**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 September 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.    x  Yes    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 November 3,2008, there were 74,058,417 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 nine months ended September 30, 2008 and  2007 |
|    | Condensed Consolidated  Balance Sheets as of September 30, 2008 and December 31, 2007                        |
|    | Condensed Consolidated  Statements of Cash Flows for the nine months ended September 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

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**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  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|-----------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                            | ** ** | **2008**                                             | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net sales                                                             |       | $                                                    | 880.8      |                                                | $          | 763.1 |   | $ | 2,647.8 |   | $ | 2,281.1 |   |
| Cost of products  sold                                                |       | 623.3                                                |       | 525.8                                               |       | 1,834.5 |   | 1,549.2 |   |
| Gross profit                                                          |       | 257.5                                                |       | 237.3                                               |       | 813.3 |   | 731.9 |   |
| Selling, general  and administrative expenses                         |       | 170.3                                                |       | 148.8                                               |       | 512.7 |   | 441.7 |   |
| Restructuring  charges, net                                           |       | 3.4                                                  |       | 2.9                                                 |       | 5.7 |   | 8.9 |   |
| Gain on sale of  assets and other                                     |       | (2.7                                                 | )          | (0.1                                                | )          | (1.8 | ) | (5.3 | ) |
| Operating income                                                      |       | 86.5                                                 |       | 85.7                                                |       | 296.7 |   | 286.6 |   |
| Other income  (expenses):                                             |       |                                                 |       |                                                |       |   |   |   |   |
| Interest expense  (a)                                                 |       | (56.3                                                | )          | (57.0                                               | )          | (139.7 | ) | (158.6 | ) |
| Interest income                                                       |       | 0.6                                                  |       | 1.7                                                 |       | 4.2 |   | 10.1 |   |
| Loss on early  extinguishment of debt                                 |       | —                                               |       | —                                              |       | — |   | (18.6 | ) |
| Refinancing  expenses                                                 |       | —                                               |       | —                                              |       | — |   | (0.9 | ) |
| Foreign exchange  (loss) gain, net                                    |       | (26.5                                                | )          | 7.8                                                 |       | (12.2 | ) | 11.3 |   |
| Other, net                                                            |       | 0.2                                                  |       | (0.1                                                | )          | 0.7 |   | (0.1 | ) |
| Other expenses,  net                                                  |       | (82.0                                                | )          | (47.6                                               | )          | (147.0 | ) | (156.8 | ) |
| Income from  continuing operations before taxes and minority interest |       | 4.5                                                  |       | 38.1                                                |       | 149.7 |   | 129.8 |   |
| Income tax  provision                                                 |       | 10.3                                                 |       | 16.1                                                |       | 50.6 |   | 56.8 |   |
| (Loss) income  from continuing operations before minority interest    |       | (5.8                                                 | )          | 22.0                                                |       | 99.1 |   | 73.0 |   |
| Minority  interest in continuing operations, net of tax               |       | 1.0                                                  |       | (2.8                                                | )          | 0.4 |   | (6.2 | ) |
| Net (loss)  income from continuing operations                         |       | (4.8                                                 | )          | 19.2                                                |       | 99.5 |   | 66.8 |   |
| Income from  discontinued operations, net of tax                      |       | 1.5                                                  |       | 5.5                                                 |       | 2.9 |   | 15.6 |   |
| Gain on sale of  discontinued operations, net of tax                  |       | —                                               |       | —                                              |       | — |   | 115.7 |   |
| Minority  interest in discontinued operations, net of tax             |       | —                                               |       | —                                              |       | — |   | (0.1 | ) |
| Net (loss)  income                                                    |       | $                                                    | (3.3       | )                                                   | $          | 24.7 |   | $ | 102.4 |   | $ | 198.0 |   |
|                                                                  |       |                                                 |       |                                                |       |   |   |   |   |
| Basic (loss)  earnings per share:                                     |       |                                                 |       |                                                |       |   |   |   |   |
| (Loss) earnings  from continuing operations                           |       | $                                                    | (0.06      | )                                                   | $          | 0.26 |   | $ | 1.35 |   | $ | 0.91 |   |
| Earnings from  discontinued operations, net of tax                    |       | 0.02                                                 |       | 0.07                                                |       | 0.03 |   | 1.77 |   |
| Basic (loss)  earnings per share                                      |       | $                                                    | (0.04      | )                                                   | $          | 0.33 |   | $ | 1.38 |   | $ | 2.68 |   |
|                                                                  |       |                                                 |       |                                                |       |   |   |   |   |
| Diluted (loss)  earnings per share:                                   |       |                                                 |       |                                                |       |   |   |   |   |
| (Loss) earnings  from continuing operations                           |       | $                                                    | (0.06      | )                                                   | $          | 0.25 |   | $ | 1.30 |   | $ | 0.88 |   |
| Earnings from  discontinued operations, net of tax                    |       | 0.02                                                 |       | 0.07                                                |       | 0.03 |   | 1.72 |   |
| Diluted (loss)  earnings per share                                    |       | $                                                    | (0.04      | )                                                   | $          | 0.32 |   | $ | 1.33 |   | $ | 2.60 |   |
|                                                                  |       |                                                 |       |                                                |       |   |   |   |   |
| Weighted average  number of basic shares outstanding                  |       | 74,039                                               |       | 73,820                                              |       | 73,957 |   | 73,801 |   |
| Weighted average  number of diluted shares outstanding                |       | 74,039                                               |       | 76,383                                              |       | 76,795 |   | 76,155 |   |
|                                                                  |       |                                                 |       |                                                |       |   |   |   |   |
| (a) Interest  expense includes:                                  |       |                                                 |       |                                                |       |   |   |   |   |
| Interest expense on  debt                                             |       | $                                                    | (43.9      | )                                                   | $          | (41.4 | ) | $ | (125.8 | ) | $ | (136.3 | ) |
| Mark-to-market losses  on interest rate swaps                         |       | (10.0                                                | )          | (13.4                                               | )          | (6.8 | ) | (15.4 | ) |
| Deferred financing  costs                                             |       | (2.4                                                 | )          | (2.2                                                | )          | (7.1 | ) | (6.9 | ) |
| Total                                                                 |       | $                                                    | (56.3      | )                                                   | $          | (57.0 | ) | $ | (139.7 | ) | $ | (158.6 | ) |

 

See accompanyingnotes to condensed consolidated financial statements.

 

3

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**ROCKWOODHOLDINGS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

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

**sharesin thousands)**

**(Unaudited)**

 
| ** **                                                                                                                                                                                                                                           | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                           | ** ** | **2008**               | ** ** | **2007**              | ** ** |
| **ASSETS**                                                                                                                                                                                                                                           |       |                   |       |                  |       |
| Current assets:                                                                                                                                                                                                                                      |       |                   |       |                  |       |
| Cash and cash  equivalents                                                                                                                                                                                                                           |       | $                      | 410.3      |                  | $          | 350.1 |   |
| Accounts  receivable, net                                                                                                                                                                                                                            |       | 585.6                  |       | 460.3                 |       |
| Inventories                                                                                                                                                                                                                                          |       | 629.4                  |       | 526.9                 |       |
| Deferred income  taxes                                                                                                                                                                                                                               |       | 24.6                   |       | 22.6                  |       |
| Prepaid expenses  and other current assets                                                                                                                                                                                                           |       | 68.7                   |       | 69.7                  |       |
| Assets of  discontinued operations                                                                                                                                                                                                                   |       | 64.3                   |       | 75.2                  |       |
| Total current  assets                                                                                                                                                                                                                                |       | 1,782.9                |       | 1,504.8               |       |
| Property, plant  and equipment, net                                                                                                                                                                                                                  |       | 1,770.3                |       | 1,508.5               |       |
| Goodwill                                                                                                                                                                                                                                             |       | 1,736.9                |       | 1,730.0               |       |
| Other intangible  assets, net                                                                                                                                                                                                                        |       | 725.1                  |       | 675.9                 |       |
| Deferred debt issuance  costs, net of accumulated amortization of $36.9 and $31.2, respectively                                                                                                                                                      |       | 40.9                   |       | 41.1                  |       |
| Deferred income  taxes                                                                                                                                                                                                                               |       | 15.8                   |       | 15.4                  |       |
| Other assets                                                                                                                                                                                                                                         |       | 60.2                   |       | 39.2                  |       |
| Total assets                                                                                                                                                                                                                                         |       | $                      | 6,132.1    |                  | $          | 5,514.9 |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                                       |       |                   |       |                  |       |
| Current  liabilities:                                                                                                                                                                                                                                |       |                   |       |                  |       |
| Accounts payable                                                                                                                                                                                                                                     |       | $                      | 276.5      |                  | $          | 285.5 |   |
| Income taxes  payable                                                                                                                                                                                                                                |       | 11.6                   |       | 9.5                   |       |
| Accrued  compensation                                                                                                                                                                                                                                |       | 89.6                   |       | 81.5                  |       |
| Restructuring  liability                                                                                                                                                                                                                             |       | 10.5                   |       | 14.0                  |       |
| Accrued expenses  and other current liabilities                                                                                                                                                                                                      |       | 222.3                  |       | 164.3                 |       |
| Deferred income  taxes                                                                                                                                                                                                                               |       | 7.9                    |       | 7.2                   |       |
| Long-term debt,  current portion                                                                                                                                                                                                                     |       | 81.4                   |       | 107.4                 |       |
| Liabilities of  discontinued operations                                                                                                                                                                                                              |       | 14.8                   |       | 17.1                  |       |
| Total current  liabilities                                                                                                                                                                                                                           |       | 714.6                  |       | 686.5                 |       |
| Long-term debt                                                                                                                                                                                                                                       |       | 2,752.5                |       | 2,474.0               |       |
| Pension and  related liabilities                                                                                                                                                                                                                     |       | 324.5                  |       | 327.5                 |       |
| Deferred income  taxes                                                                                                                                                                                                                               |       | 165.8                  |       | 112.5                 |       |
| Other  liabilities                                                                                                                                                                                                                                   |       | 178.4                  |       | 165.7                 |       |
| Total  liabilities                                                                                                                                                                                                                                   |       | 4,135.8                |       | 3,766.2               |       |
| Minority  interest                                                                                                                                                                                                                                   |       | 377.2                  |       | 175.3                 |       |
| Performance  restricted stock units                                                                                                                                                                                                                  |       | 5.2                    |       | 1.8                   |       |
|                                                                                                                                                                                                                                                 |       |                   |       |                  |       |
| Stockholders’  equity:                                                                                                                                                                                                                          |       |                   |       |                  |       |
| Common stock  ($0.01 par value, 400,000 shares authorized, 74,153 shares issued and 74,058  shares outstanding at September 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                                                                                                                                                                                                                                      |       | 1,161.5                |       | 1,156.2               |       |
| Accumulated  other comprehensive income                                                                                                                                                                                                              |       | 305.6                  |       | 371.0                 |       |
| Retained  earnings                                                                                                                                                                                                                                   |       | 147.5                  |       | 45.1                  |       |
| Treasury stock,  at cost                                                                                                                                                                                                                             |       | (1.4                   | )          | (1.4                  | )          |
| Total  stockholders’ equity                                                                                                                                                                                                                     |       | 1,613.9                |       | 1,571.6               |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                                                                     |       | $                      | 6,132.1    |                  | $          | 5,514.9 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

 

4

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**ROCKWOODHOLDINGS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OFCASH FLOWS**

**(Dollarsin millions)**

**(Unaudited)**

 
| ** **                                                                                                                                                            | ** ** | **Nine months ended** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                                                                            | ** ** | **September 30,**          | ** ** |
| ** **                                                                                                                                                            | ** ** | **2008**                        | ** ** | **2007** | ** ** |
| **CASH FLOWS FROM OPERATING ACTIVITIES:**                                                                                                                             |       |                            |       |   |   |
| Net income                                                                                                                                                            |       | $                               | 102.4      |   | $ | 198.0 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities:                                                                                    |       |                            |       |   |   |
| Income from discontinued operations, net of tax                                                                                                                       |       | (2.9                            | )          | (15.6 | ) |
| Gain on sale of discontinued operations, net of tax                                                                                                                   |       | —                          |       | (115.7 | ) |
| Minority interest in discontinued operations                                                                                                                          |       | —                          |       | 0.1 |   |
| Depreciation and amortization                                                                                                                                         |       | 190.6                           |       | 152.6 |   |
| Deferred financing costs amortization                                                                                                                                 |       | 7.1                             |       | 6.9 |   |
| Loss on early extinguishment of debt (including $4.1  of non-cash write-offs on deferred financing costs)                                                             |       | —                          |       | 18.6 |   |
| Foreign exchange loss (gain)                                                                                                                                          |       | 12.2                            |       | (11.3 | ) |
| Fair value adjustment of derivatives                                                                                                                                  |       | 6.8                             |       | 15.4 |   |
| Bad debt provision                                                                                                                                                    |       | 0.9                             |       | 1.2 |   |
| Acquired in-process research and development                                                                                                                          |       | 2.8                             |       | — |   |
| Stock-based compensation                                                                                                                                              |       | 6.3                             |       | 2.4 |   |
| Deferred income taxes                                                                                                                                                 |       | 14.2                            |       | 24.3 |   |
| Gain on sale of assets and other                                                                                                                                      |       | (1.8                            | )          | (5.3 | ) |
| Minority interest in continuing operations                                                                                                                            |       | (0.4                            | )          | 6.2 |   |
| Changes in assets and liabilities, net of the effect  of foreign currency translation and acquisitions:                                                               |       |                            |       |   |   |
| Accounts receivable                                                                                                                                                   |       | (60.5                           | )          | (35.7 | ) |
| Inventories, including inventory write-up charges                                                                                                                     |       | (45.0                           | )          | (1.1 | ) |
| Prepaid expenses and other assets                                                                                                                                     |       | 6.4                             |       | (5.7 | ) |
| Accounts payable                                                                                                                                                      |       | (29.1                           | )          | (25.0 | ) |
| Income taxes payable                                                                                                                                                  |       | 3.4                             |       | 5.8 |   |
| Accrued expenses and other liabilities                                                                                                                                |       | 26.1                            |       | 39.8 |   |
| Net cash provided by operating activities of  continuing operations                                                                                                   |       | 239.5                           |       | 255.9 |   |
| Net cash provided by operating activities of  discontinued operations                                                                                                 |       | 11.9                            |       | 35.9 |   |
| **Net cash provided by operating activities**                                                                                                                         |       | 251.4                           |       | 291.8 |   |
| **CASH FLOWS FROM INVESTING ACTIVITIES:**                                                                                                                             |       |                            |       |   |   |
| Acquisitions, including transaction fees paid, net  of cash acquired                                                                                                  |       | (181.7                          | )          | (168.3 | ) |
| Post closing purchase price consideration                                                                                                                             |       | 29.1                            |       | — |   |
| Capital expenditures, excluding capital leases                                                                                                                        |       | (157.1                          | )          | (135.5 | ) |
| Proceeds from formation of Viance joint venture, net                                                                                                                  |       | —                          |       | 73.0 |   |
| Proceeds on sale of assets                                                                                                                                            |       | 4.3                             |       | 13.7 |   |
| Net cash used in investing activities of continuing  operations                                                                                                       |       | (305.4                          | )          | (217.1 | ) |
| Net cash (used in) provided by investing activities  of discontinued operations, including sale proceeds of $421.1 for the nine  months ended September 30, 2007 |       | (5.1                            | )          | 416.3 |   |
| **Net cash (used in) provided by investing  activities**                                                                                                              |       | (310.5                          | )          | 199.2 |   |
| **CASH FLOWS FROM FINANCING ACTIVITIES:**                                                                                                                             |       |                            |       |   |   |
| Issuance of common stock, net of fees                                                                                                                                 |       | 2.4                             |       | 0.7 |   |
| Titanium Dioxide Pigments venture financing                                                                                                                           |       | 362.5                           |       | — |   |
| Payment of assumed debt to Titanium Dioxide Pigments  venture minority shareholder                                                                                    |       | (141.4                          | )          | — |   |
| Repayment of 2011 Notes                                                                                                                                               |       | —                          |       | (273.4 | ) |
| Repayment of senior secured credit facilities                                                                                                                         |       | (68.7                           | )          | (57.1 | ) |
| Repayment of senior secured credit facilities  revolver                                                                                                               |       | —                          |       | (37.0 | ) |
| Payments on other long-term debt                                                                                                                                      |       | (30.7                           | )          | (22.2 | ) |
| Deferred financing costs                                                                                                                                              |       | (5.0                            | )          | — |   |
| Payments related to early extinquishment of debt                                                                                                                      |       | —                          |       | (14.5 | ) |
| Distribution to minority shareholder                                                                                                                                  |       | (3.9                            | )          | — |   |
| Net cash provided by (used in) financing activities  of continuing operations                                                                                         |       | 115.2                           |       | (403.5 | ) |
| Net cash used in financing activities of  discontinued operations                                                                                                     |       | —                          |       | — |   |
| **Net cash provided by (used in) financing  activities**                                                                                                              |       | 115.2                           |       | (403.5 | ) |
| Effect of exchange rate changes on cash and cash  equivalents                                                                                                         |       | 4.1                             |       | (9.6 | ) |
| Net increase in cash and cash equivalents                                                                                                                             |       | 60.2                            |       | 77.9 |   |
| Less increase in cash and cash equivalents from  discontinued operations, net (a)                                                                                     |       | —                          |       | (1.6 | ) |
| Increase in cash and cash equivalents from continuing  operations                                                                                                     |       | 60.2                            |       | 76.3 |   |
| Cash and cash equivalents of continuing operations,  beginning of period                                                                                              |       | 350.1                           |       | 27.7 |   |
| Cash and cash equivalents of continuing operations,  end of period                                                                                                    |       | $                               | 410.3      |   | $ | 104.0 |   |

 

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(a) - Excludes $11.2 of intercompany transfers, net of $4.4 ofsale-related cash outflows for the nine months ended September 30, 2008.Excludes sale proceeds of $421.1 and intercompany transfers of $29.5 for thenine months ended September 30, 2007.
|                                               |   |   |   |   |   |
|----------------------------------------------------|--------|--------|--------|--------|--------|
| Supplemental disclosures of cash flow information: |   |   |   |   |   |
| Interest paid                                      |   | $      | 104.0  |   | $      | 119.2 |   |
| Income taxes paid, net of refunds                  |   | $      | 32.9   |   | $      | 27.1 |   |
| Non-cash investing activities:                     |   |   |   |   |   |
| Titanium Dioxide Pigments venture formation, net   |   | $      | 214.7  |   | $      | — |   |
| Acquisition of capital equipment                   |   | $      | 8.0    |   | $      | 8.5 |   |

 

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 SUMMARY OF 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”refer to 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 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.

 

On September 1,2008, the Company completed the formation of a venture with Kemira Oyj (“Kemira”)that focuses on specialty titanium dioxide pigments (See Note 4, “Acquisitions,”for further details).

 

On October 10, 2008,the Company completed the sale of its pool and spa chemicals business (See Note16, “Subsequent Event,” for further details).

 

***Basis of Presentation***—The accompanyingcondensed financial statements of Rockwood are presented on a consolidatedbasis. All significant intercompany accounts and transactions have beeneliminated in consolidation. Certain prior period amounts related to reportingthe sale of the Groupe Novasep segment, the Electronics business, excluding thewafer reclaim business, and the pool and spa chemicals business as discontinuedoperations, have been reclassified to conform to current-year classification.See Note 2, “Discontinued Operations,” for further details.

 

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 the Viance, LLC joint venture andthe Titanium Dioxide Pigments venture) that are consolidated but less than 100%owned. On January 2, 2007, Chemical Specialties, Inc. (“CSI”), awholly-owned subsidiary of the Company within the Timber Treatment Chemicalsbusiness of the Performance Additives segment, and Rohm and Haas Companycompleted the formation of Viance, LLC, a joint venture company that providesan extensive range of advanced wood treatment technologies and services to theglobal wood treatment industry. In accordance with the consolidationprinciples of FIN 46 (R),*Consolidation ofVariable 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.

 

As noted above, theCompany completed a Titanium Dioxide Pigments venture with Kemira in September2008.  The Company has consolidated thisventure and has reported Kemira’s interest as minority interest in the condensedconsolidated financial statements. The water treatment business formerly withinthe Titanium Dioxide Pigments segment was not part of the transaction and isnow being reported within the Clay-based Additives business in the PerformanceAdditives segment. As a result, the Company’s financial statements have beenreclassified to reflect the water treatment business as part of the PerformanceAdditives segment for the periods presented. See Note 4, “Acquisitions,” forfurther details.

 

Unless otherwise noted,all amounts which are denominated in currencies other than the U.S. dollar areconverted at the September 30, 2008 exchange rate of €1.00 = $1.4093.

 

***Nature of Operations/Segment Reporting***—TheCompany is a global developer, manufacturer and marketer of high value-added 

 

6

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specialty chemicals andadvanced materials. The Company currently operates in various business lineswithin its five reportable segments consisting of: (1) SpecialtyChemicals, which includes lithium compounds and chemicals, metal surfacetreatment chemicals, and synthetic metal sulfides, (2) Performance Additives,which includes color pigments and services, timber treatment chemicals andclay-based additives, (3) Titanium Dioxide Pigments, which consists oftitanium dioxide pigments, and zinc- and barium-based compounds, (4) AdvancedCeramics, which includes ceramic-on-ceramic ball head and liner components usedin hip-joint prostheses systems, ceramic cutting tools and a range of otherceramic components and (5) Specialty Compounds, which consists of plasticcompounds. As discussed above, the Company sold its Electronics business,excluding its European wafer reclaim business, in December 2007. As aresult, the European wafer reclaim business is included within “Corporate andother” for all periods presented (See Note 3, “Segment Information,” forfurther details).  The Company completedthe sale of its pool and spa chemicals business in October 2008.  As a result, the Company’s financialstatements have been reclassified to reflect the pool and spa chemicalsbusiness as a discontinued operation for the periods presented.

 

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, an affiliate of DLJMB, served as an underwriter in the secondaryoffering of the Company’s stock by certain stockholders in June 2008. TheCompany did not receive any proceeds in that offering or pay anycommissions. Except for the aforementioned secondary offering, there havenot been additional related party transactions for the period ended September 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. Accrualsare 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 September 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 September 30, 2008, intercompany debt arrangementsdeemed to be of a long-term investment nature for which settlement is notplanned or anticipated in the foreseeable future is predominantly related to€519.4 million (or $732.0 million at September 30, 2008) of intercompanyloans.

