |       | 179.1                            |       | 152.6                          |       | 349.2 |   | 299.8 |   |
|                                                                      |       | 18.9                             | %          | 19.0                           | %          | 19.4 | % | 19.3 | % |
| Restructuring  charges, net                                               |       | 1.5                              |       | 2.0                            |       | 2.3 |   | 6.0 |   |
| Loss (gain) on  sale of assets and other                                  |       | 0.8                              |       | (0.4                           | )          | 0.9 |   | (5.2 | ) |
| **Operating  income (loss):**                                             |       |                             |       |                           |       |   |   |   |   |
| Specialty  Chemicals                                                      |       | 64.3                             |       | 52.7                           |       | 127.9 |   | 108.3 |   |
|                                                                      |       | 19.2                             | %          | 19.5                           | %          | 19.8 | % | 20.1 | % |
| Performance  Additives                                                    |       | 19.6                             |       | 32.1                           |       | 32.9 |   | 51.4 |   |
|                                                                      |       | 7.7                              | %          | 14.8                           | %          | 7.1 | % | 12.8 | % |
| Titanium Dioxide  Pigments                                                |       | 1.2                              |       | 9.8                            |       | 12.2 |   | 21.9 |   |
|                                                                      |       | 0.9                              | %          | 7.9                            | %          | 4.7 | % | 9.1 | % |
| Advanced  Ceramics                                                        |       | 32.6                             |       | 21.5                           |       | 58.9 |   | 40.4 |   |
|                                                                      |       | 22.4                             | %          | 18.1                           | %          | 21.1 | % | 18.0 | % |
| Specialty  Compounds                                                      |       | 6.9                              |       | 6.5                            |       | 12.6 |   | 11.6 |   |
|                                                                      |       | 9.4                              | %          | 9.2                            | %          | 8.9 | % | 8.3 | % |
| Corporate and  other                                                      |       | (16.5                            | )          | (16.2                          | )          | (32.5 | ) | (29.5 | ) |
| Total operating  income                                                   |       | 108.1                            |       | 106.4                          |       | 212.0 |   | 204.1 |   |
| **Other  income (expenses):**                                             |       |                             |       |                           |       |   |   |   |   |
| Interest expense                                                          |       | (9.7                             | )          | (47.0                          | )          | (83.4 | ) | (101.7 | ) |
| Interest income                                                           |       | 1.4                              |       | 3.6                            |       | 3.6 |   | 8.4 |   |
| Loss on early  extinguishment of debt                                     |       | —                           |       | (19.1                          | )          | — |   | (19.1 | ) |
| Refinancing  expenses                                                     |       | —                           |       | —                         |       | — |   | (0.9 | ) |
| Foreign exchange  (loss) gain, net                                        |       | (0.8                             | )          | 3.4                            |       | 14.3 |   | 3.5 |   |
| Other, net                                                                |       | 0.1                              |       | 0.1                            |       | 0.5 |   | — |   |
| **Income  from continuing operations before taxes and minority interest** |       | 99.1                             |       | 47.4                           |       | 147.0 |   | 94.3 |   |
| Income tax  provision                                                     |       | 21.1                             |       | 20.9                           |       | 40.7 |   | 41.7 |   |
| Income from  continuing operations before minority interest               |       | 78.0                             |       | 26.5                           |       | 106.3 |   | 52.6 |   |
| Minority  interest in continuing operations, net of tax                   |       | —                           |       | (2.3                           | )          | (0.6 | ) | (3.4 | ) |
| Net income from  continuing operations                                    |       | 78.0                             |       | 24.2                           |       | 105.7 |   | 49.2 |   |
| Income from  discontinued operations, net of tax                          |       | —                           |       | 3.8                            |       | — |   | 8.5 |   |
| Gain on sale of  discontinued operations, net of tax                      |       | —                           |       | —                         |       | — |   | 115.7 |   |
| Minority  interest in discontinued operations, net of tax                 |       | —                           |       | —                         |       | — |   | (0.1 | ) |
| Net income                                                                |       | $                                | 78.0       |                           | $          | 28.0 |   | $ | 105.7 |   | $ | 173.3 |   |
| **Adjusted  EBITDA:**                                                     |       |                             |       |                           |       |   |   |   |   |
| Specialty  Chemicals                                                      |       | $                                | 82.1       |                           | $          | 66.3 |   | $ | 162.6 |   | $ | 134.6 |   |
|                                                                      |       | 24.5                             | %          | 24.5                           | %          | 25.1 | % | 25.0 | % |
| Performance  Additives                                                    |       | 39.1                             |       | 45.5                           |       | 70.3 |   | 78.1 |   |
|                                                                      |       | 15.4                             | %          | 21.0                           | %          | 15.1 | % | 19.5 | % |
| Titanium Dioxide  Pigments                                                |       | 15.4                             |       | 21.0                           |       | 39.3 |   | 43.4 |   |
|                                                                      |       | 11.5                             | %          | 17.0                           | %          | 15.1 | % | 18.1 | % |
| Advanced  Ceramics                                                        |       | 44.9                             |       | 32.7                           |       | 83.4 |   | 61.5 |   |
|                                                                      |       | 30.9                             | %          | 27.6                           | %          | 29.9 | % | 27.4 | % |
| Specialty  Compounds                                                      |       | 10.1                             |       | 9.5                            |       | 18.8 |   | 17.6 |   |
|                                                                      |       | 13.8                             | %          | 13.4                           | %          | 13.2 | % | 12.5 | % |
| Corporate and  other                                                      |       | (13.3                            | )          | (14.5                          | )          | (27.7 | ) | (27.7 | ) |
| Total Adjusted  EBITDA (a)                                                |       | $                                | 178.3      |                           | $          | 160.5 |   | $ | 346.7 |   | $ | 307.5 |   |

 

----

(a)               This amount doesnot include $8.5 million and $17.7 million of Adjusted EBITDA for the three andsix months ended June 30, 2007, respectively, from the Electronicsbusiness sold on December 31, 2007 and $1.8 million of Adjusted EBITDA forthe six months ended June 30, 2007 from the former Groupe Novasep segmentsold on January 9, 2007.

 

