**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-Q**

**x**              QUARTERLY REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

**For the quarterly period ended September 30, 2006**

**Or**

**o**                 TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

**Commissionfile number   001-32609**

**Rockwood Holdings, 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 bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the Registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.     x Yes     o No

Indicate by check markwhether the Registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer.  See definition of“accelerated filer and large accelerated filer” in Rule 12b-2 of theExchange Act.
| Large accelerated filer o | Accelerated filer o | Non-accelerated filer x |
|---------------------------|---------------------|-------------------------|

 

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

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

As of November 10, 2006, there were 73,784,632 outstanding shares ofcommon stock, par value $0.01 per share, of the Registrant.

 

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**TABLE OFCONTENTS**

**FORM10-Q**
|         | PART I- FINANCIAL  INFORMATION                                                                                    |   |
|---------|-------------------------------------------------------------------------------------------------------------------|--------|
| Item  1 | Financial  Statements (Unaudited)                                                                                 |   |
|    | Condensed  Consolidated Statements of Operations for the three and nine months ended  September 30, 2006 and 2005 |   |
|    | Condensed  Consolidated Balance Sheets as of September 30, 2006 and December 31, 2005                             |   |
|    | Condensed  Consolidated Statements of Cash Flows for the nine months ended September 30,  2006 and 2005           |   |
|    | Notes  to Condensed Consolidated Financial Statements                                                             |   |
| Item  2 | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                       |   |
| Item  3 | Quantitative  and Qualitative Disclosures about Market Risk                                                       |   |
| Item 4  | Controls  and Procedures                                                                                          |   |
|    |                                                                                                              |   |
|    | PART II-  OTHER INFORMATION                                                                                       |   |
| Item 1  | Legal  Proceedings                                                                                                |   |
| Item 1A | Risk Factors                                                                                                      |   |
| Item  2 | Unregistered  Sales of Equity Securities and Use of Proceeds                                                      |   |
| Item  3 | Defaults  Upon Senior Securities                                                                                  |   |
| Item  4 | Submission  of Matters to a Vote of Security Holders                                                              |   |
| Item 5  | Other  Information                                                                                                |   |
| Item 6  | Exhibits                                                                                                          |   |
|    |                                                                                                              |   |
|    | Signatures                                                                                                        |   |

 

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**PART I – FINANCIAL INFORMATION**

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

**ROCKWOODHOLDINGS, INC. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

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

**sharesin thousands)**

**(Unaudited)**
| ** **                                            | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|-------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                            | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                            | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| NET SALES                                             |       | $                                | 827.0      |                            | $          | 771.7 |   | $ | 2,495.4 |   | $ | 2,358.8 |   |
| COST OF PRODUCTS SOLD                                 |       | 579.7                            |       | 538.2                           |       | 1,729.5 |   | 1,636.7 |   |
| GROSS PROFIT                                          |       | 247.3                            |       | 233.5                           |       | 765.9 |   | 722.1 |   |
| SELLING, GENERAL AND  ADMINISTRATIVE EXPENSES         |       | 159.5                            |       | 143.8                           |       | 478.8 |   | 451.5 |   |
| RESTRUCTURING CHARGES,  net                           |       | 1.7                              |       | 2.9                             |       | 3.9 |   | 8.7 |   |
| MANAGEMENT SERVICES  AGREEMENT TERMINATION FEE        |       | —                           |       | 10.0                            |       | — |   | 10.0 |   |
| OPERATING INCOME                                      |       | 86.1                             |       | 76.8                            |       | 283.2 |   | 251.9 |   |
| OTHER INCOME  (EXPENSES):                             |       |                             |       |                            |       |   |   |   |   |
| Interest expense, net                                 |       | (60.8                            | )          | (55.4                           | )          | (147.7 | ) | (177.6 | ) |
| Loss on early  extinguishment of debt                 |       | —                           |       | (26.6                           | )          | — |   | (26.6 | ) |
| Foreign exchange gain,  net                           |       | 4.8                              |       | 2.1                             |       | 7.7 |   | 116.1 |   |
| Loss on sale of  business                             |       | —                           |       | —                          |       | (12.1 | ) | — |   |
| Other, net                                            |       | 0.3                              |       | —                          |       | 2.7 |   | — |   |
| Net                                                   |       | (55.7                            | )          | (79.9                           | )          | (149.4 | ) | (88.1 | ) |
| INCOME (LOSS) BEFORE  TAXES AND MINORITY INTEREST     |       | 30.4                             |       | (3.1                            | )          | 133.8 |   | 163.8 |   |
| INCOME TAX PROVISION                                  |       | 12.4                             |       | 10.8                            |       | 34.5 |   | 52.5 |   |
| NET INCOME  (LOSS) BEFORE MINORITY INTEREST           |       | 18.0                             |       | (13.9                           | )          | 99.3 |   | 111.3 |   |
| MINORITY INTEREST                                     |       | 3.4                              |       | 0.6                             |       | (0.8 | ) | 2.3 |   |
| NET INCOME  (LOSS)                                    |       | $                                | 21.4       |                            | $          | (13.3 | ) | $ | 98.5 |   | $ | 113.6 |   |
|                                                  |       |                             |       |                            |       |   |   |   |   |
| Per share data:                                       |       |                             |       |                            |       |   |   |   |   |
| BASIC EARNINGS (LOSS)  PER COMMON SHARE               |       | $                                | 0.29       |                            | $          | (0.25 | ) | $ | 1.34 |   | $ | 2.02 |   |
| DILUTED EARNINGS (LOSS)  PER COMMON SHARE             |       | $                                | 0.29       |                            | $          | (0.25 | ) | $ | 1.31 |   | $ | 1.98 |   |
|                                                  |       |                             |       |                            |       |   |   |   |   |
| WEIGHTED AVERAGE NUMBER  OF BASIC SHARES OUTSTANDING  |       | 73,782                           |       | 61,845                          |       | 73,781 |   | 54,197 |   |
| WEIGHTED AVERAGE NUMBER OF DILUTED SHARES OUTSTANDING |       | 74,915                           |       | 61,845                          |       | 75,001 |   | 55,092 |   |

 

See accompanying notes to condensed consolidatedfinancial statements.

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**ROCKWOODHOLDINGS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(Dollars in millions, except per share amounts;**

**shares in thousands)**

**(Unaudited)**
| ** **                                                                                                                                                                                                                                 | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                 | ** ** | **2006**               | ** ** | **2005**              | ** ** |
| **ASSETS**                                                                                                                                                                                                                                 | ** ** | ** **             | ** ** | ** **            | ** ** |
| CURRENT ASSETS:                                                                                                                                                                                                                            |       |                   |       |                  |       |
| Cash and cash  equivalents                                                                                                                                                                                                                 |       | $                      | 70.0       |                  | $          | 102.2 |   |
| Accounts  receivable, net                                                                                                                                                                                                                  |       | 522.2                  |       | 484.2                 |       |
| Inventories                                                                                                                                                                                                                                |       | 494.0                  |       | 458.2                 |       |
| Deferred income  taxes                                                                                                                                                                                                                     |       | 8.4                    |       | 12.2                  |       |
| Prepaid expenses  and other current assets                                                                                                                                                                                                 |       | 48.3                   |       | 68.1                  |       |
| Total current assets                                                                                                                                                                                                                       |       | 1,142.9                |       | 1,124.9               |       |
| PROPERTY, PLANT  AND EQUIPMENT, net                                                                                                                                                                                                        |       | 1,502.7                |       | 1,402.4               |       |
| GOODWILL                                                                                                                                                                                                                                   |       | 1,681.9                |       | 1,599.2               |       |
| OTHER INTANGIBLE  ASSETS, net                                                                                                                                                                                                              |       | 586.1                  |       | 583.0                 |       |
| DEFERRED DEBT  ISSUANCE COSTS, net of accumulated amortization of $22.2 and $13.5,  respectively                                                                                                                                           |       | 52.5                   |       | 56.6                  |       |
| OTHER ASSETS                                                                                                                                                                                                                               |       | 59.5                   |       | 44.0                  |       |
| TOTAL ASSETS                                                                                                                                                                                                                               |       | $                      | 5,025.6    |                  | $          | 4,810.1 |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                             | ** ** | ** **             | ** ** | ** **            | ** ** |
| CURRENT  LIABILITIES:                                                                                                                                                                                                                      |       |                   |       |                  |       |
| Accounts payable                                                                                                                                                                                                                           |       | $                      | 268.8      |                  | $          | 295.7 |   |
| Income taxes  payable                                                                                                                                                                                                                      |       | 25.6                   |       | 18.9                  |       |
| Accrued  compensation                                                                                                                                                                                                                      |       | 103.3                  |       | 92.0                  |       |
| Restructuring  liability                                                                                                                                                                                                                   |       | 8.6                    |       | 13.6                  |       |
| Accrued expenses  and other current liabilities                                                                                                                                                                                            |       | 232.3                  |       | 191.1                 |       |
| Senior secured  revolving credit facility                                                                                                                                                                                                  |       | —                 |       | 30.0                  |       |
| Long-term debt,  current portion                                                                                                                                                                                                           |       | 98.2                   |       | 83.1                  |       |
| Total current liabilities                                                                                                                                                                                                                  |       | 736.8                  |       | 724.4                 |       |
| LONG-TERM DEBT                                                                                                                                                                                                                             |       | 2,716.7                |       | 2,730.7               |       |
| PENSION AND  RELATED LIABILITIES                                                                                                                                                                                                           |       | 374.1                  |       | 361.6                 |       |
| DEFERRED INCOME  TAXES                                                                                                                                                                                                                     |       | 34.7                   |       | 27.2                  |       |
| OTHER  LIABILITIES                                                                                                                                                                                                                         |       | 98.7                   |       | 106.3                 |       |
| Total liabilities                                                                                                                                                                                                                          |       | 3,961.0                |       | 3,950.2               |       |
| MINORITY  INTEREST                                                                                                                                                                                                                         |       | 28.0                   |       | 25.2                  |       |
|                                                                                                                                                                                                                                       |       |                   |       |                  |       |
| STOCKHOLDERS’  EQUITY:                                                                                                                                                                                                                |       |                   |       |                  |       |
| Common stock  ($0.01 par value, 400,000 shares authorized, 73,879 shares issued and 73,785  shares outstanding at September 30, 2006; 400,000 shares authorized, 73,873  shares issued and 73,779 shares outstanding at December 31, 2005) |       | 0.7                    |       | 0.7                   |       |
| Paid-in capital                                                                                                                                                                                                                            |       | 1,151.8                |       | 1,151.7               |       |
| Accumulated  other comprehensive income                                                                                                                                                                                                    |       | 154.6                  |       | 52.0                  |       |
| Accumulated  deficit                                                                                                                                                                                                                       |       | (269.1                 | )          | (367.6                | )          |
| Treasury stock,  at cost                                                                                                                                                                                                                   |       | (1.4                   | )          | (1.4                  | )          |
| Other                                                                                                                                                                                                                                      |       | —                 |       | (0.7                  | )          |
| Total stockholders’ equity                                                                                                                                                                                                            |       | 1,036.6                |       | 834.7                 |       |
| TOTAL  LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                                                                           |       | $                      | 5,025.6    |                  | $          | 4,810.1 |   |

 

See accompanyingnotes to condensed consolidated financial statements.

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**ROCKWOOD HOLDINGS, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Dollars in millions)**

**(Unaudited)**
| ** **                                                                                                          | ** ** | **Nine months ended September 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                                                          | ** ** | **2006**                                                | ** ** | **2005** | ** ** |
| ** **                                                                                                          | ** ** | ** **                                              | ** ** | **As restated** | ** ** |
| ** **                                                                                                          | ** ** | ** **                                              | ** ** | **See Note 16** | ** ** |
| **CASH  FLOWS FROM OPERATING ACTIVITIES:**                                                                          | ** ** | ** **                                              | ** ** | ** ** | ** ** |
| Net income                                                                                                          |       | $                                                       | 98.5       |   | $ | 113.6 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities:                                  |       |                                                    |       |   |   |
| Depreciation and amortization                                                                                       |       | 165.2                                                   |       | 154.7 |   |
| Deferred financing costs amortization                                                                               |       | 7.2                                                     |       | 8.3 |   |
| Loss on early extinguishment of debt (including  $13.4 million of non- cash write-offs on deferred financing costs) |       | —                                                  |       | 26.6 |   |
| Foreign exchange gain, net                                                                                          |       | (7.7                                                    | )          | (116.1 | ) |
| Non-cash interest expense on pay-in-kind loans                                                                      |       | —                                                  |       | 24.1 |   |
| Loss on sale of business, net of cash                                                                               |       | 11.3                                                    |       | — |   |
| Gains related to asset sales                                                                                        |       | (0.7                                                    | )          | — |   |
| Fair value adjustment of derivatives                                                                                |       | (6.4                                                    | )          | (12.6 | ) |
| Bad debt provision                                                                                                  |       | 0.6                                                     |       | 0.8 |   |
| Deferred income taxes                                                                                               |       | 10.3                                                    |       | 18.5 |   |
| Minority interest                                                                                                   |       | 0.8                                                     |       | (2.3 | ) |
| Changes in  assets and liabilities, net of the effect of foreign currency translation and  acquisitions:            |       |                                                    |       |   |   |
| Accounts receivable                                                                                                 |       | (20.1                                                   | )          | (15.0 | ) |
| Inventories, including inventory write-up reversal                                                                  |       | (28.1                                                   | )          | (23.1 | ) |
| Prepaid expenses and other assets                                                                                   |       | 18.7                                                    |       | (4.9 | ) |
| Accounts payable                                                                                                    |       | (27.0                                                   | )          | 35.2 |   |
| Income taxes payable                                                                                                |       | 17.3                                                    |       | 10.7 |   |
| Accrued expenses and other liabilities                                                                              |       | 6.8                                                     |       | (19.6 | ) |
| **Net cash provided by operating activities**                                                                       |       | 246.7                                                   |       | 198.9 |   |
| **CASH  FLOWS FROM INVESTING ACTIVITIES:**                                                                          | ** ** | ** **                                              | ** ** | ** ** | ** ** |
| Acquisitions,  net of cash acquired                                                                                 |       | (13.4                                                   | )          | — |   |
| Post closing  purchase price consideration                                                                          |       | —                                                  |       | (16.1 | ) |
| Capital  expenditures, excluding capital leases                                                                     |       | (146.4                                                  | )          | (139.3 | ) |
| Proceeds on sale  of property, plant and equipment                                                                  |       | 4.0                                                     |       | 0.2 |   |
| **Net cash used in investing activities**                                                                           |       | (155.8                                                  | )          | (155.2 | ) |
| **CASH  FLOWS FROM FINANCING ACTIVITIES:**                                                                          | ** ** | ** **                                              | ** ** | ** ** | ** ** |
| Issuance of  common stock, net of fees                                                                              |       | —                                                  |       | 435.7 |   |
| Proceeds from  senior secured credit facilities                                                                     |       | 170.2                                                   |       | 331.0 |   |
| Repayment of  senior secured credit facilities                                                                      |       | (242.7                                                  | )          | (338.4 | ) |
| Long-term debt  repayments from IPO proceeds                                                                        |       | —                                                  |       | (370.7 | ) |
| Payments on  other long-term debt                                                                                   |       | (48.2                                                   | )          | (26.2 | ) |
| Redemption of  redeemable convertible preferred stock from IPO proceeds                                             |       | —                                                  |       | (38.5 | ) |
| Costs related to  early extinguishment of debt                                                                      |       | —                                                  |       | (13.2 | ) |
| **Net cash used in financing activities**                                                                           |       | (120.7                                                  | )          | (20.3 | ) |
| EFFECT OF  EXCHANGE RATE CHANGES ON CASH                                                                            |       | (2.4                                                    | )          | (0.9 | ) |
| NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                                                                |       | (32.2                                                   | )          | 22.5 |   |
| CASH AND CASH  EQUIVALENTS, BEGINNING OF PERIOD                                                                     |       | 102.2                                                   |       | 111.3 |   |
| CASH AND CASH EQUIVALENTS, END OF PERIOD                                                                            |       | $                                                       | 70.0       |   | $ | 133.8 |   |
| SUPPLEMENTAL  DISCLOSURES OF CASH FLOW INFORMATION:                                                                 |       |                                                    |       |   |   |
| Interest paid,  net                                                                                                 |       | $                                                       | 116.9      |   | $ | 128.6 |   |
| Income taxes  paid, net of refunds                                                                                  |       | $                                                       | 11.2       |   | $ | 24.9 |   |
| NON-CASH  INVESTING ACTIVITIES:                                                                                     |       |                                                    |       |   |   |
| Acquisition of  equipment under capital leases                                                                      |       | $                                                       | 4.1        |   | $ | 4.9 |   |
| Decrease in liabilities  for property, plant and equipment                                                          |       | $                                                       | (16.4      | ) | $ | (16.3 | ) |

 

See accompanyingnotes to condensed consolidated financial statements.

5

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**ROCKWOOD HOLDINGS, INC. AND SUBSIDIARIES**

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

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

***Business Description, Background***—RockwoodHoldings, Inc. and Subsidiaries (“Rockwood” or the “Company”) is a globaldeveloper, manufacturer and marketer of high value-added specialty chemicalsand advanced materials used for industrial and commercial purposes. Rockwood isthe ultimate parent company of Rockwood Specialties Group, Inc. (“Group”).

Rockwood is controlled byaffiliates of Kohlberg Kravis Roberts & Co. L.P. (“KKR”) and wasformed in connection with an acquisition of certain assets, stock andbusinesses from Laporte plc (“Laporte”) on November 20, 2000 (the “KKR Acquisition”).

On July 31, 2004, theCompany completed the acquisition of four businesses of Dynamit Nobel from mgtechnologies ag and MG North America Holdings, Inc. (the “Dynamit NobelAcquisition”).  The businesses acquiredare focused on highly specialized markets and consist of: white pigments,surface treatment and lithium chemicals, ceramics and pharmaceuticalintermediates.

On August 22, 2005,the Company completed an initial public offering (“IPO”) of 23,469,387 sharesof its common stock, which included 3,061,224 shares issued and sold as aresult of the underwriters’ exercise of the over-allotment option.

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

The interim financialstatements included herein are unaudited. The condensed consolidated financialstatements are presented based upon accounting principles generally accepted inthe United States of America (“U.S. GAAP”), except that certain information andfootnote disclosures, normally included in financial statements prepared inaccordance with U.S. GAAP, have been condensed or omitted. The accompanyingcondensed consolidated financial statements should be read in conjunction withthe consolidated financial statements and the notes thereto contained in theCompany’s 2005 Form 10-K. In the opinion of management, thisinformation contains all adjustments necessary, consisting of normal andrecurring accruals, for a fair presentation of the results for the periodspresented.

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

The Company’s minorityinterest represents the total of the minority party’s interest in certaininvestments (principally the Groupe Novasep segment) that are consolidated butless than 100% owned.

Effective July 18,2005, the Company’s Board of Directors authorized a 34.22553019-for-one stocksplit of its common stock and increased the company’s authorized shares ofcommon stock to 400 million shares. As a result of the stock split, theaccompanying condensed consolidated financial statements reflect an increase inthe number of outstanding shares of common stock and the transfer of theadditional paid-in-capital to par value. All share amounts have been restatedto reflect the retroactive effect of the stock split for all periods presented.

***Nature of Operations/Segment Reporting***—TheCompany is a global developer, manufacturer and marketer of high value-addedspecialty chemicals and advanced materials. The Company operates in variousbusiness lines within its seven reportable segments consisting of:(1) Specialty Chemicals, which includes lithium compounds and chemicals,metal surface treatment chemicals, and synthetic metal sulfides,(2) Performance Additives, which includes color pigments and services, timbertreatment chemicals, clay-based additives, and water treatment chemicals,(3) Titanium Dioxide Pigments, which consists of titanium dioxidepigments, and zinc- and barium-based compounds, (4) Advanced Ceramics,which includes ceramic-on-ceramic ball head and liner components used inhip-joint prostheses systems, ceramic cutting tools and a range of otherceramic components, (5) Groupe Novasep, which includes sensitivechemistry, highly potent active ingredients and chiral technologies for thesynthesis of pharmaceutical compounds and purification and separation processequipment, systems and studies, (6) Specialty Compounds, which consists ofplastic compounds, and (7) Electronics, which consists of electronicchemicals, wafer reclaim and photomasks.

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

6

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periods reported. Theseestimates include, among other things, assessing the collectibility of accountsreceivable, the use and recoverability of inventory, the valuation of deferredtax assets, impairment of goodwill as well as property, plant and equipment andother intangible assets, and the useful lives of tangible and intangibleassets, among others. Actual results could differ from those estimates.

Such estimates alsoinclude the fair value of assets acquired and liabilities assumed allocated tothe purchase price 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 and DLJMerchant Banking Partners III, L.P. (“DLJMB”) and affiliates of each.  Prior to the IPO, KKR and DLJMB had providedthe Company with consulting and management advisory services for an annual feeof $2.1 million, increasing 5% annually. In connection with the IPO, theparties agreed to terminate the management services agreement for an aggregateconsideration of $10.0 million.

***Revenue Recognition***—The Companyrecognizes revenue when the earnings process is complete, except for amounts(less than 1% of consolidated revenues in 2005) derived from long-termcontracts accounted for under the percentage of completion method within theGroupe Novasep segment. Product sales are recognized when products are shippedto the customer in accordance with the terms of the contract of sale, title andrisk of loss have been transferred, collectibility is reasonably assured, andpricing is fixed or determinable. Accruals are made for sales returns and otherallowances based on the Company’s experience. Revenue under service agreementsis realized when the service is performed.

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

***Accretion on Senior Discount Notes***—TheCompany’s senior discount notes accreted principal value for a portion of theirterm. The Company recorded such accretion as interest expense for financialreporting purposes. As a result of the completion of the IPO, the Company used$89.2 million of the proceeds to redeem the outstanding principal amount of thesenior discount notes (including accreted and unpaid interest).

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

***Pension, Postemployment and Postretirement Costs***—Definedbenefit costs and liabilities have been determined in accordance with SFAS 87,*Employers’ Accounting for Pensions*. Otherpostretirement benefit costs and liabilities have been determined in accordancewith SFAS 106,*Employers’ Accountingfor Postretirement Benefits Other Than Pensions*. Postemploymentbenefit costs and liabilities have been determined in accordance withSFAS 112,*Employers’ Accounting forPostemployment Benefits*. See Note 11, “Employee Benefit Plans,” forfurther detail.

***Income Taxes***—Income taxes aredetermined in accordance with SFAS 109,*Accounting for Income Taxes*. Deferred tax assets and liabilities arerecognized for future tax consequences attributable to differences between thefinancial statement carrying amounts and the corresponding tax carrying amountsof assets and liabilities. Deferred tax assets are also recognized for tax lossand tax credit 

7

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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.

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

Comprehensiveincome is summarized as follows:
|                                                     | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|-----------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                          | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| **($ in millions)**                       | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net income  (loss)                                  |       | $                                | 21.4       |                            | $          | (13.3 | ) | $ | 98.5 |   | $ | 113.6 |   |
| Foreign currency  translation                       |       | (4.8                             | )          | (5.4                            | )          | 79.3 |   | (125.0 | ) |
| Intercompany  foreign currency transactions         |       | (12.0                            | )          | (5.3                            | )          | 89.4 |   | (167.1 | ) |
| Net investment  hedge, net of tax                   |       | 12.5                             |       | (10.3                           | )          | (70.7 | ) | 20.9 |   |
| Reduction of  minimum pension liability, net of tax |       | —                           |       | —                          |       | 4.6 |   | — |   |
| Total  comprehensive income (loss)                  |       | $                                | 17.1       |                            | $          | (34.3 | ) | $ | 201.1 |   | $ | (157.6 | ) |

 

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 millionthat effectively converted the U.S. dollar fixed-rate debt in respect of thedollar notes sold into euro fixed-rate debt. The Company has designated thiscontract as a hedge of the foreign currency exposure of its net investment inits euro-denominated operations. There was no ineffective portion of the netinvestment hedge as of September 30, 2006 and December 31, 2005. TheCompany does not expect any of the loss on the net investment hedge residing incomprehensive income at September 30, 2006 to be reclassified into earningsduring the subsequent twelve months.

In addition, wedesignated the remaining portion of our euro-denominated debt that is recordedon our U.S. books as a net investment hedge of our euro-denominated investmentsas of October 1, 2005 (euro-denominated debt of €684.3 million or $867.3million based on the September 30, 2006 exchange rate of €1.00 = $1.2674). As aresult, effective October 1, 2005, any foreign currency gains and lossesresulting from the euro-denominated debt discussed above is accounted for as acomponent of accumulated other comprehensive income. There was no ineffectiveportion of the net investment hedge as of September 30, 2006. The Company doesnot expect any of the loss on the net investment hedge residing incomprehensive income at September 30, 2006 to be reclassified into earningsduring the subsequent twelve months.

***Accounting for Environmental Liabilities***—Inthe ordinary course of business, the Company is subject to extensive andchanging federal, state, local and foreign environmental laws and regulations,and has made provisions for the estimated financial impact of environmentalcleanup related costs. The Company’s policy has been to accrue costs of anon-capital nature related to environmental clean-up when those costs arebelieved to be probable and can be reasonably estimated. If the aggregateamount of the obligation and the amount and timing of the cash payments for asite are fixed or reliably determinable, the liability is discounted.Expenditures that extend the life of the related property or mitigate orprevent future environmental contamination are capitalized and expendituresrelated to existing conditions resulting from past or present operations andfrom which no current or future benefit is discernible are immediately expensed.The quantification of environmental exposures requires an assessment of manyfactors, including changing laws and regulations, advancements in environmentaltechnologies, the quality of information available related to specific sites,the assessment stage of each site investigation and the length of time involvedin remediation or settlement. In some matters, the Company may share costs withother parties. The Company does not include anticipated recoveries frominsurance carriers or other third parties in its accruals for environmentalliabilities. The Company’s liability estimates are based upon available facts,existing technology, past experience and, in some instances, insurancerecoveries where the remediation costs are being paid directly by the Company’sinsurers, and are generated by several means, including State-mandatedschedules, environmental consultants and internal experts, depending on thecircumstances.

***Cash and Cash Equivalents***—All highlyliquid instruments and money market funds with an original maturity of threemonths or less 

8

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are considered to be cashequivalents. The carrying amount approximates fair value because of the shortmaturities of these instruments.

***Recent Accounting Pronouncements***—TheCompany implemented the financial accounting standards listed below onJanuary 1, 2006. The adoption of these standards did not have a materialimpact on the Company.
| SFAS 123R |   | Share-Based Payment                      |
|-----------|--------|------------------------------------------|
| SFAS 151  |   | Inventory Costs                          |
| SFAS 153  |   | Exchanges of Nonmonetary Assets          |
| SFAS 154  |   | Accounting Changes and Error Corrections |

 

SFAS 123R revisesSFAS 123,*Accounting for Stock-BasedCompensation,* and supersedes APB Opinion No. 25,*Accounting for Stock Issued to Employees*,and its related implementation guidance. SFAS 123R requires entities tomeasure the cost of employee services received in exchange for an award ofequity instruments based on the grant-date fair value of the award. These costsare recognized over the period during which the employee is required to provideservices in exchange for the award. This standard eliminates the use of theintrinsic value method of accounting for share-based payments as previouslyprovided in APB 25. The Company is applying SFAS 123R on a modifiedprospective basis. In accordance with SFAS 123R, beginning in the first quarterof 2006, the Company recorded compensation cost for the unvested portion ofawards issued after February 2005, which is the date it first filed itsregistration statement with the Securities and Exchange Commission (“SEC”), andfor any awards modified, repurchased or cancelled after this date. See Note 2, “Share-BasedPayment (SFAS No. 123R),” and Note 3, “Stock-Based Compensation,” forfurther details of the impact of adopting this standard.

SFAS 151 clarifies theaccounting for abnormal amounts of idle facility expense, freight, handlingcosts, and wasted material (spoilage), requiring that such items be recognizedas current-period charges. This statement eliminates a narrow differencebetween the Financial Accounting Standards Board (“FASB”) and InternationalAccounting Standards Board (“IASB”) accounting standards to improve thecomparability of cross-border financial reporting.

SFAS 153 eliminatesthe exception for nonmonetary exchanges of similar productive assets andreplaces it with a general exception for exchanges of nonmonetary assets thatdo not have commercial substance. This statement eliminates a narrow differencebetween the FASB and IASB accounting standards to improve the comparability ofcross-border financial reporting.

SFAS 154 replaces APBOpinion No. 20,*Accounting Changes*,and SFAS Statement No. 3,*ReportingAccounting Changes in Interim Financial Statements*, and changes therequirements for the accounting and reporting of a change in accountingprinciple. SFAS 154 requires retrospective application to prior periods’financial statements of changes in accounting principle, unless it isimpracticable to determine either the period-specific effects or the cumulativeeffect of the change. SFAS 154 also requires that (1) a change indepreciation, amortization, or depletion method for long-lived, non-financialassets be accounted for as a change in accounting estimate affected by a changein accounting principle and (2) correction of errors in previously issuedfinancial statements should be termed a “restatement.” This statementeliminates a narrow difference between the FASB and IASB accounting standardsto improve the comparability of cross-border financial reporting.