 

***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 

 

7

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risks associated withfluctuations in interest rates and foreign currency exchange rates. See “ComprehensiveIncome” section of Note 1 for the impact of the Company’s net investmenthedges. The Company does not enter into derivative contracts for tradingpurposes nor does it use leveraged or complex instruments.

 

***Pension, Postemployment and Postretirement Costs***—Definedbenefit costs and liabilities have been determined in accordance with SFAS 87,*Employers’ Accounting for Pensions* andSFAS 158,*Employers’ Accounting for DefinedBenefit Pension and Other Postretirement Plans, an amendment of FASB StatementsNo. 87, 88, 106 and 132 (R)*. Other postretirement benefit 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. It is the Company’s policy that the valuation allowance is reversed inthe period management determines it is more likely than not that the deferredtax assets will be realized.

 

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 (loss)is summarized as follows:

 
| ** **                               | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                               | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| **($ in millions)**            | ** ** | **2008**                         | ** ** | **2007**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net (loss)  income                       |       | $                                | (3.3       | )                               | $          | 24.7 |   | $ | 102.4 |   | $ | 198.0 |   |
| Pension related  adjustments, net of tax |       | (1.3                             | )          | (0.8                            | )          | (0.9 | ) | (0.7 | ) |
| Foreign currency  translation            |       | (190.9                           | )          | 77.9                            |       | (71.4 | ) | 139.3 |   |
| Intercompany  foreign currency loans     |       | (86.6                            | )          | 38.3                            |       | (25.1 | ) | 49.9 |   |
| Net investment  hedge, net of tax        |       | 125.8                            |       | (54.8                           | )          | 32.0 |   | (79.2 | ) |
| Total  comprehensive (loss) income       |       | $                                | (156.3     | )                               | $          | 85.3 |   | $ | 37.0 |   | $ | 307.3 |   |

 

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 September 30, 2008. The Company does notexpect any of the loss on the net investment hedge residing in comprehensiveincome at September 30, 2008 to be reclassified into earnings during thesubsequent twelve months.

 

In addition, the Companydesignated the remaining portion of the euro-denominated debt that is recordedon the U.S. books as a net investment hedge of our euro-denominated investments(euro-denominated debt of €663.0 million or $934.4 million). As a result,any foreign currency gains and losses resulting from the euro-denominated debtdiscussed above are accounted for as a component of accumulated othercomprehensive income. There was no ineffective portion of the net investmenthedge as of September 30, 2008. The Company does not expect any of the losson the net investment hedge residing in comprehensive income at September 30,2008 to 

 

8

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be reclassified intoearnings during the subsequent twelve months.

 

***Accounting for Environmental Liabilities***—Inthe ordinary course of business, Rockwood is subject to extensive and changingfederal, state, local and foreign environmental laws and regulations, and hasmade provisions for the estimated financial impact of environmental cleanuprelated costs. Rockwood’s policy has been to accrue costs of a non-capital naturerelated to environmental clean-up when those costs are believed to be probableand can be reasonably estimated. If the aggregate amount of the obligation andthe amount and timing of the cash payments for a site are fixed or reliablydeterminable, the liability is discounted. Expenditures that extend the life ofthe related property or mitigate or prevent future environmental contaminationare capitalized and expenditures related to existing conditions resulting frompast or present operations and from which no current or future benefit isdiscernible are immediately expensed. The quantification of environmentalexposures requires an assessment of many factors, including changing laws andregulations, advancements in environmental technologies, the quality ofinformation available related to specific sites, the assessment stage of eachsite investigation and the length of time involved in remediation orsettlement. 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 grantsrecorded under the Plan resulted in a decrease to income from continuingoperations before taxes and minority interest of $2.2 million and $1.5 millionfor the three months ended September 30, 2008 and 2007, respectively, and$6.3 million and $2.2 million for the nine months ended September 30, 2008and 2007, respectively. See Note 10, “Stock-Based Compensation,” forfurther details.

 

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 September 30, 2008 have been recorded asmezzanine equity (outside of permanent equity) in the Condensed ConsolidatedBalance Sheets.

 

***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 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 does not expect a material impact on its financial statements as aresult of this change in 2008.

 

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 foracquisitions completed on or after January 1, 2009.

 

9

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In December 2007,SFAS No. 160,*Noncontrolling Interestsin Consolidated Financial Statements, an amendment of ARB No. 51,*was issued. Per this statement, the accounting and reporting for minorityinterests will be recharacterized as noncontrolling interests and classified asa component of equity (but separate from parent’s equity). This statement alsoestablishes reporting requirements that provide sufficient disclosures thatclearly identify and distinguish between the interests of the parent and theinterests of the noncontrolling owners. This statement is effective for the Company as of January 1, 2009.The Company is currently evaluating the impact this statement will have on itsfinancial statements, primarily relating to its Viance, LLC joint venture andits Titanium Dioxide Pigments venture, as discussed above.

 

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-BasedPayment.* SAB 110 is effective for share options granted as of January 1,2008. SAB 110 extended the use of the simplified method beyond December 31,2007, under certain circumstances, which included not having sufficienthistorical exercise data to provide a reasonable basis upon which to estimateexpected term due to the limited period of time a company’s equity shares havebeen publicly traded. As Rockwood became a public company in August 2005,there is not sufficient historical exercise data available to estimate expectedterm. As a result, the Company will continue to use the “simplified” method toestimate expected term for share option grants until more relevant detailedinformation becomes widely available.

 

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 removesleasing from the scope of SFAS No. 157. FSP FAS 157-2 delays theeffective date of SFAS No. 157 from 2008 to 2009 for all nonfinancialassets and nonfinancial liabilities, except those that are recognized ordisclosed at fair value in the financial statements on a recurring basis (atleast annually). The Company will apply the provisions of FSP 157-2 on January 1,2009 and does not expect this FSP to have a material impact on its financialstatements.

 

In March 2008, SFAS No. 161,*Disclosures about Derivative Instruments and HedgingActivities - an Amendment of FASB Statement 133* was issued. Thisstatement changes the disclosure requirements for derivative instruments andhedging activities, including enhanced disclosures about (a) how and whyan entity uses derivative instruments, (b) how derivative instruments andrelated hedged items are accounted for under SFAS No. 133,*Accounting for Derivative Instruments and HedgingActivities* and its related interpretations, and (c) howderivative instruments and related hedged items affect an entity’s financialposition, financial performance, and cash flows. SFAS No. 161 iseffective for the Company as of January 1, 2009. The Company does notexpect this statement to have a material impact on its financial statements.

 

In April 2008, theFASB issued FSP No. 142-3,*Determination of the Useful Life of Intangible Assets*. This FSPamends the factors that should be considered in developing renewal or extensionassumptions used to determine the useful life of a recognized intangible assetunder FASB Statement No. 142,*Goodwilland Other Intangible Assets*. The intent of this FSP is to improvethe consistency between the useful life of a recognized intangible asset underStatement 142 and the period of expected cash flows used to measure the fairvalue of the asset under FASB Statement No. 141 (revised 2007),*Business Combinations*, and other U.S.GAAP. This FSP is effective for recognized intangible assets acquired after 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 ofaccounting principles and the framework for selecting the principles used inthe preparation of financial statements of nongovernmental entities that arepresented in conformity with generally accepted accounting principles (GAAP) inthe United States (the GAAP hierarchy). This Statement shall be effective as ofNovember 15, 2008. As issued by the FASB, the effective date of thisstatement was tied to the SEC’s approval of the Public Company AccountingOversight Board amendments to AU Section 411,*The Meaning of Present Fairly in Conformity With Generally AcceptedAccounting Principles.* The Company does not expect this statement tohave a material impact on its financial statements.

 

In October 2008, theFASB issued FSP FAS 157-3, *Determining**the Fair Value of a Financial Asset When the Market for That Asset IsNot Active.*This FSP clarifies the application of SFAS No. 157in a market that is not active and provides an example to illustrate keyconsiderations in determining the fair value of a financial asset when themarket for that financial asset is not active. This FSP is effective uponissuance, including prior periods for which financial statements have not beenissued. This FSP did not have an impact on the Company’s condensed consolidatedfinancial statements.

 

**2.       DISCONTINUED OPERATIONS:**

 

On October 10, 2008,the Company completed the sale of its pool and spa chemicals business andreceived approximately $124.0 million in cash. As of September 30, 2008,the Company met the criteria for reporting the pending sale of this business asan asset held for sale and discontinued operations pursuant to SFAS No. 144,*Accounting for the Impairment or Disposal ofLong-Lived Assets*. As a result, the Company’s financial statementshave been reclassified to reflect this business as a discontinued operation forall periods presented.

 

10

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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,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.

 

Operating results of thediscontinued operations of the pool and spa chemicals business for the threeand nine months ended September 30, 2008 were as follows:

 
| ** **                                    | ** ** | **Three months ended** | ** ** | **Nine months ended**  | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| **($ in millions)**                 | ** ** | **September 30, 2008** | ** ** | **September 30, 2008** | ** ** |
| Net sales                                     |       | $                                | 19.5       |                             | $          | 52.0 |   |
| Cost of products  sold                        |       | 13.5                             |       | 37.4                             |       |
| Gross profit                                  |       | 6.0                              |       | 14.6                             |       |
| Selling, general  and administrative expenses |       | 3.5                              |       | 10.3                             |       |
| Operating income                              |       | 2.5                              |       | 4.3                              |       |
| Other expenses:                               |       |                             |       |                             |       |
| Interest expense                              |       | (0.2                             | )          | (0.2                             | )          |
| Other                                         |       | (0.5                             | )          | (0.5                             | )          |
| Other expenses                                |       | (0.7                             | )          | (0.7                             | )          |
| Income before  taxes                          |       | 1.8                              |       | 3.6                              |       |
| Income tax  provision                         |       | 0.3                              |       | 0.7                              |       |
| Net income                                    |       | $                                | 1.5        |                             | $          | 2.9 |   |

 

Operating results of thediscontinued operations of the pool and spa chemicals business and theElectronics business for the three months ended September 30, 2007 were asfollows:

 
| ** **                                    | ** ** | **Pool and Spa** | ** ** | ** **      | ** ** | ** ** | ** ** |
|-----------------------------------------------|------------|----------------------------|------------|-----------------|------------|------------|------------|
| ** **                                    | ** ** | **Chemicals**              | ** ** | **Electronics** | ** ** | ** ** | ** ** |
| **($ in millions)**                 | ** ** | **Business**               | ** ** | **Business**    | ** ** | **Total**  | ** ** |
| Net sales                                     |       | $                          | 15.7       |            | $          | 50.8       |       | $ | 66.5 |   |
| Cost of products  sold                        |       | 10.5                       |       | 38.0            |       | 48.5       |       |
| Gross profit                                  |       | 5.2                        |       | 12.8            |       | 18.0       |       |
| Selling, general  and administrative expenses |       | 3.3                        |       | 7.5             |       | 10.8       |       |
| Operating income                              |       | 1.9                        |       | 5.3             |       | 7.2        |       |
| Other income  (expenses):                     |       |                       |       |            |       |       |       |
| Interest income                               |       | —                     |       | 0.2             |       | 0.2        |       |
| Foreign exchange  loss, net                   |       | —                     |       | (0.2            | )          | (0.2       | )          |
| Other, net                                    |       | —                     |       | 0.1             |       | 0.1        |       |
| Other income,  net                            |       | —                     |       | 0.1             |       | 0.1        |       |
| Income before  taxes                          |       | 1.9                        |       | 5.4             |       | 7.3        |       |
| Income tax  provision                         |       | 0.8                        |       | 1.0             |       | 1.8        |       |
| Net income                                    |       | $                          | 1.1        |            | $          | 4.4        |       | $ | 5.5 |   |

 

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Operating results of the discontinuedoperations of the pool and spa chemicals business, the Electronics business andGroupe Novasep for the nine months ended September 30, 2007 were asfollows:

 
| ** **                                    | ** ** | **Pool and Spa** | ** ** | ** **      | ** ** | ** **  | ** ** | ** ** | ** ** |
|-----------------------------------------------|------------|----------------------------|------------|-----------------|------------|-------------|------------|------------|------------|
| ** **                                    | ** ** | **Chemicals**              | ** ** | **Electronics** | ** ** | **Groupe**  | ** ** | ** ** | ** ** |
| **($ in millions)**                 | ** ** | **Business**               | ** ** | **Business**    | ** ** | **Novasep** | ** ** | **Total**  | ** ** |
| Net sales                                     |       | $                          | 48.1       |            | $          | 147.2       |       | $          | 8.9        |   | $ | 204.2 |   |
| Cost of products  sold                        |       | 32.8                       |       | 109.4           |       | 7.0         |       | 149.2      |       |
| Gross profit                                  |       | 15.3                       |       | 37.8            |       | 1.9         |       | 55.0       |       |
| Selling, general  and administrative expenses |       | 10.2                       |       | 22.7            |       | 1.0         |       | 33.9       |       |
| Gain on sale of  business/assets              |       | —                     |       | —          |       | (117.7      | )          | (117.7     | )          |
| Operating income                              |       | 5.1                        |       | 15.1            |       | 118.6       |       | 138.8      |       |
| Other income  (expenses):                     |       |                       |       |            |       |        |       |       |       |
| Interest expense                              |       | (0.1                       | )          | —          |       | (0.3        | )          | (0.4       | )          |
| Interest income                               |       | —                     |       | 0.9             |       | —      |       | 0.9        |       |
| Loss on early  extinguishment of debt         |       | (0.5                       | )          | (0.3            | )          | —      |       | (0.8       | )          |
| Other income  (expenses), net                 |       | (0.6                       | )          | 0.6             |       | (0.3        | )          | (0.3       | )          |
| Income before  taxes and minority interest    |       | 4.5                        |       | 15.7            |       | 118.3       |       | 138.5      |       |
| Income tax  provision                         |       | 1.8                        |       | 3.3             |       | 2.1         |       | 7.2        |       |
| Net income  before minority interest          |       | 2.7                        |       | 12.4            |       | 116.2       |       | 131.3      |       |
| Minority  interest, net of tax                |       | —                     |       | —          |       | (0.1        | )          | (0.1       | )          |
| Net income                                    |       | $                          | 2.7        |            | $          | 12.4        |       | $          | 116.1      |   | $ | 131.2 |   |

 

The carrying values ofthe assets and liabilities of the pool and spa chemicals business included inthe Condensed Consolidated Balance Sheets are as follows:

 
| ** **                                      | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                      | ** ** | **2008**               | ** ** | **2007**              | ** ** |
| **ASSETS**                                      |       |                   |       |                  |       |
| Current assets:                                 |       |                   |       |                  |       |
| Accounts receivable,  net                       |       | $                      | 10.4       |                  | $          | 23.4 |   |
| Inventories                                     |       | 11.4                   |       | 8.5                   |       |
| Prepaid expenses  and other current assets      |       | 0.7                    |       | 1.0                   |       |
| Property, plant  and equipment, net             |       | 3.8                    |       | 4.3                   |       |
| Goodwill                                        |       | 37.0                   |       | 37.0                  |       |
| Other intangible  assets, net                   |       | 0.9                    |       | 0.9                   |       |
| Deferred income  taxes                          |       | 0.1                    |       | 0.1                   |       |
| Total assets to  be disposed                    |       | $                      | 64.3       |                  | $          | 75.2 |   |
| **LIABILITIES**                                 |       |                   |       |                  |       |
| Current  liabilities:                           |       |                   |       |                  |       |
| Accounts payable                                |       | $                      | 7.0        |                  | $          | 7.7 |   |
| Income taxes  payable                           |       | 2.3                    |       | 3.2                   |       |
| Accrued  compensation                           |       | 1.4                    |       | 1.6                   |       |
| Accrued expenses  and other current liabilities |       | 2.1                    |       | 1.5                   |       |
| Other  liabilities                              |       | 2.0                    |       | 3.1                   |       |
| Total  liabilities to be disposed               |       | $                      | 14.8       |                  | $          | 17.1 |   |

 

As of September 30,2007, the Company had received net cash proceeds of $421.1 million from thesale of Groupe Novasep. These proceeds were reported as net cash provided byinvesting activities of discontinued operations for the nine months ended September 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 and clay-based 

 

12

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additives; (3) TitaniumDioxide Pigments; (4) Advanced Ceramics; and (5) Specialty Compounds.

 

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 maintained basedon legal or tax considerations). The primary components of Corporate and otherloss, in addition to operating loss, are interest expense on external debt(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.

 

In September 2008,the Company completed the formation of its Titanium Dioxide Pigments venture.The water treatment business of the Titanium Dioxide Pigments segment has beenretained and is being reported within the Clay-based Additives business in thePerformance Additives segment. As a result, the Company’s financial statementshave been reclassified to reflect the water treatment business as part of thePerformance Additives segment for the periods presented.

 

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 September 30, 2008** |       |          |       |            |       |         |       |         |       |          |       |               |       |             |       |
| Net sales                                       |       | $             | 319.5      |            | $          | 223.2        |       | $            | 140.6      |          | $          | 126.4              |       | $                | 68.6       |   | $ | 2.5 |   | $ | 880.8 |   |
| Total Adjusted  EBITDA (a)                      |       | 78.8          |       | 28.6            |       | 23.9         |       | 38.1         |       | 7.9           |       | (14.1              | )          | 163.2            |       |
| **Three  months ended September 30, 2007** |       |          |       |            |       |         |       |         |       |          |       |               |       |             |       |
| Net sales                                       |       | $             | 261.4      |            | $          | 203.7        |       | $            | 113.8      |          | $          | 111.7              |       | $                | 69.8       |   | $ | 2.7 |   | $ | 763.1 |   |
| Total Adjusted  EBITDA (a)                      |       | 58.2          |       | 40.8            |       | 21.8         |       | 30.7         |       | 7.8           |       | (13.8              | )          | 145.5            |       |
| **Nine  months ended September 30, 2008**  |       |          |       |            |       |         |       |         |       |          |       |               |       |             |       |
| Net sales                                       |       | $             | 966.7      |            | $          | 676.8        |       | $            | 380.8      |          | $          | 404.9              |       | $                | 210.8      |   | $ | 7.8 |   | $ | 2,647.8 |   |
| Total Adjusted  EBITDA (a)                      |       | 241.4         |       | 99.5            |       | 60.2         |       | 121.5        |       | 26.7          |       | (41.8              | )          | 507.5            |       |
| **Nine  months ended September 30, 2007**  |       |          |       |            |       |         |       |         |       |          |       |               |       |             |       |
| Net sales                                       |       | $             | 800.2      |            | $          | 590.8        |       | $            | 334.7      |          | $          | 335.8              |       | $                | 210.2      |   | $ | 9.4 |   | $ | 2,281.1 |   |
| Total Adjusted  EBITDA (a)                      |       | 192.8         |       | 119.5           |       | 60.9         |       | 92.2         |       | 25.4          |       | (41.5              | )          | 449.3            |       |

 
| ** **                  | ** ** | ** **    | ** ** | ** **      | ** ** | **Titanium** | ** ** | ** **   | ** ** | ** **    | ** ** | ** **                  | ** ** | ** **                | ** ** | ** **                | ** ** |
|-----------------------------|------------|---------------|------------|-----------------|------------|--------------|------------|--------------|------------|---------------|------------|-----------------------------|------------|---------------------------|------------|---------------------------|------------|
| ** **                  | ** ** | **Specialty** | ** ** | **Performance** | ** ** | **Dioxide**  | ** ** | **Advanced** | ** ** | **Specialty** | ** ** | **Corporate**               | ** ** | ** **                | ** ** | ** **                | ** ** |
| ** **                  | ** ** | **Chemicals** | ** ** | **Additives**   | ** ** | **Pigments** | ** ** | **Ceramics** | ** ** | **Compounds** | ** ** | **and other (b)** | ** ** | **Eliminations (c)** | ** ** | **Consolidated (d)** | ** ** |
| Identifiable  assets as of: |       |          |       |            |       |         |       |         |       |          |       |                        |       |                      |       |                      |       |
| September 30,  2008    |       | $             | 2,042.3    |            | $          | 1,384.6      |       | $            | 1,247.2    |          | $          | 821.2                       |       | $                         | 271.9      |                      | $          | 497.8 |   | $ | (197.2 | ) | $ | 6,067.8 |   |
| December 31,  2007     |       | 1,900.1       |       | 1,344.2         |       | 764.8        |       | 843.6        |       | 281.8         |       | 464.3                       |       | (159.1                    | )          | 5,439.7                   |       |
|                        |       |          |       |            |       |         |       |         |       |          |       |                        |       |                      |       |                      |       |
|                             |            |               |            |                 |            |              |            |              |            |               |            |                             |            |                           |            |                           |            |  |  |  |  |  |  |  |  |

 

----

(a)                This amount doesnot include $2.7 million and $5.1 million of Adjusted EBITDA for the three andnine months ended September 30, 2008, respectively, and $2.2 million and$5.9 million of Adjusted EBITDA for the three and nine months ended September 30,2007, respectively, from the pool and spa chemicals business sold in October 2008.This amount also excludes $9.6 million and $27.3 million of Adjusted EBITDA forthe three and nine months ended September 30, 2007, respectively, from theElectronics business sold on December 31, 2007 and $1.8 million ofAdjusted EBITDA for the nine months ended September 30, 2007 from theformer Groupe Novasep segment sold on January 9, 2007.

 

(b)               This amountincludes $52.9 million and $56.5 million of assets from legacy businesses at September 30,2008 and December 31, 2007, respectively. These businesses were formerlyowned primarily by Dynamit Nobel.

 

(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.

 

(d)               This amount doesnot include $64.3 million and $75.2 million of identifiable assets at September 30,2008 and December 31, 2007, respectively, from the pool and spa chemicalsbusiness sold in October 2008. Total identifiable assets including theseamounts were $6,132.1 million and $5,514.9 million at September 30, 2008and December 31, 2007, respectively.

 

13

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

 

On a segment basis, theCompany defines Adjusted EBITDA as operating income excluding depreciation andamortization, certain non-cash gains and charges, certain other special gainsand charges deemed by 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 ongoing performance of the Company’s business segmentsand 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.