33

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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, 2008 versus 2007** | ** ** | **Change: Six months ended June 30, 2008 versus 2007** | ** ** |
|---------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------|------------|
| ** **                                                                | ** ** | ** **                                                                                       | ** ** | ** **                                                                                     | ** ** | **Constant** | ** ** | **Constant** | ** ** | ** ** | ** ** | ** ** | ** ** | **Constant** | ** ** | **Constant** | ** ** |
| ** **                                                                | ** ** | ** **                                                                                       | ** ** | **%**                                                                                          | ** ** | **Currency** | ** ** | **Currency** | ** ** | ** ** | ** ** | **%** | ** ** | **Currency** | ** ** | **Currency** | ** ** |
| **($ in millions)**                                             | ** ** | **Total**                                                                                        | ** ** | **Change**                                                                                     | ** ** | **Effect (a)** | ** ** | **Basis** | ** ** | **Total** | ** ** | **Change** | ** ** | **Effect (a)** | ** ** | **Basis** | ** ** |
| **Statement  of operations data:**                                        |       |                                                                                             |       |                                                                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Net  sales:**                                                           |       |                                                                                             |       |                                                                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Specialty  Chemicals                                                      |       | $                                                                                                | 64.6       |                                                                                           | 23.8       | % | $ | 31.3 |   | $ | 33.3 |   | $ | 108.4 |   | 20.1 | % | $ | 59.0 |   | $ | 49.4 |   |
| Performance  Additives                                                    |       | 38.5                                                                                             |       | 17.8                                                                                           |       | 5.5 |   | 33.0 |   | 65.3 |   | 16.3 |   | 10.2 |   | 55.1 |   |
| Titanium Dioxide  Pigments                                                |       | 10.9                                                                                             |       | 8.8                                                                                            |       | 18.5 |   | (7.6 | ) | 20.6 |   | 8.6 |   | 34.3 |   | (13.7 | ) |
| Advanced  Ceramics                                                        |       | 26.7                                                                                             |       | 22.5                                                                                           |       | 18.6 |   | 8.1 |   | 54.4 |   | 24.3 |   | 34.2 |   | 20.2 |   |
| Specialty  Compounds                                                      |       | 2.4                                                                                              |       | 3.4                                                                                            |       | 0.9 |   | 1.5 |   | 1.8 |   | 1.3 |   | 2.3 |   | (0.5 | ) |
| Corporate and other                                                       |       | (0.3                                                                                             | )          | (10.3                                                                                          | )          | 0.4 |   | (0.7 | ) | (1.4 | ) | (20.9 | ) | 0.7 |   | (2.1 | ) |
| Total net sales                                                           |       | 142.8                                                                                            |       | 17.8                                                                                           |       | 75.2 |   | 67.6 |   | 249.1 |   | 16.1 |   | 140.7 |   | 108.4 |   |
|                                                                      |       |                                                                                             |       |                                                                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Gross profit                                                              |       | 28.9                                                                                             |       | 11.1                                                                                           |       | 25.4 |   | 3.5 |   | 59.7 |   | 11.8 |   | 48.1 |   | 11.6 |   |
|                                                                      |       |                                                                                             |       |                                                                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Selling, general  and administrative expenses                             |       | 26.5                                                                                             |       | 17.4                                                                                           |       | 15.8 |   | 10.7 |   | 49.4 |   | 16.5 |   | 29.2 |   | 20.2 |   |
| Restructuring  charges                                                    |       | (0.5                                                                                             | )          |                                                                                           |       |   |   | (0.5 | ) | (3.7 | ) |   |   |   |   | (3.7 | ) |
| Loss (gain) on  sale of assets and other                                  |       | 1.2                                                                                              |       |                                                                                           |       |   |   | 1.2 |   | 6.1 |   |   |   |   |   | 6.1 |   |
| Total operating  expenses                                                 |       | 27.2                                                                                             |       | 17.6                                                                                           |       | 15.8 |   | 11.4 |   | 51.8 |   | 17.2 |   | 29.2 |   | 22.6 |   |
| **Operating  income (loss):**                                             |       |                                                                                             |       |                                                                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Specialty  Chemicals                                                      |       | 11.6                                                                                             |       | 22.0                                                                                           |       | 4.9 |   | 6.7 |   | 19.6 |   | 18.1 |   | 9.5 |   | 10.1 |   |
| Performance  Additives                                                    |       | (12.5                                                                                            | )          | (38.9                                                                                          | )          | 0.5 |   | (13.0 | ) | (18.5 | ) | (36.0 | ) | 0.5 |   | (19.0 | ) |
| Titanium Dioxide  Pigments                                                |       | (8.6                                                                                             | )          | (87.8                                                                                          | )          | 0.1 |   | (8.7 | ) | (9.7 | ) | (44.3 | ) | 1.5 |   | (11.2 | ) |
| Advanced  Ceramics                                                        |       | 11.1                                                                                             |       | 51.6                                                                                           |       | 4.6 |   | 6.5 |   | 18.5 |   | 45.8 |   | 8.1 |   | 10.4 |   |
| Specialty  Compounds                                                      |       | 0.4                                                                                              |       | 6.2                                                                                            |       | 0.1 |   | 0.3 |   | 1.0 |   | 8.6 |   | 0.2 |   | 0.8 |   |
| Corporate and  other                                                      |       | (0.3                                                                                             | )          | (1.9                                                                                           | )          | (0.6 | ) | 0.3 |   | (3.0 | ) | (10.2 | ) | (0.9 | ) | (2.1 | ) |
| Total                                                                     |       | 1.7                                                                                              |       | 1.6                                                                                            |       | 9.6 |   | (7.9 | ) | 7.9 |   | 3.9 |   | 18.9 |   | (11.0 | ) |
| **Other  income (expenses):**                                             |       |                                                                                             |       |                                                                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest expense                                                          |       | 37.3                                                                                             |       | (79.4                                                                                          | )          | 1.3 |   | 36.0 |   | 18.3 |   | (18.0 | ) | 0.9 |   | 17.4 |   |
| Interest income                                                           |       | (2.2                                                                                             | )          | (61.1                                                                                          | )          | — |   | (2.2 | ) | (4.8 | ) | (57.1 | ) | — |   | (4.8 | ) |
| Loss on early  extinguishment of debt                                     |       | 19.1                                                                                             |       |                                                                                           |       |   |   |   |   | 19.1 |   |   |   |   |   |   |   |
| Refinancing  expenses                                                     |       | —                                                                                           |       |                                                                                           |       |   |   |   |   | 0.9 |   |   |   |   |   |   |   |
| Foreign exchange  (loss) gain, net                                        |       | (4.2                                                                                             | )          |                                                                                           |       |   |   |   |   | 10.8 |   |   |   |   |   |   |   |
| Other, net                                                                |       | —                                                                                           |       |                                                                                           |       |   |   |   |   | 0.5 |   |   |   |   |   |   |   |
| **Income  from continuing operations before taxes and minority interest** |       |                                                                                             |       |                                                                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Specialty  Chemicals                                                      |       | 7.6                                                                                              |       |                                                                                           |       |   |   |   |   | 13.5 |   |   |   |   |   |   |   |
| Performance  Additives                                                    |       | (16.2                                                                                            | )          |                                                                                           |       |   |   |   |   | (27.0 | ) |   |   |   |   |   |   |
| Titanium Dioxide  Pigments                                                |       | (9.7                                                                                             | )          |                                                                                           |       |   |   |   |   | (11.8 | ) |   |   |   |   |   |   |
| Advanced  Ceramics                                                        |       | 11.0                                                                                             |       |                                                                                           |       |   |   |   |   | 18.3 |   |   |   |   |   |   |   |
| Specialty  Compounds                                                      |       | 1.7                                                                                              |       |                                                                                           |       |   |   |   |   | 2.3 |   |   |   |   |   |   |   |
| Corporate and  other                                                      |       | 57.3                                                                                             |       |                                                                                           |       |   |   |   |   | 57.4 |   |   |   |   |   |   |   |
| Total                                                                     |       | 51.7                                                                                             |       |                                                                                           |       |   |   |   |   | 52.7 |   |   |   |   |   |   |   |
| Income tax  provision                                                     |       | 0.2                                                                                              |       |                                                                                           |       |   |   |   |   | (1.0 | ) |   |   |   |   |   |   |
| Income from  continuing operations before minority interest               |       | 51.5                                                                                             |       |                                                                                           |       |   |   |   |   | 53.7 |   |   |   |   |   |   |   |
| Minority  interest in continuing operations, net of tax                   |       | 2.3                                                                                              |       |                                                                                           |       |   |   |   |   | 2.8 |   |   |   |   |   |   |   |
| Net income from  continuing operations                                    |       | 53.8                                                                                             |       |                                                                                           |       |   |   |   |   | 56.5 |   |   |   |   |   |   |   |
| Income from  discontinued operations, net of tax                          |       | (3.8                                                                                             | )          |                                                                                           |       |   |   |   |   | (8.5 | ) |   |   |   |   |   |   |
| Gain on sale of  discontinued operations, net of tax                      |       | —                                                                                           |       |                                                                                           |       |   |   |   |   | (115.7 | ) |   |   |   |   |   |   |
| Minority  interest in discontinued operations, net of tax                 |       | —                                                                                           |       |                                                                                           |       |   |   |   |   | 0.1 |   |   |   |   |   |   |   |
| Net income                                                                |       | $                                                                                                | 50.0       |                                                                                           |       |   |   |   |   |   | $ | (67.6 | ) |   |   |   |   |   |   |
| **Adjusted  EBITDA:**                                                     |       |                                                                                             |       |                                                                                           |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Specialty  Chemicals                                                      |       | $                                                                                                | 15.8       |                                                                                           | 23.8       | % | $ | 6.4 |   | $ | 9.4 |   | $ | 28.0 |   | 20.8 | % | $ | 12.4 |   | $ | 15.6 |   |
| Performance  Additives                                                    |       | (6.4                                                                                             | )          | (14.1                                                                                          | )          | 1.2 |   | (7.6 | ) | (7.8 | ) | (10.0 | ) | 2.0 |   | (9.8 | ) |
| Titanium Dioxide  Pigments                                                |       | (5.6                                                                                             | )          | (26.7                                                                                          | )          | 2.1 |   | (7.7 | ) | (4.1 | ) | (9.4 | ) | 5.1 |   | (9.2 | ) |
| Advanced  Ceramics                                                        |       | 12.2                                                                                             |       | 37.3                                                                                           |       | 6.4 |   | 5.8 |   | 21.9 |   | 35.6 |   | 11.3 |   | 10.6 |   |
| Specialty  Compounds                                                      |       | 0.6                                                                                              |       | 6.3                                                                                            |       | 0.2 |   | 0.4 |   | 1.2 |   | 6.8 |   | 0.4 |   | 0.8 |   |
| Corporate and  other                                                      |       | 1.2                                                                                              |       | 8.3                                                                                            |       | (0.4 | ) | 1.6 |   | — |   | — |   | (0.7 | ) | 0.7 |   |
| Total Adjusted  EBITDA                                                    |       | $                                                                                                | 17.8       |                                                                                           | 11.1       | % | $ | 15.9 |   | $ | 1.9 |   | $ | 39.2 |   | 12.7 | % | $ | 30.5 |   | $ | 8.7 |   |

 

----

(a)                The constantcurrency effect is the translation impact calculated based on the change in theapplicable rate, primarily the euro, to the U.S. dollar exchange rate for theapplicable period.