The Company will adopt the following in the futureas they are required:

In September 2006, theSEC issued Staff Accounting Bulletin (“SAB”) No. 108, which providesinterpretive guidance on how registrants should quantify financial statementmisstatements.  Prior to SAB 108, therewere two methods most commonly used to quantify misstatements:  the “rollover” method, which focusedprimarily on the income statement impact of misstatements, and the “ironcurtain” method, which focused primarily on the balance sheet impact ofmisstatements.  Under SAB 108,registrants will be required to consider both the rollover and iron curtainmethods (i.e., dual approach) when evaluating the materiality of financialstatement errors.  SAB 108 is effectivefor the Company for its financial statements for the year ended December 31,2006.  The adoption of this SAB is notexpected to have an impact on the Company’s financial statements for the yearended December 31, 2006.

In September 2006, SFAS No. 157, *Fair Value Measurements*, was issued.  This statement defines fair value,establishes a framework for measuring fair value in generally acceptedaccounting principles (“GAAP”), and expands disclosures about fair valuemeasurements.  This statement does not requireany new fair value measurements.  Thisstatement is effective for the Company as of January 1, 2008.  The Company is currently evaluatingthe impact this statement will have on its financial statements.

In September 2006, SFAS No. 158, *Employers’ Accounting for Defined Benefit Pension andOther Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and132 (R)*, was issued.  Thisstatement requires an employer to recognize the overfunded or underfundedstatus of a single-employer defined benefit postretirement plan as an asset orliability in its statement of financial position and to recognize changes inthat funded status in comprehensive income in the year in which the changesoccur.  In addition, employers arerequired to measure the funded status of a plan as of the date of its year-endstatement of financial position, with limited exceptions.  SFAS No. 158 also has expanded the disclosurerequirements for pension plans and other postretirement plans.  This statement provides different effectivedates for the recognition and related disclosure provisions and for therequired change to a fiscal year-end measurement date.  The requirement to recognize the fundedstatus of a benefit plan and the disclosure requirements are effective for theCompany as of the end of the year ending December 31, 2006.  The requirement to measure plan assets andbenefit obligations as of the date of the employer’s fiscal year-end statementof financial position is effective for the Company for the fiscal year endedDecember 31, 2008.  The Company iscurrently evaluating the impact this statement will have on its financialstatements.

9

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The Company will adoptthe following in the first quarter of 2007:

In June 2006, a finalconsensus was reached on Emerging Issues Task Force (“EITF”) Issue No. 06-3, *How Taxes Collected From Customers and Remitted to GovernmentalAuthorities Should Be Presented in the Income Statement (That Is, Gross VersusNet Presentation)*.  The scopeof this Issue includes any tax assessed by a governmental authority that isdirectly imposed on a revenue-producing transaction between a seller and acustomer and may include, but is not limited to, sales, use, value added, andsome excise taxes.  This Issue affirmsthat the presentation of taxes in the income statement should be on either agross (included in revenues and costs) or a net (excluded from revenues) basisand that this is an accounting policy decision that should be disclosedpursuant to APB Opinion No. 22.  Inaddition, if such taxes are significant and reported on a gross basis, theamounts of those taxes should be disclosed in interim and annual financialstatements.  The Company will adopt thisEITF in the first quarter of 2007.  TheCompany currently records taxes collected from customers and remitted togovernmental authorities on a net basis.

In July 2006, FASBInterpretation (“FIN”) No. 48, *Accounting for Uncertaintyin Income Taxes – An Interpretation of FASB Statement No. 109*, wasissued.  FIN 48 clarifies the accountingfor uncertainty in income taxes recognized in an enterprise’s financialstatements in accordance with FASB Statement No. 109.  FIN 48 also prescribes a recognitionthreshold and measurement attribute for the financial statement recognition andmeasurement of a tax position taken or expected to be taken in a taxreturn.  The provisions of FIN 48 are effectivefor fiscal years beginning after December 15, 2006.  The Company will adopt this interpretation inthe first quarter of 2007 and is currently evaluating the impact it will haveon its financial statements.

InSeptember 2006, the FASB issued FASB Staff Position (“FSP”) No. AUG AIR-1, *Accounting for Planned Major Maintenance Activities*.  This FSP prohibits the use of theaccrue-in-advance method of accounting for planned major maintenance activitiesin annual and interim financial reporting periods.  It continues to permit the application ofthree alternative methods of accounting for planned maintenance activities:direct expense, built-in-overhaul and deferral methods.  In addition, this FSP requires disclosure ofthe method of accounting for planned maintenance activities selected.  The Company will adopt this FSP in the firstquarter of 2007 and does not expect its adoption to have a material impact onits financial statements.

**2.     SHARE-BASED PAYMENT (SFAS NO. 123R):**

Effective January 1,2006, the Company adopted SFAS No. 123R,*Share-Based Payment*, and related interpretations and began expensingthe grant-date fair value of stock options. Prior to January 1, 2006, theCompany applied the recognition and measurement principles of APB Opinion 25,*Accounting for Stock Issued to Employees*,and related interpretations. Accordingly, no compensation expense wasrecognized in net income for employee stock options, as the options granted hadan exercise price equal to the market value of the underlying common stock onthe date of grant. The estimated impact of adopting SFAS No. 123R in 2006is expected to reduce net income for the year by approximately $0.2 millionbefore taxes (and to reduce diluted earnings per share for the year by lessthan $0.01 per share).

As noted above under “RecentAccounting Pronouncements,” the Company adopted SFAS No. 123R using themodified prospective approach and therefore has not restated prior periods. Asa result, the Company is recording compensation cost for the unvested portionof awards issued after February 2005 and for any awards modified,repurchased or cancelled after this date. In the three and nine months endedSeptember 30, 2006, the adoption of SFAS No. 123R resulted in incrementalstock-based compensation expense of $0.1 million and $0.2 million, respectively.The incremental stock-based compensation expense caused income before taxes andminority interest to decrease by $0.1 million, net income to decrease by lessthan $0.1 million and basic and diluted earnings per share to decrease by lessthan $0.01 per share for the three months ended September 30, 2006. For thenine months ended September 30, 2006, the incremental stock-based compensationexpense caused income before taxes and minority interest to decrease by $0.2million, net income to decrease by $0.1 million and basic and diluted earningsper share to decrease by less than $0.01 per share.

SFAS No. 123Rmodified the disclosure requirements related to share-based compensation.Accordingly, the disclosures prescribed by SFAS No. 123R are included inNote 3, “Stock-Based Compensation.”

For stock options grantedprior to the adoption of SFAS No. 123R, the Company applied APB Opinion 25to account for its stock-based awards. If compensation cost for the Company’sstock option plans had been determined based on the fair value at grant dateconsistent with the provisions of SFAS No. 123 as amended by SFASNo. 148,*Accounting for Stock-BasedCompensation-Transition and Disclosure*, the Company’s net earningsand earnings per share would have been as follows:

10

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|                                                                                                        | ** ** | **Three months**            | ** ** | **Nine months**             | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                                                                                             | ** ** | **ended**                        | ** ** | **ended**                        | ** ** |
| **($ in millions, except per share amounts)**                            | ** ** | **September 30, 2005** | ** ** | **September 30, 2005** | ** ** |
| Net (loss)  income, as reported                                                                        |       | $                                | (13.3      | )                                | $          | 113.6 |   |
| Less:  Stock-based employee compensation expense determined under fair value based  method, net of tax |       | (0.2                             | )          | (0.6                             | )          |
| Pro forma net  (loss) income                                                                           |       | (13.5                            | )          | 113.0                            |       |
| Redeemable  convertible preferred stock dividends                                                      |       | (2.0                             | )          | (4.3                             | )          |
| Pro forma net  (loss) income applicable to common shareholders                                         |       | $                                | (15.5      | )                                | $          | 108.7 |   |
|                                                                                                   |       |                             |       |                             |       |
| (Loss) earnings  per common share, as reported:                                                        |       |                             |       |                             |       |
| Basic                                                                                                  |       | $                                | (0.25      | )                                | $          | 2.02 |   |
| Diluted                                                                                                |       | $                                | (0.25      | )                                | $          | 1.98 |   |
|                                                                                                   |       |                             |       |                             |       |
| Pro forma (loss)  earnings per common share:                                                           |       |                             |       |                             |       |
| Basic                                                                                                  |       | $                                | (0.25      | )                                | $          | 2.01 |   |
| Diluted                                                                                                |       | $                                | (0.25      | )                                | $          | 1.97 |   |

 

**3.     STOCK-BASED COMPENSATION:**

**Rockwood Plan**

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.

***Restricted Stock***—Restricted stock ofthe Company can be granted with or without payment of consideration withrestrictions on the recipient’s right to transfer or sell the stock. During thethird quarter of 2006, the Company granted 1,207 shares of restricted stockwhich vest over five years. The compensation cost related to this restrictedstock caused income before taxes and minority interest to decrease by less than$0.1 million and net income to decrease by less than $0.1 million for the threeand nine months ended September 30, 2006. The weighted average grant date fair value of the restricted sharesgranted in the third quarter of 2006 was $20.70. As of September 30, 2006,there was less than $0.1 million of unrecognized compensation cost related torestricted stock awards determined in accordance with SFAS No. 123R, which isexpected to be recognized over a weighted-average period of approximately 4.9years.

***Stock Purchase***—Eligible employees anddirectors can purchase shares of the Company’s common stock at prices asdetermined by its board of directors. Under the Plan, the Company sold 4,106shares during the three and nine months ended September 30, 2006 at the fairmarket value of the stock ($20.70 per share) based on the closing price of thestock on the New York Stock Exchange on the date of purchase for gross proceedsof approximately $0.1 million.

***Board of Directors Stock Options***—Stockoptions granted to directors under this Plan shall have an exercise price atleast equal to the fair market value of the Company’s common stock on the dateof grant. Options available for grant under this Plan are time options whichhave a life of ten years from the date of grant and vest in three equal annualinstallments on each of the first three anniversaries of the grant date.

***Stock Options***—Stock options grantedunder the Plan shall have an exercise price at least equal to the fair marketvalue of the Company’s common stock on the date of grant. There are two typesof options available for grant under the Plan. Time options have a life of tenyears from the date of grant and vest as follows: time options granted prior to2004 vest 10% in year one, 10% year two, 25% year three, 25% year four and 30%year five; time options granted in 2004 and after vest in installments of 20%on each of the first five anniversaries of the grant date. Performance optionshave a life of ten years and become exercisable with respect to 20% of thetotal performance options granted upon the achievement of certain performancetargets. Performance options become exercisable on the eighth anniversary ofthe grant date to the extent that the options have not become otherwiseexercisable or have not been terminated. In October 2004, the performancetargets were modified as a result of the Dynamit Nobel Acquisition. Certain optionholders have “company-wide performance targets,” for which targets are based onthe achievement by the Company of certain implied equity values. Other optionholders have “divisional performance targets,” for which targets are based on aparticular division’s achievement of annual or cumulative Adjusted EBITDA.

11

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The Company recorded nocompensation cost in the historical statements of operations related to thePlan prior to 2006. The measurement date for determining compensation expensefor each option has been the option issuance date and at that time the marketprice of the stock was equal to the exercise price in each case. The timeoptions have been accounted for as a fixed plan. The performance options havebeen treated similar to fixed stock option plans as the Company concluded thepredefined (non-accelerated) vesting schedule is substantive as it is deemed tobe more likely than not that the applicable individuals will remain employedwith the Company through that vesting date, particularly if the performancetrigger has not occurred. As such, the measurement date for these options isthe option grant date in accordance with APB Opinion 25. The change to theapplicable performance targets as a result of the Dynamit Nobel Acquisition wasa permitted change per the applicable stock option agreements; as such nomodification occurred requiring a new measurement date calculation.

The compensation costcharged against income under the Plan in accordance with SFAS No. 123R inthe three and nine months ended September 30, 2006 for share-based compensationprograms was less than $0.1 million and $0.1 million, respectively, beforetaxes.

The fair value of stockoptions granted in the three and nine months ended September 30, 2006 and 2005are estimated on the date of grant using the Black-Scholes option pricing modelthat used the assumptions noted in the following table:
|                           | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|---------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| Expected term  (in years) |       | 7.2                              |       | 6.9                             |       | 6.8 |   | 6.9 |   |
| Expected  volatility      |       | 35                               | %          | 35                              | %          | 35 | % | 35 | % |
| Risk-free rate            |       | 4.8                              | %          | 4.2                             | %          | 4.8 | % | 4.2 | % |
| Expected dividends        |       | N/A                              |       | N/A                             |       | N/A |   | N/A |   |

 

The expected termrepresents the period of time that options granted are expected to beoutstanding based on the simplified method for determining expected term of anemployee share option (in accordance with SEC Staff Accounting BulletinNo. 107). As Rockwood became a public company in August 2005, thereis not a long period of history of the Company’s share price. As a result, theCompany’s expected volatility is based on the expected volatilities ofcomparable peer companies that are publicly traded. The risk-free rate is basedon the U.S. Treasury yield curve in effect at the time of grant. Expected dividendsare not applicable as the Company currently does not pay a dividend on itsshares.

As of September 30, 2006,there was $0.4 million of unrecognized compensation cost related to nonvestedstock options determined in accordance with SFAS No. 123R, which is expected tobe recognized over a weighted-average period of approximately 4.0 years.

As of January 1,2006 and September 30, 2006, the number of nonvested stock options determinedin accordance with SFAS No. 123R was 53,800 and 47,814, respectively, and theweighted-average grant date fair value of nonvested stock options was $8.68 and$9.14, respectively.

The total intrinsic valueof stock options exercised during the nine months ended September 30, 2006 wasless than $0.1 million. Cash received from option exercises during the firstnine months of 2006 was less than $0.1 million. The total tax benefit realizedfrom options exercised in the first nine months of 2006 was less than $0.1million. The total fair value of shares vested during the three and nine monthsended September 30, 2006 was $0.2 million and $0.3 million respectively.

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Asummary of the status of the Company’s options granted pursuant to the Plan atSeptember 30, 2006 and changes during the period ended on that date ispresented below:
|                                                                   | ** ** | ** **      | ** ** | ** **   | ** ** | **Weighted**    | ** ** | ** **                    | ** ** |
|-------------------------------------------------------------------|------------|-----------------|------------|--------------|------------|-----------------|------------|-------------------------------|------------|
| ** **                                                        | ** ** | ** **      | ** ** | **Weighted** | ** ** | **Average**     | ** ** | ** **                    | ** ** |
| ** **                                                        | ** ** | ** **      | ** ** | **Average**  | ** ** | **Remaining**   | ** ** | **Aggregate**                 | ** ** |
| ** **                                                        | ** ** | ** **      | ** ** | **Exercise** | ** ** | **Contractual** | ** ** | **Intrinsic**                 | ** ** |
| ** **                                                        | ** ** | **Shares**      | ** ** | **Price**    | ** ** | **Term**        | ** ** | **Value**                     | ** ** |
| ** **                                                        | ** ** | **(‘000)** | ** ** | ** **   | ** ** | **(years)**     | ** ** | **($ in millions)** | ** ** |
| Outstanding at  December 31, 2005                                 |       | 3,863           |       | $            | 14.69      |            |       |                          |       |   |
| Granted                                                           |       | 27              |       | 21.87        |       |            |       |                          |       |
| Exercised                                                         |       | (2              | )          | 14.61        |       |            |       |                          |       |
| Forfeited                                                         |       | (42             | )          | 18.76        |       |            |       |                          |       |
| Outstanding at  September 30, 2006                                |       | 3,846           |       | $            | 14.69      |            | 6.51       |                          | $          | 20.3 |   |
|                                                              |       |            |       |         |       |            |       |                          |       |
| Options  exercisable at September 30, 2006                        |       | 1,779           |       | $            | 14.62      |            | 5.91       |                          | $          | 9.5 |   |
|                                                              |       |            |       |         |       |            |       |                          |       |
| Weighted-average fair  value of options granted during the period |       | $               | 9.92       |         |       |            |       |                          |       |   |
|                                                                   |            |                 |            |              |            |                 |            |                               |            |  |  |  |

 

**Subsidiary Plan**

***Stock Options***—In September 2005,Groupe Novasep SAS (“Groupe Novasep”), a subsidiary of the Company, approved astock option plan for certain of its employees (the “Subsidiary Plan”). Underthe Subsidiary Plan, there are 24,543 authorized shares of Groupe Novasep stockavailable for grant. There are two types of options available for grant underthe Subsidiary Plan. Time options have a life of 62 months from the date ofgrant and vest as follows: 20% per year at each one year anniversary.Performance options have a maximum life of ten years and become exercisablebased on attainment of certain stock price targets on the occasion of certaintriggering events (IPO or Change of Control).

***Stock Purchase***—Eligible employees andmanagement personnel of Groupe Novasep and its subsidiaries can purchase sharesof common stock at prices as determined by the Supervisory Board of GroupeNovasep. Under the Subsidiary Plan, Groupe Novasep sold 4,013 shares during thequarter ended December 31, 2005 at the fair market value of the stock (€211.00per share) as determined by the Supervisory Board of Groupe Novasep at the dateof purchase for gross proceeds of $1.0 million.

The Company recorded nocompensation cost in the historical statements of operations related to theSubsidiary Plan prior to 2006. The time options qualified as a fixed plan inaccordance with APB Opinion 25 prior to 2006. The performance options do notqualify as a fixed plan and therefore are accounted for as a variable plan. Inaccordance with FASB Interpretation No. 38,*Determining the Measurement Date for Stock Option, Purchase, and AwardPlans Involving Junior Stock—An Interpretation of APB Opinion No. 25*,as the triggering events were not probable, no compensation cost was recordedas of September 30, 2006 in accordance with SFAS No. 123R.

The compensation costcharged against income under the Subsidiary Plan for the time options inaccordance with SFAS No. 123R in the three and nine months ended September30, 2006 for share-based compensation programs was less than $0.1 million and$0.1 million, respectively, before taxes.

There were no optionsgranted or exercised in the first nine months of 2006 under the SubsidiaryPlan. The fair value of options granted in 2005 was estimated on the date ofgrant using the Black-Scholes option pricing model.

As of September 30, 2006,there was €0.9 million ($1.1 million using a September 30, 2006 exchange rateof €1.00 = $1.2674) of unrecognized compensation cost related to nonvestedstock options under the Subsidiary Plan, which is expected to be recognizedover a weighted-average period of approximately 3.0 years.

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A summary of the statusof the options granted by Groupe Novasep at September 30, 2006 and changesduring the period ended on that date is presented below:
|                                                                   | ** ** | ** **      | ** ** | ** **   | ** ** | **Weighted**    | ** ** | ** **             | ** ** |
|-------------------------------------------------------------------|------------|-----------------|------------|--------------|------------|-----------------|------------|------------------------|------------|
| ** **                                                        | ** ** | ** **      | ** ** | **Weighted** | ** ** | **Average**     | ** ** | ** **             | ** ** |
| ** **                                                        | ** ** | ** **      | ** ** | **Average**  | ** ** | **Remaining**   | ** ** | **Aggregate**          | ** ** |
| ** **                                                        | ** ** | ** **      | ** ** | **Exercise** | ** ** | **Contractual** | ** ** | **Intrinsic**          | ** ** |
| ** **                                                        | ** ** | **Shares**      | ** ** | **Price**    | ** ** | **Term**        | ** ** | **Value**              | ** ** |
| ** **                                                        | ** ** | **(‘000)** | ** ** | ** **   | ** ** | **(years)**     | ** ** | **(in millions)** | ** ** |
| Outstanding at  December 31, 2005                                 |       | 22              |       | €       | 211.00     |            |       |                   |       |   |
| Granted                                                           |       | —          |       | —       |       |            |       |                   |       |
| Exercised                                                         |       | —          |       | —       |       |            |       |                   |       |
| Forfeited                                                         |       | (2              | )          | 211.00       |       |            |       |                   |       |
| Outstanding at  September 30, 2006                                |       | 20              |       | €       | 211.00     |            | 9.08       |                   | €     | — |   |
|                                                              |       |            |       |         |       |            |       |                   |       |
| Options  exercisable at September 30, 2006                        |       | —          |       | €       | —     |            | —     |                   | €     | — |   |
|                                                              |       |            |       |         |       |            |       |                   |       |
| Weighted-average fair  value of options granted during the period |       | €          | —     |         |       |            |       |                   |       |   |
|                                                                   |            |                 |            |              |            |                 |            |                        |            |  |  |  |

 

**4.     SEGMENT INFORMATION:**

Rockwoodoperates in seven reportable segments according to the nature and economic characteristicsof its products and services as well as the manner in which the information isused internally by the Company’s chief operating decision maker, who is theCompany’s Chief Executive Officer. The seven segments are: (1) SpecialtyChemicals, which consists of the surface treatment and fine chemicals businesslines; (2) Performance Additives, which consists of the color pigments andservices, timber treatment chemicals, clay-based additives and water treatmentchemicals business lines; (3) Titanium Dioxide Pigments; (4) AdvancedCeramics; (5) Groupe Novasep; (6) Specialty Compounds; and(7) Electronics, which consistsofthe electronic chemicals, wafer reclaim and photomasks business lines.

Items that cannot bereadily attributed to individual segments have been classified as “Corporate.”Corporate operating loss primarily represents payroll, professional fees andother operating expenses of centralized functions such as treasury, legal,internal auditing and consolidation accounting as well as the cost of operatingour central offices (including some maintained based on legal or taxconsiderations). The primary components of corporate loss, in addition tooperating loss, are interest expense on external debt (including theamortization of deferred financing costs), foreign exchange losses or gains,and mark-to-market gains or losses on derivatives. Major Corporate componentswithin the reconciliation of income before taxes and minority interest(described more fully below) include systems/organization establishmentexpenses such as outside consulting costs for Sarbanes-Oxley initialdocumentation and fees relating to the implementation of a new consolidationsoftware system, tax provision (benefit) resulting from corporate income(losses), interest expense on external debt, foreign exchange losses or gains,refinancing expenses related to external debt and initial public offeringrelated expenses. Corporate identifiable assets primarily represent deferredfinancing costs that have been capitalized in connection with corporateexternal debt financing, deferred income tax assets and cash balancesmaintained in accordance with centralized cash management techniques. Thecorporate classification also includes the results of operations, assets(primarily real estate) and liabilities (including pension and environmental)of legacy businesses formerly belonging to Dynamit Nobel. These operations aresubstantially unrelated by nature to businesses currently within the Company’soperating segments.

14

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Summarized financialinformation for each of the reportable segments is provided in the followingtable:
|                                           | ** ** | ** **    | ** ** | ** **      | ** ** | **Titanium** | ** ** | ** **   | ** ** | ** **  | ** ** | ** **    | ** ** | ** **      | ** ** | ** **    | ** ** | ** **       | ** ** |
|-------------------------------------------|------------|---------------|------------|-----------------|------------|--------------|------------|--------------|------------|-------------|------------|---------------|------------|-----------------|------------|---------------|------------|------------------|------------|
| ** **                                | ** ** | **Specialty** | ** ** | **Performance** | ** ** | **Dioxide**  | ** ** | **Advanced** | ** ** | **Groupe**  | ** ** | **Specialty** | ** ** | ** **      | ** ** | ** **    | ** ** | ** **       | ** ** |
| **($ in millions)**             | ** ** | **Chemicals** | ** ** | **Additives**   | ** ** | **Pigments** | ** ** | **Ceramics** | ** ** | **Novasep** | ** ** | **Compounds** | ** ** | **Electronics** | ** ** | **Corporate** | ** ** | **Consolidated** | ** ** |
| **Three months ended September 30, 2006** | ** ** | ** **    | ** ** | ** **      | ** ** | ** **   | ** ** | ** **   | ** ** | ** **  | ** ** | ** **    | ** ** | ** **      | ** ** | ** **    | ** ** | ** **       | ** ** |
| Net sales                                 |       | $             | 225.5      |            | $          | 192.4        |       | $            | 111.2      |        | $          | 95.6          |       | $               | 87.2       |          | $          | 62.1             |       | $ | 53.0 |   | $ | — |   | $ | 827.0 |   |
| Adjusted EBITDA                           |       | 49.0          |       | 31.3            |       | 23.2         |       | 25.8         |       | 13.9        |       | 8.2           |       | 9.6             |       | (13.4         | )          | 147.6            |       |
| **Three months ended September 30, 2005** | ** ** | ** **    | ** ** | ** **      | ** ** | ** **   | ** ** | ** **   | ** ** | ** **  | ** ** | ** **    | ** ** | ** **      | ** ** | ** **    | ** ** | ** **       | ** ** |
| Net sales                                 |       | $             | 202.6      |            | $          | 170.7        |       | $            | 106.6      |        | $          | 95.3          |       | $               | 92.0       |          | $          | 57.6             |       | $ | 46.9 |   | $ | — |   | $ | 771.7 |   |
| Adjusted EBITDA                           |       | 40.8          |       | 36.9            |       | 21.5         |       | 24.5         |       | 12.3        |       | 6.6           |       | 7.7             |       | (10.3         | )          | 140.0            |       |
| **Nine months ended September 30, 2006**  | ** ** | ** **    | ** ** | ** **      | ** ** | ** **   | ** ** | ** **   | ** ** | ** **  | ** ** | ** **    | ** ** | ** **      | ** ** | ** **    | ** ** | ** **       | ** ** |
| Net sales                                 |       | $             | 685.6      |            | $          | 587.7        |       | $            | 330.4      |        | $          | 286.3         |       | $               | 260.0      |          | $          | 191.4            |       | $ | 154.0 |   | $ | — |   | $ | 2,495.4 |   |
| Adjusted EBITDA                           |       | 151.1         |       | 107.4           |       | 65.9         |       | 75.0         |       | 49.6        |       | 24.1          |       | 27.9            |       | (38.5         | )          | 462.5            |       |
| **Nine months ended September 30, 2005**  | ** ** | ** **    | ** ** | ** **      | ** ** | ** **   | ** ** | ** **   | ** ** | ** **  | ** ** | ** **    | ** ** | ** **      | ** ** | ** **    | ** ** | ** **       | ** ** |
| Net sales                                 |       | $             | 642.3      |            | $          | 520.3        |       | $            | 320.3      |        | $          | 283.6         |       | $               | 279.9      |          | $          | 177.8            |       | $ | 134.6 |   | $ | — |   | $ | 2,358.8 |   |
| Adjusted EBITDA                           |       | 133.2         |       | 118.3           |       | 64.5         |       | 70.0         |       | 35.3        |       | 21.3          |       | 20.5            |       | (29.4         | )          | 433.7            |       |

 
| ** **                  | ** ** | ** **    | ** ** | ** **      | ** ** | **Titanium** | ** ** | ** **   | ** ** | ** **  | ** ** | ** **    | ** ** | ** **      | ** ** | ** **             | ** ** | ** **                | ** ** | ** **       | ** ** |
|-----------------------------|------------|---------------|------------|-----------------|------------|--------------|------------|--------------|------------|-------------|------------|---------------|------------|-----------------|------------|------------------------|------------|---------------------------|------------|------------------|------------|
| ** **                  | ** ** | **Specialty** | ** ** | **Performance** | ** ** | **Dioxide**  | ** ** | **Advanced** | ** ** | **Groupe**  | ** ** | **Specialty** | ** ** | ** **      | ** ** | ** **             | ** ** | ** **                | ** ** | ** **       | ** ** |
| ** **                  | ** ** | **Chemicals** | ** ** | **Additives**   | ** ** | **Pigments** | ** ** | **Ceramics** | ** ** | **Novasep** | ** ** | **Compounds** | ** ** | **Electronics** | ** ** | **Corporate (a)** | ** ** | **Eliminations (b)** | ** ** | **Consolidated** | ** ** |
| Identifiable  assets as of: |       |          |       |            |       |         |       |         |       |        |       |          |       |            |       |                   |       |                      |       |             |       |
| September 30, 2006          |       | $             | 1,774.9    |            | $          | 1,028.4      |       | $            | 687.9      |        | $          | 717.9         |       | $               | 358.0      |                   | $          | 234.0                     |       | $                | 349.1      |   | $ | 267.6 |   | $ | (392.2 | ) | $ | 5,025.6 |   |
| December 31, 2005           |       | 1,501.6       |       | 1,011.5         |       | 644.8        |       | 653.3        |       | 396.7       |       | 221.9         |       | 323.6           |       | 258.1                  |       | (201.4                    | )          | 4,810.1          |       |
|                             |            |               |            |                 |            |              |            |              |            |             |            |               |            |                 |            |                        |            |                           |            |                  |            |  |  |  |  |  |  |  |  |  |  |

 

----

(a)   Thisincludes $63.1 million and $39.7 million of assets from the legacy businessesformerly belonging to Dynamit Nobel at September 30, 2006 and December 31,2005, respectively.