 

14

----

 

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 September 30, 2008**                              |       |          |       |            |       |         |       |         |       |          |       |               |       |             |       |
| Income (loss)  from continuing operations before taxes and minority interest |       | $             | 44.5       |            | $          | (5.2         | )          | $            | (1.5       | )             | $          | 17.0               |       | $                | 2.5        |   | $ | (52.8 | ) | $ | 4.5 |   |
|                                                                         |
| Interest expense  (a)                                                        |       | 14.6          |       | 7.8             |       | 8.6          |       | 8.5          |       | 2.3           |       | 14.5               |       | 56.3             |       |
| Interest income                                                              |       | 1.0           |       | 1.0             |       | (0.1         | )          | 0.1          |       | (0.1          | )          | (2.5               | )          | (0.6             | )          |
| Depreciation and  amortization                                               |       | 17.8          |       | 17.2            |       | 14.3         |       | 11.8         |       | 2.6           |       | 1.9                |       | 65.6             |       |
| Restructuring  charges, net                                                  |       | 0.6           |       | 1.6             |       | —       |       | 0.4          |       | 0.4           |       | 0.4                |       | 3.4              |       |
| Systems/organization  establishment expenses                                 |       | 0.6           |       | 1.4             |       | 0.7          |       | 0.1          |       | 0.1           |       | 0.8                |       | 3.7              |       |
| Cancelled  acquisition and disposal costs                                    |       | —        |       | 0.1             |       | —       |       | —       |       | 0.1           |       | —             |       | 0.2              |       |
| Inventory  write-up charges                                                  |       | 0.1           |       | 1.5             |       | 2.1          |       | —       |       | —        |       | —             |       | 3.7              |       |
| (Gain) loss on  sale of assets and other                                     |       | (0.5          | )          | —          |       | —       |       | 0.1          |       | —        |       | (2.3               | )          | (2.7             | )          |
| Acquired  in-process research and development                                |       | —        |       | 2.8             |       | —       |       | —       |       | —        |       | —             |       | 2.8              |       |
| Foreign exchange  loss (gain), net                                           |       | 0.3           |       | 0.3             |       | (0.1         | )          | 0.2          |       | —        |       | 25.8               |       | 26.5             |       |
| Other                                                                        |       | (0.2          | )          | 0.1             |       | (0.1         | )          | (0.1         | )          | —        |       | 0.1                |       | (0.2             | )          |
| Total Adjusted  EBITDA (b)                                                   |       | $             | 78.8       |            | $          | 28.6         |       | $            | 23.9       |          | $          | 38.1               |       | $                | 7.9        |   | $ | (14.1 | ) | $ | 163.2 |   |
| **Three  months ended September 30, 2007**                              |       |          |       |            |       |         |       |         |       |          |       |               |       |             |       |
| Income (loss)  from continuing operations before taxes and minority interest |       | $             | 34.9       |            | $          | 15.7         |       | $            | 3.4        |          | $          | 11.4               |       | $                | 3.0        |   | $ | (30.3 | ) | $ | 38.1 |   |
|                                                                         |
| Interest expense  (a)                                                        |       | 11.5          |       | 6.9             |       | 8.0          |       | 8.6          |       | 2.3           |       | 19.7               |       | 57.0             |       |
| Interest income                                                              |       | (1.2          | )          | (0.1            | )          | 0.1          |       | (0.1         | )          | (0.3          | )          | (0.1               | )          | (1.7             | )          |
| Depreciation and  amortization                                               |       | 13.5          |       | 14.4            |       | 10.2         |       | 10.1         |       | 2.9           |       | 1.5                |       | 52.6             |       |
| Restructuring  charges, net                                                  |       | 1.4           |       | 0.7             |       | —       |       | 0.7          |       | —        |       | 0.1                |       | 2.9              |       |
| Systems/organization  establishment expenses                                 |       | —        |       | 0.4             |       | —       |       | 0.3          |       | (0.1          | )          | —             |       | 0.6              |       |
| Cancelled  acquisition and disposal costs                                    |       | (0.1          | )          | —          |       | 0.4          |       | —       |       | —        |       | 1.7                |       | 2.0              |       |
| Inventory  write-up charges                                                  |       | 0.1           |       | 2.6             |       | —       |       | —       |       | —        |       | —             |       | 2.7              |       |
| (Gain) loss on  sale of assets and other                                     |       | (0.4          | )          | 0.2             |       | 0.1          |       | —       |       | —        |       | —             |       | (0.1             | )          |
| Foreign exchange  gain, net                                                  |       | (0.6          | )          | (0.2            | )          | (0.4         | )          | (0.3         | )          | —        |       | (6.3               | )          | (7.8             | )          |
| Other                                                                        |       | (0.9          | )          | 0.2             |       | —       |       | —       |       | —        |       | (0.1               | )          | (0.8             | )          |
| Total Adjusted  EBITDA (b)                                                   |       | $             | 58.2       |            | $          | 40.8         |       | $            | 21.8       |          | $          | 30.7               |       | $                | 7.8        |   | $ | (13.8 | ) | $ | 145.5 |   |
| **Nine  months ended September 30, 2008**                               |       |          |       |            |       |         |       |         |       |          |       |               |       |             |       |
| Income (loss)  from continuing operations before taxes and minority interest |       | $             | 148.7      |            | $          | 13.1         |       | $            | (9.0       | )             | $          | 59.2               |       | $                | 10.8       |   | $ | (73.1 | ) | $ | 149.7 |   |
|                                                                         |
| Interest expense  (a)                                                        |       | 41.0          |       | 22.6            |       | 26.6         |       | 26.4         |       | 6.9           |       | 16.2               |       | 139.7            |       |
| Interest income                                                              |       | (0.9          | )          | 1.1             |       | (0.1         | )          | (0.1         | )          | (0.4          | )          | (3.8               | )          | (4.2             | )          |
| Depreciation and  amortization                                               |       | 51.0          |       | 50.9            |       | 39.3         |       | 35.6         |       | 8.3           |       | 5.5                |       | 190.6            |       |
| Restructuring  charges, net                                                  |       | 0.8           |       | 3.2             |       | —       |       | 0.9          |       | 0.4           |       | 0.4                |       | 5.7              |       |
| Systems/organization  establishment expenses                                 |       | 1.4           |       | 3.6             |       | 0.7          |       | 0.3          |       | 0.3           |       | 0.8                |       | 7.1              |       |
| Cancelled  acquisition and disposal costs                                    |       | —        |       | 0.1             |       | —       |       | —       |       | 0.4           |       | 0.4                |       | 0.9              |       |
| Inventory  write-up charges                                                  |       | 0.6           |       | 1.5             |       | 2.1          |       | —       |       | —        |       | —             |       | 4.2              |       |
| (Gain) loss on  sale of assets and other                                     |       | (0.5          | )          | —          |       | 0.8          |       | 0.2          |       | —        |       | (2.3               | )          | (1.8             | )          |
| Acquired  in-process research and development                                |       | —        |       | 2.8             |       | —       |       | —       |       | —        |       | —             |       | 2.8              |       |
| Foreign exchange  loss (gain), net                                           |       | —        |       | 0.1             |       | (0.1         | )          | (0.9         | )          | —        |       | 13.1               |       | 12.2             |       |
| Other                                                                        |       | (0.7          | )          | 0.5             |       | (0.1         | )          | (0.1         | )          | —        |       | 1.0                |       | 0.6              |       |
| Total Adjusted  EBITDA (b)                                                   |       | $             | 241.4      |            | $          | 99.5         |       | $            | 60.2       |          | $          | 121.5              |       | $                | 26.7       |   | $ | (41.8 | ) | $ | 507.5 |   |
| **Nine  months ended September 30, 2007**                               |       |          |       |            |       |         |       |         |       |          |       |               |       |             |       |
| Income (loss)  from continuing operations before taxes and minority interest |       | $             | 125.6      |            | $          | 61.5         |       | $            | 6.3        |          | $          | 35.3               |       | $                | 9.0        |   | $ | (107.9 | ) | $ | 129.8 |   |
|                                                                         |
| Interest expense  (a)                                                        |       | 30.5          |       | 11.7            |       | 23.9         |       | 25.2         |       | 7.0           |       | 60.3               |       | 158.6            |       |
| Interest income                                                              |       | (2.9          | )          | (0.6            | )          | —       |       | (0.1         | )          | (0.5          | )          | (6.0               | )          | (10.1            | )          |
| Depreciation and  amortization                                               |       | 39.9          |       | 40.4            |       | 29.9         |       | 29.8         |       | 8.4           |       | 4.2                |       | 152.6            |       |
| Restructuring  charges, net                                                  |       | 1.9           |       | 1.0             |       | —       |       | 1.4          |       | —        |       | 4.6                |       | 8.9              |       |
| Systems/organization  establishment expenses                                 |       | (0.4          | )          | 0.9             |       | —       |       | 0.9          |       | 0.4           |       | —             |       | 1.8              |       |
| Cancelled  acquisition and disposal costs                                    |       | —        |       | —          |       | 1.1          |       | —       |       | —        |       | 1.7                |       | 2.8              |       |
| Inventory  write-up charges                                                  |       | 0.1           |       | 2.6             |       | —       |       | 0.1          |       | —        |       | —             |       | 2.8              |       |
| Loss on early  extinguishment of debt                                        |       | —        |       | 1.4             |       | —       |       | —       |       | 1.1           |       | 16.1               |       | 18.6             |       |
| Refinancing  expenses                                                        |       | —        |       | —          |       | —       |       | —       |       | —        |       | 0.9                |       | 0.9              |       |
| (Gain) loss on  sale of assets and other                                     |       | (0.4          | )          | 0.3             |       | 0.1          |       | —       |       | —        |       | (5.3               | )          | (5.3             | )          |
| Foreign exchange  gain, net                                                  |       | (0.3          | )          | (0.2            | )          | (0.4         | )          | (0.4         | )          | —        |       | (10.0              | )          | (11.3            | )          |
| Other                                                                        |       | (1.2          | )          | 0.5             |       | —       |       | —       |       | —        |       | (0.1               | )          | (0.8             | )          |
| Total Adjusted  EBITDA (b)                                                   |       | $             | 192.8      |            | $          | 119.5        |       | $            | 60.9       |          | $          | 92.2               |       | $                | 25.4       |   | $ | (41.5 | ) | $ | 449.3 |   |

 

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(a)                Includes losses of$10.0 million and $13.4 million for the three months ended September 30,2008 and 2007, respectively, and losses of $6.8 million and $15.4 million forthe nine months ended September 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 $2.7 million and $5.1 million of Adjusted EBITDA for the three andnine months ended September 30, 2008, respectively, and $2.2 million and$5.9 million of Adjusted EBITDA for the three and nine months ended 

 

15

----

 

September 30, 2007,respectively, from the pool and spa chemicals business sold in October 2008.In addition, this amount does not include $9.6 million and $27.3 million ofAdjusted EBITDA for the three and nine months ended September 30, 2007,respectively, from the Electronics business sold on December 31, 2007 and$1.8 million of Adjusted EBITDA for the nine months ended September 30,2007 from the former Groupe Novasep segment sold on January 9, 2007.

 

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

 

*Itemsexcluded from Adjusted EBITDA*

 

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 $3.4 million and $2.9 million were recorded in thethree months ended September 30, 2008 and 2007, respectively, and $5.7million and $8.9 million were recorded in the nine months ended September 30,2008 and 2007, respectively, for miscellaneous restructuring activities,including headcount reductions and facility closures (see Note 13, “RestructuringLiability,” for further details).

 

·                  *Systems/organizationestablishment expenses*:  For the three and nine months ended September 30,2008, expenses of $3.7 million and $7.1 million, respectively, were recordedrelated to the integration of businesses acquired, primarily related to theacquisition of the Elementis plc business in the Performance Additives segmentin August 2007 and the completion of the Titanium Dioxide Pigments ventureon September 1, 2008. For the three and nine months ended September 30,2007, expenses of $0.6 million and $1.8 million, respectively, were recordedrelated to the integration of businesses acquired.

 

·                  *Cancelledacquisition and disposal costs*:  Costs of $0.2 million and $2.0million were recorded for the three months ended September 30, 2008 and2007, respectively, and costs of $0.9 million and $2.8 million were recordedfor the nine months ended September 30, 2008 and 2007, respectively, inconnection with non-consummated acquisitions and dispositions. Approximately$1.6 million of costs were incurred in 2007 related to the expected sale of theelectronics business.

 

·                  *Inventorywrite-up charges*:  Under SFAS 141,*Business Combinations*, all inventoriesacquired in an acquisition must be revalued to “fair value.” In connection withacquisitions, the Company allocates a portion of the total purchase price toinventory to reflect manufacturing profit in inventory at the date of theacquisitions. This resulted in a reduction of gross profit of $3.7 millionand $4.2 million for the three and nine months ended September 30, 2008,respectively, primarily related to the acquisition of Holliday Pigments in August 2008in the Performance Additives segment and the completion of the Titanium DioxidePigments venture and $2.7 million and $2.8 million for the three and ninemonths ended September 30, 2007, respectively, primarily related to theacquisition of the Elementis plc businesses in the third quarter of 2007.

 

·                  *Acquired in-process research and development:* UnderSFAS 141,*Business Combinations*,acquired in-process research and development costs are charged to expense as ofthe acquisition date. For the three and nine months ended September 30, 2008,the Company expensed $2.8 million related to the acquisition of HollidayPigments in August 2008 in the Performance Additives segment.

 

·                  *Losson early extinguishment of debt*: In the second quarter of 2007, the Company paid a redemption premium of$14.5 million and wrote off $4.1 million of deferred financing costs associatedwith the redemption of the 2011 Notes on May 15, 2007.

 

·                  *Refinancingexpenses*:* * In March 2007,the Company expensed $0.9 million related to the fourth amendment of the seniorsecured credit agreement to refinance all outstanding borrowings under thetranche F term loans with new tranche G term loans.

 

·                  *(Gain)loss on sale of assets and other*:  The Company recorded a gainon the sale of assets and other of $2.7 million for the three months ended September 30,2008 primarily related to the sale of land that was acquired as part of theacquisition of Dynamit Nobel in 2004. For the nine months ended September 30,2008, a gain of $1.8 million was recorded related to the sale of land discussedabove, partially offset by the liquidation of a joint venture in the TitaniumDioxide Pigments segment. The Company recorded a gain of $5.3 million for thenine months ended September 30, 2007 primarily related to the sale of theU.S. wafer reclaim business.

 

·                  *Foreignexchange (gain) loss, net*:  For the three and nine months endedSeptember 30, 2008, the Company recorded losses of $26.5 million and $12.2million, respectively, due to the impact of a weaker euro related tonon-operating euro-denominated transactions and intercompany financingarrangements. For the three and nine months ended September 30, 2007,gains of $7.8 million and $11.3 million, respectively, were recorded due to theimpact of the stronger euro related to non-operating euro-denominatedtransactions and intercompany financing arrangements.

 

16

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**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.

 

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 includedin the Color Pigments and Services business, which is part of the PerformanceAdditives segment. The allocation of the purchase price to the identifiableassets acquired and the liabilities assumed is complete.

 

On August 11, 2008,the Company completed the acquisition of Holliday Pigments, the leading globalmanufacturer of technical grade ultramarine blue and manganese violet pigments,from Yule Catto & Co. plc for a purchase price of approximately €46.0million ($68.6 million using an August 11, 2008 exchange rate of $1.4909).Holliday Pigments manufactures inorganic ultramarine pigments for a wide rangeof applications, including plastics, cosmetics, coatings and inks. HollidayPigments was incorporated into the Color Pigments and Services business, whichis part of the Performance Additives segment. The allocation of the purchaseprice to the identifiable assets acquired is preliminary and is subject tochange, with estimated completion during the first half of 2009.

 

On September 1,2008, the Company completed the formation of a venture with Kemira that focuseson specialty titanium dioxide pigments. The venture combines the Company’stitanium dioxide pigments and functional additives businesses, which are partof the Titanium Dioxide Pigments segment, including its production facility inDuisburg, Germany, and Kemira’s titanium dioxide business, including Kemira’stitanium dioxide plant in Pori, Finland. The Company has consolidated this venture and has reported Kemira’sinterest as minority interest in the condensed consolidated financialstatements. The Company owns 61% of the venture with Kemira owning the remainingportion.  The venture’s acquisition ofthe shares of the Rockwood and Kemira entities was facilitated by theborrowings under a term loan of €250.0 million on September 3, 2008($362.5 million using a September 3, 2008 exchange rate of 1.4498).  The venture made a payment of €97.5 million($141.4 million using a September 3, 2008 exchange rate) to the venture’sminority shareholder. In addition, the venture obtained a €30.0 million ($42.3million) revolving credit facility to finance its operations and the venturehas assumed debt of €25.2 million ($35.5 million) from Kemira, primarily due toa defined benefit pension plan. The Company estimates that the potentialexposure range for assumed environmental liabilities is from $14.1 million to$25.3 million. At September 30, 2008, $14.1 million of related reservesare recorded. The purchase accounting allocation is preliminary and is subjectto change, with estimated completion during 2009.

 

On September 4,2008, the Company completed the acquisition of Nalco Holdings, Inc.’s (“Nalco”)Finishing Technologies business for a purchase price of approximately $75.0million. Nalco’s Finishing Technologies business provides chemicals andservices for pre-treating of metal and is part of the Surface Treatmentbusiness within the Specialty Chemicals segment. The allocation of the purchaseprice to the identifiable assets acquired is preliminary and is subject tochange, with estimated completion during the first half of 2009.

 

In addition to theacquisitions described above, the Company has completed other smalleracquisitions in 2007 and in the first nine 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 September 30, 2008.

 

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

 

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

 

Inventories are comprisedof the following:

 
| ** **                    | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------|------------|------------------------|------------|-----------------------|------------|
| **($ in millions)** | ** ** | **2008 (a)**      | ** ** | **2007**              | ** ** |
| Raw materials                 |       | $                      | 211.7      |                  | $          | 184.6 |   |
| Work-in-process               |       | 73.0                   |       | 60.7                  |       |
| Finished goods                |       | 336.9                  |       | 275.5                 |       |
| Packaging  materials          |       | 7.8                    |       | 6.1                   |       |
| Total                         |       | $                      | 629.4      |                  | $          | 526.9 |   |

 

----

(a)     The increase from December 31,2007 is primarily related to the Titanium Dioxide Pigment venture and otheracquisitions, net of the impact of currency changes.

 

17

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**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      |            | $          | 493.9        |       | $            | 172.3      |          | $          | 258.5      |       | $ | 121.2 |   | $ | 1,730.0 |   |
| Post closing  purchase price consideration (a) |       | (18.2         | )          | —          |       | (6.0         | )          | (4.9         | )          | —        |       | (29.1      | )          |
| Acquisitions (b)                               |       | 11.0          |       | 31.1            |       | 53.8         |       | —       |       | —        |       | 95.9       |       |
| Foreign exchange  and other (c)                |       | (21.2         | )          | (17.4           | )          | (6.3         | )          | (8.5         | )          | (6.5          | )          | (59.9      | )          |
| Balance,  September 30, 2008              |       | $             | 655.7      |            | $          | 507.6        |       | $            | 213.8      |          | $          | 245.1      |       | $ | 114.7 |   | $ | 1,736.9 |   |

 

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(a)                In March 2008,the Company entered into an agreement with GEA Group and GEA North America tosettle all existing and future environmental claims in consideration of paymentto 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 relatedto goodwill from the Titanium Dioxide Pigments venture, the Holliday Pigmentsacquisition in the Performance Additives segment and the acquisition of Nalco’sFinishing Technologies business in the Specialty Chemicals segment.

 

(c)                Consists primarilyof foreign currency changes.

 

**7.****            OTHER INTANGIBLE ASSETS:**

 

Other intangible assets,net consist of:

 
| ** **                               | ** ** | **As of September 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 |       | $                                                | 408.6      |                                            | $          | (136.0 | ) | $ | 272.6 |   | $ | 395.6 |   | $ | (116.7 | ) | $ | 278.9 |   |
| Trade names and  trademarks              |       | 139.7                                            |       | (25.9                                           | )          | 113.8 |   | 146.6 |   | (23.0 | ) | 123.6 |   |
| Customer  relationships                  |       | 331.8                                            |       | (72.6                                           | )          | 259.2 |   | 273.0 |   | (57.3 | ) | 215.7 |   |
| Supply  agreements                       |       | 59.7                                             |       | (5.2                                            | )          | 54.5 |   | 29.6 |   | (2.9 | ) | 26.7 |   |
| Other                                    |       | 58.3                                             |       | (33.3                                           | )          | 25.0 |   | 57.7 |   | (26.7 | ) | 31.0 |   |
| Total                                    |       | $                                                | 998.1      |                                            | $          | (273.0 | ) | $ | 725.1 |   | $ | 902.5 |   | $ | (226.6 | ) | $ | 675.9 |   |

 

----

(a)     The increase from December 31,2007 is primarily related to the impact of acquisitions, net of the impact ofcurrency changes.

 

Amortization of otherintangible assets was $20.2 million and $16.5 million for the three monthsended September 30, 2008 and 2007, respectively and $58.8 million and$47.8 million for the nine months ended September 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                          |       | $                | 79.1       |   |
| 2009                          |       | 73.7             |       |
| 2010                          |       | 71.2             |       |
| 2011                          |       | 67.8             |       |
| 2012                          |       | 66.4             |       |
|                               |            |                  |            |  |

 

18

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

 

Long-term debt and loanspayable are summarized as follows:

 
| ** **                                                                                    | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| **($ , € and £ in millions)**                         | ** ** | **2008**               | ** ** | **2007**              | ** ** |
| Senior secured  credit facilities:                                                            |       |                   |       |                  |       |
| Tranche A-1 term  loans (€22.8 and €29.3, respectively)                             |       | $                      | 32.2       |                  | $          | 42.8 |   |
| Tranche A-2 term  loans (€99.4 and €127.8, respectively)                            |       | 140.1                  |       | 186.5                 |       |
| Tranche E term  loans                                                                         |       | 1,104.9                |       | 1,116.4               |       |
| Tranche G term  loans (€265.2 and €267.9, respectively)                             |       | 373.7                  |       | 390.9                 |       |
| 2014 Notes  (€375.0 and $200.0 as of September 30, 2008 and December 31, 2007) |       | 728.5                  |       | 747.1                 |       |
| Titanium Dioxide  Pigments venture term loans (€250.0 as of September 30, 2008)     |       | 352.3                  |       | —                |       |
| Capitalized  lease obligations (€32.4 and €34.1, respectively)                      |       | 45.7                   |       | 49.7                  |       |
| Other loans                                                                                   |       | 56.5                   |       | 24.2                  |       |
| Preferred stock  of subsidiary (£12.0 as of December 31, 2007)                      |       | —                 |       | 23.8                  |       |
|                                                                                          |       | 2,833.9                |       | 2,581.4               |       |
| Less current  maturities                                                                      |       | (81.4                  | )          | (107.4                | )          |
|                                                                                          |       | $                      | 2,752.5    |                  | $          | 2,474.0 |   |

 

The Titanium DioxidePigments venture entered into a facility agreement that provides for a termloan facility in an aggregate amount of €250.0 million and a revolving creditfacility in an aggregate amount of €30.0 million ($42.3 million), both maturingon June 17, 2013. On September 3, 2008, the Titanium Dioxide Pigmentsventure borrowed €250.0 million ($352.3 million) under the term loan facility.As of September 30, 2008, there were no outstanding borrowings under thisrevolving credit facility. The interest rate on the loans is EURIBOR (or LIBORif the currency is not EURO) plus 3%, subject to a step down determined byreference to a leverage ratio test. The term loan shall be repaid ininstallments over a five-year period from the date of the facility agreement,with payments commencing twelve months from such date; both loans may be repaidin advance without penalty. In addition, the Titanium Dioxide Pigments venturehas assumed debt of €25.2 million ($35.5 million) from Kemira at interest ratesranging from 3.75% to 5.00%.