 

***Three months ended June 30, 2008 compared to threemonths ended June 30, 2007***

 

**Overview**

 

Net sales increased$142.8 million in the second quarter of 2008 compared with the same period inthe prior year primarily due to the positive impact of currency changes of$75.2 million, the acquisition of the global color pigments business ofElementis plc completed on August 31, 2007 and increased selling prices of$21.1 million. Higher volumes, particularly in our Specialty Chemicals andAdvanced Ceramics segments, also had a favorable impact on net sales. Seefurther discussion by segment below.

 

Operating income andAdjusted EBITDA also increased in the second quarter of 2008 compared with thesame period in the prior year due to the positive impact of currency changesand the sales increases noted above. Operating income and Adjusted EBITDA were 

 

34

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negatively impacted byhigher raw material and energy costs in most businesses.

 

Net income fromcontinuing operations increased $53.8 million compared with the same period inthe prior year primarily due to costs of $19.1 million incurred in the secondquarter of 2007 to redeem our 2011 Notes and lower interest expense recordeddue to higher mark-to-market gains on our interest rate hedging instruments.

 

Income from discontinuedoperations, net of tax was $3.8 million in the second quarter of 2007 and wascomprised of income from operating the Electronics business, excluding theEuropean wafer reclaim business.

 

Net income increased$50.0 million in the second quarter of 2008 compared with the same period inthe prior year due to the reasons noted above.

 

**Netsales**

 

*SpecialtyChemicals*.   Net sales increased $64.6 million overthe prior year, including the positive impact of currency changes of $31.3million. In the Fine Chemicals business, higher selling prices of lithiumproducts, as well as increased volumes, had a favorable impact on net sales.Net sales in the Surface Treatment business were favorably impacted by higherselling prices, increased volumes in all markets, particularly in Europeanautomotive, aerospace and general industrial applications, and the impact of abolt-on acquisition made in December 2007.

 

*PerformanceAdditives*.   Net sales increased $38.5 million overthe prior year primarily due to the acquisition of the global color pigmentsbusiness of Elementis plc.  Also, increasedselling prices in our Color Pigments and Services and Clay-based Additivesbusinesses and the positive impact of currency changes of $5.5 million werepartially offset by lower volumes of construction-related products in our ColorPigments and Services and Timber Treatment Chemicals businesses.

 

*TitaniumDioxide Pigments*.   Net sales increased $10.9million over the prior year due to the positive impact of currency changes of$18.5 million, partially offset by lower volumes and selling prices oftitanium dioxide products, primarily commodity grade.

 

*AdvancedCeramics*.   Net sales increased $26.7 million overthe prior year primarily due to the positive impact of currency changes of$18.6 million and increased volumes of medical and cutting tool applications.This was partially offset by volume declines in mechanical systems andmechanical applications.

 

*SpecialtyCompounds*.   Net sales increased $2.4 million overthe prior year due to increased selling prices and the positive impact ofcurrency changes of $0.9 million, partially offset by lower volumes,particularly in wire and cable and footwear applications.

 

*Corporateand other*.   Net sales decreased $0.3 million overthe prior year primarily due to lower volumes and selling prices in theEuropean wafer reclaim business.

 

**Grossprofit**

 

Gross profit increased$28.9 million over the prior year primarily due to the positive impact ofcurrency changes of $25.4 million.  Salesincreases noted above, in particular selling price increases, were partially offsetby raw material cost increases, particularly from the impact of higher tin andphosphoric acid costs in our Specialty Chemicals segment, higher iron-oxide andcobalt costs in our Color Pigments and Services business and higher PVC resincosts in our Specialty Compounds segment. We also experienced lower volumes in our Color Pigments and Services,Timber Treatment Chemicals and Titanium Dioxide Pigments businesses.  In addition, depreciation and amortizationcosts were higher in most businesses, in part from the impact ofacquisitions.  Gross profit as apercentage of net sales decreased to 30.6% in the second quarter of 2008 from32.5% in the second quarter of 2007.

 

**Selling,general and administrative expenses**

 

Selling, general andadministrative expenses, or SG&A, increased $26.5 million over the prioryear primarily due to the impact of currency changes of $15.8 million. HigherSG&A costs were also recorded in a few segments, particularly in theSpecialty Chemicals and Advanced Ceramics segments, related to increased salesvolumes. SG&A expenses as a percentage of net sales were 18.9% and 19.0% inthe second quarter of 2008 and 2007, respectively.

 

**Restructuringcharges, net**

 

We recorded $1.5 millionof restructuring charges in the second quarter of 2008 for restructuringactions in the Specialty Chemicals, Performance Additives and Advanced Ceramicssegments for miscellaneous headcount reductions. We recorded $2.0 million ofrestructuring charges in the second quarter of 2007 primarily related to headcountreductions and facility closures in the Specialty Chemicals, PerformanceAdditives, Advanced Ceramics and “Corporate and other” segments. See Note13, “Restructuring Liability,” for further details.

 

35

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**Loss(gain) on sale of assets and other**

 

We recorded a loss of$0.8 million in the second quarter of 2008 related to the liquidation of ajoint venture in the Titanium Dioxide Pigments segment and a gain of $0.4million in the second quarter of 2007 related to the sale of assets.

 

**Operatingincome**

 

*SpecialtyChemicals*.   Operating income increased $11.6million over the prior year primarily due to the impact of higher sales in boththe Surface Treatment and Fine Chemicals businesses and the positive impact ofcurrency changes of $4.9 million. This increase was partially offset by higherraw material costs of $4.7 million, primarily for tin and phosphoric acid, andincreased depreciation and amortization costs, including the impact of abolt-on acquisition made in December 2007.

 

*PerformanceAdditives*.   Operating income decreased $12.5million over the prior year due to the lower sales volumes discussed above, andhigher raw material costs of $13.0 million, particularly iron-oxide and cobaltcosts in the Color Pigments and Services business, MEA costs in our TimberTreatment Chemicals business and higher quat costs in our Clay-based Additivesbusiness. Higher depreciation and amortization costs of $3.8 millionprimarily due to the acquisition of the global color pigments business ofElementis plc also had an unfavorable impact on operating income. Thesedecreases were partially offset by the sales increases noted above.

 

*TitaniumDioxide Pigments*.   Operating income decreased $8.6million over the prior year primarily due to the lower sales volumes andselling prices noted above, increased depreciation and amortization costs of$2.9 million and higher energy costs of $1.3 million.

 

*AdvancedCeramics*.   Operating income increased $11.1million over the prior year primarily due to the impact of the increased salesvolumes noted above, productivity improvements and the positive impact ofcurrency changes of $4.6 million. This increase was partially offset by lowerselling prices.

 

*SpecialtyCompounds*.   Operating income increased $0.4million over the prior year due to higher selling prices and lower operatingcosts relating to the closure of a U.K. facility in December 2007. Thiswas partially offset by higher raw material costs of $4.2 million, particularlyPVC resin costs, and lower sales volumes.

 

**Otherincome (expenses)**

 

*Interestexpense*.  Interest expense decreased $37.3 millionin the second quarter of 2008 compared to the same period in the prior year.The second quarter of 2008 and 2007 included gains of $34.0 million and $0.8million, respectively, representing the movement in the mark-to-marketvaluation of our interest rate hedging instruments. The remaining interestexpense decrease of $4.1 million is primarily due to the redemption of the 2011Notes in May 2007 in the aggregate amount of $273.4 million.

 

*Interestincome*.  Interest income decreased $2.2 million inthe second quarter of 2008 compared to the same period in the prior year due tolower short-term interest rates and lower average cash balances in the secondquarter of 2008 compared to the second quarter of 2007.

 

*Loss onearly extinguishment of debt.*   In the secondquarter of 2007, we paid a redemption premium of $14.5 million and wrote off$4.6 million of deferred financing costs associated with the redemption of the2011 Notes in May 2007.

 

*Foreignexchange gain, net*.   In the second quarter of2008, we had foreign exchange losses of $0.8 million compared to foreignexchange gains of $3.4 million recorded in the same period in the prioryear. The foreign exchange loss reported in the second quarter of 2008 isprimarily due to the impact of a slightly weaker euro as of June 30, 2008versus March 31, 2008 related to intercompany financing arrangements andnon-operating euro denominated transactions.