(b)   Amounts contained in the “Eliminations”column represent the individual subsidiaries’ retained interest in theircumulative net cash balance (deposits less withdrawals) included in thecorporate centralized cash system and within the identifiable assets of therespective segment. These amounts are eliminated as the corporate centralizedcash system is included in the Corporate segment’s identifiable assets.

Geographic informationregarding net sales based on seller’s location and long-lived assets aredescribed in Note 4, “Segment Information,” in the Company’s 2005 Form 10-K.

The summary of segmentinformation above includes “Adjusted EBITDA,” a financial measure used by thechief operating decision maker, who is the Company’s Chief Executive Officer,to evaluate the operating performance of each segment.

*Itemsexcluded from Adjusted EBITDA*

The process of refocusingand restructuring the businesses acquired in the KKR Acquisition andestablishing the post-acquisition corporate entity, along with the impact ofthe acquisition of the specialty chemicals and advanced materials businesses ofDynamit Nobel and the Company’s initial public offering, resulted in a numberof charges that have affected Rockwood’s historical results. These charges,along with certain other items, are added to or subtracted from income beforetaxes and minority interest to derive Adjusted EBITDA, as defined below. Themore significant of these items include the following:

·                  *Systems/organizationestablishment expenses*.  Forthe three and nine months ended September 30, 2006, expenses of $3.2 millionand $7.3 million, respectively, were recorded related to professional feesincurred regarding systems and internal control documentation in connectionwith the Sarbanes-Oxley Act of 2002 and fees relating to the implementation ofa new consolidation software system. For the three and nine months endedSeptember 30, 2005, expenses of $1.4 million and $3.3 million, respectively,were recorded related to the integration of the businesses acquired in theDynamit Nobel Acquisition, as well as professional fees incurred regardingsystems and internal control documentation in connection with theSarbanes-Oxley Act of 2002. We estimate non-recurring costs of approximately$0.7 million are remaining to complete initial Sarbanes-Oxley compliance.

·                  *Restructuring and related charges*.  Restructuring charges of $1.7 million and$2.9 million were recorded in the three months ended September 30, 2006 and2005, respectively, and $3.9 million and $9.2 million (which includes $0.5million of charges recorded in the second quarter of 2005 in cost of productssold in the condensed consolidated statements of operations) in the nine monthsended September 30, 2006 and 2005, respectively, for miscellaneousrestructuring activities, including headcount reductions and facility closures(see Note 14, “Restructuring Liability,” for further details).

15

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·                  *Loss on sale of business*.  In connection with the sale of Rohner AG inMarch 2006, the Company recorded a pre-tax loss of $12.1 million for thenine months ended September 30, 2006 (see Note 13, “Sale of Rohner AG,” forfurther detail).

·                  *Inventory write-up reversal*.  Under SFAS 141,*Business Combinations*, all inventoriesacquired in an acquisition must be revalued to “fair value.” In connection withthe Groupe Novasep combination in 2004, the acquisition of the Süd-Chemiebusinesses in 2005 and an acquisition in the Advanced Ceramics segment in 2006,the Company allocated a portion of the total purchase price to inventory toreflect manufacturing profit in inventory at the date of the acquisition. Thisresulted in a consequential reduction in gross profit, including currencyeffects, of $0.9 million and $3.1 million for the nine months ended September30, 2006 and 2005, respectively, as the inventory was sold in the normal courseof business

·                  *Chromated copper arsenate* (*CCA)litigation defense costs*. Costs of $0.3 million and income of $0.1 million were recorded in thethree months ended September 30, 2006 and 2005, respectively, and costs of $0.8million and $1.4 million were recorded in the nine months ended September 30,2006 and 2005, respectively, primarily attorney fees related to the Company’sTimber Treatment Chemicals business line of the Performance Additives segment.

·                  *Cancelled acquisition and disposal costs*.  Costs of $0.4 million for the three monthsended September 30, 2006 and costs of $1.3 million and $0.6 million for thenine months ended September 30, 2006 and 2005, respectively, were recorded inconnection with non-consummated acquisitions and dispositions.

·                  *Foreign exchange gain (loss), net*.  During the periods presented, the Companyrecorded foreign exchange gains and (losses) related to our long-term debt andother non-operating transactions. These amounts primarily reflect the non-cashtranslation impact on our euro-denominated debt resulting from thestrengthening or weakening of the euro against the U.S. dollar and/or theBritish pound.  For the three monthsended September 30, 2006 and 2005, gains of $4.8 million and $2.1 million,respectively, were recorded.  For thenine months ended September 30, 2006 and 2005, gains of $7.7 million and $116.1million, respectively, were recorded. The decrease in the nine months ended September 30, 2006 from the sameperiod in the prior year was primarily due to the designation of the majorityof the Company’s euro-denominated debt as a net investment hedge in October2005 whereby foreign exchange gains and losses are now recorded in accumulatedother comprehensive income within stockholders’ equity for the portion of thehedge that remains effective.

·                  *Management services agreement termination fee*.  In connection with the IPO, an expense of$10.0 million was recorded in the third quarter of 2005 to terminate themanagement services agreement with affiliates of KKR and DLJMB.

·                  *Loss on early extinguishment of debt*.  In the third quarter of 2005, the Companypaid a redemption premium of $13.2 million to redeem long-term debt and wroteoff $13.4 million of deferred financing costs associated with the debt repaidin connection with the IPO.

·                  *Other. *In the ninemonth period ended September 30, 2006, the Company recorded $2.1 million ofincome primarily related to the correction of an immaterial error reported inthe first quarter of 2006 related to a previously unrecorded asset in theTitanium Dioxide segment of $1.6 million.

On a segment basis, theCompany defines Adjusted EBITDA as operating income excluding depreciation andamortization, certain non-cash gains and charges, certain other special gainsand charges deemed by our senior management to be non-recurring gains andcharges and certain items deemed by senior management to have little or nobearing on the day-to-day operating performance of its business segments andreporting units. The adjustments made to operating income directly correlatewith the adjustments to net income in calculating Adjusted EBITDA on aconsolidated basis pursuant to the senior secured credit agreement. Theindentures governing the 2011 Notes and the 2014 Notes exclude certainadjustments permitted under the senior credit agreement. Senior management usesAdjusted EBITDA on a segment basis as the primary measure to evaluate theongoing performance of the Company’s business segments and reporting units.

The Company uses AdjustedEBITDA on a segment basis to assess its operating performance. Because theCompany views Adjusted EBITDA on a segment basis as an operating performance measure,the Company uses income before taxes and minority interest as the mostcomparable GAAP measure. The following table presents a reconciliation ofincome before taxes and minority interest to Adjusted EBITDA on a segment GAAPbasis:

16

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| ** **                                        | ** ** | ** **    | ** ** | ** **      | ** ** | **Titanium** | ** ** | ** **   | ** ** | ** **  | ** ** | ** **    | ** ** | ** **      | ** ** | ** **    | ** ** | ** **       | ** ** |
|---------------------------------------------------|------------|---------------|------------|-----------------|------------|--------------|------------|--------------|------------|-------------|------------|---------------|------------|-----------------|------------|---------------|------------|------------------|------------|
| ** **                                        | ** ** | **Specialty** | ** ** | **Performance** | ** ** | **Dioxide**  | ** ** | **Advanced** | ** ** | **Groupe**  | ** ** | **Specialty** | ** ** | ** **      | ** ** | ** **    | ** ** | ** **       | ** ** |
| **($ in millions)**                     | ** ** | **Chemicals** | ** ** | **Additives**   | ** ** | **Pigments** | ** ** | **Ceramics** | ** ** | **Novasep** | ** ** | **Compounds** | ** ** | **Electronics** | ** ** | **Corporate** | ** ** | **Consolidated** | ** ** |
| **Three  months ended September 30, 2006**        | ** ** | ** **    | ** ** | ** **      | ** ** | ** **   | ** ** | ** **   | ** ** | ** **  | ** ** | ** **    | ** ** | ** **      | ** ** | ** **    | ** ** | ** **       | ** ** |
| Income (loss) before taxes and minority interest  |       | $             | 26.6       |            | $          | 14.4         |       | $            | 6.5        |        | $          | 8.9           |       | $               | 1.9        |          | $          | (1.1             | )          | $ | 6.1 |   | $ | (32.9 | ) | $ | 30.4 |   |
| Interest expense, net (a)                         |       | 9.7           |       | 3.7             |       | 7.3          |       | 7.8          |       | 3.8         |       | 7.1           |       | 0.1             |       | 21.3          |       | 60.8             |       |
| Depreciation and amortization                     |       | 11.7          |       | 11.8            |       | 9.5          |       | 8.3          |       | 8.2         |       | 1.9           |       | 3.7             |       | 1.0           |       | 56.1             |       |
| Restructuring and related charges                 |       | 0.6           |       | 0.3             |       | —       |       | 0.6          |       | —      |       | —        |       | 0.2             |       | —        |       | 1.7              |       |
| CCA litigation defense costs                      |       | —        |       | 0.3             |       | —       |       | —       |       | —      |       | —        |       | —          |       | —        |       | 0.3              |       |
| Systems/organization establishment expenses       |       | (0.2          | )          | 0.6             |       | —       |       | 0.4          |       | —      |       | 0.3           |       | —          |       | 2.1           |       | 3.2              |       |
| Cancelled acquisition and disposal costs          |       | 0.1           |       | —          |       | —       |       | —       |       | —      |       | —        |       | —          |       | 0.3           |       | 0.4              |       |
| Losses (gains) related to asset sales             |       | 0.3           |       | 0.1             |       | —       |       | (0.1         | )          | —      |       | —        |       | —          |       | (0.3          | )          | —           |       |
| Foreign exchange loss (gain), net                 |       | 0.2           |       | —          |       | —       |       | —       |       | —      |       | —        |       | (0.5            | )          | (4.5          | )          | (4.8             | )          |
| Other                                             |       | —        |       | 0.1             |       | (0.1         | )          | (0.1         | )          | —      |       | —        |       | —          |       | (0.4          | )          | (0.5             | )          |
| Total Adjusted EBITDA                             |       | $             | 49.0       |            | $          | 31.3         |       | $            | 23.2       |        | $          | 25.8          |       | $               | 13.9       |          | $          | 8.2              |       | $ | 9.6 |   | $ | (13.4 | ) | $ | 147.6 |   |
| **Three  months ended September 30, 2005**        | ** ** | ** **    | ** ** | ** **      | ** ** | ** **   | ** ** | ** **   | ** ** | ** **  | ** ** | ** **    | ** ** | ** **      | ** ** | ** **    | ** ** | ** **       | ** ** |
| Income (loss) before taxes and minority interest  |       | $             | 25.0       |            | $          | 19.2         |       | $            | 4.9        |        | $          | 8.2           |       | $               | (0.8       | )             | $          | 5.3              |       | $ | 2.9 |   | $ | (67.8 | ) | $ | (3.1 | ) |
| Interest expense, net (a)                         |       | 5.2           |       | 6.9             |       | 7.8          |       | 8.3          |       | 4.0         |       | (0.7          | )          | 1.5             |       | 22.4          |       | 55.4             |       |
| Depreciation and amortization                     |       | 9.8           |       | 7.9             |       | 8.8          |       | 7.4          |       | 9.1         |       | 1.4           |       | 4.2             |       | 0.9           |       | 49.5             |       |
| Restructuring and related charges                 |       | 0.5           |       | 1.5             |       | —       |       | 0.6          |       | 0.2         |       | —        |       | 0.1             |       | —        |       | 2.9              |       |
| CCA litigation defense costs                      |       | —        |       | —          |       | —       |       | —       |       | —      |       | —        |       | —          |       | (0.1          | )          | (0.1             | )          |
| Systems/organization establishment expenses       |       | —        |       | 0.3             |       | —       |       | —       |       | —      |       | —        |       | —          |       | 1.1           |       | 1.4              |       |
| Management services agreement termination fee (c) |       | —        |       | —          |       | —       |       | —       |       | —      |       | —        |       | —          |       | 10.0          |       | 10.0             |       |
| Loss on early extinguishment of debt (c)          |       | —        |       | 1.1             |       | —       |       | —       |       | —      |       | 0.6           |       | 0.3             |       | 24.6          |       | 26.6             |       |
| Foreign exchange loss (gain), net                 |       | 0.3           |       | —          |       | —       |       | —       |       | (0.2        | )          | —        |       | (1.3            | )          | (0.9          | )          | (2.1             | )          |
| Other                                             |       | —        |       | —          |       | —       |       | —       |       | —      |       | —        |       | —          |       | (0.5          | )          | (0.5             | )          |
| Total Adjusted EBITDA                             |       | $             | 40.8       |            | $          | 36.9         |       | $            | 21.5       |        | $          | 24.5          |       | $               | 12.3       |          | $          | 6.6              |       | $ | 7.7 |   | $ | (10.3 | ) | $ | 140.0 |   |
| **Nine  months ended September 30, 2006**         | ** ** | ** **    | ** ** | ** **      | ** ** | ** **   | ** ** | ** **   | ** ** | ** **  | ** ** | ** **    | ** ** | ** **      | ** ** | ** **    | ** ** | ** **       | ** ** |
| Income (loss) before taxes and minority interest  |       | $             | 81.8       |            | $          | 60.2         |       | $            | 18.3       |        | $          | 25.3          |       | $               | 3.3        |          | $          | 10.6             |       | $ | 13.8 |   | $ | (79.5 | ) | $ | 133.8 |   |
| Interest expense, net (a)                         |       | 32.1          |       | 11.3            |       | 21.5         |       | 23.3         |       | 10.9        |       | 7.0           |       | 0.9             |       | 40.7          |       | 147.7            |       |
| Depreciation and amortization                     |       | 34.8          |       | 32.1            |       | 27.8         |       | 24.7         |       | 24.3        |       | 6.2           |       | 12.3            |       | 3.0           |       | 165.2            |       |
| Restructuring and related charges                 |       | 1.1           |       | 1.1             |       | —       |       | 0.6          |       | —      |       | —        |       | 1.1             |       | —        |       | 3.9              |       |
| CCA litigation defense costs                      |       | —        |       | 0.8             |       | —       |       | —       |       | —      |       | —        |       | —          |       | —        |       | 0.8              |       |
| Systems/organization establishment expenses       |       | (0.1          | )          | 1.0             |       | —       |       | 0.7          |       | —      |       | 0.3           |       | —          |       | 5.4           |       | 7.3              |       |
| Cancelled acquisition and disposal costs          |       | 1.0           |       | —          |       | —       |       | —       |       | —      |       | —        |       | —          |       | 0.3           |       | 1.3              |       |
| Inventory write-up reversal                       |       | —        |       | 0.8             |       | —       |       | 0.1          |       | —      |       | —        |       | —          |       | —        |       | 0.9              |       |
| (Gains) losses related to asset sales             |       | 0.3           |       | —          |       | —       |       | —       |       | (0.3        | )          | —        |       | —          |       | (0.7          | )          | (0.7             | )          |
| Loss on sale of business                          |       | —        |       | —          |       | —       |       | —       |       | 12.1        |       | —        |       | —          |       | —        |       | 12.1             |       |
| Foreign exchange loss (gain), net                 |       | 0.4           |       | 0.1             |       | —       |       | —       |       | (0.7        | )          | —        |       | (0.2            | )          | (7.3          | )          | (7.7             | )          |
| Other                                             |       | (0.3          | )          | —          |       | (1.7         | )          | 0.3          |       | —      |       | —        |       | —          |       | (0.4          | )          | (2.1             | )          |
| Total Adjusted EBITDA                             |       | $             | 151.1      |            | $          | 107.4        |       | $            | 65.9       |        | $          | 75.0          |       | $               | 49.6       |          | $          | 24.1             |       | $ | 27.9 |   | $ | (38.5 | ) | $ | 462.5 |   |
| **Nine  months ended September 30, 2005**         | ** ** | ** **    | ** ** | ** **      | ** ** | ** **   | ** ** | ** **   | ** ** | ** **  | ** ** | ** **    | ** ** | ** **      | ** ** | ** **    | ** ** | ** **       | ** ** |
| Income (loss) before taxes and minority interest  |       | $             | 69.0       |            | $          | 66.3         |       | $            | 12.9       |        | $          | 20.7          |       | $               | (7.0       | )             | $          | 17.2             |       | $ | 4.4 |   | $ | (19.7 | ) | $ | 163.8 |   |
| Interest expense, net (a)                         |       | 27.0          |       | 20.6            |       | 24.1         |       | 26.4         |       | 11.8        |       | (0.8          | )          | 4.0             |       | 64.5          |       | 177.6            |       |
| Depreciation and amortization                     |       | 33.8          |       | 24.6            |       | 27.5         |       | 22.2         |       | 27.1        |       | 4.3           |       | 12.5            |       | 2.7           |       | 154.7            |       |
| Restructuring and related charges (b)             |       | 1.6           |       | 4.7             |       | —       |       | 0.6          |       | 0.2         |       | —        |       | 2.1             |       | —        |       | 9.2              |       |
| CCA litigation defense costs                      |       | —        |       | 1.3             |       | —       |       | —       |       | —      |       | —        |       | —          |       | 0.1           |       | 1.4              |       |
| Systems/organization establishment expenses       |       | —        |       | 0.3             |       | —       |       | —       |       | —      |       | —        |       | —          |       | 3.0           |       | 3.3              |       |
| Cancelled acquisition and disposal costs          |       | —        |       | 0.2             |       | —       |       | —       |       | —      |       | —        |       | —          |       | 0.4           |       | 0.6              |       |
| Inventory write-up reversal                       |       | —        |       | —          |       | —       |       | —       |       | 3.1         |       | —        |       | —          |       | —        |       | 3.1              |       |
| Management services agreement termination fee (c) |       | —        |       | —          |       | —       |       | —       |       | —      |       | —        |       | —          |       | 10.0          |       | 10.0             |       |
| Loss on early extinguishment of debt (c)          |       | —        |       | 1.1             |       | —       |       | —       |       | —      |       | 0.6           |       | 0.3             |       | 24.6          |       | 26.6             |       |
| Foreign exchange loss (gain), net                 |       | 1.8           |       | (0.8            | )          | —       |       | 0.1          |       | 0.1         |       | —        |       | (2.8            | )          | (114.5        | )          | (116.1           | )          |
| Other                                             |       | —        |       | —          |       | —       |       | —       |       | —      |       | —        |       | —          |       | (0.5          | )          | (0.5             | )          |
| Total Adjusted EBITDA                             |       | $             | 133.2      |            | $          | 118.3        |       | $            | 64.5       |        | $          | 70.0          |       | $               | 35.3       |          | $          | 21.3             |       | $ | 20.5 |   | $ | (29.4 | ) | $ | 433.7 |   |

 

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(a)     Includes losses of $9.1 million and gainsof $6.4 million for the three months ended September 30, 2006 and 2005,respectively, and gains of $6.4 million and $12.6 million for the nine monthsended September 30, 2006 and 2005, respectively, representing the movement inthe mark-to-market valuation of the Company’s interest rate and cross-currencyhedging instruments.

(b)     Includes inventory writedowns of $0.5million recorded in cost of products sold in the nine months ended September30, 2005.

(c)     In connection with the IPO, the managementservices agreement with the affiliates of KKR and DLJMB was terminated for$10.0 million. In addition, a redemption premium of $13.2 million was incurredin connection with the repayment of long-term debt and deferred financing costsof $13.4 million were written off.

**5.     ACQUISITIONS:**

SinceFebruary 2002, pursuant to our business strategy of achieving profitablegrowth through selective acquisitions, we have acquired ten businesses atpurchase prices ranging from approximately $3.0 million (a U.S. liquidpigments asset acquisition by our Performance Additives segment) to $2,290.3million, including net debt assumed (the four businesses of Dynamit Nobel); andcombined the three business lines of our Custom Synthesis segment (now known asGroupe Novasep segment) with the acquired businesses of Groupe Novasep SAS. Inaccordance with SFAS No. 142,*Goodwilland Other Intangible Assets*, any goodwill resulting fromacquisitions is tested for impairment at least annually.

17

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InDecember 2005, we completed an acquisition of the rheological additivesand carbonless developers businesses of Süd-Chemie AG, Munich, Germany. Bothbusinesses have been incorporated into Rockwood’s Clay-based Additives businessunit, which is part of the Performance Additives segment. We accounted for theacquisition of these businesses using the purchase method of accounting andhave allocated the total estimated purchase price to the assets acquired andliabilities assumed. The allocation of the purchase price to the identifiableassets acquired was completed in the third quarter of 2006.  The excess of the total purchase price overthe estimated fair value of the net assets acquired at closing has beenallocated to goodwill. Goodwill in the transaction totaled $9.8 million as ofSeptember 30, 2006.

In the first quarter of2006, the Company recorded adjustments primarily relating to certain previouslyunidentified fixed assets acquired and an overstated pension accrual inconnection with the Groupe Novasep combination and Dynamit Nobel Acquisition.These adjustments to the Company’s purchase accounting resulted in an increaseto property, plant and equipment, net of $10.9 million, an increase todeferred income tax liabilities of $3.7 million, and a decrease to pensionliabilities of $4.0 million with a corresponding decrease in goodwill of$11.7 million. The effects of the adjustments to the Company’s financialstatements for the year ended December 31, 2005 are not material.

**6.    INVENTORIES:**

Inventories are comprisedof the following:
|                               | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------|------------|------------------------|------------|-----------------------|------------|
| **($ in millions)** | ** ** | **2006**               | ** ** | **2005**              | ** ** |
| Raw materials                 |       | $                      | 160.6      |                  | $          | 141.6 |   |
| Work-in-process               |       | 65.0                   |       | 75.0                  |       |
| Finished goods                |       | 255.4                  |       | 227.9                 |       |
| Packaging  materials          |       | 13.0                   |       | 13.7                  |       |
|                          |       | $                      | 494.0      |                  | $          | 458.2 |   |

 

**7.    GOODWILL:**

Below are goodwillbalances and activity by segment:
| ** **                                                | ** ** | ** **    | ** ** | ** **      | ** ** | **Titanium** | ** ** | ** **   | ** ** | ** **  | ** ** | ** **    | ** ** | ** **      | ** ** | ** ** | ** ** |
|-----------------------------------------------------------|------------|---------------|------------|-----------------|------------|--------------|------------|--------------|------------|-------------|------------|---------------|------------|-----------------|------------|------------|------------|
| ** **                                                | ** ** | **Specialty** | ** ** | **Performance** | ** ** | **Dioxide**  | ** ** | **Advanced** | ** ** | **Groupe**  | ** ** | **Specialty** | ** ** | ** **      | ** ** | ** ** | ** ** |
| **($ in millions)**                             | ** ** | **Chemicals** | ** ** | **Additives**   | ** ** | **Pigments** | ** ** | **Ceramics** | ** ** | **Novasep** | ** ** | **Compounds** | ** ** | **Electronics** | ** ** | **Total**  | ** ** |
| Balance,  December 31, 2005                               |       | $             | 538.8      |            | $          | 459.5        |       | $            | 151.7      |        | $          | 187.5         |       | $               | 33.2       |       | $          | 109.2 |   | $ | 119.3 |   | $ | 1,599.2 |   |
| Acquisitions                                              |       | —        |       | —          |       | —       |       | 5.4          |       | —      |       | —        |       | —          |       | 5.4        |       |
| Other tax  adjustments                                    |       | (2.7          | )          | —          |       | —       |       | (0.5         | )          | —      |       | —        |       | —          |       | (3.2       | )          |
| Post-closing  consideration and other related adjustments |       | —        |       | (0.9            | )          | —       |       | —       |       | —      |       | —        |       | —          |       | (0.9       | )          |
| Foreign exchange  and other (a)                           |       | 38.8          |       | 14.3            |       | 11.2         |       | 14.4         |       | (5.8        | )          | 5.3           |       | 3.2             |       | 81.4       |       |
| Balance, September 30,  2006                              |       | $             | 574.9      |            | $          | 472.9        |       | $            | 162.9      |        | $          | 206.8         |       | $               | 27.4       |       | $          | 114.5 |   | $ | 122.5 |   | $ | 1,681.9 |   |

 

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(a) Foreign exchangeand other primarily consists of foreign currency changes and the adjustmentsdescribed below.

The adjustmentsrecorded during the first quarter of 2006 as disclosed in Note 5, “Acquisitions,”are recorded in “foreign exchange and other,” as reductions to goodwill withinSpecialty Chemicals ($4.0 million) and Groupe Novasep ($7.7 million).

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**8.    OTHER INTANGIBLE ASSETS:**

Other intangible assets,net consist of:
| ** **                               | ** ** | **As of September 30, 2006** | ** ** | **As of December 31, 2005** | ** ** |
|------------------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                               | ** ** | **Gross**                                        | ** ** | ** **                                      | ** ** | ** ** | ** ** | **Gross** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                               | ** ** | **Carrying**                                     | ** ** | **Accumulated**                                 | ** ** | ** ** | ** ** | **Carrying** | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
| **($ in millions)**            | ** ** | **Amount (a)**                              | ** ** | **Amortization**                                | ** ** | **Net** | ** ** | **Amount** | ** ** | **Amortization** | ** ** | **Net** | ** ** |
| Patents and  other intellectual property |       | $                                                | 353.9      |                                            | $          | (83.7 | ) | $ | 270.2 |   | $ | 340.1 |   | $ | (64.3 | ) | $ | 275.8 |   |
| Trade names and  trademarks              |       | 124.4                                            |       | (13.5                                           | )          | 110.9 |   | 114.3 |   | (7.4 | ) | 106.9 |   |
| Customer  relationships                  |       | 208.5                                            |       | (35.3                                           | )          | 173.2 |   | 190.6 |   | (20.9 | ) | 169.7 |   |
| Other                                    |       | 52.8                                             |       | (21.0                                           | )          | 31.8 |   | 47.2 |   | (16.6 | ) | 30.6 |   |
| Total                                    |       | $                                                | 739.6      |                                            | $          | (153.5 | ) | $ | 586.1 |   | $ | 692.2 |   | $ | (109.2 | ) | $ | 583.0 |   |

 

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(a) The increase sinceDecember 31, 2005 is primarily due to foreign currency changes.

Amortization of otherintangible assets was $16.1 million and $12.6 million for the three monthsended September 30, 2006 and 2005, respectively, and $45.2 million and$39.3 million for the nine months ended September 30, 2006 and 2005,respectively. As of September 30, 2006, the estimated aggregateamortization expense for each of the five succeeding years is as follows:
| ($ in millions) | ** ** | **Amortization** | ** ** |
|---------------------------|------------|------------------|------------|
| **Year ended**       | ** ** | **Expense**      | ** ** |
| 2006                      |       | $                | 60.5       |   |
| 2007                      |       | 60.6             |       |
| 2008                      |       | 59.6             |       |
| 2009                      |       | 52.6             |       |
| 2010                      |       | 51.7             |       |
|                           |            |                  |            |  |

 

**9.     LONG-TERM DEBT**

Long-term debt and loanspayable are summarized as follows:
|                                                                                            | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| **($ and € in millions)**                                         | ** ** | **2006**               | ** ** | **2005**              | ** ** |
| Senior secured  credit facilities:                                                         |       |                   |       |                  |       |
| Tranche A-1 term loans (€35.2 and €39.1,  respectively)                          |       | $                      | 44.6       |                  | $          | 46.1 |   |
| Tranche A-2 term loans (€153.4 and €170.4,  respectively)                        |       | 194.4                  |       | 201.0                 |       |
| Tranche E term loans                                                                       |       | 1,127.8                |       | 1,139.3               |       |
| Tranche F term loans (€270.7 and €273.4,  respectively)                          |       | 343.1                  |       | 322.5                 |       |
| Revolving short-term loans                                                                 |       | —                 |       | 30.0                  |       |
| 2011 Notes                                                                                 |       | 273.4                  |       | 273.4                 |       |
| 2014 Notes  (€375.0 and $200.0 as of September 30, 2006 and December 31, 2005)        |       | 675.3                  |       | 642.4                 |       |
| Other term loan  facilities                                                                |       | 54.2                   |       | 92.7                  |       |
| Capitalized  lease obligations (€50.4 and €51.0, respectively)                   |       | 63.9                   |       | 61.2                  |       |
| Preferred stock  of subsidiary (£12.0 as of September 30, 2006 and December 31, 2005) |       | 22.5                   |       | 20.6                  |       |
| Other (€12.4 and  €12.2, respectively)                                           |       | 15.7                   |       | 14.6                  |       |
|                                                                                       |       | 2,814.9                |       | 2,843.8               |       |
| Less current  maturities                                                                   |       | (98.2                  | )          | (113.1                | )          |
|                                                                                       |       | $                      | 2,716.7    |                  | $          | 2,730.7 |   |

 

Inthe normal course of business, the Company incurs obligations which includeguarantees related to contract completion, regulatory compliance and productperformance. Under certain circumstances, these obligations are supportedthrough the issuance of letters of credit and other bank guarantees. As ofSeptember 30, 2006, the Company had approximately $60.6 million of letters ofcredit and other bank guarantees, of which $36.0 million will expire in lessthan one year, $0.2 million will expire in 2-3 years, $7.9 million will expirein 4-5 years and $16.5 million will expire after five years. This amountincludes outstanding letters of credit of $25.9 million 

19

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thatreduced our availability under the senior secured credit facility. In theopinion of management, such obligations will not significantly affect theCompany’s financial position, results of operations or cash flows as theCompany anticipates fulfilling its performance obligations.