 

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

 

Income tax expense hasbeen computed based on the projected effective tax rate for the year. Theeffective tax rate for the nine months ended September 30, 2008 and 2007was 33.8% and 43.8%, respectively. The effective tax rate is lower in 2008compared to 2007 primarily as a result of lower statutory rates in variousEuropean countries, geographic mix, the 2008 allocation of tax benefits tocontinuing operations primarily related to other comprehensive income,partially offset by increased domestic losses which are 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, theimpact of the valuation allowance on domestic losses and the allocation ofbenefits to continuing operations.

 

In the nine months ended September 30,2008, the Company decreased its worldwide valuation allowances by $4.0 million.The decrease in the valuation allowance was primarily due to a reduction ofdomestic losses in other comprehensive income, the offset of net operatinglosses against uncertain tax benefit liabilities, reduced by an increase indeferred tax assets generally associated with the Company’s domestic earnings.The change in the valuation allowance for the nine months ended September 30,2008 increased the tax provision by $16.3 million. The following table reflectsthe activity in the valuation allowance for worldwide net operating losses andother deferred income tax assets:

 
| ** **                                                                                     | ** ** | **Valuation** | ** ** |
|------------------------------------------------------------------------------------------------|------------|---------------|------------|
| **($ in millions)**                                                                  | ** ** | **Allowance** | ** ** |
| Balance as of  December 31, 2007                                                          |       | $             | 100.1      |   |
| Increase as  reflected in income tax expense                                                   |       | 16.3          |       |
| Decrease as  reflected in other comprehensive income (a)                                       |       | (16.1         | )          |
| Decrease due to  the offset of net operating losses against uncertain tax position liabilities |       | (4.2          | )          |
| Balance as of  September 30, 2008                                                         |       | $             | 96.1       |   |

 

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(a)                Primarily relatedto net investment hedges, as well as the mark-to-market of the Company’sEuro-denominated debt.

 

In the nine months ended September 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 to release the U.S.Federal valuation allowance that has been recorded. During the nine monthsended September 30, 2008, the Company’s net U.S. Federal deferred taxassets and liabilities were maintained at a zero level, other than a noncurrentdeferred tax liability relating to goodwill with an indefinite reversal periodand a noncurrent deferred tax asset relating to a Federal AMT Credit. It is theCompany’s policy that the valuation allowance is reversed in the yearmanagement determines it is more likely than not that the deferred tax assetswill be realized.

 

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 September 30, 2008 were $27.9 million. This includes $25.2 million oftax benefits that, if recognized, would affect the effective tax rate, $2.3million of tax benefits that if recognized, would result in a decrease togoodwill recorded in purchase business combinations and $0.4 million of taxbenefits that, if recognized, would result in an adjustment to other tax 

 

19

----

 

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 nine months ended September 30, 2008, the accrual forinterest and penalties was increased by $2.3 million to $6.6 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 taxauthorities; in the U.S. from 2000, in the U.K. from 2003, and in Germany from2000.

 

**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 $1.5 millionfor the three months ended September 30, 2008 and 2007, respectively, and$6.3 million and $2.2 million for the nine months ended September 30, 2008and 2007, respectively. The total tax benefit recognized related to stockoptions was $0.3 million and $0.2 million for the three months ended September 30,2008 and 2007, respectively, and $0.7 million and $0.3 million for the ninemonths ended September 30, 2008 and 2007, respectively.

 

**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** | ** ** | **Nine months ended** | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                    | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| **($ in millions)**                 | ** ** | **2008**                         | ** ** | **2007**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| Service cost                                  |       | $                                | 2.0        |                            | $          | 1.9 |   | $ | 5.7 |   | $ | 5.7 |   |
| Interest cost                                 |       | 7.7                              |       | 5.8                             |       | 22.0 |   | 17.3 |   |
| Expected return  on assets                    |       | (3.4                             | )          | (2.1                            | )          | (8.9 | ) | (6.3 | ) |
| Net amortization  of actuarial losses (gains) |       | —                           |       | 0.1                             |       | (0.1 | ) | 0.3 |   |
| Total pension  cost                           |       | $                                | 6.3        |                            | $          | 5.7 |   | $ | 18.7 |   | $ | 17.0 |   |

 

As part of the TitaniumDioxide Pigments venture, the Company assumed responsibility for two definedbenefit plans. Summary information as of the formation of the venture (September 1,2008) is as follows:

 
| **($ in millions)**   | ** ** | ** ** | ** ** |
|---------------------------------|------------|------------|------------|
| Fair value of  plan assets      |       | $          | 169.5      |   |
| Benefit  obligation             |       | 158.5      |       |
| Funded status                   |       | $          | 11.0       |   |
|                            |       |       |       |
| Discount rate  assumption       |       | 5.75       | %          |
| Expected return  on plan assets |       | 5.00       | %          |

 

20

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**12.****         EARNINGSPER COMMON SHARE:**

 

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

 
| ** **                                                                                                      | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                      | ** ** | **September 30,**           | ** ** | **Setember 30,**           | ** ** |
| **($ in millions, except per share amounts; shares in thousands)** | ** ** | **2008**                         | ** ** | **2007**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| **EPS  Numerator - Basic:**                                                                                     |       |                             |       |                            |       |   |   |   |   |
| Net (loss)  income from continuing operations                                                                   |       | $                                | (4.8       | )                               | $          | 19.2 |   | $ | 99.5 |   | $ | 66.8 |   |
| Income from  discontinued operations, net of tax                                                                |       | 1.5                              |       | 5.5                             |       | 2.9 |   | 15.6 |   |
| Gain on sale of  discontinued operations, net of tax                                                            |       | —                           |       | —                          |       | — |   | 115.7 |   |
| Minority interest in discontinued operations, net of  tax                                                       |       | —                           |       | —                          |       | — |   | (0.1 | ) |
| Net (loss)  income                                                                                              |       | $                                | (3.3       | )                               | $          | 24.7 |   | $ | 102.4 |   | $ | 198.0 |   |
|                                                                                                            |       |                             |       |                            |       |   |   |   |   |
| **EPS  Denominator - Basic:**                                                                                   |       |                             |       |                            |       |   |   |   |   |
| Weighted average  number of common shares outstanding                                                           |       | 74,039                           |       | 73,820                          |       | 73,957 |   | 73,801 |   |
|                                                                                                            |       |                             |       |                            |       |   |   |   |   |
| **Basic  (loss) earnings per common share:**                                                                    |       |                             |       |                            |       |   |   |   |   |
| (Loss) earnings  from continuing operations                                                                     |       | $                                | (0.06      | )                               | $          | 0.26 |   | $ | 1.35 |   | $ | 0.91 |   |
| Earnings from  discontinued operations, net of tax                                                              |       | 0.02                             |       | 0.07                            |       | 0.03 |   | 1.77 |   |
| Basic (loss)  earnings per common share                                                                         |       | $                                | (0.04      | )                               | $          | 0.33 |   | $ | 1.38 |   | $ | 2.68 |   |
|                                                                                                            |       |                             |       |                            |       |   |   |   |   |
| **EPS  Numerator - Diluted:**                                                                                   |       |                             |       |                            |       |   |   |   |   |
| Net (loss)  income from continuing operations                                                                   |       | $                                | (4.8       | )                               | $          | 19.2 |   | $ | 99.5 |   | $ | 66.8 |   |
| Income from  discontinued operations, net of tax                                                                |       | 1.5                              |       | 5.5                             |       | 2.9 |   | 15.6 |   |
| Gain on sale of  discontinued operations, net of tax                                                            |       | —                           |       | —                          |       | — |   | 115.7 |   |
| Minority  interest in discontinued operations, net of tax                                                       |       | —                           |       | —                          |       | — |   | (0.1 | ) |
| Net (loss)  income                                                                                              |       | $                                | (3.3       | )                               | $          | 24.7 |   | $ | 102.4 |   | $ | 198.0 |   |
|                                                                                                            |       |                             |       |                            |       |   |   |   |   |
| **EPS  Denominator - Diluted:**                                                                                 |       |                             |       |                            |       |   |   |   |   |
| Weighted average  number of common shares outstanding                                                           |       | 74,039                           |       | 73,820                          |       | 73,957 |   | 73,801 |   |
| Effect of  dilutive stock options and other incentives                                                          |       | —                           |       | 2,563                           |       | 2,838 |   | 2,354 |   |
| Weighted average  number of common shares outstanding and common stock equivalents                              |       | 74,039                           |       | 76,383                          |       | 76,795 |   | 76,155 |   |
|                                                                                                            |       |                             |       |                            |       |   |   |   |   |
| **Diluted  (loss) earnings per common share:**                                                                  |       |                             |       |                            |       |   |   |   |   |
| (Loss) earnings  from continuing operations                                                                     |       | $                                | (0.06      | )                               | $          | 0.25 |   | $ | 1.30 |   | $ | 0.88 |   |
| Earnings from  discontinued operations, net of tax                                                              |       | 0.02                             |       | 0.07                            |       | 0.03 |   | 1.72 |   |
| Diluted (loss)  earnings per common share                                                                       |       | $                                | (0.04      | )                               | $          | 0.32 |   | $ | 1.33 |   | $ | 2.60 |   |

 

For the three monthsended September 30, 2008, the effect of stock-based awards, computed onthe treasury stock method, have been excluded from the diluted earnings pershare calculation since the effect of such securities is anti-dilutive.Stock-based awards under employee compensation plans representing common stockof 1,026,414 shares were outstanding during the nine months ended September 30,2008 and 523,697 shares were outstanding during the three and nine months endedSeptember 30, 2007, but were not included in the computation of dilutedearnings per common share because their inclusion would have had ananti-dilutive effect.

 

**13.****         RESTRUCTURINGLIABILITY:**

 

The Company recordedrestructuring charges of $3.4 million and $2.9 million for the three monthsended September 30, 2008 and 2007, respectively and $5.7 million and $8.9million for the nine months ended September 30, 2008 and 2007,respectively. The Company records restructuring liabilities that representcharges incurred in connection with consolidations and 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 nine monthsended September 30, 2008, the Company expensed $5.7 million ofrestructuring charges. In the Color Pigments and Services business, arestructuring plan was implemented in connection with the integration of thebusiness acquired from Elementis plc which includes the reorganization andrelocation of its North American Finance and IT services and the closure ofthree manufacturing facilities by the end of 2008. The Company recorded $2.3 millionof severance costs and $0.5 million of asset write-offs related to thisrestructuring plan. In the Timber Treatment Chemicals business, $0.4 millionwas recorded for miscellaneous headcount reductions. In the Advanced Ceramics,Specialty Chemicals and Specialty Compounds segments, $0.9 million, $0.8million and $0.4 million, respectively, were recorded for miscellaneousheadcount reductions. In the Corporate and other segment, facility closurecosts of $0.4 million were recorded related to the restructuring of the waferreclaim business.

 

21

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During the nine monthsended September 30, 2007, the Company expensed $8.9 million ofrestructuring charges. In the Corporate and other segment, facility closure andseverance costs of $4.6 million were recorded primarily related to therestructuring of the wafer reclaim business. In addition, $1.9 million wasrecorded in the Specialty Chemicals segment and $1.4 million was recorded inthe Advanced Ceramics segment for miscellaneous headcount reductions. In thePerformance Additives segment, $1.0 million was recorded for miscellaneousheadcount reductions 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 ofDynamit 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:

 
| ** **                                  | ** ** | ** **    | ** ** | **Facility** | ** ** | **Relocation** | ** ** | **Write-** | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|---------------|------------|--------------|------------|----------------|------------|------------|------------|------------|------------|
| **($ in millions)**               | ** ** | **Severance** | ** ** | **Closure**  | ** ** | **Costs**      | ** ** | **Downs**  | ** ** | **Total**  | ** ** |
| **2008**                                    | ** ** | ** **    | ** ** | ** **   | ** ** | ** **     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Liability  balance, December 31, 2007  |       | $             | —     |         | $          | —         |       | $          | —     |       | $          | — |   | $ | — |   |
| Acquisitions                                |       | 1.4           |       | —       |       | —         |       | —     |       | 1.4        |       |
| Restructuring  charge in 2008               |       | 4.6           |       | 0.3          |       | 0.1            |       | 0.5        |       | 5.5        |       |
| Utilized in 2008                            |       | (3.7          | )          | (0.2         | )          | (0.1           | )          | (0.5       | )          | (4.5       | )          |
| Foreign exchange  and other                 |       | (0.1          | )          | —       |       | —         |       | —     |       | (0.1       | )          |
| Liability  balance, September 30, 2008 |       | $             | 2.2        |         | $          | 0.1            |       | $          | —     |       | $          | — |   | $ | 2.3 |   |

 

These actions areexpected to be completed during 2008 and 2009.

 

Selected information forthe 2007 restructuring actions follows:

 
| ** **                                  | ** ** | ** **    | ** ** | **Facility** | ** ** | ** **     | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|---------------|------------|--------------|------------|----------------|------------|------------|------------|
| **($ in millions)**               | ** ** | **Severance** | ** ** | **Closure**  | ** ** | **Relocation** | ** ** | **Total**  | ** ** |
| **2007**                                    | ** ** | ** **    | ** ** | ** **   | ** ** | ** **     | ** ** | ** ** | ** ** |
| Liability  balance, December 31, 2007  |       | $             | 6.1        |         | $          | 0.3            |       | $          | 0.3        |   | $ | 6.7 |   |
| Utilized in 2008                            |       | (1.8          | )          | (0.8         | )          | —         |       | (2.6       | )          |
| Foreign exchange  and other                 |       | (1.9          | )          | 2.9          |       | (0.3           | )          | 0.7        |       |
| Liability  balance, September 30, 2008 |       | $             | 2.4        |         | $          | 2.4            |       | $          | —     |   | $ | 4.8 |   |

 

These actions areexpected to be completed during 2008 and 2009.

 

22

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Selected information forthe 2006 restructuring actions follows:

 
| ** **                                  | ** ** | ** **    | ** ** | **Facility** | ** ** | ** **     | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|---------------|------------|--------------|------------|----------------|------------|------------|------------|
| **($ in millions)**               | ** ** | **Severance** | ** ** | **Closure**  | ** ** | **Relocation** | ** ** | **Total**  | ** ** |
| **2006**                                    |       |          |       |         |       |           |       |       |       |
| Liability  balance, December 31, 2007  |       | $             | 1.3        |         | $          | 4.1            |       | $          | 0.1        |   | $ | 5.5 |   |
| Restructuring  charge in 2008               |       | —        |       | 0.3          |       | —         |       | 0.3        |       |
| Utilized in 2008                            |       | (1.6          | )          | (1.3         | )          | —         |       | (2.9       | )          |
| Foreign exchange  and other                 |       | 0.3           |       | (0.6         | )          | —         |       | (0.3       | )          |
| Liability  balance, September 30, 2008 |       | $             | —     |         | $          | 2.5            |       | $          | 0.1        |   | $ | 2.6 |   |

 

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:

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

 

These actions areexpected to be completed in 2008.

 

Selected information forthe 2004 restructuring actions follows:

 
| ** **                                  | ** ** | ** **    | ** ** | **Facility** | ** ** | ** **     | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|---------------|------------|--------------|------------|----------------|------------|------------|------------|
| **($ in millions)**               | ** ** | **Severance** | ** ** | **Closure**  | ** ** | **Relocation** | ** ** | **Total**  | ** ** |
| **2004**                                    | ** ** | ** **    | ** ** | ** **   | ** ** | ** **     | ** ** | ** ** | ** ** |
| 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                 |       | (0.1          | )          | —       |       | (0.4           | )          | (0.5       | )          |
| Liability  balance, September 30, 2008 |       | $             | 0.5        |         | $          | 0.1            |       | $          | —     |   | $ | 0.6 |   |

 

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

 

Restructuring reserves bysegment are as follows:

 
| ** **                    | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------|------------|------------------------|------------|-----------------------|------------|
| **($ in millions)** | ** ** | **2008**               | ** ** | **2007**              | ** ** |
| Specialty  Chemicals          |       | $                      | 1.7        |                  | $          | 3.4 |   |
| Performance  Additives        |       | 3.8                    |       | 4.6                   |       |
| Titanium Dioxide  Pigments    |       | 1.4                    |       | —                |       |
| Advanced  Ceramics            |       | 0.4                    |       | 0.8                   |       |
| Specialty  Compounds          |       | 0.5                    |       | 2.4                   |       |
| Corporate and  other          |       | 2.7                    |       | 2.8                   |       |
|                          |       | $                      | 10.5       |                  | $          | 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*

 

23

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*andFinancial Liabilities* —*Includingan Amendment of FASB Statement No. 115,* entities are permittedto choose to measure many financial instruments and certain other items at fairvalue. The Company has elected not to measure any instruments at fairvalue under SFAS No. 159.

 

As of September 30,2008, the only assets and liabilities that the Company currently measures atfair value 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:

 
| Level 1 – | Inputs are unadjusted  quoted market prices in active markets for identical assets or liabilities  that the Company has the ability to access at the measurement date.                                                                                                                                                                                                                                                                  |
|----------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| Level 2 – | Inputs are directly or  indirectly observable, which include quoted prices for similar assets and  liabilities in active markets, quoted prices for identical or similar assets  or liabilities in markets that are not active, inputs other than quoted  prices that are observable for the asset or liability and inputs that are  derived principally from or corroborated by observable market data by  correlation or other means. |
|           |                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| Level 3 – | Inputs are unobservable  inputs that are used to measure fair value to the extent observable inputs  are not available. The Company does not have any financial assets or  liabilities that are classified as Level 3 inputs as of September 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 September 30, 2008:

 
| ** **                                                     | ** ** | **As of**                   | ** ** | **Fair Value Measurements** | ** ** |
|----------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------------|------------|
| ** **                                                     | ** ** | **September 30, 2008** | ** ** | **Level 1**                      | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
| Assets                                                         |       |                             |       |                                  |       |   |   |   |   |
| Marketable  securities (a)                                     |       | $                                | 322.2      |                                  | $          | 322.2 |   | $ | — |   | $ | — |   |
| Interest rate  swaps (b)                                       |       | 1.9                              |       | —                                |       | 1.9 |   | — |   |
| Total assets at  fair value                                    |       | $                                | 324.1      |                                  | $          | 322.2 |   | $ | 1.9 |   | $ | — |   |
|                                                           |       |                             |       |                                  |       |   |   |   |   |
| Liabilities                                                    |       |                             |       |                                  |       |   |   |   |   |
| Interest rate  swaps (b)                                       |       | $                                | 23.2       |                                  | $          | — |   | $ | 23.2 |   | $ | — |   |
| Cross-currency  interest rate swaps (c)                        |       | 5.3                              |       | —                                |       | 5.3 |   | — |   |
| Cross-currency  interest rate swaps - net investment hedge (d) |       | 19.4                             |       | —                                |       | 19.4 |   | — |   |
| Raw material  purchase hedge (e)                               |       | 0.4                              |       | —                                |       | 0.4 |   | — |   |
| Total  liabilities at fair value                               |       | $                                | 48.3       |                                  | $          | — |   | $ | 48.3 |   | $ | — |   |

 

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| (a)    |   | These primarily  represent money market funds with an original maturity of three months or  less.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| (b)    |   | The Company has  historically entered into interest rate swaps to manage its exposure to  changes in interest rates related to variable rate debt. As of  September 30, 2008, these contracts cover notional amounts of $610.0  million (at interest rates ranging from 4.864% to 5.038%) and €288.0 million  (at an interest rate of 4.416%). These derivative contracts effectively  convert the senior secured credit obligations to fixed rate obligations.  These hedges will mature between November 2009 and July 2012. The  Company has elected not to apply hedge accounting for these interest rate  swaps and has recorded the mark-to-market of these derivatives as a component  of interest expense in the Condensed Consolidated Statements of Operations. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| (c)    |   | The Company entered  into cross-currency interest rate swaps with current notional amounts of  $19.3 million and €17.0 million that effectively convert U.S. dollar  borrowings into euro-based obligations at an effective interest rate of  EURIBOR plus 4%. These contracts have final maturity dates of July 2010.  The Company has elected not to apply hedge accounting for these interest rate  swaps and has recorded the mark-to-market of these derivatives as a component  of interest expense in the Condensed Consolidated Statements of Operations.                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| (d)    |   | In connection with the  offering of the 2014 Notes, the Company entered into a cross-currency  interest rate swap in November 2004 with a notional amount of €155.6  million that effectively converts the U.S. dollar fixed rate debt in respect  of the 2014 dollar-denominated notes sold into euro fixed rate debt. This  swap has a final maturity date of November 2009. The Company designated  this contract as a hedge of the foreign currency exposure of its net  investment in its euro-denominated operations. As a result, any foreign  currency gains and losses resulting from the translation of this  euro-denominated debt is accounted for as a component of accumulated other  comprehensive income for as long as the hedge remains effective.           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| (e)    |   | In March 2008, the  Titanium Dioxide Pigments segment entered into a derivative contract to  protect a portion of its exposure to movements in certain raw material  prices. The Company has elected not to apply hedge accounting for this  derivative contract and has recorded the mark-to-market of this derivative in  cost of products sold in the Condensed Consolidated Statements of                                                                                                                                                                                                                                                                                                                                                                                            |

 

24

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|   |   | 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.