 

**Provisionfor income taxes**

 

The effective income taxrate for the second quarter of 2008 was 21.3% and an income tax provision of$21.1 million was recorded for the second quarter of 2008. The effective incometax rate compared to the federal statutory rate was positively impacted bydomestic income which is not tax effected as a result of a full valuationallowance, primarily related to mark-to-market gains on interest rate hedges,favorable European rate changes and geographic earnings mix. The effectiveincome tax rate was 44.1% for the second quarter of 2007 and was negativelyimpacted by the absence of a tax benefit for the Company’s domestic losses as aresult of a full valuation allowance.

 

**Minorityinterest in continuing operations**

 

Minority interestrepresents the minority interest portion of the Viance, LLC joint venturecompleted 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 2008 was $78.0 million ascompared to net income from continuing 

 

36

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operations of $24.2million for the second quarter of 2007 for the reasons described above.

 

**Incomefrom discontinued operations, net of tax**

 

Income from discontinuedoperations, net of tax was $3.8 million in the second quarter of 2007 and wasdue to income from operating the Electronics business in the second quarter of2007.

 

**Netincome**

 

Net income for the secondquarter of 2008 was $78.0 million as compared to net income of $28.0 millionfor the second quarter of 2007 for the reasons described above.

 

**AdjustedEBITDA**

 

*SpecialtyChemicals*.   Adjusted EBITDA increased $15.8million over the prior year primarily due to the impact of higher sales in boththe Surface Treatment and Fine Chemicals businesses and the positive impact ofcurrency changes of $6.4 million. This increase was partially offset by higherraw material costs of $4.7 million as discussed above.

 

*PerformanceAdditives*.   Adjusted EBITDA decreased $6.4 millionover the prior year due to lower sales volumes and higher raw material costs of$13.0 million as discussed above. These decreases were partially offset bythe selling price increases noted above.

 

*TitaniumDioxide Pigments*.   Adjusted EBITDA decreased $5.6million over the prior year primarily due to the lower sales volumes andselling prices noted above and higher energy costs of $1.3 million. Thiswas partially offset by the impact of currency changes of $2.1 million.

 

*AdvancedCeramics*.   Adjusted EBITDA increased $12.2 millionover the prior year primarily due to the impact of the increased sales volumesnoted above, productivity improvements and the positive impact of currencychanges of $6.4 million. This increase was partially offset by lower sellingprices.

 

*SpecialtyCompounds*.   Adjusted EBITDA increased $0.6 millionover the prior year due to higher selling prices and lower operating costsrelating to the closure of a U.K. facility in December 2007. This waspartially offset by higher raw material costs of $4.2 million, particularly PVCresin costs, and lower sales volumes.

 

*Corporateand other*.   Adjusted EBITDA increased $1.2 millionover the prior year due to lower professional fees partially offset byadditional stock compensation expense related to stock-based awards made in2008 and 2007.

 

***Six months ended June 30, 2008 compared to six monthsended June 30, 2007***

 

**Overview**

 

Net sales increased$249.1 million in the first six months of 2008 compared with the same period inthe prior year primarily due to the positive impact of currency changes of$140.7 million, the acquisition of the global color pigments business ofElementis plc and increased selling prices of $39.6 million. Highervolumes in our Specialty Chemicals and Advanced Ceramics segments also had afavorable impact on net sales. See further discussion by segment below.

 

Operating income andAdjusted EBITDA also increased in the first six months of 2008 compared withthe same period in the prior year due to the positive impact of currencychanges and the sales increases noted above. Operating income and AdjustedEBITDA were negatively impacted by higher raw material and energy costs in mostbusinesses.

 

Net income from continuingoperations increased $56.5 million compared with the same period in the prioryear primarily due to lower interest expense due to mark-to-market gains on ourinterest rate hedging instruments, costs of $19.1 million incurred in thesecond quarter of 2007 to redeem our 2011 Notes and increased foreign exchangegains due to the impact of the stronger euro.

 

Income from discontinuedoperations, net of tax was $8.5 million in the first six months of 2007 and wasprimarily comprised of income from operating the Electronics business,excluding the European wafer reclaim business.

 

The gain on sale ofdiscontinued operations, net of tax of $115.7 million recorded in the first sixmonths of 2007 is related to the sale of Groupe Novasep in January 2007.

 

Net income decreased$67.6 million in the first six months of 2008 compared with the same period inthe prior year due to the reasons noted above.

 

**Netsales**

 

*SpecialtyChemicals*.   Net sales increased $108.4 millionover the prior year, including the positive impact of currency changes of 

 

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$59.0 million. In theFine Chemicals business, higher selling prices of lithium products, as well asincreased volumes, had a favorable impact on net sales. Net sales in theSurface Treatment business were favorably impacted by higher selling prices,increased volumes in all markets, particularly in European automotive andgeneral industrial applications, and the impact of a bolt-on acquisition madein December 2007.

 

*PerformanceAdditives*.   Net sales increased $65.3 million overthe prior year due to the acquisition of the global color pigments business ofElementis plc, as well as increased selling prices in our Color Pigments andServices and Clay-based Additives businesses and the positive impact ofcurrency changes of $10.2 million. This was partially offset by lower volumesof construction-related products in our Color Pigments and Services and TimberTreatment Chemicals businesses.

 

*TitaniumDioxide Pigments*.   Net sales increased $20.6million over the prior year due to the positive impact of currency changes of$34.3 million, partially offset by lower volumes and selling prices oftitanium dioxide products and lower volumes of functional additives.

 

*AdvancedCeramics*.   Net sales increased $54.4 million overthe prior year primarily due to the positive impact of currency changes of$34.2 million, increased volumes of medical and cutting tool applications andthe impact of a bolt-on acquisition made in April 2007. This was partiallyoffset by lower selling prices and volume declines in mechanical systems andmechanical applications.

 

*SpecialtyCompounds*.   Net sales increased $1.8 million overthe prior year due to the positive impact of currency changes of $2.3 million andhigher selling prices, partially offset by lower volumes in wire and cable andmedical applications.

 

*Corporateand other*.   Net sales decreased $1.4 million overthe prior year primarily due to the sale of our U.S. wafer reclaim business inthe first quarter of 2007 and lower volumes and selling prices in the Europeanwafer reclaim business.

 

**Grossprofit**

 

Gross profit increased$59.7 million over the prior year primarily due to the positive impact ofcurrency changes of $48.1 million and the sales increases noted above, inparticular selling price increases. This was partially offset by raw materialcost increases, particularly from the impact of higher tin and phosphoric acidcosts in our Specialty Chemicals segment, higher iron-oxide and cobalt costs inour Color Pigments and Services business and higher PVC resin costs in ourSpecialty Compounds segment.  We alsoexperienced lower volumes in our Color Pigments and Services, Timber TreatmentChemicals and Titanium Dioxide Pigments businesses and higher depreciation andamortization costs in most businesses including the impact ofacquisitions.  Gross profit as apercentage of net sales decreased to 31.4% for the six months ended June 30,2008 from 32.6% for the six months ended June 30, 2007.

 

**Selling,general and administrative expenses**

 

Selling, general andadministrative expenses, or SG&A, increased $49.4 million over the prioryear primarily due to the impact of currency changes of $29.2 million. HigherSG&A costs were also recorded in a few segments, particularly in SpecialtyChemicals and Advanced Ceramics, related to increased sales volumes. SG&Aexpenses as a percentage of net sales was 19.4% for the six months ended June 30,2008 versus 19.3% for the six months ended June 30, 2007.

 

**Restructuringcharges, net**

 

We recorded $2.3 millionof restructuring charges for the six months ended June 30, 2008 forrestructuring actions in the Performance Additives, Specialty Chemicals andAdvanced Ceramics segments for miscellaneous headcount reductions. We recorded$6.0 million of restructuring charges for the six months ended June 30,2007 primarily related to facility closures in the Corporate and other segmentrelated to the restructuring of the wafer reclaim business. See Note 13, “RestructuringLiability,” for further details.

 

**Loss(gain) on sale of assets**

 

We recorded a loss of$0.9 million in the six months ended June 30, 2008 primarily related tothe liquidation of a joint venture in the Titanium Dioxide Pigments segment anda gain of $5.2 million in the six months ended June 30, 2007 primarilyrelated to the sale of our U.S. wafer reclaim business.