**10.     TAXES ON INCOME:**

Income tax expense hasbeen computed based on the projected effective tax rate for the year. Theeffective tax rate for the first nine months of 2006 and 2005 was 25.8% and32.1%, respectively. The 2006 rate included a tax benefit of $21.8 millionrelated to the favorable treatment on the sale of Rohner AG. The 2005 rate wasfavorably impacted by the reversal of $20.3 million of valuation allowancesrelated to U.S. federal income generated. The effective tax rate for the third quarter of 2006 is 40.8%, which isprimarily a function of foreign and domestic earnings and their impact on theeffective tax rate.  The Company recordedan income tax provision of $10.8 million in the third quarter of 2005 on apre-tax loss of $3.1 million. Included in the tax provision in the thirdquarter of 2005 was the recording of a valuation allowance of $8.3 million ondeferred tax assets for U.S. net operating loss carry-forwards.

In the nine months endedSeptember 30, 2006, the Company reduced its worldwide valuation allowances by$16.2 million. The reduction in the valuation allowance was the result of adecrease in the net deferred tax assets of Rohner AG offset by an increase inthe U.S. net deferred tax assets. The change in the valuation allowance for thethird quarter of 2006 impacted the effective tax rate by $5.1 million. Thefollowing table reflects the activity in the valuation allowance for worldwidenet operating losses and other deferred income tax assets:
|                                                      | ** ** | **Valuation** | ** ** |
|------------------------------------------------------|------------|---------------|------------|
| **($ in millions)**                        | ** ** | **Allowance** | ** ** |
| Balance as of  December 31, 2005                     |       | $             | 77.1       |   |
| Reduction in  deferred tax assets of Rohner AG       |       | (26.4         | )          |
| Increase as  reflected in income tax expense         |       | 6.0           |       |
| Increase as  reflected in other comprehensive income |       | 4.5           |       |
| Expired net  operating loss                          |       | (0.3          | )          |
| Balance as of  September 30, 2006                    |       | $             | 60.9       |   |

 

In the third quarter of2006, based on the Company’s policy and steady-state analysis, it wasdetermined that there was not sufficient positive evidence of future taxableincome in order to release the U.S. valuation allowance recorded in 2004.During the first nine months of 2006, the Company’s net deferred tax assets andliabilities were maintained at a zero level, other than a noncurrent deferredtax liability relating to goodwill with an indefinite reversal period. It isthe Company’s policy that the valuation allowance is reversed in the yearmanagement determines it is more likely than not that the deferred tax assetswill be realized.

**11.     EMPLOYEE BENEFIT PLANS:**

The following tablerepresents the net periodic benefit costs and related components in accordancewith SFAS 132R, *Employers’ Disclosures aboutPensions and Other Postretirement Benefits – An Amendment of FASB StatementsNo. 87, 88 and 106*:
|                                       | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|---------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                            | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| **($ in millions)**         | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| Service cost                          |       | $                                | 2.4        |                            | $          | 2.9 |   | $ | 7.7 |   | $ | 8.4 |   |
| Interest cost                         |       | 5.7                              |       | 5.9                             |       | 17.1 |   | 18.7 |   |
| Expected return  on assets            |       | (2.0                             | )          | (2.2                            | )          | (6.6 | ) | (7.6 | ) |
| Net amortization  of actuarial losses |       | 0.6                              |       | 0.2                             |       | 2.0 |   | 0.6 |   |
| Net periodic benefit cost             |       | 6.7                              |       | 6.8                             |       | 20.2 |   | 20.1 |   |
| Special  termination benefit cost     |       | —                           |       | 0.3                             |       | — |   | 0.3 |   |
| Impact of  curtailment/settlement     |       | 0.5                              |       | 1.2                             |       | 0.5 |   | 1.2 |   |
| Total pension  cost                   |       | $                                | 7.2        |                            | $          | 8.3 |   | $ | 20.7 |   | $ | 21.6 |   |

 

Thecurtailment/settlement costs for the three and nine months ended September 30,2006 relate to settlements in the Rockwood UK Retirement Plan within thePerformance Additives segment.  Thespecial termination benefit cost for the three and nine months ended September30, 2005 relates to the closing of the Baulking, United Kingdom facility in theClay-based Additives business within the Performance Additives segment.  The curtailment/settlement costs for the threeand nine months ended September 30, 2005 also relate to the closing of theBaulking facility and to pension costs incurred in connection with converting aspecific defined benefit plan to a defined contribution plan in the Electronicssegment.

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**12.     EARNINGS PER COMMON SHARE:**

Basic and dilutedearnings per common share (“EPS”) were computed using the following commonshare data:
| ** **                                                                                                      | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                      | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| **($ in millions, except per share amounts; shares in thousands)** | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| EPS Numerator -  Basic:                                                                                         |       |                             |       |                            |       |   |   |   |   |
| Net income (loss)                                                                                               |       | $                                | 21.4       |                            | $          | (13.3 | ) | $ | 98.5 |   | $ | 113.6 |   |
| Less:                                                                                                           |       |                             |       |                            |       |   |   |   |   |
| Redeemable convertible preferred stock dividends                                                                |       | —                           |       | (2.0                            | )          | — |   | (4.3 | ) |
| Net income (loss) applicable to common shareholders                                                             |       | $                                | 21.4       |                            | $          | (15.3 | ) | $ | 98.5 |   | $ | 109.3 |   |
|                                                                                                            |       |                             |       |                            |       |   |   |   |   |
| EPS Denominator  - Basic:                                                                                       |       |                             |       |                            |       |   |   |   |   |
| Weighted average number of common shares outstanding                                                            |       | 73,782                           |       | 61,845                          |       | 73,781 |   | 54,197 |   |
|                                                                                                            |       |                             |       |                            |       |   |   |   |   |
| Basic earnings  (loss) per common share                                                                         |       | $                                | 0.29       |                            | $          | (0.25 | ) | $ | 1.34 |   | $ | 2.02 |   |
|                                                                                                            |       |                             |       |                            |       |   |   |   |   |
| EPS Numerator - Diluted:                                                                                        |       |                             |       |                            |       |   |   |   |   |
| Net income (loss)                                                                                               |       | $                                | 21.4       |                            | $          | (13.3 | ) | $ | 98.5 |   | $ | 113.6 |   |
| Less:                                                                                                           |       |                             |       |                            |       |   |   |   |   |
| Redeemable convertible preferred stock dividends                                                                |       | —                           |       | (2.0                            | )          | — |   | (4.3 | ) |
| Net income (loss) applicable to common shareholders                                                             |       | $                                | 21.4       |                            | $          | (15.3 | ) | $ | 98.5 |   | $ | 109.3 |   |
|                                                                                                            |       |                             |       |                            |       |   |   |   |   |
| EPS Denominator  - Diluted:                                                                                     |       |                             |       |                            |       |   |   |   |   |
| Weighted average number of common shares outstanding  (a)                                                       |       | 73,782                           |       | 61,845                          |       | 73,781 |   | 54,197 |   |
| Effect of dilutive stock options and other  incentives                                                          |       | 1,133                            |       | —                          |       | 1,220 |   | 895 |   |
| Weighted average number of common shares outstanding  and common stock equivalents                              |       | 74,915                           |       | 61,845                          |       | 75,001 |   | 55,092 |   |
|                                                                                                            |       |                             |       |                            |       |   |   |   |   |
| Diluted earnings (loss)  per common share                                                                       |       | $                                | 0.29       |                            | $          | (0.25 | ) | $ | 1.31 |   | $ | 1.98 |   |

 

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(a)           Stock options, warrants andrestricted stock representing equivalents of 4,838 shares of common stockduring the three months ended September 30, 2005 were outstanding but were notincluded in the computation of diluted earnings per common share because theirinclusion would not have had a dilutive effect. As a result, diluted loss per share for this period is equal to basicloss per share.

**13.     SALE OF ROHNER AG:**

In late 2005, Rockwoodhad decided to substantially downsize the operations of Rohner AG (“Rohner”).This decision was driven by a number of factors, including, in particular, continuedcapacity utilization issues as a result of the loss of a key customer in 2003and the inability to replace this lost volume with comparable profitablevolume. The downsizing included a review of Rockwood’s strategic options forthis business including potential sale or closure. The Company had recorded afull impairment charge at the end of 2005 with respect to Rohner’s long-termassets, primarily property, plant and equipment, totaling $44.7 million due tothese actions. On March 9, 2006, after exploring several alternatives, theCompany sold all of the capital stock of Rohner for a nominal price. Until thattime, Rohner, located in Pratteln, Switzerland, had been a subsidiary in theCompany’s Groupe Novasep segment. Rohner produced chemicals on a custom-synthesisand toll manufacturing basis for the pharmaceutical and agrochemicalindustries, specializing in transition metal catalysis.

The Company recorded anet pre-tax loss of $12.1 million on the sale of Rohner in the first quarter of2006, representing consideration given less the remaining net liabilities ofRohner, which have been transferred to the purchaser. The sale agreementcontains a potential favorable purchase price adjustment of up to €5.0 millionupon the achievement of certain operating targets of Rohner through 2008. Thesale agreement also contains a potential unfavorable purchase price adjustmentof €1.0 million. The Company has not included these potential purchase priceadjustments in its determination of its net loss on the sale of Rohner as theseadjustments were not probable at September 30, 2006.

Rockwood has reviewedwhether the above activity should result in Rohner being treated as adiscontinued operation and concluded that such treatment would not beappropriate as certain products will continue to be produced by other GroupeNovasep entities.

21

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In addition, inconnection with this downsizing, the Company had recorded for the year endedDecember 31, 2005 a minority interest charge of $13.9 million related to aguarantee, in an amount up to €55.0 million, entered into in May 2005 by one ofour wholly-owned subsidiaries that is the 78.6% owner of Groupe Novasep SAS, ofloans made by a Groupe Novasep SAS subsidiary to Rohner.  At the time of the guarantee, the Companyconcluded the likelihood of having to fulfill this guarantee obligation wasremote based on the limited term of the guarantee, the fact that the Companyindirectly controlled the subsidiary receiving the guarantee and theexpectation of continuing operations at Rohner. In connection with the preparation of the Company’s 2005 financialstatements, the Company concluded that it was probable that it would have tofulfill this guarantee obligation. Accordingly, the Company recorded theminority interest charge, based on the 21.4% minority interest in GroupeNovasep SAS not held by the Company. In October 2006, this guarantee obligationwas settled for €35.0 million. As a result, minority interest income ofapproximately $3.3 million ($5.5 million before taxes) was recorded in thethird quarter of 2006 as the final negotiated guarantee settlement was lessthan the amount that was originally contractually agreed upon.

**14.     RESTRUCTURING LIABILITY:**

The Company recordsrestructuring liabilities from time to time that represent charges incurred inconnection with consolidations and cessations of certain of its operations,including operations from acquisitions, as well as headcount reductionprograms. These charges consist primarily of write-offs of assets and severancecosts. Severance charges are based on various factors including the employee’slength of service, contract provisions, salary levels and local governmentallegislation. At the time a related charge is recorded, the Company calculatesits best estimate based upon detailed analysis. Although significant changesare not expected, actual costs may differ from these estimates.

The Company recorded $1.7million and $2.9 million of restructuring charges for the three months endedSeptember 30, 2006 and 2005, respectively, and $3.9 million and $8.7 million ofrestructuring charges for the nine months ended September 30, 2006 and 2005,respectively. In addition, inventory writedowns of $0.5 million were recordedin cost of products sold in the second quarter of 2005 related to therestructuring of the Wafer Reclaim business in the Electronics segment.

**2006Restructuring Activities:**

During the nine monthsended September 30, 2006, the Company expensed $3.9 million of restructuringcharges for miscellaneous restructuring actions, including $1.1 million for theannounced restructuring of the Wafer Reclaim business in the Electronicssegment. The Company recorded severance and related costs for employees inconnection with the closure of two Wafer Reclaim facilities. The Company closeda Wafer Reclaim facility in the U.K. in January 2006 and one of thefacilities in the U.S. in March 2006. In the Performance Additivessegment, $1.1 million was recorded for miscellaneous headcount reductions andthe announced closure of the Baulking, United Kingdom facility for ourClay-based Additives business. In addition, $1.1 million was recorded inthe Specialty Chemicals segment and $0.6 million was recorded in theAdvanced Ceramics segment for miscellaneous headcount reductions.

**DynamitNobel Restructuring and Johnson Matthey Pigments and Dispersions Restructuring**

The Company began toassess and formulate specific plans to involuntarily terminate or relocatecertain employees and/or exit certain activities of the Dynamit Nobelbusinesses as of the Dynamit Nobel Acquisition date. This assessment led tocertain restructuring measures being taken by the Company as described below.

The Company closed theformer corporate office of Dynamit Nobel located in Troisdorf, Germany in thefourth quarter of 2004. The Company recorded restructuring charges related tothis closure including severance costs for 44 general and administrativepersonnel of the former Dynamit Nobel company, the closure costs on thisbuilding and the relocation costs for the remaining 27 employees who wererelocated to the Company’s new Frankfurt, Germany location. Also in 2004, aspart of the acquisition of the Pigments and Dispersions business of JohnsonMatthey, the Company enacted a restructuring program and 40 positions wereeliminated. All of these employees were selling, general and administrativepersonnel.

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Selected information forthe 2006 restructuring actions follows:
|                                        | ** ** | ** **    | ** ** | **Facility** | ** ** | ** ** | ** ** |
|----------------------------------------|------------|---------------|------------|--------------|------------|------------|------------|
| ** **                             | ** ** | **Severance** | ** ** | **Closure**  | ** ** | ** ** | ** ** |
| **($ in millions)**          | ** ** | **Costs**     | ** ** | **Costs**    | ** ** | **Total**  | ** ** |
| **2006**                               | ** ** | ** **    | ** ** | ** **   | ** ** | ** ** | ** ** |
| Liability  balance, December 31, 2005  |       | $             | —     |         | $          | —     |       | $ | — |   |
| Restructuring charge  in 2006          |       | 0.3           |       | 0.5          |       | 0.8        |       |
| Utilized in 2006                       |       | (0.3          | )          | (0.5         | )          | (0.8       | )          |
| Foreign exchange  and other            |       | —        |       | —       |       | —     |       |
| Liability balance,  September 30, 2006 |       | $             | —     |         | $          | —     |       | $ | — |   |

 

Selected information forthe 2005 restructuring actions follows:
|                                        | ** ** | ** **    | ** ** | **Facility** | ** ** | ** ** | ** ** |
|----------------------------------------|------------|---------------|------------|--------------|------------|------------|------------|
| ** **                             | ** ** | **Severance** | ** ** | **Closure**  | ** ** | ** ** | ** ** |
| **($ in millions)**          | ** ** | **Costs**     | ** ** | **Costs**    | ** ** | **Total**  | ** ** |
| **2005**                               | ** ** | ** **    | ** ** | ** **   | ** ** | ** ** | ** ** |
| Liability  balance, December 31, 2005  |       | $             | 1.5        |         | $          | -          |       | $ | 1.5 |   |
| Restructuring  charge in 2006          |       | 0.9           |       | 1.1          |       | 2.0        |       |
| Utilized in 2006                       |       | (1.3          | )          | (1.3         | )          | (2.6       | )          |
| Foreign exchange  and other            |       | (0.4          | )          | 0.2          |       | (0.2       | )          |
| Liability balance,  September 30, 2006 |       | $             | 0.7        |         | $          | —     |       | $ | 0.7 |   |

 

Selected information forthe 2004 restructuring actions follows:
|                                        | ** ** | ** **    | ** ** | **Facility** | ** ** | ** **     | ** ** | ** ** | ** ** |
|----------------------------------------|------------|---------------|------------|--------------|------------|----------------|------------|------------|------------|
| ** **                             | ** ** | **Severance** | ** ** | **Closure**  | ** ** | **Relocation** | ** ** | ** ** | ** ** |
| **($ in millions)**          | ** ** | **Costs**     | ** ** | **Costs**    | ** ** | **Costs**      | ** ** | **Total**  | ** ** |
| **2004**                               | ** ** | ** **    | ** ** | ** **   | ** ** | ** **     | ** ** | ** ** | ** ** |
| Liability  balance, December 31, 2005  |       | $             | 10.6       |         | $          | 1.1            |       | $          | 0.4        |   | $ | 12.1 |   |
| Restructuring  charge in 2006          |       | 1.0           |       | 0.1          |       | —         |       | 1.1        |       |
| Utilized in 2006                       |       | (5.0          | )          | (1.0         | )          | —         |       | (6.0       | )          |
| Foreign exchange  and other            |       | 0.7           |       | —       |       | —         |       | 0.7        |       |
| Liability balance,  September 30, 2006 |       | $             | 7.3        |         | $          | 0.2            |       | $          | 0.4        |   | $ | 7.9 |   |

 

Restructuringreserves by segment are as follows:
|                               | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------|------------|------------------------|------------|-----------------------|------------|
| **($ in millions)** | ** ** | **2006**               | ** ** | **2005**              | ** ** |
| Specialty  Chemicals          |       | $                      | 3.8        |                  | $          | 4.9 |   |
| Performance  Additives        |       | 0.8                    |       | 1.1                   |       |
| Titanium Dioxide  Pigments    |       | 0.3                    |       | 0.3                   |       |
| Advanced  Ceramics            |       | —                 |       | 0.5                   |       |
| Groupe Novasep                |       | —                 |       | 0.2                   |       |
| Specialty  Compounds          |       | —                 |       | —                |       |
| Electronics                   |       | 0.1                    |       | 0.7                   |       |
| Corporate                     |       | 3.6                    |       | 5.9                   |       |
|                          |       | $                      | 8.6        |                  | $          | 13.6 |   |

 

AtSeptember 30, 2006 and December 31, 2005, restructuring reserves of $8.6million and $13.6 million are included in the Condensed Consolidated BalanceSheets in restructuring liabilities.

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**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 5,*Accounting for Contingencies*, if it is probable that aliability has been incurred and an amount can be reasonably estimated. It isthe Company’s policy to disclose such matters when there is at least areasonable possibility that a material loss may have been incurred. Althoughthe Company expects to continue to pay legal fees in connection with certainlegal actions related to chromated copper arsenate and other product liabilitymatters, based on currently available facts, the Company does not believe thatthese actions will have a material effect on the financial condition, resultsof operations or liquidity of the Company. Reserves in connection with suchproduct liability matters do not individually exceed $500,000 and in theaggregate $3.0 million. The Company’s reserve estimates are based onavailable facts, including damage claims and input from its internal andexternal legal counsel, past experience, and, in some instances where defensecosts are being paid by its insurer’s insurance coverage, 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. Inaddition, the Company does not believe that there is any other individual legalproceeding that is likely to have a material adverse effect on its business orfinancial condition. However, the Company cannot predict the outcome of anylitigation or the potential for future litigation.

***Indemnity Matters***—Under the terms ofthe Business and Share Sale and Purchase Agreement, the Deed of Tax Covenantand the Environmental Deed entered into in connection with the KKR Acquisition,Degussa U.K. Holdings Ltd., as successor to Laporte Plc, is obligated toindemnify the Company for certain legal, tax and environmental liabilities andobligations that relate to the period prior to the closing of the KKRAcquisition.  Under the terms of the Saleand Purchase Agreement with mg technologies ag (now known as GEA Group Aktiengesellschaft)and its subsidiary MG North America Holdings, Inc. (now known as GEA NorthAmerica Inc.), GEA Group is obligated to indemnify the Company for certainlegal, tax and environmental liabilities and obligations that relate to theperiod prior to the closing, subject to certain limits and exclusions. Pursuantto these agreements, the Company has various claims for indemnification withDegussa and GEA Group. In addition, the Company may be subject to indemnityclaims relating to properties or businesses it divested. In the opinion ofmanagement, and based upon information currently available, the ultimateresolution of any indemnification obligations owed to the Company or by theCompany will not have a material effect on the Company’s financial condition,results of operations or cash flows.

**Safety,Health and Environmental Matters**

***General***

The Company is subject toextensive environmental, health and safety laws in the United States, theEuropean Union (“EU”) and elsewhere at the international, national, state, andlocal levels. Many of these laws impose requirements relating to clean-up ofcontamination, and impose liability in the event of damage to human beings,natural resources or property, and provide for substantial fines, injunctionsand potential criminal sanctions for violations. The products, including theraw materials handled, are also subject to rigorous industrial hygieneregulations and investigation. The nature of the Company’s operations exposesit to risks of liability for breaches of these laws and regulations as a resultof the production, storage, transportation and sale of materials that can causecontamination or personal injury when released into the environment.Environmental laws are subject to change and have tended to become stricterover time. Such changes in environmental laws, or the enactment of newenvironmental laws, could result in materially increased capital, operating andcompliance costs.

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

The Company is committedto achieving and maintaining compliance with all applicable safety, health andenvironmental (“SHE”) legal requirements, and the Company’s subsidiaries havedeveloped policies and management systems that are intended to identify the SHElegal requirements applicable to their operations, enhance compliance with suchrequirements, ensure the safety of the Company’s employees, contractors,community neighbors and customers and minimize the production and emission ofwastes and other pollutants. Although SHE legal requirements are constantlychanging, these SHE management systems are designed to assist the Company inmeeting its compliance goals and minimizing overall risk.

***SHE Capital Expenditures***

The Company may incurfuture costs for capital improvements and general compliance under SHE laws.For the year ended December 31, 2005, the capital expenditures for SHEmatters totaled approximately $32.8 million, excluding costs to maintainand repair pollution control equipment. For 2006 and 2007, the Company estimatescapital expenditures for compliance with SHE laws to be at similar levels;however, because capital expenditures for these matters are subject to changesin existing and new SHE laws, the Company cannot provide assurance that itsrecent expenditures will be indicative of future amounts required to complywith these laws.

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***Regulatory Developments***

In October 2003, theEuropean Commission adopted a proposal for a new EU framework for chemicalsknown as the Registration, Evaluation and Authorization of Chemicals, or REACHwhich will significantly expand the EU’s regulation of chemicals. As currentlyproposed, REACH would include requirements that certain manufacturers andimporters of chemicals register those chemicals, perform health andenvironmental risk analyses of those chemicals, and in certain instances,obtain authorizations for the use of the chemicals. Substances that are notregistered within the prescribed deadlines will not be permitted to bemanufactured or marketed within the EU. As a specialty chemicals company, it is possible that the Company is theonly manufacturer of one or more substances to be regulated under REACH andthus could potentially bear the full cost of compliance with REACH for some orall of the Company’s products. The Company estimates it has over 400 productsthat might be subject to REACH, which is scheduled to become an EU directive inearly 2007; compliance with REACH will be required starting in 2008.

Under the European UnionIntegrated Pollution Prevention and Control Directive (“IPPC”), EU membergovernments are to adopt rules and implement a cross-media (air, water andwaste) environmental permitting program for individual facilities. IPPCrequires a consistent application of Best Available Techniques, or BAT,throughout the EU. Generally, by 2007, facilities located within the EU must beoperating consistent with BAT. While the EU countries are at varying stages intheir respective implementation of the IPPC permit program, the Company hassubmitted all necessary IPPC permit applications required to date, and in somecases received completed permits from the applicable government agency. TheCompany expects to submit all other IPPC applications and related documents ona timely basis as the various countries implement the IPPC permit program.Although it is not known with certainty what each IPPC permit will require, theCompany believes, based upon its experience with the permits received to date,that the costs of compliance with the IPPC permit program will not be materialto its results of operations, financial position or liquidity.

The Kyoto Protocol is anamendment to an international treaty on global warming. The Protocolestablishes significant emission reduction targets for six gases considered tohave global warming potential, referred to as greenhouse gases. The Protocolwas adopted in 1997 and became effective in February 2005 in over 140countries that have ratified it. The EU, including Germany and other countrieswhere the Company has interests, ratified the Kyoto Protocol in 2002 and, indoing so, have enacted regulations that reduce the emission of greenhouse gasesand have established a trading system covering carbon dioxide emissions. Such atrading system became effective at the start of 2005. The new regulationdirectly affects our power plants at the Duisburg and Langelsheim sites inGermany, as well as the power plant being operated by a third party on one ofour sites. Rockwood and such third party may be required to purchase carbondioxide credits, which could result in increased operating costs, or may berequired to develop additional cost-effective methods to reduce carbon dioxideemissions, which could result in increased capital expenditures. The newregulation indirectly affects our other operations in the EU, which mayexperience higher energy costs from third party providers. The Companycontinues to evaluate options in order to comply with the Protocol. However, wedo not expect this to have a material impact on our cash flow or results ofoperations.

***Remediation Liabilities***

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

Environmentalcontamination is known to exist at certain of the Company’s present and formerfacilities, including its facilities located in Turin, Italy; St. Fromond, St.Cheron and Sens, France; Hainhaussen, Troisdorf, Schlebusch, Stadeln, Duisburg,Plochingen, Marktredwitz, Ronnenberg-Empelde and Langelsheim, Germany; Oss, TheNetherlands; Kidsgrove, Sudbury and Barrow, U.K.; Boksburg East, South Africaand in the United States, in Valdosta, Georgia, Beltsville, Maryland,Louisville, Kentucky, New Johnsonville, Tennessee, Harrisburg, North Carolina,Laurens, South Carolina, Silver Peak, Nevada and La Mirada, California. Soilcontamination is also known to exist at the Company’s facilities at Freeport,Texas, Chasse-sur-Rhone, France, Sudbury, U.K. and Sumperk in Czech Republic;however, no further regulatory remedial actions are currently required forthese facilities and any liabilities arising from such contamination is coveredby indemnity obligations or the previous owners of these facilities with theexception of Freeport. The Company is currently operating groundwaterremediation systems at its Hainhaussen, Stadeln, Valdosta, and Silver Peakfacilities. The Company also operates groundwater remediation and/or monitoringsystems at its Schlebusch, Plochingen, Marktredwitz, Stadeln, Troisdorf, NewJohnsonville, Tennessee and Laurens facilities, for which prior owners orinsurers have assumed responsibility. The Company also continues to monitorgroundwater at the Beltsville and St. Cheron facilities, which were previouslythe subject of a soil removal action. Groundwater is also monitored at the St.Fromond and Barrow facilities due to prior spills and at the Harrisburg andLouisville facilities due to a landfill closure. The Company is also requiredto monitor 

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groundwater quality atits facility at Mourenx, France. The Company believes that additionalenvironmental studies, and possibly environmental remediations, will berequired at the Harrisburg facility. The Company is also in the process ofdetermining appropriate remedial actions with the regulatory authorities at thefollowing locations: Duisburg, Langelsheim, Troisdorf, Turin andLa Mirada. Furthermore, as a result of facility closings, divestitures andoffsite disposal activities, the Company is responsible for the following othermatters: contamination beneath divested portions of the manufacturing facilityin Troisdorf; a former disposal site in Laurel, Maryland; contamination at aclosed Specialty Chemicals facility in Houston, Texas; contamination at aformer Specialty Chemicals facility in Sunbright, Virginia; groundwaterremediation at Stadeln; and former sites operated by Dynamit Nobel’s previouslydivested explosives business. The Company is also a*de minimis* participant in several Superfund matters.

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

**GovernmentEnforcement Proceedings and Civil Litigation**

During the course of theCompany’s business, the Company may receive notices of violation, enforcementand other complaints from regulatory agencies alleging non-compliance withapplicable SHE laws. Currently, the Company is a party to a consent order withthe Metropolitan Sewer District (“MSD”) in Saint Louis, Missouri to reduceammonia concentrations in wastewater discharge to a city treatment plant. MSD’snew National Pollution Discharge Elimination System (“NPDES”) permit willrequire the Company to reduce the facility’s ammonia discharge by an average of50% by December 31, 2008. The Company is evaluating various options toreduce the amount of ammonia discharge. Although the Company will be requiredto make capital expenditures in connection with this matter, it does notbelieve that this issue will have a material adverse effect on its business orfinancial condition.

**EnvironmentalIndemnities**

Pursuant to theenvironmental deed entered into in connection with the KKR Acquisition,Degussa, as successor to Laporte, is required to indemnify the Company and itssubsidiaries for certain environmental matters that relate to the business asconducted prior to the closing of the KKR Acquisition. The environmental deedprovides that Degussa will indemnify the Company and its subsidiaries forclaims for which notice is given within a period of two years for breaches ofrepresentations and warranties, which expired in 2002, and five years, whichexpired in September 2005, for claims related to the contamination of the Company’sproperties or its subsidiaries’ properties (inclusive of contamination whichleaks or escapes from the Company’s properties or its subsidiaries’properties). These indemnity obligations are subject to a minimum per matterloss of $0.2 million and are further subject to a $5.0 milliondeductible for the indemnity to be available. In addition, the environmentaldeed provides that Degussa will indemnify Rockwood and its subsidiaries forclaims relating to properties that were formerly owned, occupied or used as ofNovember 20, 2000, as well as properties owned by third parties (inclusiveof disposal of waste and certain other identified issues prior toNovember 20, 2000). The environmental deed provides that in this instance,Degussa will be responsible for reasonable costs and expenses incurred.