 

**Counter-party risk**

 

The Company managescounter-party risk by entering into derivative contracts with only majorfinancial institutions of investment grade quality and by limiting the amountof exposure to each financial institution. The Company has considered creditadjustments to the fair value of its derivative assets and liabilities as ofSeptember 30, 2008 based on market participant assumptions. In addition, basedon the credit evaluation of each institution comprising our derivative assetsas of September 30, 2008, the Company has determined the carrying values ofthese assets as of September 30, 2008 to be fully realizable.

 

**15.****         COMMITMENTS AND CONTINGENCIES:**

 

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

 

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 appellatecourt heard oral arguments in October 2008. The Company cannot predict howthis decision will impact the ultimate resolution of the case; however, theCompany will continue to vigorously defend this matter. While the Companybelieves its subsidiary has meritorious defenses against Hospira’s claims anddoes not believe that resolution of this matter will have a material adverseeffect on its business or financial condition, the Company cannot predict theultimate outcome of this litigation and resolution of this claim may have amaterial adverse effect on its results of operations or cash flows in anyquarterly or annual reporting period.

 

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 September 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***— The Company may beindemnified by third parties in connection with certain matters related toacquired businesses.  For example, underthe terms of the sale and purchase agreement, mg technologies ag (now known asGEA Group Aktiengesellschaft (“GEA Group”)) and its subsidiary MG North AmericaHoldings, Inc. (now known as GEA North America Inc. (“GEA North America”)),were obligated to indemnify the Company for certain legal, tax andenvironmental liabilities and obligations that relate to the period prior tothe closing, subject to certain limits and exclusions. Pursuant to theseagreements, the Company has various claims for indemnification with GEA Group.However, in March 2008, the Company entered into an agreement with GEAGroup and GEA North America to settle all existing and future environmentalindemnities under the sale and purchase agreement relating to the Dynamit NobelAcquisition in consideration of payment to the Company of €18.8 million ($29.1million), 

 

25

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which was received on March 28,2008. Although the Company has no reason to believe that the financialcondition of those parties who may have indemnification obligations to theCompany is other than sound, in the event the Company seeks indemnity under anyof these agreements or through other means, there can be no assurance that anyparty who may have obligations to indemnify the Company will adhere to theirobligations and the Company may have to resort to legal action to enforce itsrights under the indemnities. In cases where the Company’s indemnificationclaims to such third parties are uncontested, the Company expects to realizerecoveries within the short term.

 

In addition, the Companymay be subject to indemnity claims relating to properties or businesses itdivested. The Company is required to indemnify the buyer of its formerElectronics business, Groupe Novasep segment and pool and spa chemicalsbusiness. For example, the Company is required to indemnify the buyer of itsElectronics business for certain known and unknown environmental actions whichmay arise in the future that relate to the period prior to the closing. In theopinion of management, and based upon information currently available, theultimate resolution of any indemnification obligations owed to the Company orby the Company is not expected to have a material adverse effect on the Company’sfinancial condition, results of operations or cash flows, but may have amaterial adverse effect on the Company’s results of operations or cash flow inany quarterly or annual reporting period.

 

**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 hygiene regulationsand investigation. The nature of the Company’s operations exposes it to risksof liability for breaches of these laws and regulations as a result of theproduction, 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***

 

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, obtain authorizationsfor the use of the chemicals. Covered substances must be pre-registered by December 31,2008. Currently, REACH is expected to be implemented in three phases over thenext eleven years based on known product hazards and/or volume of product incommerce. Under REACH, where warranted by a risk assessment, specified uses ofsome hazardous substances may be restricted. As a specialty chemicals company,it is possible that the Company is the only manufacturer of one or moresubstances to be regulated under REACH and thus could potentially bear the fullcost of compliance with REACH for some or all of the Company’s products. TheCompany estimates it has approximately 350 products that might be subject toREACH. The Company is taking steps to comply with REACH and is evaluating thepotential costs of compliance. The Company does not believe these costs willhave a material impact on its results of operations, financial position orliquidity. In addition, it is possible that REACH may affect raw material supply,customer demand for certain products and the Company’s decision to continue tomanufacture and sell certain products.

 

In addition, the Companyis subject to the Homeland Security Agency’s regulations, which addresschemical plant safety, the Kyoto Protocol, which relates to the emission ofgreenhouse gasses and the European Union Integrated Pollution Prevention andControl Directive, which relates to environmental permitting programs forindividual facilities.  The Company doesnot believe, based upon 

 

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currently availableinformation, that these regulations will have a material adverse impact on itsresults of operations, financial position or liquidity.

 

***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 September 30,2008:

 
| **Country**     | ** ** | **Location**                     | ** ** | **(a)** | ** ** | **(b)** | ** ** | **(c)** | ** ** | **(d)** | ** ** | **(e)** | ** ** |
|-----------------|------------|----------------------------------|------------|---------|------------|---------|------------|---------|------------|---------|------------|---------|------------|
| Brazil          |       | Diadema                          |       |    |       |    |       | X       |       |    |       |    |       |
| China           |       | Shenzhen                         |       |    |       |    |       | X       |       |    |       |    |       |
| Finland         |       | Kipsikorski                      |       |    |       |    |       |    |       | X       |       |    |       |
|            |       | Pori                             |       |    |       |    |       |    |       | 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)      TheCompany is currently operating groundwater monitoring and/or remediationsystems at these locations.

 

(b)      TheCompany is currently operating groundwater monitoring and/or remediationsystems at these locations for which prior owners or insurers have assumedresponsibility.

 

(c)      TheCompany is currently conducting investigations into additional possible soiland/or groundwater contamination at these locations.

 

(d)      TheCompany has land restoration obligations relating to landfill activities orsurface mining at these locations.

 

(e)      TheCompany is responsible for liabilities related to environmental matters atthese 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 September 30, 2008. In addition, theGerman environmental authorities recently notified the Company, along with afew other potentially responsible parties, of a potential remediation at aformer site in Liebenau, Germany. The Company is currently in the process ofgathering additional information regarding the site and cannot predict thepotential scope of any such remediation. Based upon currently availableinformation, the Company does not believe this matter will have a materialeffect on its results of operations.

 

Although the Companycannot provide assurances in this regard, the Company does not believe thatthese issues will have a material 

 

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adverse effect on itsbusiness or financial condition, but may have a material adverse effect on theresults of operations or cash flows in any given quarterly or annual reportingperiod. Nonetheless, the discovery of contamination arising from present orhistorical industrial operations at some of the Company’s or its predecessor’sformer and present properties and/or at sites where the Company and itspredecessor disposed wastes could expose the Company to cleanup obligations andother damages in the future.

 

***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 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 $57.4 million and $40.7 million forknown environmental liabilities as of September 30, 2008 and December 31,2007, respectively, all of which were classified as other non-currentliabilities in the Condensed Consolidated Balance Sheets.  The increase in the environmental reserve isprimarily due to environmental liabilities assumed from the Titanium DioxidePigments venture that was completed in September 2008.  The environmental liabilities assumed aresubject to change upon the finalization of purchase accounting. Included in the$57.4 million as of September 30, 2008 is $21.4 million that is discountedusing discount rates ranging from 5.0% to 7.5%, with the undiscounted amount ofthese reserves equaling $30.7 million. Included in the $40.7 million as of December 31,2007 is $15.8 million that is discounted using discount rates ranging from 5.0%to 7.0%, with the undiscounted amount of these reserves equaling $22.5 million.In certain cases, the Company’s remediation liabilities are payable overperiods of up to 30 years. The Company estimates that the potential range forsuch environmental matters as of September 30, 2008 is from $57.4 millionto $96.4 million. For the nine months ended September 30, 2008, theCompany recorded charges of $2.5 million to increase its environmentalliabilities and made payments of $1.8 million for clean-up and remediationcosts, which reduced its environmental liabilities. For the nine months ended September 30,2008, the recurring cost of managing hazardous substances for ongoingoperations is $38.4 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 potentialsettlement dates for its obligations. Consequently, the Company cannot employ apresent value technique to estimate fair value and, accordingly, has notaccrued for any environmental related costs to remediate soil at thesefacilities.

 

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 EVENT:**

 

On October 10, 2008,the Company completed the sale of its pool and spa chemicals business andreceived approximately $124.0 million in cash. This business, whichmanufactured and marketed branded swimming pool, spa and surface watertreatment chemicals primarily through pool and spa professionals and specialtyretailers, was part of the Performance Additives segment. As a result, the 

 

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Company has accounted forthe results of this business as a discontinued operation in the condensedconsolidated financial statements. See Note 2, “Discontinued Operations,” forfurther details.

 

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

 

*In2007, we completed the sale of our Groupe Novasep and Electronics businesses,excluding our European wafer reclaim business. In addition,**the Company completed the sale of its pool and spa chemicals businessin October 2008. As aresult, our condensed consolidated financial statements have been reclassifiedto reflect these businesses as discontinued operations. See Note 2, “DiscontinuedOperations,” for further details.*

 

*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.*

 

*Unlessotherwise noted, all amounts which are denominated in currencies other than theU.S. dollar are converted at the September 30, 2008 exchange rate of €1.00= $1.4093**.*

 

**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 2007that was included in our Color Pigments and Service business within ourPerformance Additives segment. In August 2008, we acquired HollidayPigments, which was also included in our Color Pigments and Service business.In addition, we acquired Nalco’s Finishing Technologies business in September 2008,which was included in our Specialty Chemicals segment;

 

·      We completed the TitaniumDioxide Pigments venture with Kemira in September 2008. See Note 4, “Acquisitions,”for further details;

 

·      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 in October 2008, we completed the sale of our pooland spa chemicals 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 services and the closure of three manufacturing facilities by the end of2008.

 

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**FactorsWhich Affect Our Results of Operations**

 

**OurMarkets**

 

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

 

***Specialty Chemicals***

 

·                  Demand forSurface Treatment products in our Specialty Chemicals segment generally followsthe activity levels of metal processing manufacturers, including the automotivesupply, steel and aerospace industries. Sales growth in the Surface Treatmentbusiness occurred in 2007 and has continued in the first nine months of 2008 inmost markets and regions served, especially in the general industrial andEuropean automotive industries.  Thisgrowth was driven by price and volume increases and the impact of bolt-onacquisitions made in December 2007 and September 2008 that more thanoffset raw material cost increases. We expect the Surface Treatment business tocontinue to grow in the remainder of 2008. However, our results could be negatively impacted by a slowdown in theautomotive and general industrial markets.

 

·                  Demand for ourlithium products in the Fine Chemicals business line of our Specialty Chemicalssegment is generally driven by demand for lithium carbonate in industrialapplications, the aluminum business, glass ceramics, cement and the generaldemand in China. Sales of lithium products specifically used in life scienceapplications depend on the trends in drug development and growth inpharmaceuticals markets as well as generic competition. Growth in the FineChemicals business occurred in 2007 and has continued in the first nine monthsof 2008 in most market segments, driven by higher sales volumes of lithiumspecialties and price increases for lithium products. Growth in the FineChemicals business is expected to continue in most lithium applications for theremainder of 2008.

 

***Performance Additives***

 

·                  Generally, atrend 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 nine months of 2008 and are expected to continue todecline throughout the remainder of 2008. However, sales in our Color Pigmentsand Services business in North America were favorably impacted in the firstnine months of 2008 by the acquisition of the global color pigments business ofElementis plc in August 2007 and the acquisition of Holliday Pigments in August2008, as well as higher selling prices implemented to help recover raw materialand energy cost increases. We expect this trend to continue for theremainder of 2008. Unlike North America, construction volumes in Europe inour Color Pigments and Services business increased slightly in 2007. However,weaker economic conditions in Europe have resulted in a reduction in Europeanconstruction volumes in the first nine months of 2008 and we expect this trendto continue throughout the remainder of 2008.

 

·                  The change inthe market to environmentally advanced wood treatment chemical products, suchas alkaline copper quaternary, or ACQ, and the phase out of chromated copperarsenate, or CCA, for residential use previously had a positive impact on theTimber Treatment Chemicals business, which is a leading supplier of thesehigher margin products. However, the market position of ACQ was negatively impactedin 2007 and the first nine months of 2008 by customer shifts to substituteproducts, a general slowdown in the construction market and the use of woodsubstitutes. These trends are expected to continue throughout the remainder of2008. The expiration of the ACQ patent in May 2007 had a negative impacton our results of operations, as one new competitor has entered the market andothers may follow. Although we commercialized the next generation non-metallictimber treatment preservatives system (*Ecolife*)in the third quarter of 2007 through our joint venture with Rohm and Haas, thiswill not have a significant impact in 2008.

 

·                  In theClay-based Additives business, sales were up slightly in 2007 and continued toincrease in the first nine 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.

 

·                  Raw materialcosts have increased in general in the Performance Additives segment. In theColor Pigments and Services and Clay-based Additives businesses, selling priceincreases helped offset the increases in raw material and energy costs,specifically iron oxide for Color Pigments and Services and quaternary amine (“quat”)for Clay-based Additives. The Timber Treatment Chemicals businesscontinues to experience high costs for monoethanolamine (“MEA”). Sellingprice increases were implemented in 2007 and were essentially maintained in thefirst nine months of 2008 to partially offset higher MEA costs. Our ability topass on additional selling price increases throughout 2008 is uncertain inthese 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,cosmetics, pharmaceutical, food, paper and plastics industries.  Marketconditions, including pricing pressure and current industry overcapacity, havecontinued to negatively impact this segment. Volumes and selling prices in the fiber anatase business decreased in2007 and continued to decline in the first nine months of 2008. We expect thistrend to continue for the remainder of 2008. While sales of titanium dioxideproducts in rutile grade were up slightly in 2007 on increased volumes, salesof these products were down in the first nine months of 2008 due to lowervolumes and selling prices and are expected to be lower for the remainder of2008. Our functional additives business increased in 2007 on higher sellingprices and volumes, but was down in the first nine months of 2008 on lowervolumes. We expect sales in the functional additives business to decline forthe remainder of 2008.

 

·                  As discussed inNote 4, “Acquisitions,” we completed the formation of a venture with Kemira on September 1,2008 that focuses on producing and marketing specialty titanium dioxidepigments for the synthetic fiber, packaging inks, cosmetics, pharmaceutical andfood industries.

 

***Advanced Ceramics***

 

·                  Demand for ourceramic medical devices is mainly tied to the aging population in Europe andthe United States. Although the volume of our products used in medical deviceapplications sold experienced double-digit growth each year from 2001 through2005, in 2006 some customers in the U.S. reduced their demand due to highinventory levels and delayed approvals resulting in lower volumes. However,sales of our medical device applications increased in 2007 on higher volumesand continued to increase in the first nine months of 2008. We expect thistrend to continue throughout the remainder of 2008.

 

·                  Despite thenegative impact of pricing pressure from Asian competitors, sales of ceramicproducts for use in cutting tool products were higher in 2007 and in the firstnine months of 2008 due to volume increases and new customer projects. However,volumes of cutting tool applications are expected to be lower for the remainderof 2008.  Sales of mechanical systems andapplications were up in 2007, but were lower in the first nine months of 2008on decreased volumes and are expected to continue to be decline throughout2008. Sales in our electronic products business were lower in 2007 primarily ondecreased volumes and continued to decrease in the first nine months of 2008 onlower selling prices and volumes. We expect this trend to continue throughoutthis year. Sales of our multi-functional applications were higher in 2007 fromincreased volumes, but were down in the first nine months of 2008 from lowerselling prices and are expected to decline for the remainder of 2008 on lowervolumes.

 

***Specialty Compounds***

 

·                  Our largestproduct line in the Specialty Compounds segment is wire and cable compounds.Sales within this product line are dependent upon the telecommunications marketand related sectors, specifically demand for high-end voice and datacommunication wire and cable, for which our Specialty Compounds segment is asignificant provider of sheathing materials. Newly developed non-halogenproducts for wire and cable data communication, military and other applicationshave expanded business in North America for those applications and createdopportunities in Europe. Although sales of wire and cable products were upslightly in 2007, sales growth was due to the acquisition of the Megolondivision of Scapa Group, plc., the wire and cable business was negatively impactedby a general downturn in the wire and cable market. As a result of continuedweakness in the wire and cable market, volumes of wire and cable products weredown slightly in the first nine months of 2008 and expected to decline for theremainder of 2008.

 

·                  Most of theother 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 nine months of 2008, and are expected to be up slightly for the remainderof 2008. Net sales of regulated packaging were lower in 2007 and the first ninemonths of 2008 and are expected to continue to decline for the remainder of2008.

 

·                  Raw materialprices for polyvinyl chloride (“PVC”) resin, plasticizers and ammoniumoctamolybdate, key raw materials used in the production of wire and cableproducts, were slightly lower in 2007, but were up in the first nine months of2008.  We expect the prices of PVC resinand plasticizers to decrease throughout the remainder of 2008.

 

**GlobalExposure**

 

We operate ageographically diverse business. Of our 2007 net sales, 52% were shipments toEurope, 31% to North America (predominantly the United States) and 17% to therest of the world. For a geographic description of the origin of our net salesand location of our long-lived assets, see Note 4, “Segment Information” in our2007 Form 10-K.

 

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We estimate that we soldto customers in more than 60 countries during this period. Currently, we serveour diverse and extensive customer base with 95 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.

 

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 nine months ended September 30, 2008, the average exchangerate of the euro against the U.S. dollar was higher compared to the same periodin 2007. 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 specificgeographic regions. In addition, we may not be able to pass on raw materialprice increases to our customers. See details of our ten most significantraw materials (in terms of dollars) in 2007 in Item 1, “Business — RawMaterials” 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 nine 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 nine months of 2008.

 

**IncomeTaxes**

 

We recorded an income taxprovision of $10.3 million in the third quarter of 2008 on income fromcontinuing operations before taxes and minority interest of $4.5 million. Theincome tax provision in the third quarter of 2008 was negatively impacted bythe absence of a tax benefit for the Company’s domestic losses as a result of afull valuation allowance. This domestic loss is primarily due to foreignexchange losses and mark-to-market losses on derivative instruments. This waspartially offset by the allocation of tax benefits to continuing operations.

 

In the third quarter of2008, the worldwide valuation allowance decreased by $37.3 million. This wasdue to a $53.4 million reduction in domestic losses in other comprehensiveincome, a decrease of $2.3 million due to the offset of net operating lossesagainst uncertain tax benefit liabilities, partially offset by a $18.4 milliondeferred tax increase associated with the Company’s domestic earnings. Of the $37.3million decrease in the valuation allowance for the third quarter of 2008, $18.4million 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.

 

**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 nine monthsended September 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 

 

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secured credit agreementas a basis and reflects management’s interpretations thereof. Adjusted EBITDA,which is referred to under the senior secured credit agreement as “ConsolidatedEBITDA,” is defined in the senior secured credit agreement as consolidatedearnings (which, as defined in the senior secured credit agreement, equalsincome (loss) before the deduction of income taxes of Rockwood SpecialtiesGroup, Inc. and the Restricted Subsidiaries (as such term is defined inthe senior secured credit agreement), excluding extraordinary items) plus:

 

·                  interestexpense;

·                  depreciationexpense;

·                  amortizationexpense, including amortization of deferred financing fees;

·                  extraordinarylosses and non-recurring charges;

·                  non-cashcharges;

·                  losses on assetsales;

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

·                  expenses paid byus or any of our subsidiaries in connection with the Dynamit Nobel Acquisition,the senior secured credit agreement, the granting of liens under the securitydocuments (as such term is defined in the senior secured credit agreement), theindenture governing the 2014 Notes and the offering of the 2014 Notes and anyother related transactions;

·                  any expenses orcharges incurred in connection with any issuance of debt or equity securities;

·                  any fees andexpenses related to permitted acquisitions;

·                  any deductionfor minority interest expense; and

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

 

less:

 

·                  extraordinarygains and non-recurring gains;

·                  non-cash gains;and

·                  gains on assetsales,

 

in all cases, subject tocertain exclusions.

 

For presentation purposeswithin this report, we use the computation set forth in our senior securedcredit agreement as a basis which reflects management’s interpretationsthereof. Management has determined that stock-based compensation costs, whichare non-cash charges, will not be an adjustment in calculating Adjusted EBITDAas these costs will be an ongoing recurring cost to the Company. 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 

 

33

----

 

units. The adjustmentsmade to operating income directly correlate with the adjustments to net incomein calculating Adjusted EBITDA on a consolidated basis pursuant to the seniorsecured credit agreement, which reflects management’s interpretations thereof.

 

**Limitations**

 

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

 

·                  the cash portionof interest expense, net, income tax provision (benefit), and restructuring aswell as non-recurring charges related to securities issuance, acquisitionactivities, and systems/organization establishment, generally represent charges(gains) which may significantly affect funds available to use in our operating,investing and financing activities;

 

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

 

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

 

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

 

Adjusted EBITDA is not analternative to net income (loss) or income (loss) from continuing operationsbefore taxes and minority interest or operating income or cash flows fromoperating activities as calculated and presented in accordance with U.S. GAAP.You should not rely on Adjusted EBITDA as a substitute for any such U.S. GAAPfinancial measures. We strongly urge you to review the reconciliations ofAdjusted EBITDA to 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 of othercompanies.

 

**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 nine months ended September 30,2008 and 2007), including as a percentage of net sales, for the periodspresented. See Note 3, “Segment Information,” for segment information and areconciliation to income from continuing operations before taxes and minorityinterest to Adjusted EBITDA on a segment basis.