 

**Operatingincome**

 

*SpecialtyChemicals*.   Operating income increased $19.6million over the prior year primarily due to the impact of higher sales in boththe Surface Treatment and Fine Chemicals businesses and the positive impact ofcurrency changes of $9.5 million. This increase was partially offset by higherraw material costs of $9.4 million, primarily for tin and phosphoric acid, andincreased depreciation and amortization costs, including the impact of abolt-on acquisition made in December 2007.

 

*PerformanceAdditives*.   Operating income decreased $18.5million over the prior year due to the lower sales volumes discussed above, andhigher raw material costs of $17.6 million, particularly iron-oxide and cobaltcosts in the Color Pigments and Services business, MEA costs in our TimberTreatment Chemicals business and higher quat costs in our Clay-based Additivesbusiness. Higher 

 

38

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depreciation andamortization costs of $7.7 million primarily due to the acquisition of theglobal color pigments business of Elementis plc also had an unfavorable impacton operating income. These decreases were partially offset by the salesincreases noted above.

 

*TitaniumDioxide Pigments*.   Operating income decreased $9.7million over the prior year primarily due to the lower sales volumes andselling prices noted above, increased depreciation and amortization costs of$5.5 million and higher energy costs of $2.2 million.

 

*AdvancedCeramics*.   Operating income increased $18.5million over the prior year primarily due to the impact of the increased salesvolumes noted above, productivity improvements and the positive impact of currencychanges of $8.1 million. The impact of a bolt-on acquisition made in April 2007also had a favorable impact on operating income. This increase was partiallyoffset by lower selling prices and increased depreciation and amortizationcosts of $4.1 million primarily related to the acquisition discussed above.

 

*SpecialtyCompounds*.   Operating income increased $1.0million over the prior year due to lower operating costs relating to theclosure of a U.K. facility in December 2007 and higher selling prices. Thiswas partially offset by higher raw material costs of $6.8 million, particularlyPVC resin costs, and lower sales volumes.

 

*Corporateand other.*   Operating loss increased $3.0 millionover the prior year primarily due to additional stock compensation expenserelated to stock-based awards made in 2008 and 2007.

 

**Otherincome (expenses)**

 

*Interestexpense*.  Interest expense decreased $18.3 millionfor the six months ended June 30, 2008 compared to the same period in theprior year. The six months ended June 30, 2008 and 2007 included gains of$3.2 million and losses of $2.0 million, respectively, representing themovement in the mark-to-market valuation of our interest rate hedginginstruments. The remaining interest expense decrease of $13.1 million isprimarily due to the redemption of the 2011 Notes in May 2007 in the aggregateamount of $273.4 million.

 

*Interestincome*.  Interest income decreased $4.8 million forthe six months ended June 30, 2008 compared to the same period in theprior year primarily related to lower average cash balances in the first sixmonths of 2008 compared to the first six months of 2007 and lower short-terminterest rates.

 

*Loss onearly extinguishment of debt.*   In the secondquarter of 2007, we paid a redemption premium of $14.5 million and wrote off$4.6 million of deferred financing costs associated with the redemption of the2011 Notes in May 2007.

 

*Refinancing expenses*.  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 tranche G term loans.

 

*Foreignexchange gain, net*.   For the six months ended June 30,2008 and 2007, we had foreign exchange gains of $14.3 million and $3.5 million,respectively. The increase from the prior year is primarily due to the impactof the stronger euro as of June 30, 2008 versus December 31, 2007related to intercompany financing arrangements.

 

**Provisionfor income taxes**

 

The effective income taxrate for the six months ended June 30, 2008 was 27.7% and an income taxprovision of $40.7 million was recorded for the six months ended June 30,2008. The effective income tax rate compared to the federal statutory rate waspositively impacted by domestic income which is not tax effected as a result ofa full valuation allowance, favorable European rate changes and geographicearnings mix, including mark-to-market gains on interest rate hedges. Theeffective income tax rate was 44.2% for the six months ended June 30,2007. This was negatively impacted by the absence of a tax benefit for theCompany’s domestic losses as a result of a full valuation allowance.

 

**Minorityinterest in continuing operations**

 

Minority interestrepresents the minority interest portion of the Viance, LLC joint venture completedin January 2007 between our Timber Treatment Chemicals business and Rohmand Haas Company.

 

**Netincome from continuing operations**

 

Net income fromcontinuing operations for six months ended June 30, 2008 was $105.7million as compared to net income from continuing operations of $49.2 millionfor the same period in the prior year for the reasons described above.

 

**Incomefrom discontinued operations, net of tax**

 

Income from discontinuedoperations, net of tax was $8.5 million for the six months ended June 30,2007 and was primarily due to income from operating the Electronics business in2007.

 

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**Gain on sale of discontinuedoperations, net of tax**

 

The gain on sale ofdiscontinued operations, net of tax, of $115.7 million recorded for the sixmonths ended June 30, 2007 is related to the sale of Groupe Novasep in January 2007.

 

**Minority interest in discontinuedoperations**

 

Minority interest indiscontinued operations represents the minority interest portion of GroupeNovasep’s net income for the six months ended June 30, 2007.

 

**Netincome**

 

Net income for the sixmonths ended June 30, 2008 was $105.7 million as compared to net income of$173.3 million for the six months ended June 30, 2007 for the reasons describedabove.

 

**AdjustedEBITDA**

 

*SpecialtyChemicals*.   Adjusted EBITDA increased $28.0million over the prior year primarily due to the impact of higher sales in boththe Surface Treatment and Fine Chemicals businesses and the positive impact ofcurrency changes of $12.4 million. This increase was partially offset by higherraw material costs of $9.4 million as discussed above.

 

*PerformanceAdditives*.   Adjusted EBITDA decreased $7.8 millionover the prior year due to lower sales volumes and higher raw material costs of$17.6 million as discussed above. These decreases were partially offset bythe sales increases noted above.

 

*TitaniumDioxide Pigments*.   Adjusted EBITDA decreased $4.1million over the prior year primarily due to the lower sales volumes and sellingprices noted above and higher energy costs of $2.2 million, partially offset bythe positive impact of currency changes of $5.1 million.

 

*AdvancedCeramics*.   Adjusted EBITDA increased $21.9 millionover the prior year primarily due to the impact of the increased sales volumesnoted above, productivity improvements and the positive impact of currencychanges of $11.3 million. The impact of a bolt-on acquisition made in April 2007also had a favorable impact on Adjusted EBITDA. This increase was partiallyoffset by lower selling prices.

 

*SpecialtyCompounds*.   Adjusted EBITDA increased $1.2 millionprimarily due to lower operating costs relating to the closure of a U.K.facility in December 2007 and higher selling prices. This was partiallyoffset by higher raw material costs of $6.8 million as discussed above andlower sales volumes.

 

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

 

Because we view AdjustedEBITDA on both a consolidated basis and segment basis as an operatingperformance measure, we use net income as the most comparable U.S. GAAP measureon a consolidated basis. The following table, which sets forth the applicablecomponents of Adjusted EBITDA, presents a reconciliation of net income toAdjusted EBITDA on a consolidated basis:

 
| ** **                                                            | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|-----------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                            | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| **($ in millions)**                                         | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net income                                                            |       | $                                | 78.0       |                           | $          | 28.0 |   | $ | 105.7 |   | $ | 173.3 |   |
| Income from  discontinued operations, net of tax                      |       | —                           |       | (3.8                           | )          | — |   | (8.5 | ) |
| Gain on sale of  discontinued operations, net of tax                  |       | —                           |       | —                         |       | — |   | (115.7 | ) |
| Minority  interest in discontinued operations, net of tax             |       | —                           |       | —                         |       | — |   | 0.1 |   |
| Net income from  continuing operations                                |       | 78.0                             |       | 24.2                           |       | 105.7 |   | 49.2 |   |
| Income tax  provision                                                 |       | 21.1                             |       | 20.9                           |       | 40.7 |   | 41.7 |   |
| Minority  interest in continuing operations, net of tax               |       | —                           |       | 2.3                            |       | 0.6 |   | 3.4 |   |
| Income from  continuing operations before taxes and minority interest |       | 99.1                             |       | 47.4                           |       | 147.0 |   | 94.3 |   |
| Interest expense  (a)                                                 |       | 9.7                              |       | 47.0                           |       | 83.4 |   | 101.7 |   |
| Interest income                                                       |       | (1.4                             | )          | (3.6                           | )          | (3.6 | ) | (8.4 | ) |
| Depreciation and  amortization                                        |       | 63.8                             |       | 51.2                           |       | 125.6 |   | 100.5 |   |
| Restructuring  and related charges                                    |       | 1.5                              |       | 2.0                            |       | 2.3 |   | 6.0 |   |
| Systems/organization  establishment expenses                          |       | 2.2                              |       | 0.3                            |       | 3.4 |   | 1.2 |   |
| Cancelled  acquisition and disposal costs                             |       | 0.7                              |       | 0.7                            |       | 0.7 |   | 0.8 |   |
| Inventory  write-up charges                                           |       | 0.1                              |       | 0.1                            |       | 0.5 |   | 0.1 |   |
| Refinancing  expenses                                                 |       | —                           |       | —                         |       | — |   | 0.9 |   |
| Loss on early  extinguishment of debt                                 |       | —                           |       | 19.1                           |       | — |   | 19.1 |   |
| Loss (gain) on  sale of assets and other                              |       | 0.8                              |       | (0.4                           | )          | 0.9 |   | (5.2 | ) |
| Foreign exchange  gain                                                |       | 0.8                              |       | (3.4                           | )          | (14.3 | ) | (3.5 | ) |
| Other                                                                 |       | 1.0                              |       | 0.1                            |       | 0.8 |   | — |   |
| Total Adjusted  EBITDA (b)                                            |       | $                                | 178.3      |                           | $          | 160.5 |   | $ | 346.7 |   | $ | 307.5 |   |