In addition, pursuant tothe sale and purchase agreement entered into in connection with the DynamitNobel Acquisition, mg technologies ag (now known as GEA GroupAktiengesellschaft) and its subsidiary, MG North America Holdings, Inc.(now known as GEA North America, Inc.), are required to indemnify Rockwood andits subsidiaries for 50% of the excess amount of losses over the amount of therelated reserves (in the case of known claims) and 50% of claims (in the case ofunknown claims) related to the contamination of the Company or its subsidiaries’properties, if notified within ten years. If GEA Group’s and GEA North America’sresponsibility for contamination matters cannot be proven, a sliding scalereduces the percentage further for each year during the five-year period fromyear six to ten. GEA Group and GEA North America are also obligated toindemnify the Company for 85% of claims related to legacy site matters, such asenvironmental matters relating to properties or businesses owned or operated byDynamit Nobel prior to, but not on, the closing of the Dynamit NobelAcquisition, if notified within ten years. In addition, GEA Group and GEA NorthAmerica are obligated to indemnify the Company for 50% of the excess amount oflosses over the amount of the related reserves for operational compliancematters, if notified by December 31, 2006, and 50% of the excess amount oflosses over the amount of the related reserves (in the case of known claims)and 50% of claims (in the case of unknown claims) related to certainenvironmental damage claims unknown at the time of the closing of the DynamitNobel Acquisition, if notified within ten years. All of these indemnityobligations are subject to different minimum per-claim thresholds depending onwhether the matter was disclosed or not, and on the subject matter, rangingbetween €100,000 and €750,000 ($126,740 and $950,550 using the September 30,2006 exchange rate of €1.00 = $1.2674) depending on the type of claim. Theindemnity obligations are further subject to certain deductibles, exclusionsand limitations. Furthermore, GEA Group and GEA North America are obligated toindemnify the Company for certain environmental risks arising from certain “sharedsite” structures for a duration of ten years. This indemnity obligation is notsubject to the percentages,*de minimis*exclusions, deductibles and thresholds described above, and it is not subjectto most of the general limitations.

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In the event the Companyseeks indemnity under any of these agreements or through other means, there canbe no assurance that GEA Group, GEA North America, Degussa or any other partywho 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 addition, the Company may be required to makeindemnity payments in connection with certain environmental matters. However,the Company does not believe that resolution of the known environmental matterssubject to indemnification obligations owed to it or by it will have a materialadverse effect on the Company’s business or financial condition, but may have amaterial adverse effect on the results of operations or cash flow in any givenquarterly or annual reporting period.

***Environmental Reserves***

The Company hasestablished reserves relating to anticipated environmental cleanup obligations,site reclamation and remediation and closure costs. Liabilities are recordedwhen potential liabilities are either known or believed to be probable and canbe reasonably estimated. The Company’s liability estimates are based uponavailable facts, existing technology, past experience and, in some instancesinsurance recoveries where the remediation costs are being paid directly by theCompany’s insurers, and are generated by several means, includingState-mandated schedules, environmental consultants and internal experts,depending on the circumstances. On a consolidated basis, the Company accruedapproximately $36.5 million and $44.8 million for known environmentalliabilities as of September 30, 2006 and December 31, 2005, respectively,all of which are classified as other non-current liabilities on the Company’sconsolidated balance sheets for such periods. Included in the $36.5 million and$44.8 million as of September 30, 2006 and December 31, 2005,respectively, is €6.5 million ($8.2 million using the September 30, 2006exchange rate of €1.00 = $1.2674) that is discounted using a 5.0% discount rate(undiscounted amount equals $12.6 million), and €1.9 million ($2.4 million)that is discounted using a 5.5% discount rate (undiscounted amount equals $3.1million). In certain cases, the Company’s remediation liabilities are payableover periods of up to 30 years. At December 31, 2005, theenvironmental reserve related to the Rohner facility within our Groupe Novasepsegment was $10.5 million. As discussed, Rohner AG was sold in March 2006(see Note 13, “Sale of Rohner AG,” for further detail).

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 the Company does not believe the additionalamount of potential losses would have a material effect on the Company’sresults of operations or financial condition, but may have a material adverseeffect on the results of operations or cash flow in any given quarterly orannual reporting period. The Company is unable to estimate the amount or rangeof any potential incremental charges should facts and circumstances change andmay in the future revise its estimates based on new information becomingavailable.

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 ofour other facilities with known contamination, regulatory authorities mayimpose more stringent requirements on us including soil remediation. TheCompany does not contemplate any such action occurring in the foreseeablefuture, as these facilities’ remaining lives are indefinite. Given theindeterminate 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 the obligations. Consequently, the Company cannot employ apresent value technique to estimate fair value and, accordingly, it has notaccrued for any environmental related costs to remediate soil at thesefacilities.

The Company believesthese environmental matters will not have a material adverse effect on itsbusiness or financial condition. However, these matters may have a materialadverse effect on its results of operations or cash flows in any givenquarterly or annual reporting period.

**16.     RESTATEMENT:**

The condensedconsolidated statements of cash flows as reported for the nine months endedSeptember 30, 2005, contained a classification error in the treatment of costsof property, plant and equipment included in accounts payable and accruedexpenses and other liabilities. In accordance with SFAS No. 95,*Statement of Cash Flows,* these costsshould be reported within cash flows from investing activities when paid. The Companywas reporting capital expenditures in its condensed consolidated statements ofcash flows on an accrual basis rather than on a cash basis, and as a result,was reporting capital expenditures in the period in which the Company acquiredlegal title to the related property, plant and equipment rather than when theCompany actually paid for such property, plant and equipment. Further, theunpaid portion of the transaction should be disclosed as a non-cash investingactivity in the supplemental disclosure of cash flow information. As a result,the Company restated the condensed consolidated statement of cash flows for thenine months ended September 30, 2005. The restatement does not change theCompany’s condensed consolidated statements of operations, the condensedconsolidated balance sheets or cash and cash equivalents reported at the end ofthe period in the condensed consolidated statements of cash flows for any ofthe periods presented.

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The classification errorchanged cash flow from operating activities and investing activities for thenine months ended September 30, 2005 as follows (in millions):
|                                                            | ** ** | **As Originally** | ** ** | **As**       | ** ** |
|------------------------------------------------------------|------------|------------------------|------------|--------------|------------|
| **Description**                                            | ** ** | **Reported**           | ** ** | **Restated** | ** ** |
| **CASH  FLOWS FROM OPERATING ACTIVITIES:**                 | ** ** | ** **             | ** ** | ** **   | ** ** |
| Accounts payable                                           |       | $                      | 20.6       |         | $          | 35.2 |   |
| Accrued expenses  and other liabilities                    |       | (21.3                  | )          | (19.6        | )          |
| Net cash  provided by operating activities                 |       | 182.6                  |       | 198.9        |       |
| **CASH  FLOWS FROM INVESTING ACTIVITIES:**                 | ** ** | ** **             | ** ** | ** **   | ** ** |
| Capital  expenditures, excluding capital leases            |       | (123.0                 | )          | (139.3       | )          |
| Net cash used in  investing activities                     |       | (138.9                 | )          | (155.2       | )          |
| **NON-CASH  INVESTING ACTIVITIES:**                        | ** ** | ** **             | ** ** | ** **   | ** ** |
| Decrease in liabilities  for property, plant and equipment |       | —                 |       | (16.3        | )          |
|                                                            |            |                        |            |              |            |  |  |

 

The Company also revisedthe reconciliation of net cash provided by operating activities to AdjustedEBITDA and the disclosures in the Liquidity and Capital Resources section ofItem 2, “Management’s Discussion and Analysis of Financial Condition andResults of Operations,” related to cash flows from operating and investingactivities for the nine months ended September 30, 2005.

**17.     SUBSEQUENT EVENTS:**

In October 2006, Rohm andHaas Company and Chemical Specialties, Inc. (“CSI”), a wholly owned subsidiaryof the Company, announced their plans to form a joint venture company toprovide an extensive range of advanced wood treatment technologies and servicesto the global wood treatment industry. The joint venture would bring together the wood biocides business ofRohm and Haas and the wood protection chemicals business of CSI. Furtherdetails of this announced joint venture are included in a Form 8-K filed by theCompany on October 12, 2006. The parties executed a definitive agreement inNovember 2006 and expect the transaction to close in early January 2007. Thistransaction is subject to government review.

In October 2006, theCompany announced that it was considering divesting the Groupe Novasep segment.The Company is currently evaluating its alternatives.

**Item 2.****          Management’s Discussion and Analysis of Financial Condition and Results ofOperations.**

The following discussioncontains forward-looking statements that involve numerous risks anduncertainties. Our actual results could differ materially from those discussedin the forward-looking statements as a result of these risks and uncertainties,including those set forth in “Forward-Looking Statements” at the end of thisManagement Discussion and Analysis section and the risk factors section of theCompany’s 2005 Form 10-K. You should read the following discussion andanalysis together with our condensed consolidated financial statements and thenotes to those statements that appear elsewhere in this Quarterly Report.Amounts may not recalculate due to rounding differences. The followingmanagement’s discussion and analysis of financial condition and results ofoperations gives effect to the restatement as described in Note 16, “Restatement.”

**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.Since the completion of the Dynamit Nobel Acquisition, we operate through sevenbusiness segments: (1) Specialty Chemicals; (2) Performance Additives;(3) Titanium Dioxide Pigments; (4) Advanced Ceramics; (5) GroupeNovasep; (6) Specialty Compounds; and (7) Electronics. Of these sevensegments, we acquired Specialty Chemicals, Titanium Dioxide Pigments, AdvancedCeramics and Groupe Novasep (then known as our Custom Synthesis segment) in theDynamit Nobel Acquisition.

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

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

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Our selling,general and administrative expenses include research and development costs,sales and marketing, divisional management expenses and corporate servicesincluding cash management, legal, benefit plan administration and otheradministrative and professional services.

We are focused ongrowth, productivity, cost reduction, margin expansion and debt reduction. Inconnection with this focus, among other things:

·                  We have cut costs, reduced overhead and eliminatedduplicative positions in the acquired Dynamit Nobel businesses and the acquiredpigments and dispersions business of Johnson Matthey Plc. For example, weclosed the former headquarters of Dynamit Nobel in Troisdorf, Germany andclosed the New Lebanon, New York manufacturing facility of our AdvancedCeramics segment. In addition, we eliminated 40 positions in connection withthe acquisition of the pigments and dispersions business.  In the Wafer Reclaim business in ourElectronics segment, we closed a facility in the U.K. in January 2006 andclosed one of our facilities in the U.S. in March 2006. In our GroupeNovasep segment, we sold our Rohner AG operation located in Pratteln,Switzerland in March 2006. We also implemented other restructuring measures inour other segments;

·                  We reduced our net working capital as a percentageof net sales by implementing more effective systems to monitor working capital,augmenting further our “just-in-time” inventory management and creatingincentives for managers to focus on working capital management; and

·                  We implemented stringent controls to help ensurethat maintenance capital expenditures are appropriate and that expansioncapital is in line with both capacity and market demands. We closely monitorcapital expenditures in all of our segments.

**Factors Which Affect Our Results of Operations**

**Our Markets**

Because thebusinesses in our segments generally serve many unrelated end-use markets, wediscuss the principal market conditions on a segment basis rather than aconsolidated basis. The principal market conditions in our segments and regionsin which we operate that impacted our results of operations during the periodspresented include 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. In 2005, we benefited from a growth indemand for most of the markets and regions we serve, especially in theaerospace and automotive industry which has continued in 2006. Despite the lessfavorable automotive conditions in the U.S., we have been able to sustain salesgrowth in our global automotive business due to market penetration as ourbusiness primarily focuses on the European automobile industry market. Growthin the Surface Treatment business occurred in the first nine months of 2006 andis expected to continue this year in most markets as price and volume increasesand productivity improvements are expected to offset raw material costincreases.

·                  Demand for our lithium products in the FineChemicals business line of our Specialty Chemicals segment is generally drivenin part by demand of lithium carbonate in industrial applications, the aluminumbusiness, glass ceramics, cement and the general demand in China. Sales oflithium products specifically used in life science applications depend on thetrends in drug development and growth in pharmaceuticals markets as well asgeneric competition. Market conditions for lithium products in the industriesserved provided increasing price trends for lithium salts in 2005. Growth inthe Fine Chemicals business has occurred in the first nine months of 2006 andis expected to continue this year in most market segments, especially driven bylithium salt applications through price increases. Tight supplies in the globalmarket and unfavorable weather conditions at our lithium ponds in Chile earlythis year have lead to shortages in lithium salts as a raw material andcustomer demand for lithium carbonate will not be completely satisfied. During2005, we experienced price increases related to key raw materials used inproducing metal sulfides.  In the firstnine months of 2006, prices for some raw materials have increased further.  Raw material prices are expected to bevolatile throughout the remainder of the year.

###### ***Performance Additives***

·                  Although the growth in demand in certain NorthAmerican end-use markets, such as construction, has slowed, sales in our ColorPigments and Services business in North America have increased on higherconstruction volumes and selling price increases that were necessary to recoverraw material and energy cost increases. Generally, a continuing trend towardsthe increased use of colored concrete products in the North Americanconstruction market has had a positive effect on our Color 

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Pigments and Services business line. The Timber Treatment Chemicalsbusiness also benefited from high levels of activity in home improvement areas;however, demand for treated wood has been negatively impacted in 2006 by theincreasing use of wood substitutes and a slowdown in the construction market.

·                  Demand in certain European end-use markets over thelast few years has slowed. This affected sales of Color Pigments and Servicesin the construction market. We experienced a decrease in European constructionvolumes in our Color Pigments and Services business in 2005.  European construction sales in our ColorPigments and Services business decreased slightly in the first nine months of2006 versus the same period in the prior year as the lower volumes werepartially offset by higher selling prices necessary to recover raw material andenergy cost increases.

·                  The change in the market to environmentally advancedwood treatment chemical products, such as ACQ, and the phase out of chromatedcopper arsenate, or CCA, for residential use had a positive impact on ourTimber Treatment Chemicals business in 2005, which is a leading supplier ofthese higher margin products. However, in the Timber Treatment Chemicalsbusiness, our ACQ market position has been negatively impacted by market sharelosses to competition and competitive pricing pressure. In addition, theexpiration of the ACQ patent in 2007 could have a negative impact on our ACQ marketposition, sales and margins.

·                  Our Clay-based Additives business supplies specialtyrheology modifiers and additives, both clay-based and synthetic, to a varietyof end-use markets.  For 2006, the majordrivers of expected growth in the Clay-based Additives business have been theacquisition of Süd-Chemie’s Rheological Additives and carbonless claybusinesses, which closed on December 30, 2005, continued strength inoilfield sales and growth in additives for water-based coatings.

·                  Raw material costs increased in general in thePerformance Additives segment in 2005 and continue to trend upward. In theColor Pigments and Services business, selling price increases were initiated in2005 to partially offset the increases in raw material and energy costs.  In the first nine months of 2006, sellingprice increases continued to be implemented to offset raw material and energycost increases.  For the first ninemonths of 2006 in the Timber Treatment Chemicals business, there have beenincreased raw material costs for copper, which have been at record highs in2006, compared to the same period in 2005, and mono-ethanolamine, primarycomponents in the ACQ production process. These increased raw material costs were not passed on to customers in2006.  In the Clay-based Additivesbusiness, price increases were implemented in 2005 in selective product linesand continued in 2006 in a majority of product lines to partially offset energyand raw material cost increases.

·                  In October 2006, Rohm and Haas Company and ChemicalSpecialties, Inc. (CSI), a wholly owned subsidiary of the Company,  announced their plans to form a joint venturecompany to provide an extensive range of advanced wood treatment technologiesand services to the global wood treatment industry. The joint venture wouldbring together the wood biocides business of Rohm and Haas and the woodprotection chemicals business of CSI. Further details of this announced jointventure are included in a Form 8-K filed by the Company on October 12, 2006.The parties executed a definitive agreement in November 2006 and expect thetransaction to close in early January 2007. This transaction is subject togovernment review.

***Titanium Dioxide Pigments***

·                  Demand for our titanium dioxide products in anatasegrade is driven mainly by demand in the synthetic fiber industry, while demandfor titanium dioxide products in rutile grade and our functional additives isdriven by demand in the coatings, paper and plastics industries. We experiencedan unexpected decrease in volume of our titanium dioxide products in anatasegrade in 2005 due, in part, to the lower cost of cotton, which negativelyaffected demand for synthetic fibers and in turn our products. However, volumesin the fiber anatase business have increased in the first nine months of 2006and are expected to continue to increase.

·                  Throughout 2005, we experienced pricing pressurefrom global suppliers in Asia, specifically Chinese suppliers related totitanium dioxide products in anatase grade. We also experienced pricingpressures on our titanium products in rutile grade. Sales of titanium dioxideproducts in rutile grade increased in the first nine months of 2006 on higherselling prices and are expected to be above the prior year level for the fullyear.

***Advanced Ceramics***

·                  Demand for our ceramic medical devices is mainlytied to the aging population in Europe and the United States. As a result ofthis demographic as well as our market share penetration, the volume of ourproducts used in medical device applications sold has experienced double-digitgrowth each year from 2001 through 2005. However, in 2006 some customers in theU.S. reduced their demand due to high inventory levels and delayed approvals.  As a result, this demand has stabilized.

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·                  Sales of ceramic products for use in cutting toolproducts and mechanical systems were negatively impacted by pricing pressurefrom Asian competitors in 2005 and 2006 and is expected to continue.  In addition, selling prices in our electronicproducts business as well as for some Piezo applications were lower in thefirst nine months of 2006 and are expected to continue to be lower for theremainder of this year.

***Groupe Novasep***

·                  Demand for our custom synthesis and proprietaryproduct chemistries and processes depend on the pipeline and lifecycles ofpharmaceuticals.  While slowdown of newdrug approval in the U.S. is affecting our market, the number of drugs that arebecoming generic is contributing to growth. Healthcare cost containment policies put pressure on prices and thisadversely affects the prices of our products. However, this also creates opportunities for innovative synthesis routesand purification and separation processes.

·                  China and India are emerging countries in this marketand represent competition for our custom synthesis chemistries.  This competition is also contributing tosales growth in our process business for equipment, processes and systems inthese countries.  In addition, thegrowing worldwide population and the aging population in the U.S., Europe andJapan have increased demand for pharmaceuticals.

·                  The demand for green industrial processes thatrelease less solvents/effluents creates continuous and profitable growthopportunities for our industrial biotech business as oil derivative productsare being replaced by others coming from agriculture such as biofuels.  The increasing price of crude oil also has apositive impact in the industrial biotech market.

·                  In October 2006, the Company announced that it wasconsidering divesting the Groupe Novasep segment.  The Company is currently evaluating itsalternatives.

***Specialty Compounds***

·                  Our largest product line in the Specialty Compoundssegment is wire and cable compounds. Sales within this product line are dependentupon the telecommunications market and related sectors, specifically demand forhigh-end voice and data communication wire and cable, for which our SpecialtyCompounds segment is a significant provider of sheathing materials. In 2005, weexperienced increased demand for these products.  Volumes for these wire and cable productshave stabilized in 2006.  Newly developednon-halogen products for wire and cable data communication, military and otherapplications have expanded business in North America and created opportunitiesin Europe.

·                  Most of the other end-use markets for whichSpecialty Compounds’ products are used generally track growth of gross domesticproduct, but many are also application specific. Our net sales in these marketswere up slightly in 2005 and thus far in 2006. We are focusing more of ourefforts towards increasing high margin specialty products to offset thisimpact, in particular, thermoplastic elastomers, and less of our efforts inregulated packaging and footwear.

·                  Raw material costs trended upward in 2005; inparticular, the Specialty Compounds segment experienced a spike in raw materialcosts as a result of Hurricanes Katrina and Rita. The price of ammoniumoctamolybdate (“AOM”) and polyvinyl chloride (“PVC”) resin and plasticizers,key raw materials used in the production of wire and cable products, increasedin 2005.   As a result, we entered into acontract with a fixed price for AOM purchases that expires inDecember 2007. Prices for these raw materials were higher in the firstnine months of 2006 compared to the same period in 2005. Selling priceincreases were successfully initiated in 2005 to help offset the raw materialsprice increase and have continued in 2006 to help compensate for the higher rawmaterial costs. However, the ability to pass on some or all of these increasesis uncertain.

***Electronics***

·                  Demand for our Electronics products generallyfollows the activity levels of semiconductor and printed circuit boardmanufacturers. The global semiconductor and printed circuit board (“PCB”)markets are cyclical in nature. Worldwide sales of semiconductors increased in2006 over the same period in 2005 and we expect sales to continue to rise in2006 driven by strong demand for consumer electronics, cell phones and PC’s.The printed circuit board industry in the United States and Europe continued todecline in 2005 while the market in Asia experienced significant growth.Despite the declines in the United States and Europe, volumes in our electronicchemicals business increased in 2005, and are expected to continue to increasethroughout 2006, particularly in Asia, which provides nearly half of the globalmarket. In the first nine months of 2006, volumes in our electronic chemicalsbusiness were up in all regions.

·                  The price of certain of our products is insulated tosome degree from the effect of changes in the price of semiconductors andprinted circuit boards due to the fact that the cost of these products isgenerally a small component of the cost of the end 

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product. Despite this, in 2005 and continuing into 2006, there has beenpricing pressure in certain businesses, particularly photomasks due to veryaggressive competition. We expect that this pricing pressure will continueduring the rest of 2006 for the photomasks businesses.

##### **Global Exposure**

We operate ageographically diverse business. Of our 2005 net sales, 51% were shipments toEurope, 33% to North America (predominantly the United States) and 16% to therest of the world.  For a geographicdescription of the origin of our net sales and location of our long-livedassets, see Note 4, “Segment Information,” in our 2005 Form 10-K.

We estimate thatwe sold to customers in more than 60 countries during this period. Currently,we serve our diverse and extensive customer base with over 100 manufacturingfacilities in 25 countries. Consequently, we are exposed to globaleconomic and political changes, particularly currency fluctuations that couldimpact our profitability.

Our sales andproduction costs are mainly denominated in U.S. dollars or euros. Our resultsof operations and financial condition have been historically impacted by thefluctuation of the euro against our reporting currency, the U.S. dollar. Forthe nine month period ended September 30, 2006, the average exchange rate ofthe euro against the U.S. dollar was lower compared to the same period in 2005and negatively impacted our net sales, gross profit and operating income. Forthe three months ended September 30, 2006, the average exchange rate of theeuro against the U.S. dollar was higher compared to the same period in 2005 andhad a positive impact on our net sales, gross profit and operating income.  The euro was stronger at September 30, 2006compared to December 31, 2005. Historically, however, our operatingmargins have not been significantly impacted by currency fluctuations because,in general, sales and costs of products sold are generated or incurred in thesame currency, subject to certain exceptions, particularly in our GroupeNovasep segment.

**RawMaterials**

Raw materialsconstituted approximately 49% of our 2005 cost of products sold. We have abroad raw material base, with the cost of no single raw material representingmore than 2% of our cost of products sold in 2005.  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.  In particular, record high prices for copperused in the Timber Treatment Chemicals business of our Performance Additivessegment have had a negative impact on results. We cannot accurately predict the impact of any future price increasesfor raw materials or any raw material shortages on our business as a whole orin specific geographic regions. In addition, we may not be able to pass on rawmaterial price increases to our customers.

**EnergyCosts**

In 2005, energypurchases represented approximately 5% of our cost of products sold. However,within certain business lines, such as our Titanium Dioxide Pigments segmentand the Color 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 and Servicesand Clay-based Additives, increases when the price of natural gas in NorthAmerica rises. Natural gas prices in North America increased in 2005, due inpart to political conditions and extreme weather conditions, includingHurricanes Katrina and Rita. Natural gas prices have been relatively stablethus far in 2006. In contrast, natural gas prices in Europe, where our TitaniumDioxide Pigments segment is located, have historically been relatively stable,although prices rose in the first nine months of 2006.

**IncomeTaxes**

The effective taxrate for the third quarter of 2006 was 40.8% which is primarily a function offoreign and domestic earnings and their impact on the effective rate.  In the third quarter of 2006, the worldwidevaluation allowance increased by $3.2 million. The increase in the valuationallowance was primarily due to an increase of $5.1 million in deferred taxassets associated with the Company’s losses partially offset by a reduction of$1.9 million in other comprehensive income. The $5.1 million increase in thevaluation allowance for the third quarter of 2006 impacted the effective taxrate.

**SpecialCharges and Credits**

During the periodspresented, we incurred certain special charges, along with certain other items,substantially in connection with the establishment of the post-acquisitioncorporate entity that incorporates the four business segments acquired in theDynamit Nobel Acquisition as well as in connection with the IPO. These itemsinclude systems/organization establishment expenses, restructuring and relatedcharges, foreign exchange gains and losses and inventory write-up reversals.See “Items excluded from Adjusted EBITDA” section in Note 4, “SegmentInformation,” for a discussion of special charges and credits recorded in thethree and nine months ended 

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September 30, 2006and 2005.

**SpecialNote Regarding Non-GAAP Financial Measures**

A non-GAAPfinancial measure is generally defined by the SEC as one that purports tomeasure historical or future financial performance, financial position or cashflows but excludes or includes amounts that would not be so adjusted in themost comparable U.S. GAAP measure. From time to time in this management’sdiscussion and analysis, we disclose non-GAAP financial measures, primarilyAdjusted EBITDA, as defined below.

**Definition of Adjusted EBITDA**

All presentationsof consolidated Adjusted EBITDA contained in this report are calculated usingthe definition set forth in the senior secured credit agreement. AdjustedEBITDA, 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;

·                  losseson asset sales;

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

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

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

·                  anyfees and expenses related to permitted acquisitions;

·                  anydeduction for minority interest expense; and

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

less:

·                  extraordinarygains and non-recurring gains;

·                  non-cashgains; and

·                  gainson asset sales,

inall cases, subject to certain exclusions.

Withrespect to entities acquired, we include Adjusted EBITDA for such entities incalculating our pro forma Adjusted EBITDA. The adjustments made to the incomefrom continuing operations before income taxes and extraordinary items of suchentities directly correlate to the adjustments to net income in calculatingAdjusted EBITDA on a consolidated basis pursuant to the senior secured creditagreement.

Forpresentation purposes within this report, we consistently use the computationprescribed under our senior secured credit agreement as described above.Specifically, calculation of Adjusted EBITDA according to the indenturesunderlying our 2011 Notes and 2014 Notes excludes certain adjustmentsprescribed within the senior secured credit agreement. Given that borrowingsunder the senior secured credit agreement are secured by most of our assets andgiven that the calculation does not materially differ from the calculation ofAdjusted EBITDA for performance measurement purposes, we believe this is themost appropriate computation of Adjusted EBITDA to present.

**Management’s Uses**

We use AdjustedEBITDA on a consolidated basis to assess our operating performance. We believethis financial measure on a consolidated basis is helpful in highlightingtrends in our overall business because the items excluded in calculatingAdjusted EBITDA have been deemed by management to have little or no bearing onour day-to-day operating performance. It is also the most 

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significantcriterion in our calculation of performance-based cash bonuses and ourdetermination of whether certain performance-based stock options vest, both ofwhich are tied to Adjusted EBITDA targets.

We also useAdjusted EBITDA on a consolidated basis as a liquidity measure. We believe thisfinancial measure on a consolidated basis is important in analyzing ourliquidity because our senior secured credit agreement and indentures governingthe 2011 Notes and 2014 Notes contain financial covenants that are determinedbased on Adjusted EBITDA. These covenants are material terms of theseagreements, which are material because they govern substantially all of ourlong-term debt, which in turn represents a substantial portion of ourcapitalization. Non-compliance with these financial covenants under our seniorsecured credit facilities—our maximum total leverage ratio and our minimuminterest coverage ratio, in particular—could result in the lenders requiring usto immediately repay all amounts borrowed. Any such acceleration could alsolead to the noteholders accelerating the maturity of the 2011 Notes and the2014 Notes. In addition, if we cannot satisfy these financial covenants in theindentures governing the 2011 Notes and 2014 Notes, we cannot engage in certainactivities, such as incurring additional indebtedness or making certainpayments. Consequently, Adjusted EBITDA is critical to our assessment of ourliquidity.