 

34

----

 
| ** **                                                                 | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|----------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **($ in millions)**                                              | ** ** | **2008**                                             | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Statement  of operations data:**                                         |       |                                                 |       |                                                |       |   |   |   |   |
| **Net  sales:**                                                            |       |                                                 |       |                                                |       |   |   |   |   |
| Specialty  Chemicals                                                       |       | $                                                    | 319.5      |                                                | $          | 261.4 |   | $ | 966.7 |   | $ | 800.2 |   |
| Performance  Additives                                                     |       | 223.2                                                |       | 203.7                                               |       | 676.8 |   | 590.8 |   |
| Titanium Dioxide Pigments                                                  |       | 140.6                                                |       | 113.8                                               |       | 380.8 |   | 334.7 |   |
| Advanced Ceramics                                                          |       | 126.4                                                |       | 111.7                                               |       | 404.9 |   | 335.8 |   |
| Specialty  Compounds                                                       |       | 68.6                                                 |       | 69.8                                                |       | 210.8 |   | 210.2 |   |
| Corporate and  other                                                       |       | 2.5                                                  |       | 2.7                                                 |       | 7.8 |   | 9.4 |   |
| Total net sales                                                            |       | 880.8                                                |       | 763.1                                               |       | 2,647.8 |   | 2,281.1 |   |
|                                                                       |       |                                                 |       |                                                |       |   |   |   |   |
| Gross profit                                                               |       | 257.5                                                |       | 237.3                                               |       | 813.3 |   | 731.9 |   |
|                                                                       |       | 29.2                                                 | %          | 31.1                                                | %          | 30.7 | % | 32.1 | % |
| Selling, general  and administrative expenses                              |       | 170.3                                                |       | 148.8                                               |       | 512.7 |   | 441.7 |   |
|                                                                       |       | 19.3                                                 | %          | 19.5                                                | %          | 19.4 | % | 19.4 | % |
| Restructuring  charges, net                                                |       | 3.4                                                  |       | 2.9                                                 |       | 5.7 |   | 8.9 |   |
| Gain on sale of  assets and other                                          |       | (2.7                                                 | )          | (0.1                                                | )          | (1.8 | ) | (5.3 | ) |
| **Operating  income (loss):**                                              |       |                                                 |       |                                                |       |   |   |   |   |
| Specialty  Chemicals                                                       |       | 60.3                                                 |       | 44.7                                                |       | 188.2 |   | 153.0 |   |
|                                                                       |       | 18.9                                                 | %          | 17.1                                                | %          | 19.5 | % | 19.1 | % |
| Performance  Additives                                                     |       | 3.9                                                  |       | 22.5                                                |       | 36.9 |   | 73.9 |   |
|                                                                       |       | 1.7                                                  | %          | 11.0                                                | %          | 5.5 | % | 12.5 | % |
| Titanium Dioxide  Pigments                                                 |       | 7.0                                                  |       | 11.1                                                |       | 17.4 |   | 29.8 |   |
|                                                                       |       | 5.0                                                  | %          | 9.8                                                 | %          | 4.6 | % | 8.9 | % |
| Advanced  Ceramics                                                         |       | 25.6                                                 |       | 19.5                                                |       | 84.5 |   | 59.9 |   |
|                                                                       |       | 20.3                                                 | %          | 17.5                                                | %          | 20.9 | % | 17.8 | % |
| Specialty  Compounds                                                       |       | 4.8                                                  |       | 5.0                                                 |       | 17.4 |   | 16.6 |   |
|                                                                       |       | 7.0                                                  | %          | 7.2                                                 | %          | 8.3 | % | 7.9 | % |
| Corporate and  other                                                       |       | (15.1                                                | )          | (17.1                                               | )          | (47.7 | ) | (46.6 | ) |
| Total operating  income                                                    |       | 86.5                                                 |       | 85.7                                                |       | 296.7 |   | 286.6 |   |
| **Other  income (expenses):**                                              |       |                                                 |       |                                                |       |   |   |   |   |
| Interest expense                                                           |       | (56.3                                                | )          | (57.0                                               | )          | (139.7 | ) | (158.6 | ) |
| Interest income                                                            |       | 0.6                                                  |       | 1.7                                                 |       | 4.2 |   | 10.1 |   |
| Loss on early  extinguishment of debt                                      |       | —                                               |       | —                                              |       | — |   | (18.6 | ) |
| Refinancing  expenses                                                      |       | —                                               |       | —                                              |       | — |   | (0.9 | ) |
| Foreign exchange  (loss) gain, net                                         |       | (26.5                                                | )          | 7.8                                                 |       | (12.2 | ) | 11.3 |   |
| Other, net                                                                 |       | 0.2                                                  |       | (0.1                                                | )          | 0.7 |   | (0.1 | ) |
| **Income  from continuing operations before taxes and  minority interest** |       | 4.5                                                  |       | 38.1                                                |       | 149.7 |   | 129.8 |   |
| Income tax  provision                                                      |       | 10.3                                                 |       | 16.1                                                |       | 50.6 |   | 56.8 |   |
| (Loss) income  from continuing operations before minority interest         |       | (5.8                                                 | )          | 22.0                                                |       | 99.1 |   | 73.0 |   |
| Minority  interest in continuing operations, net of tax                    |       | 1.0                                                  |       | (2.8                                                | )          | 0.4 |   | (6.2 | ) |
| Net (loss)  income from continuing operations                              |       | (4.8                                                 | )          | 19.2                                                |       | 99.5 |   | 66.8 |   |
| Income from  discontinued operations, net of tax                           |       | 1.5                                                  |       | 5.5                                                 |       | 2.9 |   | 15.6 |   |
| Gain on sale of  discontinued operations, net of tax                       |       | —                                               |       | —                                              |       | — |   | 115.7 |   |
| Minority  interest in discontinued operations, net of tax                  |       | —                                               |       | —                                              |       | — |   | (0.1 | ) |
| Net (loss)  income                                                         |       | $                                                    | (3.3       | )                                                   | $          | 24.7 |   | $ | 102.4 |   | $ | 198.0 |   |
| **Adjusted  EBITDA:**                                                      |       |                                                 |       |                                                |       |   |   |   |   |
| Specialty  Chemicals                                                       |       | $                                                    | 78.8       |                                                | $          | 58.2 |   | $ | 241.4 |   | $ | 192.8 |   |
|                                                                       |       | 24.7                                                 | %          | 22.3                                                | %          | 25.0 | % | 24.1 | % |
| Performance  Additives                                                     |       | 28.6                                                 |       | 40.8                                                |       | 99.5 |   | 119.5 |   |
|                                                                       |       | 12.8                                                 | %          | 20.0                                                | %          | 14.7 | % | 20.2 | % |
| Titanium Dioxide  Pigments                                                 |       | 23.9                                                 |       | 21.8                                                |       | 60.2 |   | 60.9 |   |
|                                                                       |       | 17.0                                                 | %          | 19.2                                                | %          | 15.8 | % | 18.2 | % |
| Advanced  Ceramics                                                         |       | 38.1                                                 |       | 30.7                                                |       | 121.5 |   | 92.2 |   |
|                                                                       |       | 30.1                                                 | %          | 27.5                                                | %          | 30.0 | % | 27.5 | % |
| Specialty  Compounds                                                       |       | 7.9                                                  |       | 7.8                                                 |       | 26.7 |   | 25.4 |   |
|                                                                       |       | 11.5                                                 | %          | 11.2                                                | %          | 12.7 | % | 12.1 | % |
| Corporate and  other                                                       |       | (14.1                                                | )          | (13.8                                               | )          | (41.8 | ) | (41.5 | ) |
| Total Adjusted  EBITDA (a)                                                 |       | $                                                    | 163.2      |                                                | $          | 145.5 |   | $ | 507.5 |   | $ | 449.3 |   |

 

----

(a)                This amount doesnot include $2.7 million and $5.1 million of Adjusted EBITDA for the three andnine months ended September 30, 2008, respectively, and $2.2 million and$5.9 million of Adjusted EBITDA for the three and nine months ended September 30,2007, respectively, from the pool and spa chemicals business sold in October 2008.This amount does not include $9.6 million and $27.3 million of Adjusted EBITDAfor the three and nine months ended September 30, 2007, respectively, fromthe Electronics business sold on December 31, 2007 and $1.8 million ofAdjusted EBITDA for the nine months ended September 30, 2007 from theformer Groupe Novasep segment sold on January 9, 2007.

 

35

----

 

Thefollowing table presents the changes in the major components of our operationson a historical basis in dollars and percentages:

 
| ** **                                                                | ** ** | **Change: Three months ended September 30, 2008 versus 2007** | ** ** | **Change: Nine months ended September 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                                                      |       | $                                                                                                     | 58.1       |                                                                                                 | 22.2       | % | $ | 17.1 |   | $ | 41.0 |   | $ | 166.5 |   | 20.8 | % | $ | 76.1 |   | $ | 90.4 |   |
| Performance  Additives                                                    |       | 19.5                                                                                                  |       | 9.6                                                                                                  |       | 2.0 |   | 17.5 |   | 86.0 |   | 14.6 |   | 14.8 |   | 71.2 |   |
| Titanium Dioxide  Pigments                                                |       | 26.8                                                                                                  |       | 23.6                                                                                                 |       | 9.7 |   | 17.1 |   | 46.1 |   | 13.8 |   | 41.4 |   | 4.7 |   |
| Advanced Ceramics                                                         |       | 14.7                                                                                                  |       | 13.2                                                                                                 |       | 10.2 |   | 4.5 |   | 69.1 |   | 20.6 |   | 44.4 |   | 24.7 |   |
| Specialty  Compounds                                                      |       | (1.2                                                                                                  | )          | (1.7                                                                                                 | )          | (0.7 | ) | (0.5 | ) | 0.6 |   | 0.3 |   | 1.6 |   | (1.0 | ) |
| Corporate and  other                                                      |       | (0.2                                                                                                  | )          | (7.4                                                                                                 | )          | 0.2 |   | (0.4 | ) | (1.6 | ) | (17.0 | ) | 0.9 |   | (2.5 | ) |
| Total net sales                                                           |       | 117.7                                                                                                 |       | 15.4                                                                                                 |       | 38.5 |   | 79.2 |   | 366.7 |   | 16.1 |   | 179.2 |   | 187.5 |   |
|                                                                      |       |                                                                                                  |       |                                                                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Gross profit                                                              |       | 20.2                                                                                                  |       | 8.5                                                                                                  |       | 13.6 |   | 6.6 |   | 81.4 |   | 11.1 |   | 61.7 |   | 19.7 |   |
|                                                                      |       |                                                                                                  |       |                                                                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Selling, general  and administrative expenses                             |       | 21.5                                                                                                  |       | 14.4                                                                                                 |       | 8.1 |   | 13.4 |   | 71.0 |   | 16.1 |   | 37.3 |   | 33.7 |   |
| Restructuring  charges                                                    |       | 0.5                                                                                                   |       |                                                                                                 |       |   |   | 0.5 |   | (3.2 | ) |   |   |   |   | (3.2 | ) |
| Gain on sale of  assets and other                                         |       | (2.6                                                                                                  | )          |                                                                                                 |       |   |   | (2.6 | ) | 3.5 |   |   |   |   |   | 3.5 |   |
| Total operating  expenses                                                 |       | 19.4                                                                                                  |       | 12.8                                                                                                 |       | 8.1 |   | 11.3 |   | 71.3 |   | 16.0 |   | 37.3 |   | 34.0 |   |
| **Operating  income (loss):**                                             |       |                                                                                                  |       |                                                                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Specialty  Chemicals                                                      |       | 15.6                                                                                                  |       | 34.9                                                                                                 |       | 2.5 |   | 13.1 |   | 35.2 |   | 23.0 |   | 12.0 |   | 23.2 |   |
| Performance  Additives                                                    |       | (18.6                                                                                                 | )          | (82.7                                                                                                | )          | 0.2 |   | (18.8 | ) | (37.0 | ) | (50.1 | ) | 0.9 |   | (37.9 | ) |
| Titanium Dioxide  Pigments                                                |       | (4.1                                                                                                  | )          | (36.9                                                                                                | )          | 0.3 |   | (4.4 | ) | (12.4 | ) | (41.6 | ) | 1.6 |   | (14.0 | ) |
| Advanced Ceramics                                                         |       | 6.1                                                                                                   |       | 31.3                                                                                                 |       | 2.4 |   | 3.7 |   | 24.6 |   | 41.1 |   | 10.5 |   | 14.1 |   |
| Specialty  Compounds                                                      |       | (0.2                                                                                                  | )          | (4.0                                                                                                 | )          | 0.2 |   | (0.4 | ) | 0.8 |   | 4.8 |   | 0.4 |   | 0.4 |   |
| Corporate and  other                                                      |       | 2.0                                                                                                   |       | 11.7                                                                                                 |       | (0.1 | ) | 2.1 |   | (1.1 | ) | (2.4 | ) | (1.0 | ) | (0.1 | ) |
| Total                                                                     |       | 0.8                                                                                                   |       | 0.9                                                                                                  |       | 5.5 |   | (4.7 | ) | 10.1 |   | 3.5 |   | 24.4 |   | (14.3 | ) |
| **Other  income (expenses):**                                             |       |                                                                                                  |       |                                                                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest expense                                                          |       | 0.7                                                                                                   |       | (1.2                                                                                                 | )          | 0.2 |   | 0.5 |   | 18.9 |   | (11.9 | ) | 1.1 |   | 17.8 |   |
| Interest income                                                           |       | (1.1                                                                                                  | )          | (64.7                                                                                                | )          | — |   | (1.1 | ) | (5.9 | ) | (58.4 | ) | — |   | (5.9 | ) |
| Loss on early  extinguishment of debt                                     |       | —                                                                                                |       |                                                                                                 |       |   |   |   |   | 18.6 |   |   |   |   |   |   |   |
| Refinancing  expenses                                                     |       | —                                                                                                |       |                                                                                                 |       |   |   |   |   | 0.9 |   |   |   |   |   |   |   |
| Foreign exchange  (loss) gain, net                                        |       | (34.3                                                                                                 | )          |                                                                                                 |       |   |   |   |   | (23.5 | ) |   |   |   |   |   |   |
| Other, net                                                                |       | 0.3                                                                                                   |       |                                                                                                 |       |   |   |   |   | 0.8 |   |   |   |   |   |   |   |
| **Income  from continuing operations before taxes and minority interest** |       |                                                                                                  |       |                                                                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Specialty  Chemicals                                                      |       | 9.6                                                                                                   |       |                                                                                                 |       |   |   |   |   | 23.1 |   |   |   |   |   |   |   |
| Performance  Additives                                                    |       | (20.9                                                                                                 | )          |                                                                                                 |       |   |   |   |   | (48.4 | ) |   |   |   |   |   |   |
| Titanium Dioxide  Pigments                                                |       | (4.9                                                                                                  | )          |                                                                                                 |       |   |   |   |   | (15.3 | ) |   |   |   |   |   |   |
| Advanced Ceramics                                                         |       | 5.6                                                                                                   |       |                                                                                                 |       |   |   |   |   | 23.9 |   |   |   |   |   |   |   |
| Specialty  Compounds                                                      |       | (0.5                                                                                                  | )          |                                                                                                 |       |   |   |   |   | 1.8 |   |   |   |   |   |   |   |
| Corporate and  other                                                      |       | (22.5                                                                                                 | )          |                                                                                                 |       |   |   |   |   | 34.8 |   |   |   |   |   |   |   |
| Total                                                                     |       | (33.6                                                                                                 | )          |                                                                                                 |       |   |   |   |   | 19.9 |   |   |   |   |   |   |   |
| Income tax  provision                                                     |       | (5.8                                                                                                  | )          |                                                                                                 |       |   |   |   |   | (6.2 | ) |   |   |   |   |   |   |
| (Loss) income  from continuing operations before minority interest        |       | (27.8                                                                                                 | )          |                                                                                                 |       |   |   |   |   | 26.1 |   |   |   |   |   |   |   |
| Minority interest  in continuing operations, net of tax                   |       | 3.8                                                                                                   |       |                                                                                                 |       |   |   |   |   | 6.6 |   |   |   |   |   |   |   |
| Net (loss) income  from continuing operations                             |       | (24.0                                                                                                 | )          |                                                                                                 |       |   |   |   |   | 32.7 |   |   |   |   |   |   |   |
| Income from  discontinued operations, net of tax                          |       | (4.0                                                                                                  | )          |                                                                                                 |       |   |   |   |   | (12.7 | ) |   |   |   |   |   |   |
| Gain on sale of  discontinued operations, net of tax                      |       | —                                                                                                |       |                                                                                                 |       |   |   |   |   | (115.7 | ) |   |   |   |   |   |   |
| Minority interest  in discontinued operations, net of tax                 |       | —                                                                                                |       |                                                                                                 |       |   |   |   |   | 0.1 |   |   |   |   |   |   |   |
| Net (loss) income                                                         |       | $                                                                                                     | (28.0      | )                                                                                                    |       |   |   |   |   |   | $ | (95.6 | ) |   |   |   |   |   |   |
| **Adjusted  EBITDA:**                                                     |       |                                                                                                  |       |                                                                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Specialty  Chemicals                                                      |       | $                                                                                                     | 20.6       |                                                                                                 | 35.4       | % | $ | 3.5 |   | $ | 17.1 |   | $ | 48.6 |   | 25.2 | % | $ | 15.9 |   | $ | 32.7 |   |
| Performance  Additives                                                    |       | (12.2                                                                                                 | )          | (29.9                                                                                                | )          | 0.6 |   | (12.8 | ) | (20.0 | ) | (16.7 | ) | 3.0 |   | (23.0 | ) |
| Titanium Dioxide  Pigments                                                |       | 2.1                                                                                                   |       | 9.6                                                                                                  |       | 1.7 |   | 0.4 |   | (0.7 | ) | (1.1 | ) | 6.4 |   | (7.1 | ) |
| Advanced Ceramics                                                         |       | 7.4                                                                                                   |       | 24.1                                                                                                 |       | 3.4 |   | 4.0 |   | 29.3 |   | 31.8 |   | 14.7 |   | 14.6 |   |
| Specialty  Compounds                                                      |       | 0.1                                                                                                   |       | 1.3                                                                                                  |       | 0.1 |   | — |   | 1.3 |   | 5.1 |   | 0.5 |   | 0.8 |   |
| Corporate and  other                                                      |       | (0.3                                                                                                  | )          | (2.2                                                                                                 | )          | (0.2 | ) | (0.1 | ) | (0.3 | ) | (0.7 | ) | (0.9 | ) | 0.6 |   |
| Total Adjusted  EBITDA                                                    |       | $                                                                                                     | 17.7       |                                                                                                 | 12.2       | % | $ | 9.1 |   | $ | 8.6 |   | $ | 58.2 |   | 13.0 | % | $ | 39.6 |   | $ | 18.6 |   |

 

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(a)     The constant currency effect is thetranslation impact calculated based on the change in the applicable rate,primarily the euro, to the U.S. dollar exchange rate for the applicable period.

 

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

 

**Overview**

 

Net sales increased$117.7 million in the third quarter of 2008 compared with the same period inthe prior year primarily due to the positive impact of currency changes of$38.5 million, the impact of bolt-on acquisitions and increased selling pricesof $36.4 million. Higher volumes in our Specialty Chemicals and AdvancedCeramics segments also had a favorable impact on net sales. See furtherdiscussion by segment below.

 

Operating income andAdjusted EBITDA also increased in the third 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 werenegatively impacted by higher raw material and energy costs in most businesses.

 

36

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Net income fromcontinuing operations decreased $24.0 million compared with the same period inthe prior year due to foreign exchange losses on financing activities recordedin the third quarter of 2008 and the reasons noted above.

 

Income from discontinuedoperations, net of tax was $1.5 million in the third quarter of 2008 and wascomprised of income from operating the pool and spa chemicals business that wassold in October 2008. Income from discontinued operations, net of tax was$5.5 million in the third quarter of 2007 and was comprised of income fromoperating the Electronics business, excluding the European wafer reclaimbusiness, that was sold in December 2007 and the pool and spa chemicalsbusiness.

 

Net income decreased$28.0 million in the third quarter of 2008 compared with the same period in theprior year due to the reasons noted above.

 

**Netsales**

 

*SpecialtyChemicals*.  Net sales increased $58.1 million over the prior year, including the positiveimpact of currency changes of $17.1 million. In the Fine Chemicals business,higher selling prices of lithium products, as well as increased volumes, had afavorable impact on net sales. Net sales in the Surface Treatment business werefavorably impacted by higher selling prices, increased volumes in all markets,particularly in general industrial applications, and the impact of bolt-onacquisitions in December 2007 and September 2008.

 

*PerformanceAdditives*.  Net sales increased $19.5 million over the prior year primarily due toacquisitions in August 2007 and 2008. Also, increased selling pricesin our Color Pigments and Services and Clay-based Additives businesses and thepositive impact of currency changes of $2.0 million were partially offset bylower volumes of construction-related products in our Color Pigments andServices and Timber Treatment Chemicals businesses.

 

*TitaniumDioxide Pigments*.  Net sales increased $26.8 million over the prior year due to the completion ofthe venture with Kemira on September 1, 2008 and positive impact ofcurrency changes of $9.7 million, partially offset by lower volumes andselling prices of titanium dioxide products, primarily commodity grade.

 

*AdvancedCeramics*.  Net sales increased $14.7 million over the prior year primarily due to thepositive impact of currency changes of $10.2 million and increased volumes ofmedical applications. This was partially offset by volume declines inmechanical systems and mechanical applications.

 

*SpecialtyCompounds*.  Net sales decreased $1.2 million over the prior year due to lower volumes,particularly in wire and cable and footwear applications and the negativeimpact of currency changes of $0.7 million. This was partially offset byincreased selling prices.

 

*Corporateand other*.  Net sales decreased $0.2 million over the prior year primarily due to lowervolumes and selling prices in the European wafer reclaim business.

 

**Grossprofit**

 

Gross profit increased$20.2 million over the prior year primarily due to the positive impact ofcurrency changes of $13.6 million. Sales increases noted above, inparticular selling price increases, were partially offset by raw material costincreases, particularly from the impact of higher phosphoric acid and tin costsin our Specialty Chemicals segment, higher iron-oxide costs in our ColorPigments and Services business, higher quat costs in our Clay-based additivesbusiness and higher PVC resin and plasticizer costs in our Specialty Compoundssegment. We also experienced lower volumes in our Color Pigments andServices, Timber Treatment Chemicals and Titanium Dioxide Pigments businesses. Inaddition, depreciation and amortization costs were higher in most businesses,in part from the impact of acquisitions. Gross profit as a percentage ofnet sales decreased to 29.2% in the third quarter of 2008 from 31.1% in thethird quarter of 2007.

 

**Selling,general and administrative expenses**

 

Selling, general andadministrative expenses, or SG&A, increased $21.5 million primarily due toincreased sales volumes in a few segments, particularly in the SpecialtyChemicals and Advanced Ceramics segments, and the impact of currency changes of$8.1 million. SG&A expenses as a percentage of net sales were 19.3% and19.5% in the third quarter of 2008 and 2007, respectively.

 

**Restructuringcharges, net**

 

We recorded $3.4 millionof restructuring charges in the third quarter of 2008 for restructuring actionsin a number of segments primarily for miscellaneous headcount reductions. Werecorded $2.9 million of restructuring charges in the third quarter of 2007primarily related to headcount reductions and facility closures in theSpecialty Chemicals, Performance Additives, Advanced Ceramics and “Corporateand other” segments. See Note 13, “Restructuring Liability,” for furtherdetails.

