I really have a hard time understanding the whole problem, the apparent dichotomy between grace and works that some people seem to have. The way I understand it, God gives us grace, which, when we cooperate with it, helps us to keep His commandments and do good works. But if we so choose, we can still reject that grace, because we still have free will. Being human beings, and having concupiscence, we are drawn towards sin, and we need God's grace to keep us from it. We can either cooperate with that grace, or choose not to cooperate with it...it's not like once we believe in Christ He overtakes us and puts us into auto drive or anything, I don't believe it's a like a switch that is flipped, I believe it's a process we cooperate with. But nor does the fact that we choose to cooperate or not with God's grace mean that we in any way earn our salvation, the grace is completely undeserved. The more we cooperate with God's grace, the more grace we receive, which in turn produces more good works, it produces in us those theological virtues of faith, hope, and charity....all we have to do is cooperate with the undeserved grace. If we don't cooperate with it, if we reject it, we fall from grace until we repent. I just don't get the dichotomy...grace and works are like two blades of a scissor.
Catholics believe in a thing called Sanctifying Grace. This is what we initially receive at baptism. Sanctifying Grace is what we believe resides in the soul and actually makes our souls holy. It gives the soul supernatural life, and actually it IS supernatural life. (There is also something called Actual Grace, which is kind of the kick in the pants that we get from God from time to time, to make us go and receive sanctifying grace through confession and through communion, etc...but Actual Grace doesn't reside in the soul.) This supernatural life is needed, we believe, to be able to exist in Heaven, because in Heaven we will be perfectly united with the source of all life, and we could not be perfectly united with Him if we were lacking supernatural life ourselves.
Now, Catholics believe this Sanctifying Grace is what gives us supernatural life, so that if we lose it, we lose supernatural life, and if we were to die without it, we could not enter Heaven. And what is it that causes us to lose Sanctifying Grace? Mortal sins, of course. Mortal sin kills that supernatural life within us.
What you also have to understand is that we believe this Sanctifying Grace truly cleanses us from our sins, it doesn't just cover them up. And so when we sin again, we are sullying our souls again, and they must be cleansed again. (Venial sins weaken us so that we may be more tempted to commit mortal sins, but they do not cause the Sanctifying Grace to leave our souls. Venial sins are cleansed by partaking in communion and praying for forgiveness, etc. Mortal sins have to be confessed to be cleansed.)
More on grace.
Another thing about grace as it relates to the creation covenant and original sin...I heard a great analogy once that explains how Catholics see it. We can say that our human nature is like a cup, and God's grace the liquid that fills the cup. God originally created the cup full of liquid, His grace. But the cup, having free will, at one point tipped over and poured that grace out by committing sin. This emptiness is what we call the state of original sin. Henceforth, each copy of the cup is made empty, and must be filled again by God's grace to be in a state of grace. This is initially done through baptism, which brings the cup into the covenant and pours grace into the cup...but the cup can still tip over and pour that grace out if it so chooses. To be refilled with grace (to be in the state of grace, as we call it) again when it does this it needs other sacraments (confession, communion, etc). Now Jesus was both human and divine, both cup and liquid, and so while grace (liquid) is something additional to our human (cup) nature, Christ was both equally cup and liquid.