 

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(a)                Includes gains of$34.0 million and $0.8 million for the three months ended June 30, 2008and 2007, respectively, and gains of $3.2 million and losses of $2.0 millionfor the six months ended June 30, 2008 and 2007, respectively,representing the movement in the mark-to-market valuation of the Company’sinterest rate and cross-currency hedging instruments.

 

(b)               This amount doesnot include $8.5 million and $17.7 million of Adjusted EBITDA for the three andsix months ended June 30, 2007, respectively, from the Electronicsbusiness sold on December 31, 2007 and $1.8 million of Adjusted EBITDA forthe six months ended June 30, 2007 from the former Groupe Novasep segmentsold on January 9, 2007.

 

**Liquidityand Capital Resources**

 

**CashFlows**

 

*OperatingActivities*.   Net cash provided by operatingactivities was $123.7 million and $148.3 million for the six months ended June 30,2008 and 2007, respectively. Net cash from operating activities decreasedprimarily from higher use of operating cash from working capital changes andthe lack of operating cash flows due to the divestiture of the Electronicsbusiness, partially offset by higher operating income and lower cash interestexpense.

 

*InvestingActivities*.  Net cash (used in) provided byinvesting activities was $(88.5) million and $380.8 million for the six monthsended June 30, 2008 and 2007, respectively. Net cash used in investingactivities decreased primarily due to the proceeds received in the first quarterof 2007 from the sale of the Groupe Novasep segment and from the formation ofthe Viance, LLC joint venture. This was partially offset by funds receivedrelated to the claim settlement between the Company and GEA Group in the firstquarter of 2008. See Note 6, “Goodwill,” for further details.

 

*FinancingActivities*.   Net cash used in financing activitieswas $43.6 million and $356.7 million for the six months ended June 30,2008 and 2007, respectively, and was comprised of scheduled payments forlong-term debt and revolver payments. For the six months ended June 30,2007, net cash used in financing activities included the payment of our 10 5/8%Senior Subordinated Notes due in 2011 in the aggregate principal amount of$273.4 million and related redemption premiums of $14.5 million.

 

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**Liquidity**

 

Our primary source ofliquidity has been and will continue to be cash generated from the operationsof our subsidiaries. Events that have had an impact on our liquidity include:

 

| · |   | On January 2,  2007, CSI, our wholly-owned subsidiary and Rohm and Haas Company formed  Viance, LLC, a joint venture company. We received net cash proceeds of $73.0  million. We also paid approximately $1.0 million in fees and expenses  associated with this transaction and the remainder was used for general  corporate purposes. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                           |
| · |   | On January 9,  2007, we sold our Groupe Novasep segment and received net cash proceeds of  $420.7 million. The proceeds were used to redeem our outstanding 2011  Notes and for general corporate purposes.                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                           |
| · |   | On February 12,  2007, we completed the sale of our U.S. wafer reclaim business for  approximately $11.0 million in cash and a long-term notes receivable. The  proceeds were used for general corporate purposes.                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                           |
| · |   | On May 15, 2007,  we redeemed our outstanding 10 5/8% Senior Subordinated Notes that were due  in 2011 in the aggregate principal amount of $273.4 million. In connection  with this repayment, we paid redemption premiums of $14.5 million.                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                           |
| · |   | On August 31,  2007, we completed the acquisition of the global color pigments business of  Elementis plc for a purchase price of $140.0 million.                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                           |
| · |   | On December 31,  2007, we completed the sale of our Electronics business, excluding our  European wafer reclaim business, and received net cash proceeds of $311.0  million. The proceeds will be used for general corporate purposes.                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                           |
| · |   | On March 28, 2008,  we received €18.8 million ($29.1 million) from GEA Group and GEA North  America for the settlement of all existing and future non-tax related claims  resulting from the sale and purchase agreement entered into in connection  with the Dynamit Nobel Acquisition in April 2004.                          |

 

As discussed in Note 1, “Descriptionof Business and Summary of Significant Accounting Policies,” we entered into adefinitive agreement in May 2008 with Kemira to form a joint venture thatwill focus on specialty titanium dioxide pigments.  It is expected that the joint venture willacquire the shares of the Rockwood and Kemira entities in part with borrowingsunder a term loan of up to €300 million. In addition, the joint venture expectsto enter into a €30 million revolving credit facility to finance itsoperations.  The contributed net assetsof Kemira include notes payable of approximately €25.0 million.  The Company expects to receive a cash paymentfunded from the term loan borrowings based on its ownership percentage.  Prior to the closing of this transaction, theCompany and Kemira may develop an alternative capital structure, contributecash to the joint venture, reduce the amount of indebtedness incurred by thejoint venture and/or revise the ownership structure of the joint venture.

 

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, equity issuances or other sources, and we maynot have access to these sources for a variety of reasons. See Item 1, “Business,”and Item 1A, “Risk Factors” in our 2007 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 2008 and the foreseeable futureto make required payments of principal and interest on our debt and fund ourworking capital and capital expenditure requirements. We continue to takeactions to reduce costs and exit unprofitable businesses, in part to improveour long-term liquidity. We expect this to further improve our short andlong-term liquidity. If our cash flow from operations and borrowings under ourrevolving credit facility are insufficient to fund our currently existingliquidity requirements, we may be forced to use other means available to us,such as to reduce or delay capital expenditures and seek additional capital. Wemay not have adequate capital for future acquisitions, business combinations orsimilar transactions.

 

As of June 30, 2008,we had actual total indebtedness of $2,639.4 million. As of June 30, 2008,the revolving credit facility under the senior secured credit facilitiesprovided for additional borrowings of up to $225.3 million. As of June 30,2008, there were no outstanding borrowings under the revolving credit facility.

 

As of June 30, 2008,we had cash and cash equivalents of $341.5 million primarily from cash fromoperations and the net cash proceeds received from the sale of the Electronicsbusiness in December 2007, less cash used for certain selectiveacquisitions.

 

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

 

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| · |   | tranche A-1 term loans  in an aggregate principal amount of €26.1 million (or $41.1 million at  June 30, 2008) and tranche A-2 term loans in an aggregate principal  amount of €113.6 million (or $179.0 million at June 30, 2008), each  maturing on July 30, 2011 and bearing interest at Adjusted EURIBOR plus  1.75%;                                                                                               |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| · |   | tranche E term loans in  an aggregate principal amount of $1,110.7 million at June 30, 2008,  maturing on July 30, 2012 and bearing interest at the Company’s option  of either (i) Adjusted LIBOR plus 1.50% or (ii) ABR plus 0.75%. For  the three months ended June 30, 2008, we have elected to use option  (i) Adjusted LIBOR plus 1.50%;                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| · |   | tranche G term loans in  an aggregate principal amount of €266.6 million (or $420.0 million at  June 30, 2008) maturing on July 30, 2012 and bearing interest of  Adjusted LIBOR plus 1.75%; and                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| · |   | a revolving credit  facility in an aggregate principal amount of $250.0 million maturing on  July 30, 2010, bearing interest at the Company’s option of either  (i) Adjusted LIBOR plus 1.75% or (ii) ABR plus 1.00%. As of  June 30, 2008, we had no borrowings outstanding under this facility and  had outstanding letters of credit of $24.7 million that reduced our  availability under the credit facility. |

 

In each case, the interestrates are subject to step-downs determined by reference to a performance test.Adjusted LIBOR is the London inter-bank offered rate adjusted for statutoryreserves. ABR is the alternate base rate, which is the highest of Credit Suisse’sprime rate and the federal funds effective rate plus 0.5%. Tranche A-1 andA-2 term loans are payable in January and July of each year atescalating percentages of the original principal amount. Tranche E andtranche G term loans are payable in January and July of each yearat amounts equal to 0.5% of the principal amount of the former tranche Dterm loans and tranche F term loans, respectively, with the remainder dueat the final maturity date.