 

**Gain onsale of assets and other**

 

We recorded a gain of$2.7 million in the third quarter of 2008 primarily related to the sale of landthat was acquired as part of the 

 

37

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acquisition of DynamitNobel in 2004.

 

**Operatingincome**

 

*SpecialtyChemicals*.  Operating income increased $15.6 million over the prior year primarily due tothe impact of higher sales in both the Surface Treatment and Fine Chemicalsbusinesses and the positive impact of currency changes of $2.5 million. Thisincrease was partially offset by higher raw material costs of $8.8 million,primarily for phosphoric acid and tin, and increased depreciation andamortization costs of $4.3 million, including the impact of bolt-onacquisitions in December 2007 and September 2008.

 

*PerformanceAdditives*.  Operating income decreased $18.6 million over the prior year due to the lowersales volumes discussed above, and higher raw material costs of $16.1 million,particularly iron-oxide costs in the Color Pigments and Services business andhigher quat costs in our Clay-based Additives business. Higherdepreciation and amortization costs of $2.8 million primarily due to theacquisitions in August 2007 and 2008 also had an unfavorable impact onoperating income. These decreases were partially offset by the salesincreases noted above.

 

*TitaniumDioxide Pigments*.  Operating income decreased $4.1 million over the prior year primarily due tolower sales volumes and selling prices noted above, increased depreciation andamortization costs of $4.1 million and higher energy costs of $3.2 million.This was partially offset by increased sales related to the completion of theventure with Kemira on September 1, 2008.

 

*AdvancedCeramics*.  Operating income increased $6.1 million over the prior year primarily due tothe impact of the increased sales volumes noted above, productivityimprovements and the positive impact of currency changes of $2.4 million. Thisincrease was partially offset by lower selling prices.

 

*SpecialtyCompounds*.  Operating income decreased $0.2 million over the prior year due to higher rawmaterial costs of $4.5 million, particularly PVC resin and plasticizer costs,and lower sales volumes. This was partially offset by higher selling prices andlower operating costs.

 

*Corporate and other. *Operating income increased $2.0 million primarilyrelated to the sale of land that was acquired as part of the acquisition ofDynamit Nobel in 2004.

 

**Otherincome (expenses)**

 

*Interestexpense*.  Interestexpense decreased $0.7 million in the third quarter of 2008 compared to thesame period in the prior year. The third quarter of 2008 and 2007 includedlosses of $10.0 million and $13.4 million, respectively, representing themovement in the mark-to-market valuation of our interest rate hedginginstruments. The remaining interest expense increase of $2.7 million isprimarily due to increased debt levels related to the completion of theTitanium Dioxide Pigments venture with Kemira.

 

*Interestincome*.  Interestincome decreased $1.1 million in the third quarter of 2008 compared to the sameperiod in the prior year due to lower average cash balances in the thirdquarter of 2008 compared to the third quarter of 2007 and lower short-termaverage rates.

 

*Foreignexchange, net*.  In the third quarter of 2008, we had foreign exchange losses of $26.5 millioncompared to foreign exchange gains of $7.8 million recorded in the same periodin the prior year. The foreign exchange loss reported in the third quarterof 2008 is primarily due to the impact of a weaker euro as of September 30,2008 versus June 30, 2008 related to euro-denominated financingtransactions.

 

**Provisionfor income taxes**

 

We recorded an income taxprovision of $10.3 million in the third quarter of 2008 on income fromcontinuing operations before taxes and minority interest of $4.5 million. Theincome tax provision in the third quarter of 2008 was adversely impacted by theabsence of a tax benefit for the Company’s domestic losses as a result of afull valuation allowance. These losses were primarily due to foreign exchangelosses and mark-to-market losses on derivative instruments. This was partiallyoffset by the allocation of tax benefits to continuing operations. Theeffective income tax rate was 42.3% for the third quarter of 2007 and wasnegatively impacted by the absence of a tax benefit for the Company’s domesticlosses as a result of a full valuation allowance.

 

**Minorityinterest in continuing operations**

 

For the three monthsended September 30, 2008 and 2007, we recorded minority interest of $1.0million and $(2.8) million. Minority interest represents the minority interestportion of the Viance, LLC joint venture completed in January 2007 betweenour Timber Treatment Chemicals business and Rohm and Haas Company and theminority interest portion of the Titanium Dioxide Pigments venture completed inSeptember 2008 between our Titanium Dioxide Pigments segment and Kemira.The change from the prior year primarily relates to lower volumes of timbertreatment chemicals in the Viance LLC joint venture.

 

**Net(loss) income from continuing operations**

 

Net loss from continuingoperations for the third quarter of 2008 was $4.8 million as compared to netincome from continuing operations of $19.2 million for the third quarter of2007 for the reasons described above.

 

38

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**Incomefrom discontinued operations, net of tax**

 

Income from discontinuedoperations, net of tax was $1.5 million in the third quarter of 2008 fromoperating the pool and spa chemicals business that was sold in October 2008,compared to $5.5 million in the third quarter of 2007 due to income fromoperating the Electronics business, that was sold in December 2007, andthe pool and spa chemicals business.

 

**Net(loss) income**

 

Net loss for the thirdquarter of 2008 was $3.3 million as compared to net income of $24.7 million forthe third quarter of 2007 for the reasons described above.

 

**AdjustedEBITDA**

 

*SpecialtyChemicals*.  Adjusted EBITDA increased $20.6 million over the prior year primarily due tothe impact of higher sales in both the Surface Treatment and Fine Chemicalsbusinesses and the positive impact of currency changes of $3.5 million. Thisincrease was partially offset by higher raw material costs of $8.8 million asdiscussed above.

 

*PerformanceAdditives*.  Adjusted EBITDA decreased $12.2 million over the prior year due to lower salesvolumes and higher raw material costs of $16.1 million as discussedabove. These decreases were partially offset by the selling priceincreases noted above.

 

*TitaniumDioxide Pigments*.  Adjusted EBITDA increased $2.1 million over the prior year primarily due to theimpact of currency changes of $1.7 million and the completion of the venture onSeptember 1, 2008. This was partially offset by the lower sales volumesand selling prices noted above and higher energy costs of $3.2 million.

 

*AdvancedCeramics*.  Adjusted EBITDA increased $7.4 million over the prior year primarily due to theimpact of the increased sales volumes noted above, productivity improvementsand the positive impact of currency changes of $3.4 million. This increase waspartially offset by lower selling prices.

 

*SpecialtyCompounds*.  Adjusted EBITDA increased slightly over the prior year due to the positiveimpact of foreign currency and lower operating costs.  This was partially offset by higher rawmaterial costs of $4.5 million, particularly PVC resin and plasticizer costs,and lower sales volumes.

 

***Nine months ended September 30, 2008 compared to ninemonths ended September 30, 2007***

 

**Overview**

 

Net sales increased$366.7 million in the first nine months of 2008 compared with the same periodin the prior year primarily due to the positive impact of currency changes of$179.2 million, the impact of bolt-on acquisitions and increased selling pricesof $76.0 million. Higher volumes in our Specialty Chemicals and AdvancedCeramics segments also had a favorable impact on net sales. See furtherdiscussion by segment below.

 

Operating income andAdjusted EBITDA also increased in the first nine 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 fromcontinuing operations increased $32.7 million compared with the same period inthe prior year primarily due to lower interest expense due to lowermark-to-market losses on our interest rate hedging instruments, costs of $18.6million incurred in 2007 to redeem our 2011 Notes and increased foreignexchange gains.

 

Income from discontinuedoperations, net of tax was $2.9 million in the first nine months of 2008 andwas comprised of income from operating the pool and spa chemicals business thatwas sold in October 2008. In the first nine months of 2007, income fromdiscontinued operations, net of tax was $15.6 million and was primarilycomprised of income from operating the pool and spa chemicals business and theElectronics business, excluding the European wafer reclaim business, which wassold in December 2007.

 

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

 

Net income decreased$95.6 million in the first nine months of 2008 compared with the same period inthe prior year due to the reasons noted above.

 

**Netsales**

 

*SpecialtyChemicals*.  Net sales increased $166.5 million over the prior year, including the positiveimpact of currency changes of $76.1 million. In the Fine Chemicals business,higher selling prices of lithium products, as well as increased volumes, had afavorable impact on net sales. Net sales in the Surface Treatment business werefavorably impacted by higher selling prices, increased volumes 

 

39

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in all markets,particularly in general industrial and European automotive applications, andthe impact of bolt-on acquisitions in December 2007 and September 2008.

 

*PerformanceAdditives*.  Net sales increased $86.0 million over the prior year due to acquisitions in August 2007and 2008, as well as increased selling prices in our Color Pigments andServices and Clay-based Additives businesses and the positive impact ofcurrency changes of $14.8 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 $46.1 million over the prior year due to the positiveimpact of currency changes of $41.4 million and the completion of the venturewith Kemira on September 1, 2008. This was partially offset by lowervolumes and selling prices of titanium dioxide products and lower volumes offunctional additives.

 

*AdvancedCeramics*.  Net sales increased $69.1 million over the prior year primarily due to thepositive impact of currency changes of $44.4 million, increased volumes ofmedical and cutting tool applications and the impact of a bolt-on acquisitionmade in April 2007. This was partially offset by lower selling prices andvolume declines in mechanical systems and mechanical applications.

 

*SpecialtyCompounds*.  Net sales increased $0.6 million over the prior year due to the positive impactof currency changes of $1.6 million and higher selling prices, partially offsetby lower volumes in wire and cable and medical applications.

 

*Corporateand other*.  Net sales decreased $1.6 million over the prior year primarily due to the saleof our U.S. wafer reclaim business in the first quarter of 2007 and lowervolumes and selling prices in the European wafer reclaim business.

 

**Grossprofit**

 

Gross profit increased$81.4 million over the prior year primarily due to the positive impact ofcurrency changes of $61.7 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 phosphoric acid and tincosts in our Specialty Chemicals segment, higher iron-oxide and cobalt costs inour Color Pigments and Services business, higher quat costs in our Clay-basedadditives business and higher PVC resin and plasticizer costs in our SpecialtyCompounds segment. We also experienced lower volumes in our Color Pigments andServices, Timber Treatment Chemicals and Titanium Dioxide Pigments businessesand higher depreciation and amortization costs in most businesses including theimpact of acquisitions. Gross profit as a percentage of net salesdecreased to 30.7% for the nine months ended September 30, 2008 from 32.1%for the nine months ended September 30, 2007.

 

**Selling,general and administrative expenses**

 

Selling, general andadministrative expenses, or SG&A, increased $71.0 million over the prioryear primarily due to the impact of currency changes of $37.3 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 nine months ended September 30,2008 and 2007.

 

**Restructuringcharges, net**

 

We recorded $5.7 millionof restructuring charges for the nine months ended September 30, 2008 in anumber of segments primarily for miscellaneous headcount reductions. We recorded$8.9 million of restructuring charges for the nine months ended September 30,2007 primarily related to miscellaneous headcount reductions and facilityclosures. See Note 13, “Restructuring Liability,” for further details.

 

**Gain onsale of assets**

 

We recorded a gain of$1.8 million in the nine months ended September 30, 2008 primarily relatedto the sale of land that was acquired as part of the acquisition of DynamitNobel in 2004. For the nine months ended September 30, 2007, we recorded again of $5.3 million primarily related to the sale of our U.S. wafer reclaimbusiness.

 

**Operatingincome**

 

*SpecialtyChemicals*.  Operating income increased $35.2 million over the prior year primarily due tothe impact of higher sales in both the Surface Treatment and Fine Chemicalsbusinesses and the positive impact of currency changes of $12.0 million. Thisincrease was partially offset by higher raw material costs of $18.2 million,primarily for phosphoric acid and tin, and increased depreciation andamortization costs of $11.1 million, including the impact of bolt-onacquisitions made in December 2007 and September 2008.

 

*PerformanceAdditives*.  Operating income decreased $37.0 million over the prior year due to the lowersales volumes discussed above, and higher raw material costs of $33.2 million,particularly iron-oxide and cobalt costs in the Color Pigments and Servicesbusiness and higher quat costs in our Clay-based Additivesbusiness. Higher depreciation and amortization costs of $10.5 millionprimarily due to the acquisitions made in August 2007 and 2008 also had anunfavorable impact on operating income. These decreases were partiallyoffset by the sales increases noted above.

 

40

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*TitaniumDioxide Pigments*.  Operating income decreased $12.4 million over the prior year primarily due tothe lower sales volumes and selling prices noted above, increased depreciationand amortization costs of $9.4 million and higher energy costs of $5.3 million.This was partially offset by increased sales related to the completion of theventure with Kemira on September 1, 2008 and the favorable impact ofcurrency changes of $1.6 million.

 

*AdvancedCeramics*.  Operating income increased $24.6 million over the prior year primarily due tothe impact of the increased sales volumes noted above, the positive impact ofcurrency changes of $10.5 million and productivity improvements. The impact ofa bolt-on acquisition made in April 2007 also had a favorable impact onoperating income. This increase was partially offset by lower selling pricesand increased depreciation and amortization costs of $5.8 million primarilyrelated to the acquisition discussed above.

 

*SpecialtyCompounds*.  Operating income increased $0.8 million over the prior year due to loweroperating costs relating to the closure of a U.K. facility in December 2007and higher selling prices. This was partially offset by higher rawmaterial costs of $11.2 million, particularly PVC resin and plasticizer costs,and lower sales volumes.

 

*Corporateand other.*  Operating income decreased $1.1 million primarily due to additional stockcompensation expense related to stock awards made in 2008 and 2007, partiallyoffset by the sale of land that was acquired as part of the acquisition ofDynamit Nobel in 2004.

 

**Otherincome (expenses)**

 

*Interestexpense*.  Interestexpense decreased $18.9 million for the nine months ended September 30,2008 compared to the same period in the prior year. The nine months ended September 30,2008 and 2007 included losses of $6.8 million and $15.4 million, respectively,representing the movement in the mark-to-market valuation of our interest ratehedging instruments. The remaining interest expense decrease of $10.3 millionis primarily due to the redemption of the 2011 Notes in May 2007 in theaggregate amount of $273.4 million, partially offset by increased debt levelsrelated to the completion of the Titanium Dioxide Pigments venture.

 

*Interestincome*.  Interestincome decreased $5.9 million for the nine months ended September 30, 2008compared to the same period in the prior year due to lower average cashbalances in the first nine months of 2008 compared to the first nine months of2007 and lower short-term average rates.

 

*Loss onearly extinguishment of debt.*   In the second quarter of 2007, we paid aredemption premium of $14.5 million and wrote off $4.1 million of deferredfinancing costs associated with the redemption of the 2011 Notes in May 2007.

 

*Refinancingexpenses*. In March 2007, we expensed $0.9 million related to the fourth amendment ofthe senior secured credit agreement resulting in a 50 basis point reduction onour tranche G term loans.

 

*Foreignexchange, net*.  For the nine months ended September 30, 2008, we had foreign exchangelosses of $12.2 million due to the impact of the weaker euro oneuro-denominated financing transactions. For the nine months ended September 30,2007, we had foreign exchange gains of $11.3 million related to the impact ofthe stronger euro.

 

**Provisionfor income taxes**

 

The effective income taxrate for the nine months ended September 30, 2008 was 33.8% and an incometax provision of $50.6 million was recorded for the nine months ended September 30,2008. The effective income tax rate compared to the federal statutory rate wasnegatively impacted by domestic losses which are not tax effected as a resultof a full valuation allowance and was positively impacted by favorable Europeanrate changes, geographic earnings mix and an allocation of tax benefits tocontinuing operations. The effective income tax rate was 43.8% for the ninemonths ended September 30, 2007.

 

**Minorityinterest in continuing operations**

 

For the nine months endedSeptember 30, 2008 and 2007, we recorded minority interest of $0.4 millionand $(6.2) million. Minority interest represents the minority interest portionof the Viance, LLC joint venture completed in January 2007 between ourTimber Treatment Chemicals business and Rohm and Haas Company and the minorityinterest portion of the Titanium Dioxide Pigments venture completed in September 2008between our Titanium Dioxide Pigments segment and Kemira. The change from theprior year primarily relates to lower volumes of timber treatment chemicals inthe Viance LLC joint venture.

 

**Netincome from continuing operations**

 

Net income fromcontinuing operations for nine months ended September 30, 2008 was $99.5million as compared to net income from continuing operations of $66.8 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 $2.9 million for the nine months ended September 30,2008 from operating the pool and spa chemicals business that was sold in October 2008,compared to $15.6 million for the nine months ended 

 

41

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September 30, 2007,due to income from operating the Electronics business, that was sold in December 2007and the pool and spa chemicals business.

 

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

 

The gain on sale ofdiscontinued operations, net of tax, of $115.7 million recorded for the ninemonths ended September 30, 2007 is related to the sale of Groupe Novasepin January 2007.

 

**Minorityinterest in discontinued operations**

 

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

 

**Netincome**

 

Net income for the ninemonths ended September 30, 2008 was $102.4 million as compared to netincome of $198.0 million for the nine months ended September 30, 2007 forthe reasons described above.

 

**AdjustedEBITDA**

 

*SpecialtyChemicals*.  Adjusted EBITDA increased $48.6 million over the prior year primarily due tothe impact of higher sales in both the Surface Treatment and Fine Chemicalsbusinesses and the positive impact of currency changes of $15.9 million. Thisincrease was partially offset by higher raw material costs of $18.2 million asdiscussed above.

 

*PerformanceAdditives*.  Adjusted EBITDA decreased $20.0 million over the prior year due to lower salesvolumes and higher raw material costs of $33.2 million as discussedabove. These decreases were partially offset by the sales increases notedabove.

 

*TitaniumDioxide Pigments*.  Adjusted EBITDA decreased $0.7 million over the prior year primarily due to thelower sales volumes and selling prices noted above and higher energy costs of$5.3 million, partially offset by the positive impact of currency changes of$6.4 million and the completion of the Titanium Dioxide Pigments venture withKemira.

 

*AdvancedCeramics*.  Adjusted EBITDA increased $29.3 million over the prior year primarily due tothe impact of the increased sales volumes noted above, productivityimprovements and the positive impact of currency changes of $14.7 million. Theimpact of a bolt-on acquisition made in April 2007 also had a favorableimpact on Adjusted EBITDA. This increase was partially offset by lower sellingprices.

 

*SpecialtyCompounds*.  Adjusted EBITDA increased $1.3 million primarily due to lower operating costsrelating to the closure of a U.K. facility in December 2007 and higherselling prices. This was partially offset by higher raw material costs of $11.2million as discussed above and lower sales volumes.

 

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***Reconciliation of Net (Loss) 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  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|-----------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **($ in millions)**                                         | ** ** | **2008**                                             | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net (loss)  income                                                    |       | $                                                    | (3.3       | )                                                   | $          | 24.7 |   | $ | 102.4 |   | $ | 198.0 |   |
| Income from  discontinued operations, net of tax                      |       | (1.5                                                 | )          | (5.5                                                | )          | (2.9 | ) | (15.6 | ) |
| Gain on sale of  discontinued operations, net of tax                  |       | —                                               |       | —                                              |       | — |   | (115.7 | ) |
| Minority  interest in discontinued operations, net of tax             |       | —                                               |       | —                                              |       | — |   | 0.1 |   |
| Net (loss) income from continuing operations                          |       | (4.8                                                 | )          | 19.2                                                |       | 99.5 |   | 66.8 |   |
| Income tax  provision                                                 |       | 10.3                                                 |       | 16.1                                                |       | 50.6 |   | 56.8 |   |
| Minority  interest in continuing operations, net of tax               |       | (1.0                                                 | )          | 2.8                                                 |       | (0.4 | ) | 6.2 |   |
| Income from  continuing operations before taxes and minority interest |       | 4.5                                                  |       | 38.1                                                |       | 149.7 |   | 129.8 |   |
| Interest expense  (a)                                                 |       | 56.3                                                 |       | 57.0                                                |       | 139.7 |   | 158.6 |   |
| Interest income                                                       |       | (0.6                                                 | )          | (1.7                                                | )          | (4.2 | ) | (10.1 | ) |
| Depreciation and  amortization                                        |       | 65.6                                                 |       | 52.6                                                |       | 190.6 |   | 152.6 |   |
| Restructuring  and related charges                                    |       | 3.4                                                  |       | 2.9                                                 |       | 5.7 |   | 8.9 |   |
| Systems/organization  establishment expenses                          |       | 3.7                                                  |       | 0.6                                                 |       | 7.1 |   | 1.8 |   |
| Cancelled  acquisition and disposal costs                             |       | 0.2                                                  |       | 2.0                                                 |       | 0.9 |   | 2.8 |   |
| Inventory  write-up charges                                           |       | 3.7                                                  |       | 2.7                                                 |       | 4.2 |   | 2.8 |   |
| Refinancing  expenses                                                 |       | —                                               |       | —                                              |       | — |   | 0.9 |   |
| Loss on early  extinguishment of debt                                 |       | —                                               |       | —                                              |       | — |   | 18.6 |   |
| Gain on sale of  assets and other                                     |       | (2.7                                                 | )          | (0.1                                                | )          | (1.8 | ) | (5.3 | ) |
| Acquired  in-process research and development                         |       | 2.8                                                  |       | —                                              |       | 2.8 |   | — |   |
| Foreign exchange  loss (gain)                                         |       | 26.5                                                 |       | (7.8                                                | )          | 12.2 |   | (11.3 | ) |
| Other                                                                 |       | (0.2                                                 | )          | (0.8                                                | )          | 0.6 |   | (0.8 | ) |
| Total Adjusted  EBITDA (b)                                            |       | $                                                    | 163.2      |                                                | $          | 145.5 |   | $ | 507.5 |   | $ | 449.3 |   |

 

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(a)                Includes losses of $10.0 million and $13.4 million forthe three months ended September 30, 2008 and 2007, respectively, andlosses of $6.8 million and $15.4 million for the nine months ended September 30,2008 and 2007, respectively, representing the movement in the mark-to-marketvaluation of the Company’s interest rate and cross-currency hedging instruments.

 

(b)               This amount does not include $2.7 million and $5.1million of Adjusted EBITDA for the three and nine months ended September 30,2008, respectively, and $2.2 million and $5.9 million of Adjusted EBITDA forthe three and nine months ended September 30, 2007, respectively, from thepool and spa chemicals business sold in the October 2008. In addition, thisamount does not include $9.6 million and $27.3 million of Adjusted EBITDA forthe three and nine months ended September 30, 2007, respectively, from theElectronics business sold on December 31, 2007 and $1.8 million ofAdjusted EBITDA for the nine months ended September 30, 2007 from theformer Groupe Novasep segment sold on January 9, 2007.