We also useAdjusted EBITDA on a segment basis as the primary measure used by our chiefoperating decision maker to evaluate the ongoing performance of our businesssegments and reporting units. On a segment basis, we define Adjusted EBITDA asoperating income excluding depreciation and amortization, certain non-cashgains and charges, certain other special gains and charges determined by oursenior management to be non-recurring gains and charges and certain itemsdeemed by our senior management to have little or no bearing on the day-to-dayoperating performance of our business segments and reporting units. Theadjustments made to operating income directly correlate with the adjustments tonet income in calculating Adjusted EBITDA on a consolidated basis pursuant tothe senior secured credit agreement.

**Limitations**

Adjusted EBITDAhas limitations as an analytical tool, and should not be viewed in isolationand is not a substitute for U.S. GAAP measures of earnings and cash flows.Material limitations associated with making the adjustments to our earnings andcash flows to calculate Adjusted EBITDA, and using this non-GAAP financialmeasure as compared to the most directly comparable U.S. GAAP financialmeasures, include:

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

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

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

An investor orpotential investor may find any one or all of these items important inevaluating our performance, results of operations, financial position andliquidity. Management compensates for the limitations of using non-GAAP financialmeasures by using them only to supplement our U.S. GAAP results to provide amore complete understanding of the factors and trends affecting our business.

Adjusted EBITDA isnot an alternative to net income (loss) or income (loss) before taxes and minorityinterest or operating income or cash flows from operating activities ascalculated and presented in accordance with U.S. GAAP. You should not rely onAdjusted EBITDA as a substitute for any such U.S. GAAP financial measures. Westrongly urge you to review the reconciliations of Adjusted EBITDA to GAAPfinancial measures and other financial information, in each case includedelsewhere in this report. We also strongly urge you not to rely on any singlefinancial measure to evaluate our business.

**Resultsof Operations**

**ActualResults of Operations**

The following table presents the major components of ouroperations on an actual basis and Adjusted EBITDA (the reconciliation to netincome is set forth in—Reconciliation of Net Income to Adjusted EBITDA for thethree and nine months ended September 30, 2006 and 2005), including as apercentage of net sales, for the periods presented. See Note 4, “SegmentInformation,” for segment information and a reconciliation to net income on aconsolidated basis and a reconciliation to income before taxes and minority 

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interest on a segment basis.
| ** **                                            | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|-------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| **($ in millions)**                         | ** ** | **2006**                                                 | ** ** | **2005**                                                | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Statement  of operations data:**                    |       |                                                     |       |                                                    |       |   |   |   |   |
| **Net  sales:**                                       |       |                                                     |       |                                                    |       |   |   |   |   |
| Specialty  Chemicals                                  |       | $                                                        | 225.5      |                                                    | $          | 202.6 |   | $ | 685.6 |   | $ | 642.3 |   |
| Performance  Additives                                |       | 192.4                                                    |       | 170.7                                                   |       | 587.7 |   | 520.3 |   |
| Titanium Dioxide  Pigments                            |       | 111.2                                                    |       | 106.6                                                   |       | 330.4 |   | 320.3 |   |
| Advanced  Ceramics                                    |       | 95.6                                                     |       | 95.3                                                    |       | 286.3 |   | 283.6 |   |
| Groupe Novasep                                        |       | 87.2                                                     |       | 92.0                                                    |       | 260.0 |   | 279.9 |   |
| Specialty  Compounds                                  |       | 62.1                                                     |       | 57.6                                                    |       | 191.4 |   | 177.8 |   |
| Electronics                                           |       | 53.0                                                     |       | 46.9                                                    |       | 154.0 |   | 134.6 |   |
| Total net sales                                       |       | 827.0                                                    |       | 771.7                                                   |       | 2,495.4 |   | 2,358.8 |   |
|                                                  |       |                                                     |       |                                                    |       |   |   |   |   |
| Gross profit                                          |       | 247.3                                                    |       | 233.5                                                   |       | 765.9 |   | 722.1 |   |
|                                                  |       | 29.9                                                     | %          | 30.3                                                    | %          | 30.7 | % | 30.6 | % |
| Selling, general  and administrative expenses         |       | 159.5                                                    |       | 143.8                                                   |       | 478.8 |   | 451.5 |   |
|                                                  |       | 19.3                                                     | %          | 18.6                                                    | %          | 19.2 | % | 19.1 | % |
| Restructuring  charges, net                           |       | 1.7                                                      |       | 2.9                                                     |       | 3.9 |   | 8.7 |   |
| Management  services agreement termination fee        |       | —                                                   |       | 10.0                                                    |       | — |   | 10.0 |   |
| **Operating  income (loss):**                         |       |                                                     |       |                                                    |       |   |   |   |   |
| Specialty  Chemicals                                  |       | 36.6                                                     |       | 30.5                                                    |       | 114.5 |   | 97.8 |   |
|                                                  |       | 16.2                                                     | %          | 15.1                                                    | %          | 16.7 | % | 15.2 | % |
| Performance  Additives                                |       | 18.2                                                     |       | 27.2                                                    |       | 71.7 |   | 87.2 |   |
|                                                  |       | 9.5                                                      | %          | 15.9                                                    | %          | 12.2 | % | 16.8 | % |
| Titanium Dioxide  Pigments                            |       | 13.7                                                     |       | 12.7                                                    |       | 38.1 |   | 37.0 |   |
|                                                  |       | 12.3                                                     | %          | 11.9                                                    | %          | 11.5 | % | 11.6 | % |
| Advanced  Ceramics                                    |       | 16.7                                                     |       | 16.5                                                    |       | 48.6 |   | 47.2 |   |
|                                                  |       | 17.5                                                     | %          | 17.3                                                    | %          | 17.0 | % | 16.6 | % |
| Groupe Novasep                                        |       | 5.9                                                      |       | 3.0                                                     |       | 25.4 |   | 4.9 |   |
|                                                  |       | 6.8                                                      | %          | 3.3                                                     | %          | 9.8 | % | 1.8 | % |
| Specialty  Compounds                                  |       | 6.0                                                      |       | 5.2                                                     |       | 17.6 |   | 17.0 |   |
|                                                  |       | 9.7                                                      | %          | 9.0                                                     | %          | 9.2 | % | 9.6 | % |
| Electronics                                           |       | 5.7                                                      |       | 3.4                                                     |       | 14.5 |   | 5.9 |   |
|                                                  |       | 10.8                                                     | %          | 7.2                                                     | %          | 9.4 | % | 4.4 | % |
| Corporate costs                                       |       | (16.7                                                    | )          | (21.7                                                   | )          | (47.2 | ) | (45.1 | ) |
| Total operating  income                               |       | 86.1                                                     |       | 76.8                                                    |       | 283.2 |   | 251.9 |   |
| **Other  income (expenses):**                         |       |                                                     |       |                                                    |       |   |   |   |   |
| Interest  expense, net                                |       | (60.8                                                    | )          | (55.4                                                   | )          | (147.7 | ) | (177.6 | ) |
| Loss on early  extinguishment of debt                 |       | —                                                   |       | (26.6                                                   | )          | — |   | (26.6 | ) |
| Foreign exchange  gain, net                           |       | 4.8                                                      |       | 2.1                                                     |       | 7.7 |   | 116.1 |   |
| Loss on sale of  business                             |       | —                                                   |       | —                                                  |       | (12.1 | ) | — |   |
| Other, net                                            |       | 0.3                                                      |       | —                                                  |       | 2.7 |   | — |   |
| **Income  (loss) before taxes and minority interest** |       | 30.4                                                     |       | (3.1                                                    | )          | 133.8 |   | 163.8 |   |
| Income tax  provision                                 |       | 12.4                                                     |       | 10.8                                                    |       | 34.5 |   | 52.5 |   |
| Income (loss)  before minority interest               |       | 18.0                                                     |       | (13.9                                                   | )          | 99.3 |   | 111.3 |   |
| Minority  interest                                    |       | 3.4                                                      |       | 0.6                                                     |       | (0.8 | ) | 2.3 |   |
| Net income  (loss)                                    |       | $                                                        | 21.4       |                                                    | $          | (13.3 | ) | $ | 98.5 |   | $ | 113.6 |   |
| **Adjusted  EBITDA:**                                 |       |                                                     |       |                                                    |       |   |   |   |   |
| Specialty  Chemicals                                  |       | 49.0                                                     |       | 40.8                                                    |       | 151.1 |   | 133.2 |   |
|                                                  |       | 21.7                                                     | %          | 20.1                                                    | %          | 22.0 | % | 20.7 | % |
| Performance  Additives                                |       | 31.3                                                     |       | 36.9                                                    |       | 107.4 |   | 118.3 |   |
|                                                  |       | 16.3                                                     | %          | 21.6                                                    | %          | 18.3 | % | 22.7 | % |
| Titanium Dioxide  Pigments                            |       | 23.2                                                     |       | 21.5                                                    |       | 65.9 |   | 64.5 |   |
|                                                  |       | 20.9                                                     | %          | 20.2                                                    | %          | 19.9 | % | 20.1 | % |
| Advanced  Ceramics                                    |       | 25.8                                                     |       | 24.5                                                    |       | 75.0 |   | 70.0 |   |
|                                                  |       | 27.0                                                     | %          | 25.7                                                    | %          | 26.2 | % | 24.7 | % |
| Groupe Novasep                                        |       | 13.9                                                     |       | 12.3                                                    |       | 49.6 |   | 35.3 |   |
|                                                  |       | 15.9                                                     | %          | 13.4                                                    | %          | 19.1 | % | 12.6 | % |
| Specialty  Compounds                                  |       | 8.2                                                      |       | 6.6                                                     |       | 24.1 |   | 21.3 |   |
|                                                  |       | 13.2                                                     | %          | 11.5                                                    | %          | 12.6 | % | 12.0 | % |
| Electronics                                           |       | 9.6                                                      |       | 7.7                                                     |       | 27.9 |   | 20.5 |   |
|                                                  |       | 18.1                                                     | %          | 16.4                                                    | %          | 18.1 | % | 15.2 | % |
| Corporate costs                                       |       | (13.4                                                    | )          | (10.3                                                   | )          | (38.5 | ) | (29.4 | ) |
| Total Adjusted  EBITDA                                |       | $                                                        | 147.6      |                                                    | $          | 140.0 |   | $ | 462.5 |   | $ | 433.7 |   |

35

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The followingtable presents the changes in the major components of our operations on ahistorical basis in dollars and percentages:
| ** **                                             | ** ** | **Change: Three months ended September 30, 2006 versus 2005** | ** ** | **Change: Nine months ended September 30, 2006 versus 2005** | ** ** |
|--------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------|------------|
| ** **                                             | ** ** | ** **                                                                                            | ** ** | **%**                                                                                                | ** ** | **FX** | ** ** | ** ** | ** ** | ** ** | ** ** | **%** | ** ** | **FX** | ** ** | ** ** | ** ** |
| **($ in millions)**                          | ** ** | **Total**                                                                                             | ** ** | **Change**                                                                                           | ** ** | **Effect (a)** | ** ** | **Organic (b)** | ** ** | **Total** | ** ** | **Change** | ** ** | **Effect (a)** | ** ** | **Organic (b)** | ** ** |
| **Statement  of operations data:**                     | ** ** | ** **                                                                                            | ** ** | ** **                                                                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net  sales:**                                        | ** ** | ** **                                                                                            | ** ** | ** **                                                                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Specialty  Chemicals                                   |       | $                                                                                                     | 22.9       |                                                                                                 | 11.3       | % | $ | 5.2 |   | $ | 17.7 |   | $ | 43.3 |   | 6.7 | % | $ | (9.0 | ) | $ | 52.3 |   |
| Performance  Additives                                 |       | 21.7                                                                                                  |       | 12.7                                                                                                 |       | 2.3 |   | 19.4 |   | 67.4 |   | 13.0 |   | (2.1 | ) | 69.5 |   |
| Titanium Dioxide  Pigments                             |       | 4.6                                                                                                   |       | 4.3                                                                                                  |       | 4.8 |   | (0.2 | ) | 10.1 |   | 3.2 |   | (5.6 | ) | 15.7 |   |
| Advanced Ceramics                                      |       | 0.3                                                                                                   |       | 0.3                                                                                                  |       | 3.7 |   | (3.4 | ) | 2.7 |   | 1.0 |   | (3.5 | ) | 6.2 |   |
| Groupe Novasep                                         |       | (4.8                                                                                                  | )          | (5.2                                                                                                 | )          | 3.7 |   | (8.5 | ) | (19.9 | ) | (7.1 | ) | (4.8 | ) | (15.1 | ) |
| Specialty  Compounds                                   |       | 4.5                                                                                                   |       | 7.8                                                                                                  |       | 0.9 |   | 3.6 |   | 13.6 |   | 7.6 |   | 0.2 |   | 13.4 |   |
| Electronics                                            |       | 6.1                                                                                                   |       | 13.0                                                                                                 |       | 0.8 |   | 5.3 |   | 19.4 |   | 14.4 |   | (1.2 | ) | 20.6 |   |
| Total net sales                                        |       | 55.3                                                                                                  |       | 7.2                                                                                                  |       | 21.4 |   | 33.9 |   | 136.6 |   | 5.8 |   | (26.0 | ) | 162.6 |   |
|                                                   |       |                                                                                                  |       |                                                                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Gross profit                                           |       | 13.8                                                                                                  |       | 5.9                                                                                                  |       | 6.1 |   | 7.7 |   | 43.8 |   | 6.1 |   | (8.6 | ) | 52.4 |   |
| Selling, general  and administrative expenses          |       | 15.7                                                                                                  |       | 10.9                                                                                                 |       | 4.0 |   | 11.7 |   | 27.3 |   | 6.0 |   | (5.3 | ) | 32.6 |   |
| Restructuring  charges, net                            |       | (1.2                                                                                                  | )          |                                                                                                 |       |   |   | (1.2 | ) | (4.8 | ) |   |   |   |   | (4.8 | ) |
| Management services  agreement termination fee         |       | (10.0                                                                                                 | )          |                                                                                                 |       |   |   | (10.0 | ) | (10.0 | ) |   |   |   |   | (10.0 | ) |
| Total operating  expenses                              |       | 4.5                                                                                                   |       | 2.9                                                                                                  |       | 4.0 |   | 0.5 |   | 12.5 |   | 2.7 |   | (5.3 | ) | 17.8 |   |
| **Operating  income (loss):**                          | ** ** | ** **                                                                                            | ** ** | ** **                                                                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Specialty  Chemicals                                   |       | 6.1                                                                                                   |       | 20.0                                                                                                 |       | 0.6 |   | 5.5 |   | 16.7 |   | 17.1 |   | (1.6 | ) | 18.3 |   |
| Performance  Additives                                 |       | (9.0                                                                                                  | )          | (33.1                                                                                                | )          | — |   | (9.0 | ) | (15.5 | ) | (17.8 | ) | (0.3 | ) | (15.2 | ) |
| Titanium Dioxide  Pigments                             |       | 1.0                                                                                                   |       | 7.9                                                                                                  |       | 0.5 |   | 0.5 |   | 1.1 |   | 3.0 |   | (0.6 | ) | 1.7 |   |
| Advanced Ceramics                                      |       | 0.2                                                                                                   |       | 1.2                                                                                                  |       | 0.8 |   | (0.6 | ) | 1.4 |   | 3.0 |   | (0.6 | ) | 2.0 |   |
| Groupe Novasep                                         |       | 2.9                                                                                                   |       | 96.7                                                                                                 |       | 0.2 |   | 2.7 |   | 20.5 |   | 418.4 |   | (0.5 | ) | 21.0 |   |
| Specialty  Compounds                                   |       | 0.8                                                                                                   |       | 15.4                                                                                                 |       | 0.1 |   | 0.7 |   | 0.6 |   | 3.5 |   | 0.1 |   | 0.5 |   |
| Electronics                                            |       | 2.3                                                                                                   |       | 67.6                                                                                                 |       | — |   | 2.3 |   | 8.6 |   | 145.8 |   | — |   | 8.6 |   |
| Corporate costs                                        |       | 5.0                                                                                                   |       | 23.0                                                                                                 |       | (0.1 | ) | 5.1 |   | (2.1 | ) | (4.7 | ) | 0.2 |   | (2.3 | ) |
| Total                                                  |       | 9.3                                                                                                   |       | 12.1                                                                                                 |       | 2.1 |   | 7.2 |   | 31.3 |   | 12.4 |   | (3.3 | ) | 34.6 |   |
| **Other  income (expenses):**                          | ** ** | ** **                                                                                            | ** ** | ** **                                                                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest expense,  net                                 |       | (5.4                                                                                                  | )          | 9.7                                                                                                  |       | 1.2 |   | (6.6 | ) | 29.9 |   | (16.8 | ) | 3.6 |   | 26.3 |   |
| Loss on early  extinguishment of debt                  |       | 26.6                                                                                                  |       |                                                                                                 |       |   |   |   |   | 26.6 |   |   |   |   |   |   |   |
| Foreign exchange  gain, net                            |       | 2.7                                                                                                   |       |                                                                                                 |       |   |   |   |   | (108.4 | ) |   |   |   |   |   |   |
| Loss on sale of business                               |       | —                                                                                                |       |                                                                                                 |       |   |   |   |   | (12.1 | ) |   |   |   |   |   |   |
| Other, net                                             |       | 0.3                                                                                                   |       |                                                                                                 |       |   |   |   |   | 2.7 |   |   |   |   |   |   |   |
| **Income  (loss) before taxes and minority interest:** | ** ** | ** **                                                                                            | ** ** | ** **                                                                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Specialty  Chemicals                                   |       | 1.6                                                                                                   |       |                                                                                                 |       |   |   |   |   | 12.8 |   |   |   |   |   |   |   |
| Performance  Additives                                 |       | (4.8                                                                                                  | )          |                                                                                                 |       |   |   |   |   | (6.1 | ) |   |   |   |   |   |   |
| Titanium Dioxide  Pigments                             |       | 1.6                                                                                                   |       |                                                                                                 |       |   |   |   |   | 5.4 |   |   |   |   |   |   |   |
| Advanced Ceramics                                      |       | 0.7                                                                                                   |       |                                                                                                 |       |   |   |   |   | 4.6 |   |   |   |   |   |   |   |
| Groupe Novasep                                         |       | 2.7                                                                                                   |       |                                                                                                 |       |   |   |   |   | 10.3 |   |   |   |   |   |   |   |
| Specialty  Compounds                                   |       | (6.4                                                                                                  | )          |                                                                                                 |       |   |   |   |   | (6.6 | ) |   |   |   |   |   |   |
| Electronics                                            |       | 3.2                                                                                                   |       |                                                                                                 |       |   |   |   |   | 9.4 |   |   |   |   |   |   |   |
| Corporate costs                                        |       | 34.9                                                                                                  |       |                                                                                                 |       |   |   |   |   | (59.8 | ) |   |   |   |   |   |   |
| Total                                                  |       | 33.5                                                                                                  |       |                                                                                                 |       |   |   |   |   | (30.0 | ) |   |   |   |   |   |   |
| Income tax  provision                                  |       | 1.6                                                                                                   |       |                                                                                                 |       |   |   |   |   | (18.0 | ) |   |   |   |   |   |   |
| Net income (loss)  before minority interest            |       | 31.9                                                                                                  |       |                                                                                                 |       |   |   |   |   | (12.0 | ) |   |   |   |   |   |   |
| Minority interest                                      |       | 2.8                                                                                                   |       |                                                                                                 |       |   |   |   |   | (3.1 | ) |   |   |   |   |   |   |
| Net income (loss)                                      |       | $                                                                                                     | 34.7       |                                                                                                 |       |   |   |   |   |   | $ | (15.1 | ) |   |   |   |   |   |   |
| **Adjusted  EBITDA:**                                  | ** ** | ** **                                                                                            | ** ** | ** **                                                                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Specialty  Chemicals                                   |       | $                                                                                                     | 8.2        |                                                                                                 | 20.1       | % | $ | 1.0 |   | $ | 7.2 |   | 17.9 |   | 13.4 | % | $ | (2.0 | ) | $ | 19.9 |   |
| Performance  Additives                                 |       | (5.6                                                                                                  | )          | (15.2                                                                                                | )          | 0.4 |   | (6.0 | ) | (10.9 | ) | (9.2 | ) | (0.5 | ) | (10.4 | ) |
| Titanium Dioxide  Pigments                             |       | 1.7                                                                                                   |       | 7.9                                                                                                  |       | 1.1 |   | 0.6 |   | 1.4 |   | 2.2 |   | (0.9 | ) | 2.3 |   |
| Advanced Ceramics                                      |       | 1.3                                                                                                   |       | 5.3                                                                                                  |       | 1.1 |   | 0.2 |   | 5.0 |   | 7.1 |   | (0.9 | ) | 5.9 |   |
| Groupe Novasep                                         |       | 1.6                                                                                                   |       | 13.0                                                                                                 |       | 0.5 |   | 1.1 |   | 14.3 |   | 40.5 |   | (1.0 | ) | 15.3 |   |
| Specialty  Compounds                                   |       | 1.6                                                                                                   |       | 24.2                                                                                                 |       | 0.2 |   | 1.4 |   | 2.8 |   | 13.1 |   | 0.1 |   | 2.7 |   |
| Electronics                                            |       | 1.9                                                                                                   |       | 24.7                                                                                                 |       | 0.1 |   | 1.8 |   | 7.4 |   | 36.1 |   | (0.2 | ) | 7.6 |   |
| Corporate costs  and eliminations                      |       | (3.1                                                                                                  | )          | (30.1                                                                                                | )          | (0.2 | ) | (2.9 | ) | (9.1 | ) | (31.0 | ) | 0.1 |   | (9.2 | ) |
| Total Adjusted EBITDA                                  |       | $                                                                                                     | 7.6        |                                                                                                 | 5.4        | % | $ | 4.2 |   | $ | 3.4 |   | $ | 28.8 |   | 6.6 | % | $ | (5.3 | ) | $ | 34.1 |   |

 

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(a)     The foreign exchange effect was calculatedbased on the change in the applicable rate, primarily the euro, to the U.S.dollar exchange rate for the applicable period.

(b)     Includes the impact of acquisitions anddivestitures.

36

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***Three months ended September 30, 2006 compared to threemonths ended September 30, 2005***

##### **Overview**

Net salesincreased $55.3 million in the third quarter of 2006 compared with the sameperiod in the prior year as a result of general strong demand, higher sellingprices and the favorable impact of the acquisition of the Süd-Chemie businesseson December 30, 2005.  In addition, saleswere favorably impacted by the positive impact of currency changes of $21.4million primarily due to the strengthening of the euro against the U.S. dollarfor the three month period ended September 30, 2006 compared to the same periodin 2005. See further discussion by segment below.

Operating incomeincreased $9.3 million in the third quarter of 2006 compared with the sameperiod in the prior year primarily in the Specialty Chemicals, Groupe Novasepand Electronics segments. The impact of higher overall sales and the managementservices agreement termination fee of $10.0 million recorded in the thirdquarter of 2005 was partially offset by higher raw material and energy costsand higher depreciation and amortization expense.  The positive impact of currency changes of$2.1 million had a favorable impact on operating earnings.

Adjusted EBITDAincreased $7.6 million in the third quarter of 2006 compared with the sameperiod in the prior year primarily due to the impact of the sales increasesnoted above, partially offset by higher raw material and energy costs.  The positive impact of currency changes of$4.2 million had a favorable impact on Adjusted EBITDA.

Net incomeincreased $34.7 million in the third quarter of 2006 compared with the sameperiod in the prior year primarily due to the impact of the sales increasesnoted above, and the loss on early extinguishment of debt and the managementservices agreement termination fee of $26.6 million and $10.0 million,respectively, recorded in the third quarter of 2005.  This increase was partially offset by higherraw material and energy costs and higher depreciation and amortization expense.

##### **Net sales**

*SpecialtyChemicals*.  Net sales for our Specialty Chemicalssegment increased $22.9 million over the prior year period, primarily on highervolumes and selling prices ($3.1 million) in the Surface Treatment business,higher selling prices ($6.5 million) in the Fine Chemicals business and thepositive impact of currency changes of $5.2 million.  Net sales in the Surface Treatment businesswere favorably impacted by growth in all markets, particularly in steel andgeneral industrial applications.  In theFine Chemicals business, higher selling prices for lithium salts and strongdemand for lithium applications, particularly sales of specialty products tothe pharmaceutical industry, continued to have a favorable impact on sales.

*PerformanceAdditives*.  Net sales for our Performance Additivessegment increased $21.7 million over the prior year period primarily due tohigher selling prices and volumes and the positive impact of currency changesof $2.3 million.  Higher selling pricesof $5.3 million were primarily reported in the Color Pigments and Services andClay-based Additives businesses to offset higher raw material and energy costs.Volumes were up in the Clay-based Additives and Water Treatment Chemicalsbusinesses. In the Clay-based Additives business, volumes were up on increasedsales to the carbonless paper and rheological additives markets primarily fromthe acquisition of the Süd-Chemie businesses on December 30, 2005 andincreased coatings and inks and oilfield sales. In the Water TreatmentChemicals business, volumes were higher on increased sales of pool and spachemical products.  Lower volumes inEurope in our Color Pigments and Services business and lower volumes of ACQproducts in our Timber Treatment Chemicals business had a negative impact onsales.

*TitaniumDioxide Pigments*.  Net sales for our Titanium DioxidePigments segment increased $4.6 million over the prior year period due to thepositive impact of currency changes of $4.8 million. Net sales were negativelyimpacted by lower volumes of our titanium dioxide products in rutile grade andlower volumes of our functional additives products.  This was partially offset by higher sellingprices from our functional additives products.

*AdvancedCeramics*.  Net sales for our Advanced Ceramicssegment increased $0.3 million over the prior year period. The positive impactof currency changes of $3.7 million and increased volumes of mechanical andelectronic applications were partially offset by lower volumes of medicalproducts and selling price declines of $1.5 million primarily in Piezo andelectronic applications.

*GroupeNovasep*.  Net sales for our Groupe Novasep segmentdecreased $4.8 million over the prior year. This decline was primarily theresult of the sale of Rohner AG in March 2006 and was partially offset by thepositive impact of currency changes of $3.7 million.  Rohner AG was sold in March 2006 (seeNote 13, “Sale of Rohner AG,” for further detail).

*SpecialtyCompounds*.  Net sales for our Specialty Compoundssegment increased $4.5 million over the prior year period primarily due tohigher selling prices of $3.5 million to offset higher raw material costs, afavorable product mix, and the positive impact of currency changes of $0.9million.  This increase was partiallyoffset by lower sales volumes in wire and cable, automotive and 

37

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footwearapplications.

*Electronics*. Net sales for our Electronics segment increased $6.1 million over the prioryear period primarily due to higher volumes in our Electronic Chemicalsbusinesses in all regions on sales to the printed circuit board andsemiconductor markets and the positive impact of currency changes of $0.8million. This increase was partially offset by lower volumes in the WaferReclaim business primarily due to the closure of our U.K. facility in January2006 and the closure of one of our U.S. facilities in March 2006.

##### **Gross profit**

Gross profitincreased $13.8 million over the prior year primarily due to the salesincreases noted above and the positive impact of currency changes of$6.1 million. This increase was partially offset by raw material costincreases, particularly from the impact of higher average costs of copper inour Timber Treatment Chemicals business in the Performance Additives segment,higher costs for zinc in the Titanium Dioxide Pigments segment, higher zinc andphosphoric acid costs in the Specialty Chemicals segment and PVC resin and AOMcost increases in the Specialty Compounds segment. In addition, higher energycosts partially offset the increase in gross profit.

Gross profit as apercentage of net sales was 29.9% in the third quarter of 2006 versus 30.3% inthe third quarter of 2005 primarily due to the raw material and energy costincreases noted above.

##### **Selling, general and administrative expenses**

Selling, generaland administrative expenses, or SG&A, increased $15.7 million primarily dueto higher selling costs due to higher sales, higher Corporate costs to meet therequirements of being a public equity company including external and internalaudit costs of Section 404 of Sarbanes-Oxley, fees relating to theimplementation of a new consolidation software system, higher incentivecompensation and the impact of currency changes ($4.0 million).  SG&A expenses as a percentage of netsales were 19.3% in the third quarter of 2006 as compared to 18.6% for thethird quarter of 2005.

##### **Restructuring charge, net**

We recorded $1.7million of restructuring charges in the third quarter of 2006 for miscellaneousrestructuring actions in the Performance Additives, Electronics, SpecialtyChemicals and Advanced Ceramics segments for miscellaneous headcount reductionsand facility closures. We recorded $2.9 million of restructuring charges in thethird quarter of 2005 for miscellaneous restructuring actions, primarily in thePerformance Additives segment for the announced closure of the Baulking, UnitedKingdom facility in the Clay-based Additives business and in the SpecialtyChemicals and Advanced Ceramics segments for miscellaneous headcount reductions(See Note 14, “Restructuring Liability,” for further detail).

##### **Management services agreement termination fee**

In connection withthe IPO, we recorded an expense of $10.0 million in the third quarter of 2005to terminate the management services agreement with affiliates of KKR and DLJMB.