 

The borrowings of ourindirect, wholly-owned subsidiaries, Rockwood Specialties Group, Inc. andRockwood Specialties Limited under the senior secured credit facilities areguaranteed and secured by assets and pledges of capital stock.

 

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

 

*2014Notes.*   The 2014 Notes have an aggregate principalamount of €375.0 million ($590.8 million at June 30, 2008) in the case ofthe Euro notes and $200.0 million in the case of the U.S. Dollar notes, andmature on November 15, 2014. Interest on the 2014 Notes is payablesemi-annually on May 15 and November 15. Interest on the 2014 Notesaccrues at the rate of 7.625% in the case of the Euro notes and 7.500% in thecase of the U.S. Dollar notes. Certain of our domestic subsidiaries guaranteethe 2014 Notes on a senior subordinated unsecured basis.

 

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 leverage ratio: for  the twelve-month period ended June 30, 2008, net debt (total debt plus  capital lease obligations, minus cash up to a maximum of $100.0 million) to  Adjusted EBITDA must be less than 4.75 to 1; for such period, our ratio  equaled 3.75 to 1; and                                                                                                                     |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                 |
| · |   | an interest coverage  ratio: for the twelve-month period ended June 30, 2008, Adjusted EBITDA  to cash interest expense (interest expense, net excluding deferred debt  issuance cost amortization and the movements in the mark-to market value of  our interest rate and cross-currency interest rate derivatives) must be at  least 1.95 to 1; for such period, our ratio equaled 4.12 to 1. |

 

See Item 7, Management’sDiscussion and Analysis of Financial Condition and Results of Operations—“Definitionsof Adjusted EBITDA,” for a discussion of the definition of Adjusted EBITDA usedin calculating our financial covenants.

 

These covenants are materialterms of the senior secured credit agreement. Non-compliance with thesecovenants or other covenants could result in a default under the senior securedcredit agreement and the lenders could elect to declare all amounts borrowedimmediately due and payable. Any such acceleration would also result in adefault under the indenture governing the 2014 Notes, which could lead to thenote holders electing to declare the principal, premium, if any, and intereston the then outstanding notes 

 

43

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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 thefour-fiscal quarter period ended June 30, 2008, the fixed charge coverageratio equaled 4.12 to 1. This covenant is a material term of the indenturegoverning the 2014 Notes.

 

We were in compliancewith all of the above covenants as of June 30, 2008 and December 31,2007.

 

Given our use of AdjustedEBITDA (see “Special Note Regarding Non-GAAP Financial Measures” for thedefinition of Adjusted EBITDA and management’s uses of Adjusted EBITDA) as aliquidity measure, the following table presents a reconciliation of net cashprovided by operating activities to Adjusted EBITDA:

 
| ** **                                                                                                             | ** ** | **Six months ended** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                                                             | ** ** | **June 30,**              | ** ** |
| **($ in millions)**                                                                                          | ** ** | **2008**                       | ** ** | **2007** | ** ** |
| Net cash  provided by operating activities from continuing operations                                                  |       | $                              | 123.7      |   | $ | 136.3 |   |
| Changes in  assets and liabilities, net of the effect of foreign currency translation and  acquisitions                |       | 113.1                          |       | 60.0 |   |
| Current portion  of income tax provision                                                                               |       | 24.0                           |       | 21.7 |   |
| Interest  expense, net, excluding amortization of deferred financing costs and  unrealized losses/gains on derivatives |       | 78.3                           |       | 86.6 |   |
| Restructuring  and related charges                                                                                     |       | 2.3                            |       | 6.0 |   |
| Systems/organization  establishment expenses                                                                           |       | 3.4                            |       | 1.2 |   |
| Cancelled  acquisition and disposal costs                                                                              |       | 0.7                            |       | 0.8 |   |
| Refinancing  expenses                                                                                                  |       | —                         |       | 0.9 |   |
| Inventory  write-up charges                                                                                            |       | 0.5                            |       | 0.1 |   |
| Bad debt  provision                                                                                                    |       | (1.0                           | )          | (0.9 | ) |
| Loss (gain) on  sale of assets                                                                                         |       | 0.9                            |       | (5.2 | ) |
| Other                                                                                                                  |       | 0.8                            |       | — |   |
| Total Adjusted  EBITDA                                                                                                 |       | $                              | 346.7      |   | $ | 307.5 |   |

 

***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 2007 Form 10-K. Liabilities forunrecognized tax benefits in the amount of $26.7 million as of December 31,2007 related to Financial Accounting Standards Board (“FASB”) Interpretation (“FIN”)No. 48,*Accounting for Uncertainty inIncome Taxes — An Interpretation of FASB Statement No. 109,*were excluded from the Contractual Obligations table as we were unable to makea reasonably reliable estimate of the period of cash settlement with therespective taxing authorities. Liabilities for these unrecognized tax benefitsare classified as non-current income tax liabilities (other liabilities) unlessexpected to be paid in one year. There have not been significant changes tothese contractual obligations as of June 30, 2008.

 

***Capital Expenditures***

 

Rockwood’s capitalexpenditures for the six months ended June 30, 2008 consisted primarily ofreplacements of worn, obsolete or damaged equipment as well as investments innew equipment.

 

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For the six months ended June 30, 2008 and 2007, our capitalexpenditures, excluding capital leases, were $104.8 million and $90.7 million,respectively. Capital expenditures for each of our reporting segments areprovided in the following table:

 
| ** **                           | ** ** | ** **    | ** ** | ** **      | ** ** | **Titanium** | ** ** | ** **   | ** ** | ** **    | ** ** | ** **         | ** ** | ** **       | ** ** |
|--------------------------------------|------------|---------------|------------|-----------------|------------|--------------|------------|--------------|------------|---------------|------------|--------------------|------------|------------------|------------|
| ** **                           | ** ** | **Specialty** | ** ** | **Performance** | ** ** | **Dioxide**  | ** ** | **Advanced** | ** ** | **Specialty** | ** ** | **Corporate**      | ** ** | ** **       | ** ** |
| **($ in millions)**        | ** ** | **Chemicals** | ** ** | **Additives**   | ** ** | **Pigments** | ** ** | **Ceramics** | ** ** | **Compounds** | ** ** | **and other** | ** ** | **Consolidated** | ** ** |
| Six months ended  June 30, 2008 |       | $             | 33.7       |            | $          | 20.6         |       | $            | 20.3       |          | $          | 20.6               |       | $                | 6.4        |   | $ | 3.2 |   | $ | 104.8 |   |
| Six months ended  June 30, 2007 |       | 26.5          |       | 14.8            |       | 20.2         |       | 14.4         |       | 12.6          |       | 2.2                |       | 90.7             |       |
|                                      |            |               |            |                 |            |              |            |              |            |               |            |                    |            |                  |            |  |  |  |  |  |  |  |

 

We may incur future costsfor capital improvements and general compliance under Safety, Health andEnvironmental (“SHE”) laws. For the year ended December 31, 2007, ourcapital expenditures for SHE matters totaled $29.6 million, excluding costs to maintainand repair pollution control equipment. For 2008, we estimate capitalexpenditures for compliance with SHE laws to be at similar levels; however,because capital expenditures for these matters are subject to changes in andnew SHE laws, we cannot provide assurance that our recent expenditures will beindicative of future amounts required to comply with these laws, including theEU’s Registration, Evaluation and Authorization of Chemicals (“REACH”)legislation. See Note 15, “Commitments and Contingencies,” “RegulatoryDevelopments” for a discussion of REACH.

 

***Foreign currency related transactions***

 

As of June 30, 2008,$1,292.4 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**

 

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, 2008, theCompany had approximately $29.8 million of letters of credit and other bankguarantees, of which $24.9 million will expire in 2008 through 2012. Theremaining guarantees have no specified expiration date. This amount includesoutstanding letters of credit of $24.7 million that reduced our availability underthe senior secured credit facility. In the opinion of management, suchobligations will not significantly affect the Company’s financial position,results of operations or cash flows as the Company anticipates fulfilling itsperformance obligations.