 

**Liquidityand Capital Resources**

 

**CashFlows**

 

*OperatingActivities*.  Net cash provided by operating activities was $251.4 million and $291.8 millionfor the nine months ended September 30, 2008 and 2007, respectively. Netcash from operating activities decreased primarily from the higher use ofoperating cash from working capital changes and the lack of operating cashflows due to the divestiture of the Electronics business, partially offset byhigher operating income and lower cash interest expense.

 

*InvestingActivities*.  Netcash (used in) provided by investing activities was $(310.5) million and $199.2million for the nine months ended September 30, 2008 and 2007,respectively. Net cash used in investing activities for the nine months ended September 30,2008 included the acquisitions of Holliday Pigments and Nalco’s FinishingTechnologies business in 2008.  This waspartially offset by funds received related to the claim settlement between theCompany and GEA Group in the first quarter of 2008.  See Note 6, “Goodwill,” for furtherdetails.  Net cash provided by investingactivities for the nine months ended September 30, 2007 included proceedsreceived in the first quarter of 2007 from the sale of the Groupe Novasepsegment and the formation of the Viance, LLC joint venture.

 

*FinancingActivities*.  Net cash provided by (used in) financing activities was $115.2 million and$(403.5) million for the nine months 

 

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ended September 30,2008 and 2007, respectively.  For thenine months ended September 30, 2008, net cash provided by financingactivities included $362.5 million related to the financing of the TitaniumDioxide Pigments venture, partially offset by the payment of assumed debt tothe minority shareholder of the Titanium Dioxide Pigments venture of $141.4 million.  For the nine months ended September 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.

 

**Liquidity**

 

Our primary source ofliquidity has been and will continue to be cash generated from the operationsof our subsidiaries. Events that have occurred in 2008 that have had an impacton our liquidity include:

 

·                  In March 2008, we received €18.8 million ($29.1million) from GEA Group and GEA North America for the settlement of allexisting and future non-tax related claims resulting from the sale and purchaseagreement entered into in connection with the Dynamit Nobel Acquisition in April 2004.

 

·                  In the third quarter of 2008, we acquiredHolliday Pigments for approximately €46.0 million ($68.6 million using an August 11,2008 exchange rate of 1.4909) and Nalco’s Finishing Technologies business forapproximately $75.0 million.

 

·                  In September 2008, we completed the TitaniumDioxide Pigments venture with Kemira. The venture’s acquisition of the sharesof the Rockwood and Kemira entities was facilitated by the borrowings under aterm loan of €250.0 million ($362.5 million using a September 3, 2008exchange rate of 1.4498).  The venturemade a payment of €97.5 million ($141.4 million using a September 3, 2008exchange rate) to the venture’s minority shareholder.

 

In addition, the ventureentered into a €30.0 million ($42.3 million) revolving credit facility tofinance its operations and has assumed debt of €25.2 million ($35.5 million)from Kemira.

 

·                  In October 2008, we sold the pooland spa chemicals business and received approximately $124.0 million in cash.

 

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 based on current conditions in our industry and markets,our cash reserves, cash flows from operations and borrowings available underour revolving credit facility will be adequate sources of liquidity for theremainder of 2008.  However, a prolongedeconomic downturn or recession may have a material adverse impact on our futurecash flows from operations and our liquidity. If these sources are insufficientto fund our liquidity needs, we may be forced to use other means available tous, such as reduce or delay capital expenditures or other cost cutting measuresor seek additional sources of capital. In addition, any future major acquisitions, business combinations orother such events may require us to seek additional capital resources, such asthrough additional borrowings, equity issuances or other sources, to satisfyour liquidity needs.  The recentunprecedented adverse conditions in the global capital and credit markets maylimit our ability to secure capital or obtain it on terms and conditions thatare acceptable to us.  We cannot predictwith any certainty the impact of this or any further disruption in thesemarkets or our ability to access these markets in the future.  See Item 1, “Business,” in our 2007 Form 10-Kand Item 1A, “Risk Factors” in this Form 10-Q.

 

In addition, our liquidity may bematerially and adversely impacted due to funding obligations related to certainpension plans. We have several pension plans located in Germany, Finland, theUnited Kingdom and the United States, which have been adversely impacted bymarket conditions. For example, based upon recent investment performance of pension assets in apension plan covering the majority of our German employees, we expect we willhave to make a significant payment to the plan via a one-time payment and/orlong-term funding arrangement in late 2008. However, this could change significantly based on thefourth quarter investment performance of the pension plan and the futureperformance of the pension plan assets. Any further deterioration of thecapital markets or returns available in such markets may materially andadversely impact our pension plan assets and increase our funding obligationsfor one or more of these plans and adversely impact our liquidity. We cannot predictthe impact of this or any further market disruption on our pension fundingobligations.

 

As of September 30,2008, we had actual total indebtedness of $2,833.9 million. The revolvingcredit facility under the senior secured credit facilities provided foradditional borrowings of up to $225.4 million as of September 30, 2008.There were no outstanding borrowings under this revolving credit facility as ofSeptember 30, 2008. The revolving credit facility under the TitaniumDioxide Pigments venture facility provided for additional borrowings of up to€30.0 million ($42.3 million). As of September 30, 2008, there were nooutstanding borrowings under this revolving credit facility.

 

As of September 30,2008, we had cash and cash equivalents of $410.3 million primarily from cashfrom operations and the net cash proceeds received from the sale of theElectronics business in December 2007, less cash used for certainselective acquisitions.

 

*Seniorsecured credit facilities.*   The senior secured credit facilities, asamended, consist of:

 

·                  tranche A-1 term loans in an aggregate principalamount of €22.8 million ($32.2 million) and tranche A-2 term loans in anaggregate principal amount of €99.4 million ($140.1 million), each maturing on July 30,2011 and bearing interest at Adjusted EURIBOR plus 1.75%;

 

·                  tranche E term loans in an aggregate principal amountof $1,104.9 million, maturing on July 30, 2012 and bearing interest at theCompany’s option of either (i) Adjusted LIBOR plus 1.50% or (ii) ABRplus 0.75%. For the three months ended 

 

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September 30,2008, we have elected to use option (i) Adjusted LIBOR plus 1.50%;

 

·                  tranche G term loans in an aggregate principal amountof €265.2 million ($373.7 million) maturing on July 30, 2012 and bearinginterest of Adjusted LIBOR plus 1.75%; and

 

·                  a revolving credit facility in an aggregate principalamount of $250.0 million maturing on July 30, 2010, bearing interestat the Company’s option of either (i) Adjusted LIBOR plus 1.75% or (ii) ABRplus 1.00%. As of September 30, 2008, we had no borrowings outstandingunder this facility and had outstanding letters of credit of $24.6 million thatreduced our availability under the credit facility.

 

In each case, theinterest rates are subject to step-downs determined by reference to aperformance test. Adjusted LIBOR is the London inter-bank offered rate adjustedfor statutory reserves. ABR is the alternate base rate, which is the highest ofCredit Suisse’s prime rate and the federal funds effective rate plus 0.5%.Tranche A-1 and A-2 term loans are payable in January and July ofeach year at escalating percentages of the original principal amount.Tranche E and tranche G term loans are payable in January and July ofeach year at amounts equal to 0.5% of the principal amount of the formertranche D term loans and tranche F term loans, respectively, with theremainder due at 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.

 

*Covenantcompliance.*  In addition to the affirmative and restrictive covenants, the senior securedcredit agreement contains the following financial covenants that are determinedbased on our Adjusted EBITDA, which reflects management’s interpretationsthereof:

 

·                  a leverage ratio: for the twelve-month period ended September 30,2008, net debt (total debt plus capital lease obligations, minus cash up to amaximum of $100.0 million) to Adjusted EBITDA must be less than 4.75 to 1; forsuch period, our ratio equaled 3.77 to 1; and

 

·                  an interest coverage ratio: for the twelve-monthperiod ended September 30, 2008, Adjusted EBITDA to cash interest expense(interest expense, net excluding deferred debt issuance cost amortization andthe movements in the mark-to market value of our interest rate andcross-currency interest rate derivatives) must be at least 1.95 to 1; for suchperiod, our ratio equaled 4.63 to 1.

 

Effective October 1,2008, our leverage ratio must be 4.50 to 1 and effective January 1, 2009,our leverage ratio must be 4.25 to 1 under the terms of our credit agreement.These covenants are material terms of the senior secured credit agreement.Non-compliance with these covenants or other covenants could result in adefault under the senior secured credit agreement and the lenders could electto declare all amounts borrowed immediately due and payable. Any suchacceleration would also result in a default under the indenture governing the2014 Notes, which could lead to the note holders electing to declare theprincipal, premium, if any, and interest on the then outstanding notesimmediately due and payable.  The seniorsecured credit agreement contains a cross default provision for indebtedness inexcess of $30.0 million; therefore, a default under the indenture governing the2014 Notes or other indebtedness may cause the lenders to declare the principaland interest on the then outstanding senior secured credit facilities immediatelydue and payable.

 

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.

 

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

 

*2014Notes.*  The 2014 Notes have an aggregate principal amount of €375.0 million ($528.5million) in the case of the Euro notes and $200.0 million in the case of theU.S. Dollar notes, and mature on November 15, 2014. Interest on the 2014Notes is payable semi-annually on May 15 and November 15. Interest onthe 2014 Notes accrues at the rate of 7.625% in the case of the Euro notes and7.500% in the case of the U.S. Dollar notes. Certain of our domesticsubsidiaries guarantee the 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.

 

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, 

 

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repurchases of capitalstock or restricted investments), subject to certain permitted payments,unless, among other things, the fixed charge coverage ratio for the mostrecently ended four fiscal quarters is at least 2.00 to 1. For the four-fiscalquarter period ended September 30, 2008, the fixed charge coverage ratioequaled 4.63 to 1. This covenant is a material term of the indenture governingthe 2014 Notes.

 

Because the indenturegoverning the 2014 Notes defines an event of default to include, among otherthings, a default under any other debt obligation in excess of $35.0 millionthat could cause the acceleration of such obligation, any acceleration underthe senior secured credit agreement or other debt agreement would also resultin a default under the indenture governing these notes, which could lead to thenote holders electing to declare the principal, premium, if any, and intereston the then outstanding notes immediately due and payable.

 

*TitaniumDioxide Pigments venture term loans and revolving credit facility.*   The Titanium DioxidePigments venture entered into a facility agreement that provides for a termloan facility in an aggregate amount of €250.0 million and a revolving creditfacility in an aggregate amount of €30.0 million ($42.3 million), both maturingon June 17, 2013.  On September 3,2008, the Titanium Dioxide Pigments venture borrowed €250.0 million ($352.3million) under the term loan facility. As of September 30, 2008, there were no outstanding borrowingsunder this revolving credit facility.

 

The loans are secured bythe assets of the venture. In the event that either Kemira’s or Rockwood’sownership interest changes, any lender may cancel its commitment and demandrepayment of its respective portion of the loans, including accrued and unpaidinterest.  The facility agreementcontains customary events of default, subject to remedy periods, thresholds andexceptions.  Upon the occurrence of anevent of default under the facility agreement, the lenders can terminate thecommitments and declare all amounts, including accrued and unpaid interest, tobe due and payable.

 

The interest rate on theloans is EURIBOR (or LIBOR if the currency is not EURO) plus 3%, subject to astep down determined by reference to a leverage ratio test. The term loan shallbe repaid in installments over a five-year period from the date of the facilityagreement, with payments commencing twelve months from such date; both loansmay be repaid in advance without penalty.

 

The facility agreementcontains affirmative and restrictive covenants, subject to certain thresholdsand exceptions.  The restrictivecovenants limit the venture’s ability to undertake certain actions, includingbut not limited to acquiring or disposing of assets, creating liens on assets,entering into a merger or corporate restructuring, and incurring additionalindebtedness.  In addition, the facilityagreement requires the venture to meet certain financial covenants, including:

 

·                  A leverage coverage ratio: for thetwelve-month period ended September 30, 2008, net debt to EBITDA, subjectto certain adjustments (which is substantially similar to the definition ofAdjusted EBITDA in our senior secured credit agreement) must be less than 4.00to 1: for such period, our ratio equaled 3.52 to 1;

 

·                  An interest coverage ratio: EBITDA,subject to certain adjustments to cash interest expense, must be greater than2.75 to 1; the first period for compliance for this ratio is December 31,2008; and

 

·                  Cash flow coverage ratio: cash generatedfor financing activities to debt service must be greater than 1.00; the firstperiod for compliance for this ratio is December 31, 2008.

 

We were in compliancewith the above covenant as of September 30, 2008.

 

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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:

 
| ** **                                                                                                             | ** ** | **Nine months ended  September 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **($ in millions)**                                                                                          | ** ** | **2008**                                            | ** ** | **2007** | ** ** |
| Net cash  provided by operating activities from continuing operations                                                  |       | $                                                   | 239.5      |   | $ | 255.9 |   |
| Changes in  assets and liabilities, net of the effect of foreign currency translation and  acquisitions                |       | 94.2                                                |       | 24.8 |   |
| Current portion of income tax provision                                                                                |       | 36.4                                                |       | 32.5 |   |
| Interest  expense, net, excluding amortization of deferred financing costs and  unrealized losses/gains on derivatives |       | 121.6                                               |       | 126.2 |   |
| Restructuring  and related charges                                                                                     |       | 5.7                                                 |       | 8.9 |   |
| Systems/organization  establishment expenses                                                                           |       | 7.1                                                 |       | 1.8 |   |
| Cancelled  acquisition and disposal costs                                                                              |       | 0.9                                                 |       | 2.8 |   |
| Refinancing  expenses                                                                                                  |       | —                                              |       | 0.9 |   |
| Inventory  write-up charges                                                                                            |       | 4.2                                                 |       | 2.8 |   |
| Bad debt  provision                                                                                                    |       | (0.9                                                | )          | (1.2 | ) |
| Gain on sale of  assets                                                                                                |       | (1.8                                                | )          | (5.3 | ) |
| Other                                                                                                                  |       | 0.6                                                 |       | (0.8 | ) |
| Total Adjusted  EBITDA                                                                                                 |       | $                                                   | 507.5      |   | $ | 449.3 |   |

 

***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 September 30, 2008, except for theadditional borrowings related to the formation of the Titanium Dioxide Pigmentsventure in September 2008.

 

***Capital Expenditures***

 

Rockwood’s capitalexpenditures for the nine months ended September 30, 2008 consistedprimarily of replacements of worn, obsolete or damaged equipment as well asinvestments in new equipment.

 

For the nine months endedSeptember 30, 2008 and 2007, our capital expenditures, excluding capitalleases, were $157.1 million and $135.5 million, respectively. Capitalexpenditures for each of our reporting segments are provided in the followingtable:

 
| **($ in millions)**              | ** ** | **Specialty  Chemicals** | ** ** | **Performance  Additives** | ** ** | **Titanium  Dioxide  Pigments** | ** ** | **Advanced  Ceramics** | ** ** | **Specialty  Compounds** | ** ** | **Corporate  and other** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------|------------|--------------------------|------------|----------------------------|------------|---------------------------------|------------|------------------------|------------|--------------------------|------------|-------------------------------|------------|------------------|------------|
| Nine months  ended September 30, 2008 |       | $                        | 50.8       |                       | $          | 30.3                            |       | $                      | 31.0       |                     | $          | 32.0                          |       | $                | 8.7        |   | $ | 4.3 |   | $ | 157.1 |   |
| Nine months  ended September 30, 2007 |       | 42.7                     |       | 23.5                       |       | 28.9                            |       | 21.5                   |       | 14.6                     |       | 4.3                           |       | 135.5            |       |
|                                            |            |                          |            |                            |            |                                 |            |                        |            |                          |            |                               |            |                  |            |  |  |  |  |  |  |  |

 

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 tomaintain and repair pollution control equipment. For 2008, we estimate capitalexpenditures for compliance with SHE laws to be at similar levels; however, becausecapital expenditures for these matters are subject to changes in and new SHElaws, 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.

 

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***Foreign currency related transactions***

 

As of September 30,2008, $1,516.6 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 September 30, 2008, theCompany had approximately $29.2 million of letters of credit and other bankguarantees, of which $24.8 million will expire in 2008 through 2012. Theremaining guarantees have no specified expiration date. This amount includesoutstanding letters of credit of $24.6 million that reduced our availabilityunder the 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 businesscombinations;

 

·      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 significantaccounting policies of the Company are described in Note 1,“Description ofBusiness and Summary of Significant Accounting Policies,” to the unauditedcondensed consolidated financial statements and the critical accountingpolicies and estimates are described in the “Management’s Discussion andAnalysis of Financial Condition and Results of Operations” section in theCompany’s 2007 Form 10-K. There have been no significant changes to thesecritical accounting policies and estimates as of September 30, 2008.

 

One of our criticalaccounting policies relates to the impairment of goodwill, property, plant andequipment and other intangible assets. The recoverability of goodwill is reviewed on an annual basis during thefourth quarter.  Additionally, therecoverability of goodwill, property, plant and equipment and other intangibleassets is reviewed when events or changes in circumstances occur indicatingthat the carrying value of the assets may not be recoverable.

 

Due to the recenteconomic downturn, some of our businesses have been negatively impacted.  In particular, the downturn in the domestichousing market has had an unfavorable impact our Color Pigments and Servicesand Timber Treatment Chemicals businesses that are part of our PerformanceAdditives segment.  In our TitaniumDioxide Pigments segment, market conditions, including pricing pressure andcurrent industry overcapacity, have negatively impacted this segment.  As of September 30, 2008, our analysisindicates that the fair values of our reporting units exceeded their carryingamounts and therefore, we did not have a triggering event requiring an interimimpairment review. 

 

We will continue tomonitor the economic environment and any impact it may have on our businessesand will perform our annual 

 

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goodwill impairmentreview in the fourth quarter of 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 bythese forward-looking statements. In particular, these factors include, amongother things:

 

·                  our business strategy;

·                  competitive pricing or product development activitiesaffecting demand for our products;

·                  fluctuations in interest rates, exchange rates andcurrency values;

·                  availability and pricing of raw materials;

·                  fluctuations in energy prices;

·                  changes in the end-use markets in which our productsare sold;

·                  changes in the general economic conditions in NorthAmerica and Europe and in other locations in which we currently do business;

·                  our ability to access capital markets;

·                  technological changes affecting production of ourmaterials;

·                  governmental and environmental regulations and changesin those regulations;

·                  hazards associated with chemicals manufacturing;

·                  our high level of indebtedness;

·                  risks associated with negotiating, consummating andintegrating acquisitions;

·                  risks associated with competition and the introductionof new competing products, especially in the Asia-Pacific region; and

·                  risks associated with international sales andoperations.

 

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 September 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 September 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 thethird 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 Item3, Legal Proceedings in our 2007 Form 10-K for descriptions of other legalmatters.

 

**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, except for the following:

 

****Downturns in certain industriesand general economic conditions could adversely affect our profitability.****

 

In the event that the volatile conditions affecting worldwide financialmarkets persist or result in a prolonged economic downturn or recession, ourresults of operations, cash flows and financial position could be materiallyand adversely affected. Under such circumstances, the demand for our productscould decrease, which would adversely affect our results of operations. Inaddition, our products are used in certain industries, such as the automotive,data and communications and construction industries. Prolonged downturns in oneor more of these industries could severely reduce demand for our products. Forexample, sales in our Performance Additives business have been adverselyimpacted by downward trends in commercial and residential construction, housingstarts and trends in residential repair and remodeling. Further, a downturn inthe automotive industry, particularly in Europe, may adversely affect theresults of operations of our Surface Treatment business in our SpecialtyChemicals segment. Moreover, if the value of one or more of our businessesdeteriorates, we may be required to record impairment charges that couldadversely affect our results of operations. If we are unable to successfullyanticipate or respond to changing economic conditions, our results of operationsand financial position may be materially and adversely affected.

 

Further, aprolonged economic downturn or recession or further market disruption in thecapital and credit markets may adversely impact our future cash flows fromoperations and our liquidity. For example, the recent deterioration of thesemarkets has had a material and adverse impact on our pension plan assets, whichmay require us to make certain payments into these plans in the form of aone-time payment or over an extended period, and any further deterioration inthe capital markets may require us to fund additional amounts in the future. Anysuch payments may materially and adversely impact our liquidity. If our sources of liquidity areinsufficient to meet our needs, we may be forced to use other means availableto us, such as reduce or delay capital expenditures or other cost cuttingmeasures or seek additional sources of capital such as through additionalborrowings, equity issuances or other sources, to satisfy our liquidity needs.The recent unprecedented adverse conditions in the global capital and creditmarkets may limit our ability to secure capital or obtain it on terms andconditions that are acceptable to us. We cannot predict with any certainty theimpact of this or any further disruption in these markets or our ability toaccess these markets in the future.

 

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

 

None.

 

**Item3.  Defaults upon Senior Securities.**

 

None.

 

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

 

None.

 

**Item5.  Other Information.**

 

None.

 

**Item6.  Exhibits.**

 
| **Exhibit No.** | ** ** | **Description of Exhibit**                                          |
|----------------------|------------|-------------------------------------------------------------------------------|
| ** **           | ** ** | ** **                                                                    |
| 31.1*                |       | Rule 13a-14(a)/15d-14(a) Certification  of Chief Executive Officer. |
|                 |       |                                                                          |
| 31.2*                |       | Rule 13a-14(a)/15d-14(a) Certification  of Chief Financial Officer. |

 

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| 32.1   |   | Section 1350  Certification of Chief Executive Officer. This certification accompanies this  report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and  shall not be deemed filed by the Company for purposes of Section 18 or  any other provision of the Securities Exchange Act of 1934, as amended. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                              |
| 32.2   |   | Section 1350  Certification of Chief Financial Officer. This certification accompanies this  report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and  shall not be deemed filed by the Company for purposes of Section 18 or  any other provision of the Securities Exchange Act of 1934, as amended. |

 

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*       Filed herewith.

 

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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: November 7,  2008 |
|   |                          |   |
|   |                          |   |
|   | ROCKWOOD  HOLDINGS, INC. |
|   |                          |   |
|   |                          |   |
|   | By:                           | /s/ ROBERT J. ZATTA |
|   |                          | Robert J. Zatta |
|   |                          | Senior Vice President  and Chief Financial Officer |
|   |                          | Date: November 7,  2008 |

 

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