Sanctified by Grace (Philippians 2:12,13 (LD 33; BC 24)

The Reformation really hangs on how one defines grace.  Salvation by grace alone is wonderful, but what do we do when Paul exhorts us to work out our salvation with fear and trembling?  How do we encounter such a God that causes us to be fearful and to tremble?  How is it that we are saved by grace, but yet we have to work out our salvation?  Do we rely on the Lord for our justification, but then really work hard to make sure that we conform to our justification?  Or does Paul mean something else by this exhortation that shows we are just taking this verse out of context?