 

**Commitmentsand Contingencies**

 

See Note 15, “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:

 

·      thefair values of assets acquired and liabilities assumed in business combinations;

 

·      theuse and recoverability of inventory;

 

·      thevaluation of deferred tax assets;

 

·      theamount of unrecognized tax benefits in accordance with FIN 48;

 

·      impairmentof goodwill, property, plant and equipment and other intangible assets; and

 

·      theuseful lives of 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 orconditions.

 

The significant accountingpolicies of the Company are described in Note 1,”Description of Businessand Summary of Significant Accounting Policies,” to the unaudited condensedconsolidated financial statements and the critical accounting policies andestimates are described in the “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” section in the 

 

45

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Company’s 2007 Form 10-K.There have been no significant changes to these critical accounting policiesand estimates as of June 30, 2008.

 

**Forward-LookingStatements**

 

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

 

| · |   | our business strategy;                                                                                                             |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------|
| · |   | competitive pricing or  product development activities affecting demand for our products;                                          |
| · |   | fluctuations in  interest rates, exchange rates and currency values;                                                               |
| · |   | availability and  pricing of raw materials;                                                                                        |
| · |   | fluctuations in energy  prices;                                                                                                    |
| · |   | changes in the end-use  markets in which our products are sold;                                                                    |
| · |   | changes in the general  economic conditions in North America and Europe and in other locations in  which we currently do business; |
| · |   | technological changes  affecting production of our materials;                                                                      |
| · |   | governmental and  environmental regulations and changes in those regulations;                                                      |
| · |   | hazards associated with  chemicals manufacturing;                                                                                  |
| · |   | our high level of  indebtedness;                                                                                                   |
| · |   | risks associated with  negotiating, consummating and integrating acquisitions;                                                     |
| · |   | risks associated with  competition and the introduction of new competing products, especially in the  Asia-Pacific region; and     |
| · |   | risks associated with  international sales and operations.                                                                         |

 

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

 

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

 

We are exposed to marketrisk from changes in interest rates, foreign currency exchange rates andcommodity prices. We manage our exposure to these market risks through regularoperating and financing activities and through the use of derivatives. Whenused, derivatives are employed as risk management tools and not for tradingpurposes. A discussion and analysis of the Company’s market risk isincluded in the Company’s 2007 Form 10-K. There have been no significantchanges to these market risks as of June 30, 2008.

 

**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, 2008 and concluded that ourdisclosure controls and procedures are effective. In connection with thisevaluation, our management did not identify any change in our internal controlover financial reporting that has materially affected, or is reasonably likelyto materially affect, our internal control over financial reporting during thesecond quarter of 2008.

 

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**PART II — OTHER INFORMATION**

 

**Item1.  Legal Proceedings.**

 

We are involved in legalproceedings from time to time in the ordinary course of our business, includingwith respect to product liability, intellectual property and environmentalmatters. In addition, we may be required to make indemnity payments inconnection with certain product liability and environmental claims. See Item 1,“Business,” and Item 1A, “Risk Factors,” “Environmental Indemnities—We maybe subject to environmental indemnity claims relating to properties we havedivested”; “Product Liability— Due to the nature of our business and products,we may be liable for damages arising out of product liability claims”; and “ProductLiability—Due to the nature of our business and products, we may be liable fordamages arising out of certain indemnity claims” in our 2007 Form 10-K.However, we do not believe that there is any other individual, governmental,legal proceeding or arbitration that is likely to have a material adverseeffect on our business, results of operations, cash flows or financialcondition. We cannot predict the outcome of any litigation or the potential forfuture litigation.   See Note 15,“Commitments and Contingencies,” and Item 3, Legal Proceedings in our 2007 Form 10-Kfor descriptions of other legal matters.

 

**Item1A. Risk Factors.**

 

A discussion of theCompany’s risk factors is included in the Company’s Form 10-K for the yearended December 31, 2007. There have been no material changes to these riskfactors.

 

**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.**

 

(a)   TheCompany’s Annual Meeting of Shareholders was held on Wednesday, April 23,2008.

 

(b)   Theresults of votes of security holders for the election of Class IIIdirectors are as follows:

 
| **Election of Directors** | ** ** | **For**    | ** ** | **Withheld** | ** ** |
|-------------------------------------|------------|------------|------------|--------------|------------|
| Brian F. Carroll                    |       | 47,211,216 |       | 20,922,318   |       |
| Todd A. Fisher                      |       | 46,340,505 |       | 21,793,029   |       |
| Douglas L. Maine                    |       | 67,596,898 |       | 536,636      |       |

 

Seifi Ghasemi, Sheldon R.Erikson, Perry Golkin, J. Kent Masters, Cynthia A. Niekamp and Susan Schnabelcontinued as Directors after the annual meeting.

 

(c)   Theresults of votes of security holders for the ratification of the appointment ofDeloitte & Touche, LLP as our independent registered public accountingfirm are as follows:

 
| **For**    | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Broker Non-Votes** | ** ** |
|------------|------------|-------------|------------|-------------|------------|---------------------------|------------|
| 68,122,334 |       | 6,667       |       | 4,532       |       | —                    |       |

 

**Item5.  Other Information.**

 

None.

 

**Item6.  Exhibits.**

 

| **Exhibit No.** | ** ** | **Description of Exhibit**                                                                                           |
|----------------------|------------|--------------------------------------------------------------------------------------------------------------------------------|
| 1.1 (A)              |       | Underwriting Agreement, dated June 11, 2008, between Rockwood  Holdings, Inc., the selling stockholders named        |
|                 |       | therein and Credit Suisse Securities (USA) LLC.                                                                                |
|                 |       |                                                                                                                           |
| 10.1 *               |       | Master Agreement, dated May 21, 2008, by and among, Rockwood  Holdings, Inc., Rockwood Specialties Group, Inc.  |
| ** **           |       | and certain of their affiliates and Kemira Oyj and certain of its affiliates.                                                  |
|                 |       |                                                                                                                           |
| 10.2 *               |       | Shareholders’ and Joint Venture Agreement, dated May 21, 2008, by  and among, Rockwood Holdings, Inc., Rockwood |
| ** **           |       | Specialties Group, Inc. and certain of their affiliates and Kemira  Oyj and certain of its affiliates.                    |

 

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| 10.3 *     |       | Share and Asset Purchase and Transfer Agreement, dated May 21,  2008, by and among, Rockwood Holdings, Inc.,                                                                                                                                                                                                                                                                      |
|------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** |       | Rockwood Specialties Group, Inc. and certain of their affiliates  and Kemira Oyj and certain of its affiliates.                                                                                                                                                                                                                                                                        |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.4 *     |       | Facility Agreement, made between Deukalion Einhundertvierundzwanzigste  Vermögensverwaltungs GmbH, Sachtleben Chemie GmbH, White Pigments  Holding Oy, and Kemira Pigments Oy, Merchant Banking,  Skandinaviska Enskilda  Banken AB as Agent, Security Agent and Issuing Bank; and Nordea Bank Finland  Plc as Arranger and Original Lender; and the lenders party thereto.  |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                  |
| 31.1 *     |       | Rule 13a-14(a)/15d-14(a) Certification  of Chief Executive Officer.                                                                                                                                                                                                                                                                                                               |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                        |
| 31.2 *     |       | Rule 13a-14(a)/15d-14(a) Certification  of Chief Financial Officer.                                                                                                                                                                                                                                                                                                               |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                        |
| 32.1       |       | Section 1350  Certification of Chief Executive Officer. This certification accompanies this  report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and  shall not be deemed filed by the Company for purposes of Section 18 or  any other provision of the Securities Exchange Act of 1934, as amended.                                                           |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                        |
| 32.2       |       | Section 1350  Certification of Chief Financial Officer. This certification accompanies this  report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and  shall not be deemed filed by the Company for purposes of Section 18 or  any other provision of the Securities Exchange Act of 1934, as amended.                                                           |

 

----

*        Filedherewith.

 

(A)     Incorporatedby reference to the Current Report on Form 8-K filed on June 17, 2008.

 

48

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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  HOLDINGS, INC. |
|--------|-------------------------------|
|   |                          |
|   |                          |
|   | By:                           | /s/ SEIFI GHASEMI |
|   |                          | Seifi Ghasemi |
|   |                          | Chairman of the Board  and Chief Executive Officer |
|   |                          | Date: August 6,  2008 |
|   |                          |   |
|   |                          |   |
|   | ROCKWOOD  HOLDINGS, INC. |
|   |                          |
|   |                          |
|   | By:                           | /s/ ROBERT J. ZATTA |
|   |                          | Robert J. Zatta |
|   |                          | Senior Vice President  and Chief Financial Officer |
|   |                          | Date: August 6,  2008 |

 

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