##### **Operating income**

*SpecialtyChemicals*.  Operating income for our Specialty Chemicalssegment increased $6.1 million primarily due to higher sales in both theSurface Treatment and Fine Chemicals businesses and the positive impact ofcurrency changes of $0.6 million.  Thisincrease was partially offset by higher raw material costs of $5.2 millionrelated to zinc and phosphoric acid cost increases and increased depreciationand amortization costs of $1.9 million.

*PerformanceAdditives*.  Operating income decreased $9.0 millionover the prior year period primarily from higher raw material costs of $9.3million, particularly copper costs in the Timber Treatment Chemicals businesswhich have been significantly higher, increased depreciation and amortization costsof $3.9 million primarily related to the acquisition of the Süd-Chemiebusinesses on December 30, 2005 and higher energy costs of $1.2million.  Lower volumes in Europe in ourColor Pigments and Services business and lower volumes of ACQ products in ourTimber Treatment Chemicals business also had a negative impact on results.  The above decreases in operating income werepartially offset by increased sales in other businesses and decreasedrestructuring costs of $1.2 million.

*TitaniumDioxide Pigments*.  Operating income for ourTitanium Dioxide Pigments segment increased $1.0 million versus the prior yearperiod primarily due to cost reductions, higher selling prices from ourfunctional additives products and the positive impact of currency changes of$0.5 million. This increase was partially offset by higher energy costs of $3.0million for natural gas and electricity, higher raw material costs of $1.3million and higher depreciation and amortization costs of $0.7 million.

*AdvancedCeramics*.  Operating income for our AdvancedCeramics segment increased $0.2 million from the prior year period.  The 

38

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positive impact ofcurrency changes of $0.8 million, productivity improvements and increased salesvolumes of mechanical and electronic applications were partially offset byselling price declines of $1.5 million primarily in Piezo and electronicapplications, higher depreciation and amortization costs of $0.9 million, lowervolumes of medical products and higher energy costs of $0.7 million.

*GroupeNovasep*.  Operating income increased $2.9 million overthe prior year period primarily due to losses incurred in the third quarter of2005 related to capacity utilization issues at the Rohner plant, which was soldin March 2006.

*SpecialtyCompounds*.  Operating income increased $0.8 million overthe prior year period primarily due to the impact of higher selling prices of$3.5 million and a favorable product mix. This increase was partially offset bylower sales volumes, higher PVC resin and AOM raw material costs of $2.7million, increased systems/organization establishment expenses of $0.3 millionand higher depreciation and amortization expenses of $0.5 million.

*Electronics*. Operating income increased $2.3 million primarily due to increased salesvolumes in our Electronic Chemicals business in all regions on sales to theprinted circuit board and semiconductor markets and lower depreciation andamortization costs of $0.5 million.  Inaddition, operating income benefited from previously announced restructuringsin the Wafer Reclaim business.  Thisincrease was partially offset by increased raw material costs of $0.9 million.

*Corporate*.  Operating loss at Corporate decreased $5.0 million primarily due to themanagement agreement termination fee of $10.0 million incurred in the thirdquarter of 2005.  This decrease waspartially offset by higher Corporate costs to meet the requirements of being apublic equity company including external and internal audit costs ofSection 404 of Sarbanes-Oxley, fees relating to the implementation of anew consolidation software system, as well as higher incentive compensation.

**Otherincome (expenses)**

*Interestexpense, net*.  Interest expense, net, increased$5.4 million in the third quarter of 2006 compared to the same period in 2005.The third quarter of 2006 and 2005 included losses of $9.1 million and gains of$6.4 million, respectively, representing the movement in the mark-to-marketvaluation of our interest rate and cross-currency hedging instruments as wellas $2.5 million and $2.7 million, respectively, of amortization expense relatedto deferred financing costs.  Cashinterest expense in the third quarter of 2006 and 2005 was $49.2 million and$59.1 million, respectively.  Thedecrease in cash interest expense of $9.9 million was primarily due to lowerinterest expense related to debt repaid with IPO proceeds.

*Losson early extinguishment of debt*.  In the thirdquarter of 2005, we paid redemption premiums of $13.2 million to redeem debtand wrote off $13.4 million of deferred financing costs associated with thedebt repaid in connection with the IPO.

*Foreignexchange gain, net*.  In the third quarter of 2006, wehad foreign exchange gains of $4.8 million compared to foreign exchange gainsof $2.1 million recorded in the third quarter of 2005.

##### **Provision for income taxes**

The effectiveincome tax rate for the third quarter of 2006 was 40.8% which is primarily afunction of foreign and domestic earnings and their impact on the effectiverate.  An income tax provision of $12.4million was recorded in the third quarter of 2006 on pre-tax income of $30.4million. The worldwide valuation allowance increased by $3.2 million in thethird quarter of 2006.  The increase wasprimarily due to an increase of $5.1 million in deferred tax assets associatedwith the Company’s losses in the U.S. partially offset by a reduction of $1.9million in other comprehensive income. The $5.1 million increase in the valuation allowance impacted theeffective tax rate.  We recorded anincome tax provision of $10.8 million in the third quarter of 2005 on a pre-taxloss of $3.1 million. Included in the tax provision in the third quarter of2005 was the recording of a valuation allowance of $8.3 million on deferred taxassets for U.S. net operating loss carry-forwards. In accordance with ouraccounting policy as described in Note 1, “Description of Business and Summaryof Significant Accounting Policies,” we recorded a full valuation allowance onthe net deferred tax assets in the U.S.

##### **Minority interest**

Minority interestrepresents the minority interest portion of the Groupe Novasep segment netincome and net loss in the three months ended September 30, 2006 and 2005,respectively.  Minority interest for thethree months ended September 30, 2006 includes minority interest income ofapproximately $3.3 million ($5.5 million before taxes) related to thesettlement of a guarantee associated with the Rohner sale (See Note 13, “Saleof Rohner AG,” for further detail).

##### **Net income (loss)**

Net income for thethird quarter of 2006 was $21.4 million as compared to a net loss of $13.3million for the third quarter of 2005 for 

39

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the reasonsdescribed above.

##### **Adjusted EBITDA**

*SpecialtyChemicals*.   Adjusted EBITDA for our SpecialtyChemicals segment increased $8.2 million over the prior year period due tohigher sales in both the Surface Treatment and Fine Chemicals businesses andthe positive impact of currency changes of $1.0 million. This increase waspartially offset by higher raw material costs of $5.2 million related to zincand phosphoric acid cost increases.

*PerformanceAdditives*.   Adjusted EBITDA for our PerformanceAdditives segment decreased $5.6 million over the prior year period primarilyfrom higher raw material costs of $9.3 million, particularly from continuedhigher copper costs in the Timber Treatment Chemicals business and higherenergy costs of $1.2 million. Lower European volumes in our Color Pigments andServices business and lower volumes of ACQ products in our Timber TreatmentChemicals business had a negative impact on results.  The above decreases were partially offset byincreased sales in other businesses.

*TitaniumDioxide Pigments*.   Adjusted EBITDA for ourTitanium Dioxide Pigments segment increased $1.7 million over the prior yearperiod primarily due to cost reductions and higher selling prices from ourfunctional additives products and the positive impact of currency changes of$1.1 million.  This increase waspartially offset by higher raw material costs of $1.3 million as well as higherenergy costs of $3.0 million for natural gas and electricity.

*AdvancedCeramics*.   Adjusted EBITDA for our AdvancedCeramics segment increased $1.3 million over the prior year period primarilydue to the positive impact of currency changes of $1.1 million.  Productivity improvements and increased salesvolumes of mechanical and electronic applications were partially offset byselling price declines of $1.5 million primarily in Piezo and electronicapplications, lower volumes of medical products and higher energy costs of $0.7million.

*GroupeNovasep*.   Adjusted EBITDA for our Groupe Novasepsegment increased $1.6 million over the prior year period primarily due tolosses incurred in the third quarter of 2005 related to capacity utilizationissues at the Rohner plant, which was sold in March 2006. Favorable currencychanges of $0.5 million had a positive impact on Adjusted EBITDA.

*SpecialtyCompounds*.   Adjusted EBITDA for our SpecialtyCompounds segment increased $1.6 million over the prior year period primarilydue to the impact of higher selling prices of $3.5 million and a favorableproduct mix, partially offset by higher PVC resin and AOM raw material costs of$2.7 million. This increase was partially offset by lower sales volumes.

*Electronics*.  Adjusted EBITDA for our Electronics segment increased $1.9 million primarilydue to increased sales volumes in our Electronic Chemicals business in allregions on sales to the printed circuit board and semiconductor markets.  In addition, Adjusted EBITDA benefited frompreviously announced restructurings in the Wafer Reclaim business.  This increase was partially offset byincreased raw material costs of $0.9 million.

*Corporate*.  Adjusted EBITDA loss at Corporate increased $3.1 million primarily due tohigher Corporate costs to meet the requirements of being a public equitycompany including external and internal audit costs of Section 404 ofSarbanes-Oxley, fees relating to the implementation of a new consolidationsoftware system, as well as higher incentive compensation.

***Nine months ended September 30, 2006 compared to nine monthsended September 30, 2005***

##### **Overview**

Net salesincreased $136.6 million in the first nine months of 2006 compared with thesame period in the prior year as a result of general strong demand, higherselling prices and the favorable impact of the acquisition of the Süd-Chemiebusinesses on December 30, 2005. This increase was partially offset by thenegative impact of currency changes ($26.0 million) primarily due to theweakening of the euro against the U.S. dollar for the nine month period endedSeptember 30, 2006 compared to the same period in 2005. See further discussionby segment below.

Operating incomeincreased $31.3 million in the first nine months of 2006 compared with the sameperiod in the prior year primarily in the Specialty Chemicals, Groupe Novasepand Electronics segments on higher sales and the management services agreementtermination fee of $10.0 million recorded in the third quarter of 2005. Thisincrease was partially offset by higher raw material and energy costs.

Adjusted EBITDAincreased $28.8 million in the first nine months of 2006 compared with the sameperiod in the prior year primarily due to the impact of the sales increasesnoted above, partially offset by higher raw material and energy costs and thenegative impact of currency changes ($5.3 million).

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Net incomedecreased $15.1 million in the first nine months of 2006 compared with the sameperiod in the prior year primarily due to a decrease in foreign currency gainsreflecting the non-cash currency impact on our euro-denominated debt and higherraw material and energy costs. This was partially offset by increased net salesand the favorable tax treatment on the Rohner AG sale. In October 2005, wedesignated the majority of our euro-denominated debt as a net investment hedgewhereby foreign exchange gains and losses are now recorded in accumulated othercomprehensive income within stockholders’ equity for as long as the hedgeremains effective.  Net income for thenine months ended September 30, 2005 also included the loss on earlyextinguishment of debt and the management services agreement termination fee of$26.6 million and $10.0 million, respectively.

##### **Net sales**

*SpecialtyChemicals*.  Net sales for our Specialty Chemicalssegment increased $43.3 million over the prior year period, primarily on highervolumes and selling prices ($7.9 million) in the Surface Treatment business andhigher selling prices ($14.0 million) in the Fine Chemicals business. Net salesin the Surface Treatment business were favorably impacted by growth in allmarkets, particularly in general industrial and steel applications. In the FineChemicals business, strong demand for lithium applications, particularly salesof butyllithium, specialty products to the pharmaceutical industry and lithiumbattery products, continued to have a favorable impact on sales. Unfavorableweather conditions at our lithium ponds in Chile in early 2006 had a negativeimpact on sales.  The increase in saleswas partially offset by the negative impact of currency changes of $9.0million.

*PerformanceAdditives*.  Net sales for our Performance Additivessegment increased $67.4 million over the prior year period primarily due tohigher volumes and selling prices, partially offset by the negative impact ofcurrency changes of $2.1 million. Volumes were up primarily in the Clay-basedAdditives and Water Treatment Chemicals businesses. In the Clay-based Additivesbusiness, volumes were up on increased sales to the carbonless paper andrheological additives markets primarily from the acquisition of the Süd-Chemiebusinesses on December 30, 2005 and increased coatings and inks andoilfield sales. In the Water Treatment Chemicals business, volumes were higheron increased sales of pool and spa chemical products and surface waterproducts.  Higher selling prices of $14.1million were reported in all businesses, particularly the Color Pigments andServices and Clay-based Additives businesses to offset higher raw material andenergy costs.  Lower volumes in Europe inour Color Pigments and Services business and lower volumes of ACQ products inour Timber Treatment Chemicals business had a negative impact on sales yearover year.

*TitaniumDioxide Pigments*.  Net sales for our Titanium DioxidePigments segment increased $10.1 million over the prior year period. Theincrease was primarily due to increased volumes and higher selling prices ofour titanium dioxide products in anatase grade, increased selling prices of ourtitanium dioxide products in rutile grade, as well as volume and priceincreases in our functional additives products. The increase in sales waspartially offset by the negative impact of currency changes of $5.6 million.

*AdvancedCeramics*.  Net sales for our Advanced Ceramicssegment increased $2.7 million over the prior year period. The increase was dueto increased sales in most businesses, particularly from increased volumes ofmechanical systems and mechanical, electronic and cutting toolapplications.  This increase waspartially offset by lower volumes of medical products and selling pricedeclines of $3.8 million primarily in Piezo and electronic applications and thenegative impact of currency changes of $3.5 million.

*GroupeNovasep*.  Net sales for our Groupe Novasep segmentdecreased $19.9 million over the prior year period primarily due to the sale ofRohner AG in March 2006 and the negative impact of currency changes of$4.8 million.

*SpecialtyCompounds*.  Net sales for our Specialty Compoundssegment increased $13.6 million over the prior year period primarily due to theimpact of higher selling prices of $11.8 million to offset higher raw materialcosts and a favorable product mix, partially offset by lower sales volumes.Lower volumes of wire and cable, automotive and footwear products werepartially offset by stronger sales volumes of our medical applicationsproducts.

*Electronics*. Net sales for our Electronics segment increased $19.4 million over the prioryear period primarily due to higher volumes in our Electronic Chemicals andPhotomasks businesses in all regions on sales to the printed circuit board andsemiconductor markets. This increase was partially offset by lower volumes inthe Wafer Reclaim business primarily due to the closure of our U.K. facility inJanuary 2006 and the closure of one of our U.S. facilities in March 2006 andthe negative impact of currency changes of $1.2 million.

##### **Gross profit**

Gross profitincreased $43.8 million over the prior year period primarily due to the salesincreases noted above. This was partially offset by raw material costincreases, particularly from the impact of record high copper costs in ourTimber Treatment Chemicals business in the Performance Additives segment,higher zinc and slag costs in the Titanium Dioxide segment, PVC resin and AOM costincreases in the Specialty Compounds segment and higher zinc and phosphoricacid costs in the Specialty Chemicals segment. In addition, higher energy costsand the impact of currency changes ($8.6 million) partially offset the increase in gross profit.

Gross profit as apercentage of net sales was 30.7% in the first nine months of 2006 versus 30.6%in the first nine months of 2005 due 

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to the reasonsnoted above.

##### **Selling, general and administrative expenses**

Selling, generaland administrative expenses, or SG&A, increased $27.3 million primarily dueto higher Corporate costs to meet the requirements of being a public equitycompany including external and internal audit costs of Section 404 ofSarbanes-Oxley, fees relating to the implementation of a new consolidationsoftware system, as well as higher incentive compensation. In addition, higherSG&A costs in a number of our segments were related to increased salesvolumes. The impact of currency changes decreased SG&A by $5.3 million overthe prior year. SG&A expenses as a percentage of net sales were 19.2% inthe first nine months of 2006 as compared to 19.1% for the first nine months of2005.

##### **Restructuring charge, net**

We recorded $3.9million of restructuring charges in the first nine months of 2006 for miscellaneousrestructuring actions in the Electronics, Performance Additives, SpecialtyChemicals and Advanced Ceramics segments for miscellaneous headcount reductionsand facility closures. We recorded $8.7 million of restructuring charges in thefirst nine months of 2005 for miscellaneous restructuring actions in thePerformance Additives segment for the announced closure of the Baulking, UnitedKingdom facility in the Clay-based Additives business, in the SpecialtyChemicals segment for miscellaneous headcount reductions and in the Electronicssegment relating to the wafer reclaim restructuring (See Note 14, “RestructuringLiability,” for further detail). In addition, inventory writedowns of $0.5million were recorded in cost of products sold in the second quarter of 2005related to the restructuring of the Wafer Reclaim business in our Electronicssegment.

##### **Management Services Agreement Termination Fee**

In connection withthe IPO, we recorded an expense of $10.0 million in the third quarter of 2005to terminate the management services agreement with affiliates of KKR andDLJMB.

##### **Operating income**

*SpecialtyChemicals*.  Operating income for our Specialty Chemicalssegment increased $16.7 million primarily due to higher sales in both theSurface Treatment and Fine Chemicals businesses and lower restructuring costsof $0.5 million. This increase was partially offset by higher selling, generaland administrative expenses of $8.2 million primarily related to the increasedsales volumes, higher raw material costs of $7.9 million primarily related tozinc and phosphoric acid, higher energy costs of $1.2 million and the negativeimpact of currency changes of $1.6 million. In addition, operating earnings in 2005 benefited from a receipt of $1.9million related to a customer contract termination.

*PerformanceAdditives*.  Operating income decreased $15.5million over the prior year period primarily from higher raw material costs of$27.0 million, particularly copper costs in the Timber Treatment Chemicalsbusiness that have been at record highs and higher energy costs of $5.6million.  Lower European constructionvolumes in our Color Pigments and Services business, lower volumes of ACQproducts in our Timber Treatment Chemicals business and higher depreciation andamortization costs of $7.5 million primarily related to the acquisition of theSüd-Chemie businesses on December 30, 2005 also had an unfavorable impacton operating income. The above decreases in operating income were partiallyoffset by increased sales and lower restructuring costs of $3.6 million.

*TitaniumDioxide Pigments*.  Operating income for ourTitanium Dioxide Pigments segment increased $1.1 million over the prior yearperiod due to increased volumes and higher selling prices of our titaniumdioxide products in anatase grade, increased selling prices of our titaniumdioxide products in rutile grade, as well as volume and price increases in ourfunctional additives products.  Thisincrease was partially offset by increased energy costs of $6.9 million fornatural gas and electricity, higher raw material costs of $5.8 million relatedto cost increases for zinc and slag as well as the negative impact of currencychanges of $0.6 million.

*AdvancedCeramics*.  Operating income for our AdvancedCeramics segment increased $1.4 million over the prior year period primarilydue to productivity improvements and increased sales in most businesses,particularly from increased volumes of mechanical systems and mechanical,electronic and cutting tool applications. This increase was partially offset by lower volumes of medical productsand selling price declines of $3.8 million primarily in Piezo and electronicapplications, higher energy costs of $2.0 million, increased depreciation andamortization costs of $2.5 million and the negative impact of currency changesof $0.6 million.

*GroupeNovasep*.  Operating income increased $20.5 million overthe prior year period primarily due to losses incurred in the first nine monthsof 2005 related to capacity utilization issues at the Rohner plant, which wassold in March 2006. Lower depreciation and amortization costs of $2.8 millionhad a positive impact on operating income. This increase was partially offset by the pre-tax loss of $12.1 millionrelated to the sale of Rohner AG in March 2006 (see Note 13, “Sale of RohnerAG,” for further detail).

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*SpecialtyCompounds*.  Operating income increased $0.6 millionprimarily due to the impact of higher selling prices of $11.8 million to offsethigher raw material costs and a favorable product mix.  This increase was partially offset by higherPVC resin and AOM raw material costs of $9.5 million, increased depreciationand amortization costs of $1.9 million, higher energy costs of $0.8 million andlower sales volumes.

*Electronics*. Operating income increased $8.6 million over the prior year period primarilydue to higher volumes in our Electronic Chemicals and Photomasks businesses inall regions on sales to the printed circuit board and semiconductor markets.Lower restructuring costs of $1.0 million also had a favorable impact onoperating income. This increase was partially offset by increased selling,general and administrative expenses of $2.1 million related to increasedvolumes.

*Corporate*.  Operating loss at Corporate decreased $2.1 million primarily due to themanagement termination agreement termination fee of $10.0 million incurred inthe third quarter of 2005.  This decreasewas partially offset by higher Corporate costs to meet the requirements ofbeing a public equity company including external and internal audit costs ofSection 404 of Sarbanes-Oxley, fees relating to the implementation of anew consolidation software system, as well as higher incentive compensation.

**Otherincome (expenses)**

*Interestexpense, net*.  Interest expense, net, decreased$29.9 million in the first nine months of 2006 compared to the same period in2005. The first nine months of 2006 and 2005 included gains of $6.4 million and$12.6 million, respectively, representing the movement in the mark-to-marketvaluation of our interest rate and cross-currency hedging instruments as wellas $7.2 million and $8.3 million, respectively, of amortization expense relatedto deferred financing costs.  Theremaining change of $35.0 million was primarily due to lower interest expenserelated to debt repaid with IPO proceeds.

*Losson early extinguishment of debt*.  In the thirdquarter of 2005, we paid redemption premiums of $13.2 million to redeem debtand wrote off $13.4 million of deferred financing costs associated with the debtrepaid in connection with the IPO.

*Foreignexchange gain, net*.  In the first nine months of 2006,we had foreign exchange gains of $7.7 million compared to foreign exchangegains of $116.1 million recorded in the first nine months of 2005. In the ninemonths ended September 30, 2005, foreign exchange gains were recordedreflecting the non-cash currency impact on our euro-denominated debt on ourU.S. and U.K. subsidiaries balance sheets due to the weaker euro at September30, 2005 versus December 31, 2004. On October 1, 2005, we designated themajority of this debt as a net investment hedge (the euro-denominated debt thatis recorded on our U.S. subsidiaries’ balance sheet of €684.3 million or $867.3million using the September 30, 2006 exchange rate of €1.00 = $1.2674). As aresult, foreign currency gains and losses resulting from changes in the U.S.dollar to the euro are now recorded in accumulated other comprehensive incomewithin stockholders’ equity and are not reported in the statement of operationsfor as long as the hedge remains effective. We also have €161.9 million (or$205.2 million using the September 30, 2006 exchange rate of €1.00 = $1.2674)of euro-denominated debt on our U.K. subsidiaries’ balance sheet at September30, 2006 that is not designated as a net investment hedge.

*Loss onsale of business. *Inconnection with the sale of Rohner AG in March 2006, the Company recorded apre-tax loss of $12.1 million for the nine months ended September 30, 2006 (seeNote 13, “Sale of Rohner AG,” for further detail).

*Other,net*.  For the nine months ended September 30, 2006, werecorded $2.7 million of income primarily related to the correction of animmaterial error related to a previously unrecorded asset in the TitaniumDioxide segment ($1.6 million) and gains related to asset sales ($0.7 million).

##### **Provision for income taxes**

The effectiveincome tax rate for the first nine months of 2006 and 2005 was 25.8% and 32.1%,respectively. The 2006 rate included a tax benefit of $21.8 million related tothe favorable tax treatment on the sale of Rohner AG. The effective tax rate inthe first nine months of 2005 was favorably impacted by the reversal of $20.3million of valuation allowances related to U.S. federal income generated.

##### **Minority interest**

Minority interestrepresents the minority interest portion of the Groupe Novasep segment netincome and net loss in the nine months ended September 30, 2006 and 2005,respectively.  Minority interest for thenine months ended September 30, 2006 includes minority interest income ofapproximately $3.3 million ($5.5 million before taxes) related to thesettlement of a guarantee associated with Rohner (See Note 13, “Sale of RohnerAG,” for further detail).

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##### **Net income**

Net income for thefirst nine months of 2006 was $98.5 million as compared to net income of $113.6million for the first nine months of 2005 for the reasons described above.

##### **Adjusted EBITDA**

*SpecialtyChemicals*.   Adjusted EBITDA for our SpecialtyChemicals segment increased $17.9 million over the prior year period primarilydue to higher sales in both the Surface Treatment and Fine Chemicalsbusinesses. This increase was partially offset by higher selling, general andadministrative expenses of $8.2 million primarily related to the increasedsales volumes, higher raw material costs of $7.9 million primarily related tozinc and phosphoric acid, higher energy costs of $1.2 million and the negativeimpact of currency changes of $2.0 million. In addition, operating earnings in 2005 benefited from a receipt of $1.9million related to a customer contract termination.

*PerformanceAdditives*.   Adjusted EBITDA for our PerformanceAdditives segment decreased $10.9 million over the prior year period primarilyfrom higher raw material costs of $27.0 million, particularly copper costs inthe Timber Treatment Chemicals business that have been at record highs andhigher energy costs of $5.6 million. Lower construction volumes in our Color Pigments and Services businessin Europe and lower volumes of ACQ products in our Timber Treatment Chemicalsbusiness also had an unfavorable impact on results. The decrease in AdjustedEBITDA was partially offset by increased sales.

*TitaniumDioxide Pigments*.   Adjusted EBITDA for ourTitanium Dioxide Pigments segment increased $1.4 million over the prior yearperiod due to increased volumes and higher selling prices of our titaniumdioxide products in anatase grade, increased selling prices of our titaniumdioxide products in rutile grade, as well as volume and price increases in ourfunctional additives products.  Thisincrease was partially offset by increased energy costs of $6.9 million fornatural gas and electricity, higher raw material costs of $5.8 million relatedto cost increases for zinc and slag and the negative impact of currency changesof $0.9 million.

*AdvancedCeramics*.   Adjusted EBITDA for our AdvancedCeramics segment increased $5.0 million over the prior year period primarilydue to productivity improvements and increased sales in most businesses,particularly from increased volumes of mechanical systems and mechanical,electronic and cutting tool applications. This increase was partially offset by lower volumes of medical productsand selling price declines of $3.8 million primarily in Piezo and electronicapplications, higher energy costs of $2.0 million and the negative impact ofcurrency changes of $0.9 million.

*GroupeNovasep*.   Adjusted EBITDA for our Groupe Novasepsegment increased $14.3 million over the prior year period primarily due tolosses in the first nine months of 2005 related to capacity utilization issuesat the Rohner plant.  This increase waspartially offset by the impact of currency changes ($1.0 million).

*SpecialtyCompounds*.   Adjusted EBITDA for our SpecialtyCompounds segment increased $2.8 million due to the impact of higher sellingprices of $11.8 million to offset higher raw material costs and a favorableproduct mix. This increase was partially offset by higher PVC resin and AOM rawmaterial costs of $9.5 million, higher energy costs of $0.8 million and lowersales volumes.

*Electronics*.  Adjusted EBITDA for our Electronics segment increased $7.4 million primarilydue to higher volumes in our Electronic Chemicals and Photomasks businesses inall regions on sales to the printed circuit board and semiconductormarkets.  This increase was partiallyoffset by increased selling, general and administrative expenses of $2.1million related to increased volumes.

*Corporate*.  Adjusted EBITDA loss at Corporate increased $9.1 million primarily due tohigher Corporate costs to meet the requirements of being a public equitycompany including external and internal audit costs of Section 404 ofSarbanes-Oxley, fees relating to the implementation of a new consolidationsoftware system, as well as higher incentive compensation.

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

Because we viewAdjusted EBITDA 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)**                      | ** ** | **2006**                                                 | ** ** | **2005**                                                | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net income  (loss)                                 |       | $                                                        | 21.4       |                                                    | $          | (13.3 | ) | $ | 98.5 |   | $ | 113.6 |   |
| Income tax  provision                              |       | 12.4                                                     |       | 10.8                                                    |       | 34.5 |   | 52.5 |   |
| Minority  interest                                 |       | (3.4                                                     | )          | (0.6                                                    | )          | 0.8 |   | (2.3 | ) |
| Income (loss)  before taxes and minority interest  |       | 30.4                                                     |       | (3.1                                                    | )          | 133.8 |   | 163.8 |   |
| Interest  expense, net (a)                         |       | 60.8                                                     |       | 55.4                                                    |       | 147.7 |   | 177.6 |   |
| Depreciation and  amortization                     |       | 56.1                                                     |       | 49.5                                                    |       | 165.2 |   | 154.7 |   |
| Restructuring  and related charges (b)             |       | 1.7                                                      |       | 2.9                                                     |       | 3.9 |   | 9.2 |   |
| CCA litigation  defense costs                      |       | 0.3                                                      |       | (0.1                                                    | )          | 0.8 |   | 1.4 |   |
| Systems/organization  establishment expenses       |       | 3.2                                                      |       | 1.4                                                     |       | 7.3 |   | 3.3 |   |
| Cancelled  acquisition and disposal costs          |       | 0.4                                                      |       | —                                                  |       | 1.3 |   | 0.6 |   |
| Inventory  write-up reversal                       |       | —                                                   |       | —                                                  |       | 0.9 |   | 3.1 |   |
| Management  services agreement termination fee (c) |       | —                                                   |       | 10.0                                                    |       | — |   | 10.0 |   |
| Loss on early  extinguishment of debt (c)          |       | —                                                   |       | 26.6                                                    |       | — |   | 26.6 |   |
| Gains related to  asset sales                      |       | —                                                   |       | —                                                  |       | (0.7 | ) | — |   |
| Loss on sale of  business                          |       | —                                                   |       | —                                                  |       | 12.1 |   | — |   |
| Foreign exchange  gain, net                        |       | (4.8                                                     | )          | (2.1                                                    | )          | (7.7 | ) | (116.1 | ) |
| Other                                              |       | (0.5                                                     | )          | (0.5                                                    | )          | (2.1 | ) | (0.5 | ) |
| Total Adjusted EBITDA                              |       | $                                                        | 147.6      |                                                    | $          | 140.0 |   | $ | 462.5 |   | $ | 433.7 |   |

 

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(a)     Includes losses of $9.1 million and gainsof $6.4 million for the three months ended September 30, 2006 and 2005,respectively, and gains of $6.4 million and $12.6 million for the nine monthsended September 30, 2006 and 2005, respectively, representing the movement inthe mark-to-market valuation of the Company’s interest rate and cross-currencyhedging instruments.

(b)     Includes inventory writedowns of $0.5million recorded in cost of products sold in the nine months ended September 30,2005.

(c)     In connection with the IPO in August 2005,the management services agreement with the affiliates of KKR and DLJMB wasterminated for $10.0 million. In addition, a redemption premium of $13.2million was incurred in connection with the repayment of long-term debt anddeferred financing costs of $13.4 million were written off.

**Liquidityand Capital Resources**

**CashFlows**

*Unlessotherwise noted, all amounts below which are denominated in currencies otherthan the U.S. dollar are converted at September 30, 2006 exchange rates.*

*OperatingActivities*.   Net cash provided by operatingactivities was $246.7 million and $198.9 million for the nine months endedSeptember 30, 2006 and 2005, respectively. Net cash from operating activitiesincreased in 2006 primarily from lower interest expense and higher AdjustedEBITDA.

*InvestingActivities*.   Net cash used in investing activitieswas $155.8 million and $155.2 million for the nine months ended September30, 2006 and 2005, respectively. Investing activities for the nine months endedSeptember 30, 2006 and 2005 primarily was comprised of capital expenditures.Net cash used in investing activities for the nine months ended September 30,2006 was higher primarily due to an acquisition in the Advanced Ceramics segmentin the second quarter of 2006. This was partially offset by post closingpurchase price consideration paid in the nine months ended September 30, 2005related to the Dynamit Nobel Acquisition.

*FinancingActivities*.   Net cash used in financing activitieswas $120.7 million and $20.3 million for the nine months ended September 30,2006 and 2005, respectively. Net cash used in financing activities for the ninemonths ended September 30, 2006 and 2005 primarily represented scheduledpayments of long-term debt.   Financingactivities for the nine months ended September 30, 2005 

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included proceedsreceived from the IPO and the subsequent issuance of common stock, and therepayment of long-term debt and redeemable convertible preferred stock.

**Liquidity**

On August 22,2005, we completed an IPO of 23,469,387 shares of our common stock, whichincluded 3,061,224 shares issued and sold as a result of the underwriters’exercise of the over-allotment option. As a result, we received net proceeds ofapproximately $435.7 million (net of underwriting discounts and commissions andestimated offering expenses aggregating $33.6 million). For the three and ninemonths ended September 30, 2005, interest expense on the debt paid off with IPOproceeds was $9.3 million and $33.2 million, respectively.  Pre-tax charges related to the write-off ofdeferred financing costs associated with debt repaid with IPO proceeds wereapproximately $13.4 million.  This amountis reported in “loss on early extinguishment of debt” in the CondensedConsolidated Statement of Operations.

Our primary sourceof liquidity has been and will continue to be cash generated from operations ofour subsidiaries. Our primary liquidity requirements are working capital, debtservice, capital expenditures and acquisitions. Our debt service requirementsand other contractual obligations and commitments over the next several yearsare significant and are substantially higher than historical amounts. Webelieve that our currently available sources of liquidity will be sufficientfor these needs. Furthermore, any future major acquisitions, businesscombinations or similar transactions will likely require additional capitalresources. If our present operating performance and current market conditionscontinue, we believe that such resources will be available to us for certaintransactions. We would need access to alternative sources of liquidity forlarger acquisitions such as through additional borrowings, equity issuances orother sources. We may not have access to these sources of cash for a variety ofreasons. See Item 1A, “Risk Factors,” in our 2005 Form 10-K.

We believe thatbased on current and anticipated levels of operations and conditions in ourindustry and markets, cash flows from operations and borrowings available underour revolving credit facility will be adequate for 2006 and the foreseeablefuture to make required payments of principal and interest on our debt and fundour working capital and capital expenditure requirements. We are taking actionsto reduce overhead and excess or unprofitable manufacturing capacity, in partto improve our long-term liquidity. As noted in Item 2, “Management’sDiscussion and Analysis of Financial Condition and Results of Operations,” “General,”above, we are also applying the same initiatives used after the KKRAcquisition—reducing net working capital as a percentage of net sales throughimproved systems and manager incentives as well as implementation of stringentcontrols to help ensure that maintenance capital expenditures are appropriateand that expansion capital expenditures are in line with both capacity andmarket demands. We expect this to further improve our short and long-termliquidity. If our cash flow from operations and available borrowings under ourrevolving credit facility were to be insufficient to fund our currentlyexisting liquidity requirements, we may be forced to use other means availableto us, such as reduce or delay capital expenditures and seek additionalcapital. We may not have adequate capital for working capital, futureacquisitions, business combinations or similar transactions. Also, see Item 1A,“Risk Factors,” in our 2005 Form 10-K.

As of September30, 2006, we had actual total indebtedness of $2,814.9 million.

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

·                  tranche A-1 termloans in an aggregate principal amount of €35.2 million (or approximately$44.6 million at September 30, 2006) and tranche A-2 term loans in anaggregate principal amount of €153.4 million (or approximately $194.4 millionat September 30, 2006), each maturing on July 30, 2011 and bearinginterest at Adjusted EURIBOR plus 2.25%;

·                  tranche E termloans in an aggregate principal amount of $1,127.8 million at September 30,2006, maturing on July 30, 2012 and bearing interest at the Company’soption of either (i) Adjusted LIBOR plus 2.00% or (ii) ABR plus0.75%;

·                  tranche F termloans in an aggregate principal amount of €270.7 million (or approximately$343.1 million at September 30, 2006) maturing on July 30, 2012 andbearing interest of Adjusted LIBOR plus 2.75%; and

·                  a revolvingcredit facility in an aggregate principal amount of $250.0 millionmaturing on July 30, 2010, bearing interest at the Company’s option ofeither (i) Adjusted LIBOR plus 2.25% or (ii) ABR plus 1.00%. As ofSeptember 30, 2006, we had no borrowings outstanding under this facility andhad outstanding letters of credit of $25.9 million that reduced ouravailability under the credit facility. As of November 10, 2006, we had €15.0million ($19.3 million using the November 10, 2006 exchange rate of €1.00= $1.2841) outstanding under this facility.

The U.S. dollarequivalents of term loans denominated in euros are shown based on the exchangerate on September 30, 2006 of €1.00=$1.2674. In each case, the interest ratesper year are subject to step-downs determined by reference to a performancetest. 

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Adjusted LIBOR isthe London inter-bank offered rate adjusted for statutory reserves. ABR is thealternate base rate, which is the highest of Credit Suisse’s prime rate and thefederal funds effective rate plus 0.5%. Tranche A-1 and tranche A-2 term loansare payable in January and July of each year at escalatingpercentages of the original principal amount. Tranche E and tranche F termloans are payable in January and July of each year at amounts equalto 0.5% of the original principal amount of the former tranche C term loans andtranche D term loans, respectively, with the remainder due at the finalmaturity date.

The Company’sborrowings and the borrowings of Rockwood Specialties Limited under the seniorsecured credit facilities are guaranteed and secured by assets and pledges ofcapital 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; disposeof assets; make investments; pay dividends and make payments to shareholders;make payments on certain indebtedness or to amend documents related to certainindebtedness and to enter into sale leaseback transactions.

*2011Notes and 2014 Notes*.   The Company’s 2011 Noteshad an aggregate principal amount of $273.4 million at September 30, 2006, andmature on May 15, 2011 and the 2014 Notes have an aggregate principalamount of €375.0 million ($475.3 million) in the case of the Euro notes and$200.0 million in the case of the U.S. Dollar notes, and mature onNovember 15, 2014. In connection with the IPO, $101.6 million, or 27%, ofthe 2011 Notes were redeemed. Interest on both the 2011 Notes and 2014 Notes ispayable semi-annually on May 15 and November 15. Interest on the 2011Notes accrues at the rate of 10.625% per year, and interest on the 2014 Notesaccrues at the rate of 7.625% in the case of Euro notes and 7.500% in the caseof U.S. Dollar notes. Certain of our domestic subsidiaries guarantee the 2011Notes and 2014 Notes on a senior subordinated unsecured basis. The Company mayredeem the 2011 Notes in whole or in part, at a premium, which declinesannually through maturity.

The Company’s 2011Notes and 2014 Notes contain various affirmative and restrictive covenants. Therestrictive covenants limit our ability, and the ability of our restrictedsubsidiaries, to, among other things, incur or guarantee additionalindebtedness (as described below under “Covenant Compliance”); pay dividends ormake other equity distributions or repurchase capital stock (as described belowunder “Covenant Compliance”); make investments or other restricted payments (asdescribed below under “Covenant Compliance”); create liens; transfer or sellassets; restrict dividends or other payments to us; engage in transactions withaffiliates; and merge or consolidate with other companies or sell substantiallyall of our assets.

*Covenantcompliance*.   In addition to the affirmative andrestrictive covenants, the Company’s senior secured credit agreement containsthe following financial covenants that are determined based on our AdjustedEBITDA:

·                  a maximum totalleverage ratio: for the twelve-month period ended September 30, 2006, net debtto Adjusted EBITDA must be less than 6.00 to 1; for such period, our ratioequaled 4.53 to 1; and

·                  a minimuminterest coverage ratio: for the twelve-month period ended September 30, 2006,Adjusted EBITDA to cash interest expense (interest expense, net excludingdeferred debt issuance cost amortization and the movements in themark-to-market value of our interest rate and cross-currency interest ratederivatives) must be at least 1.75 to 1; for such period, our ratio equaled3.11 to 1.

These covenantsare material terms of the senior secured credit agreement. Non-compliance withthese covenants could result in a default under the senior secured creditagreement and the lenders could elect to declare all amounts borrowedimmediately due and payable. Any such acceleration would also result in adefault under the indentures governing the 2011 Notes and the 2014 Notes, whichcould lead to the note holders electing to declare the principal, premium, ifany, and interest on the then outstanding notes immediately due and payable.

The indenturesgoverning the 2011 Notes and 2014 Notes prohibit us from incurring additionaldebt, subject to certain permitted incurrences, unless the fixed chargecoverage ratio, which is the ratio of Adjusted EBITDA (as defined thereinexcluding certain adjustments permitted under the senior secured creditagreement) to fixed charges (as defined therein), for the most recently endedfour fiscal quarters is at least 2.00 to 1. In addition, the indenturesprohibit us from making restricted payments (such as dividends or other equitydistributions, repurchases of capital stock or restricted investments), subjectto certain permitted payments, unless, among other things, the fixed chargecoverage ratio for the most recently ended four fiscal quarters is at least2.00 to 1. For the four fiscal quarter period ending September 30, 2006, thefixed charge coverage ratio equaled 3.11 to 1. These covenants are materialterms of the indentures governing the 2011 Notes and 2014 Notes.

We were incompliance with all of the above covenants as of September 30, 2006 andDecember 31, 2005.

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Given our use ofAdjusted EBITDA (see “Special Note Regarding Non-GAAP Financial Measures” forthe definition of Adjusted EBITDA and management’s uses of Adjusted EBITDA) asa liquidity measure, the following table presents a reconciliation of net cashprovided by operating activities to Adjusted EBITDA:
|                                                                                                                        | ** ** | **Nine months ended September 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| **($ in millions)**                                                                                          | ** ** | **2006**                                                | ** ** | **2005** | ** ** |
| Net cash  provided by operating activities                                                                             |       | $                                                       | 246.7      |   | $ | 198.9 |   |
| Changes in  assets and liabilities, net of the effect of foreign currency translation and  acquisitions                |       | 33.2                                                    |       | 16.7 |   |
| Current portion  of income tax provision                                                                               |       | 24.2                                                    |       | 34.0 |   |
| Interest  expense, net, excluding amortization of deferred financing costs and  unrealized losses/gains on derivatives |       | 146.9                                                   |       | 157.8 |   |
| Restructuring  and related charges                                                                                     |       | 3.9                                                     |       | 9.2 |   |
| CCA litigation  defense costs                                                                                          |       | 0.8                                                     |       | 1.4 |   |
| Systems/organization  establishment expenses                                                                           |       | 7.3                                                     |       | 3.3 |   |
| Cancelled  acquisition and disposal costs                                                                              |       | 1.3                                                     |       | 0.6 |   |
| Inventory  write-up reversal                                                                                           |       | 0.9                                                     |       | 3.1 |   |
| Management  services agreement termination fee                                                                         |       | —                                                  |       | 10.0 |   |
| Bad debt  provision                                                                                                    |       | (0.6                                                    | )          | (0.8 | ) |
| Other                                                                                                                  |       | (2.1                                                    | )          | (0.5 | ) |
| Total Adjusted EBITDA                                                                                                  |       | $                                                       | 462.5      |   | $ | 433.7 |   |

 

*Assumeddebt*.   Certain of our subsidiaries acquired in theDynamit Nobel Acquisition are borrowers under nine euro-denominated term loanfacilities that provide aggregate outstanding borrowings of approximately €21.6million ($27.4 million) as of September 30, 2006. These term loans maturebetween 2008 and 2019 and bear annual interest rates ranging between 1.00% and5.47% or EURIBOR plus 1.45% or LIBOR plus 0.39%. In addition, certain of oursubsidiaries acquired in the Dynamit Nobel Acquisition are borrowers underthree term loan facilities denominated in other foreign currencies, includingTaiwanese Dollars, Chinese Renminbi and Japanese Yen, providing for borrowingsof an aggregate U.S. dollar equivalent amount of approximately $2.9 million asof September 30, 2006 ($33.9 million of these term loans were paid inJanuary 2006). These term loans mature in 2008 and bear annual interestrates ranging between 2.50% and 5.50%. The term loan facilities described abovecontain customary events of default and some of them are secured by mortgagesor accounts receivables.

Additionally,Groupe Novasep (including subsidiaries) has three tranches of bank debttotaling €8.7 million ($11.0 million) and $7.2 million($18.2 million in total), each with a maturity date of 2010 and interestrates of EURIBOR plus 1.75% in the case of two of the tranches, and LIBOR plus1.75% for the remaining tranche. In addition, there is additional indebtednessat the Groupe Novasep subsidiary level totaling €4.6 million($5.8 million) maturing in 2010 and interest rates of EURIBOR plus 1.25%.The remaining amount of assumed debt at the Groupe Novasep level of €15.0 million($19.1 million) consists of capital leases with maturity dates ranging from2006 to 2013.

“Assumed debt”includes certain capitalized lease obligations, a full recourse receivablesfactoring arrangement and subsidiary preferred stock in addition to thelong-term debt described in the preceding two paragraphs.

***Contractual Obligations***

The Company isobligated to make future payments under various contracts such as debtagreements (including scheduled cash interest payments), operating leaseagreements, and unconditional purchase obligations. A discussion of thesecontractual obligations is included in the Company’s 2005 Form 10-K. Therehave been no significant changes to these contractual obligations as ofSeptember 30, 2006.

***Capital Expenditures***

Rockwood’s capitalexpenditures in 2005 and the first nine months of 2006 consisted primarily ofreplacements of worn, obsolete or damaged equipment as well as investments innew equipment, mostly for our Advanced Ceramics, Specialty Chemicals, TitaniumDioxide Pigments and Groupe Novasep segments. Capital expenditures in ourAdvanced Ceramics segment primarily related to expanding our medical productsproduction facility. In our Specialty Chemicals segment, we made a significantinvestment in connection with Lithium production. Capital expendituresconsisted of expansion of current Good Manufacturing Practice production linesand new equipment relating to multi-column chromatography in our Groupe Novasepsegment.

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For the ninemonths ended September 30, 2006 and 2005, our capital expenditures on a cashbasis were $146.4 million and $139.3 million, respectively. Capitalexpenditures for each of our reporting segments is provided in the followingtable:
| ** **                                | ** ** | ** **    | ** ** | ** **      | ** ** | **Titanium** | ** ** | ** **   | ** ** | ** **  | ** ** | ** **    | ** ** | ** **      | ** ** | ** **    | ** ** | ** **       | ** ** |
|-------------------------------------------|------------|---------------|------------|-----------------|------------|--------------|------------|--------------|------------|-------------|------------|---------------|------------|-----------------|------------|---------------|------------|------------------|------------|
| ** **                                | ** ** | **Specialty** | ** ** | **Performance** | ** ** | **Dioxide**  | ** ** | **Advanced** | ** ** | **Groupe**  | ** ** | **Specialty** | ** ** | ** **      | ** ** | ** **    | ** ** | ** **       | ** ** |
| **($ in millions)**             | ** ** | **Chemicals** | ** ** | **Additives**   | ** ** | **Pigments** | ** ** | **Ceramics** | ** ** | **Novasep** | ** ** | **Compounds** | ** ** | **Electronics** | ** ** | **Corporate** | ** ** | **Consolidated** | ** ** |
| **Nine  months ended September 30, 2006** |       | $             | 34.3       |            | $          | 19.6         |       | $            | 24.5       |        | $          | 23.4          |       | $               | 27.2       |          | $          | 4.1              |       | $ | 5.0 |   | $ | 8.3 |   | $ | 146.4 |   |
| **Nine months ended September 30,  2005** |       | 24.7          |       | 16.5            |       | 24.5         |       | 36.2         |       | 25.1        |       | 3.0           |       | 3.0             |       | 6.3           |       | 139.3            |       |
|                                           |            |               |            |                 |            |              |            |              |            |             |            |               |            |                 |            |               |            |                  |            |  |  |  |  |  |  |  |  |  |

 

We may incurfuture costs for capital improvements and general compliance under Safety,Health and Environmental (“SHE”) laws. For the year ended December 31,2005, our capital expenditures for SHE matters totaled approximately $32.8million, excluding costs to maintain and repair pollution control equipment.For 2006, we estimate capital expenditures for compliance with SHE laws to beat similar levels; however, because capital expenditures for these matters aresubject to changes in and new SHE laws, we cannot provide assurance that ourrecent expenditures will be indicative of future amounts required to complywith these laws.

We are applyingour capital discipline and stringent controls to reduce our future capitalexpenditures as compared to historical levels for the acquired businesses ofDynamit Nobel. Our annual capital expenditures will increase in amount, but wedo not believe they will change significantly from current levels in proportionto the size of the combined entity or as a percentage of net sales.

***Foreign currency related transactions***

As of September30, 2006, $1,181.2 million of the debt outstanding is denominated in euros,excluding the impact of the cross-currency swaps that convert U.S. dollarfixed-rate debt into euro fixed-rate debt.

**Management and transaction fees**

KKR and DLJMerchant Banking III, Inc. previously provided us with consulting andmanagement advisory services for an aggregate annual fee of $2.1 million,increasing 5% annually. In connection with the IPO, the parties agreed toterminate the management services agreement with the affiliates of KKR andDLJMB for an aggregate consideration of $10.0 million.

##### **Off-Balance Sheet Arrangements**

None.

**CriticalAccounting Policies and Estimates**

The discussion andanalysis of our financial condition and results of operations are based uponour consolidated financial statements, which have been prepared in accordancewith U.S. GAAP. The preparation of these financial statements requires us tomake estimates and judgments that affect the reported amounts of assets,liabilities, revenues and expenses, and the related disclosure of contingentassets and liabilities. These estimates include assessing, among other things:

·                  thefair values of assets acquired and liabilities assumed in businesscombinations;

·                  theuse and recoverability of inventory;

·                  thevaluation of deferred tax assets;

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

·                  theuseful lives of tangible and intangible assets.

We evaluate ourestimates on 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 

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are described inthe “Management’s Discussion and Analysis of Financial Condition and Results ofOperations” section in the Company’s 2005 Form 10-K. There have been nosignificant changes to these critical accounting policies and estimates as ofSeptember 30, 2006.

##### **Commitments and Contingencies**

See Note 15, “Commitmentsand Contingencies,” for a discussion of the Company’s Commitments andContingencies.

##### **Acquisitions**

See Note 5, “Acquisitions,”for a discussion of the acquisition of the Süd-Chemiebusinesses on December 30, 2005.

**RecentAccounting Pronouncements**

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

**Forward-Looking Statements**

This document contains forward-looking statements.Forward-looking statements are not statements of historical fact and may involvea number of risks and uncertainties. Forward-looking statements give ourcurrent expectations or forecasts of future events and estimates of amounts notyet determinable. We have used the words “anticipate,” “estimate,” “expect,” “project,”“intend,” “plan,” “believe,” “predict,” “could,” “may” and other words andterms of similar meaning, including references to assumptions, in this reportto identify forward-looking statements. These forward-looking statements aremade based on expectations and beliefs concerning future events affecting usand are subject to uncertainties and factors relating to our operations andbusiness environment, all of which are difficult to predict and many of whichare beyond our control, that could cause our actual results to differmaterially from those expressed in or implied by these forward-lookingstatements. In particular, these factors include, among other things:

·                  ourbusiness strategy;

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

·                  fluctuationsin interest rates, exchange rates and currency values;

·                  availabilityand pricing of raw materials;

·                  fluctuationsin energy prices;

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

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

·                  technologicalchanges affecting production of our materials;

·                  ourhigh level of indebtedness;

·                  governmentaland environmental regulations and changes in those regulations;

·                  hazardsassociated with chemicals manufacturing;

·                  risksassociated with negotiating, consummating and integrating acquisitions;

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

·                  risksassociated with international sales and operations.

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

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information, futureevents or otherwise.

**Item 3.  Quantitativeand Qualitative Disclosures About Market Risk.**

We are exposed tomarket risk 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 andanalysis of the Company’s market risk is included in the Company’s 2005 Form10-K. There have been no significant changes to these market risks as ofSeptember 30, 2006.

**Item 4.  Controls and Procedures**

Our management,with the participation of our Chief Executive Officer and Chief FinancialOfficer, evaluated the effectiveness of the design and operation of ourdisclosure controls and procedures as of September 30, 2006.

Our disclosurecontrols and procedures are designed to ensure that (a) informationrequired to be disclosed in our reports under the Securities Exchange Act of1934 is recorded, processed, summarized and reported within the time periodsspecified in the SEC’s rules and forms and (b) such information isaccumulated and communicated to our management, including our Chief ExecutiveOfficer and Chief Financial Officer, to allow timely decisions regardingrequired disclosures.

As a result ofthis evaluation, our Chief Executive Officer and Chief Financial Officerconcluded that our disclosure controls and procedures were effective as ofSeptember 30, 2006.

Subsequent to theissuance of the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2005 and as part of the preparation of the Quarterly Reporton Form 10-Q for the three months ended March 31, 2006, the Companydetermined that its condensed consolidated statement of cash flows included inits Quarterly Reports on Form 10-Q for the quarterly periods endedMarch 31, 2005, June 30, 2005 and September 30, 2005 should berestated. The restatement, which has been made in this Quarterly Report on Form 10-Q,was due to a classification error in the statement of cash flows regarding thetreatment of acquisition costs of property, plant and equipment included inaccounts payable and accrued expenses and other liabilities. In accordance withSFAS No. 95,*Statement of Cash Flows*,these costs should be reported within cash flows from investing activities whenpaid. The Company was reporting capital expenditures in its condensedconsolidated statements of cash flows on an accrual basis rather than on a cashbasis, and as a result, was reporting capital expenditures in the period inwhich the Company acquired legal title to the related property, plant andequipment rather than when the Company actually paid for such property, plantand equipment. Further, the unpaid portion of the transaction should bedisclosed as a non-cash investing activity in the supplemental disclosure ofcash flow information. We also revised the reconciliation of net cash providedby operating activities to Adjusted EBITDA and the disclosures in the “Liquidityand Capital Resources” section of Item 2, “Management’s Discussion andAnalysis of Financial Condition and Results of Operations,” related to cashflows from operating and investing activities for these periods.

This restatementwas a result of a material weakness in internal control over financialreporting as the control over the proper classification of acquisition costs ofproperty, plant and equipment included in accounts payable and accrued expensesand other liabilities did not operate effectively during 2005. Subsequent tothe filing of the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2005, we enacted additional procedures in the preparation andreview of the consolidated statement of cash flows to properly capture this information.We believe that as of March 31, 2006 we had remediated this weakness.

We haveimplemented a new consolidation software system in the third quarter of 2006 tofurther improve the timeliness and accuracy of the consolidation process.  Among other things, this new systemsignificantly minimizes the amount of financial information being gatheredoutside the consolidation software system and significantly decreases theamount of manual calculations being performed. There have been no other significant changes in the Company’s internalcontrol over financial reporting during the period covered by this report thathave materially affected, or are reasonably likely to materially affect, theCompany’s internal control over financial reporting.

We are currentlyperforming the system and process evaluation of our internal controls overfinancial reporting in order to allow 

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management toreport on, and our independent auditors to attest to, our internal controlsover financial reporting, as required by Section 404 of the Sarbanes-OxleyAct of 2002, which we refer to as Section 404. The requirements ofSection 404 will initially apply to us in connection with our annualreport on Form 10-K for the year ended December 31, 2006. Inconnection with our preliminary evaluation, we have identified other areas ofinternal controls that we have improved or are currently improving, such as ourincome tax accounting function, internal controls related to the segregation ofduties at certain smaller locations, system access and user security profiles,operating policies and procedures and in each case particularly with respect tonewly acquired businesses.

The Company’sglobal tax department has been established and staffed at our corporateheadquarters and the tax software system that we implemented has significantlystrengthened the income tax accounting function.  During 2006, we have continued to implementand train our accounting personnel worldwide in our new income tax accountingsoftware system. Additionally, we have continued to improve the design,documentation and implementation of our controls to ensure that our employeesenhance their understanding and knowledge of the significant applicable taxmatters which affect the Company in an effort to further strengthen thefinancial reporting process related to income taxes.

We are currentlyperforming the testing necessary to permit the management certification andauditor attestation required to comply with Section 404 in 2006. As wecomplete the evaluation and testing required by Section 404, we mayidentify conditions that may be categorized as significant deficiencies ormaterial weaknesses in the future.

**PART II – OTHER INFORMATION**

**Item 1.  Legal Proceedings.**

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

**Item 1A. Risk Factors.**

A discussion ofthe Company’s risk factors is included in the Company’s 2005 Form 10-K.  There have been no significant changes tothese risk factors as of September 30, 2006.

**Item 2.  Unregistered Sales of Equity Securities and Useof Proceeds.**

None.

**Item 3.  Defaults upon Senior Securities.**

None.

**Item 4.  Submission of Matters to a Vote of SecurityHolders.**

None.

**Item 5.  Other Information.**

As discussed inNote 16, “Restatement,” the condensed consolidated statement of cash flows forthe nine months ended September 30, 2005 was restated as a result of aclassification error in the treatment of acquisition costs of property, plantand equipment.  The effects of thismatter on the consolidated financial statements as of and for the year endedDecember 31, 2005 are not material.

**Item 6.  Exhibits.**
| Exhibit No. | ** ** | **Description of Exhibit**                                                                                                                                                                                                                                                                                              |
|-------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |       |                                                                                                                                                                                                                                                                                                                    |
| 31.1        |       | Rule 13a-14(a)/15d-14(a) Certification of Chief  Executive Officer.                                                                                                                                                                                                                                                     |
|        |       |                                                                                                                                                                                                                                                                                                                    |
| 31.2        |       | Rule 13a-14(a)/15d-14(a) Certification of Chief  Financial Officer.                                                                                                                                                                                                                                                     |
|        |       |                                                                                                                                                                                                                                                                                                                    |
| 32.1        |       | Section 1350 Certification of Chief Executive  Officer. This certification accompanies this report pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed  filed by the Company for purposes of Section 18 or any other provision of the  Securities Exchange Act of 1934, as amended. |
|        |       |                                                                                                                                                                                                                                                                                                                    |
| 32.2        |       | Section 1350 Certification of Chief Financial  Officer. This certification accompanies this report pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed  filed by the Company for purposes of Section 18 or any other provision of the  Securities Exchange Act of 1934, as amended. |

 

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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 14, 2006 |
|   |   |                         |   |   |
|   |   |                         |   |   |
|   |   | ROCKWOOD HOLDINGS, INC. |
|   |   |                         |   |   |
|   |   |                         |   |   |
|   |   | By:                          | /s/ ROBERT J. ZATTA |   |
|   |   |                         | Robert J. Zatta   Senior Vice President and Chief Financial Officer  Date: November 14, 2006 |

 

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