UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

FORM 10-Q

ý

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the Quarterly Period Ended September 30, 2008ORo

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934Commission File Number 1-13953


W. R. GRACE & CO.

Delaware

65-0773649(State of Incorporation)

(I.R.S. Employer Identification No.)7500 Grace Drive
Columbia, Maryland 21044
(410) 531-4000(Address and phone number of principal executive offices)


Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes ý    No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer ý

Accelerated filer o

Non-accelerated filer o (Do not check if a smaller reporting company)

Smaller reporting company o


Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes o    No ý

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

Class

Outstanding at October 31, 2008Common Stock, $0.01 par value per share

72,157,518 shares




---





W. R. GRACE & CO. AND SUBSIDIARIES        Table of Contents

PagePart I.

Financial InformationItem 1.

Financial Statements


3Report of Independent Registered Public Accounting Firm


4Consolidated Statements of Operations


5Consolidated Statements of Cash Flows


6Consolidated Balance Sheets


7Consolidated Statements of Shareholders' Equity (Deficit)


8Consolidated Statements of Comprehensive Income (Loss)


8Notes to Consolidated Financial Statements


9Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations


49Item 3.

Quantitative and Qualitative Disclosures About Market Risk


72Item 4.

Controls and Procedures


72Part II.

Other InformationItem 1.

Legal Proceedings


73Item 1A.

Risk Factors


73Item 6.

Exhibits


74


---

Grace®, the Grace® logo and, except as otherwise indicated, the other trademarks in this Report are trademarks or registered trademarks of W. R.
Grace & Co.Conn. or its subsidiaries in the United States and/or other countries. OCR® is a registered trademark of Chevron Intellectual Property, LLC. As
used herein, ® indicates that a trademark is registered in the United States and/or other countries. Except as otherwise indicated, in this document the terms "Grace," "we," "us," "our" or
"the company" mean W. R. Grace & Co. and/or its consolidated subsidiaries and affiliates. Unless otherwise indicated, the contents of websites mentioned in this Report are not
incorporated by reference or otherwise made a part of this Report.

2

---





PART I. FINANCIAL INFORMATION

Item 1.    Financial Statements

Review by Independent Registered Public Accounting Firm

With respect to the interim consolidated financial statements included in this Quarterly Report on Form 10-Q for the
three months and nine months ended September 30, 2008 and 2007, PricewaterhouseCoopers LLP, the company's independent registered public accounting firm, has applied limited procedures in
accordance with professional standards for a review of such information. Their report on the interim consolidated financial statements, which follows, states that they did not audit and they do not
express an opinion on the unaudited interim financial statements. Accordingly, the degree of reliance on their report on the unaudited interim financial statements should be restricted in light of the
limited nature of the review procedures applied. This report is not considered a "report" within the meaning of Sections 7 and 11 of the Securities Act of 1933, and, therefore, the independent
accountants' liability under Section 11 does not extend to it.

3

---



Report of Independent Registered Public Accounting Firm

To the Shareholders and Board of Directors of W. R. Grace & Co.:

We have reviewed the accompanying consolidated balance sheet of W. R. Grace & Co. and its subsidiaries as of
September 30, 2008, and the related consolidated statements of operations, shareholders' equity (deficit), and comprehensive income (loss) for each of the three-month and nine-month
periods ended September 30, 2008 and September 30, 2007 and the consolidated statements of cash flows for the nine-month periods ended September 30, 2008 and
September 30, 2007. These interim financial statements are the responsibility of the Company's management.

We
conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally
of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we
do not express such an opinion.

Based
on our review, we are not aware of any material modifications that should be made to the accompanying interim consolidated financial statements for them to be in conformity with
accounting principles generally accepted in the United States of America.

The
accompanying interim consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Notes 1 and 2 to the
interim consolidated financial statements, on April 2, 2001, the Company and substantially all of its domestic subsidiaries
voluntarily filed for protection under Chapter 11 of the United States Bankruptcy Code, which raises substantial doubt about the Company's ability to continue as a going concern in its present
form. Management's intentions with respect to this matter are also described in Notes 1 and 2. The accompanying interim consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.

We
have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31,
2007, and the related consolidated statements of operations, shareholders' equity (deficit) and comprehensive income (loss) for the year then ended, and of cash flows for the year then ended
December 31, 2007 (not presented herein), and in our report dated February 29, 2008, we expressed an unqualified opinion on those consolidated financial statements with an explanatory
paragraph relating to the Company's ability to continue as a going concern. As discussed in Notes 1 and 7 to the accompanying consolidated financial statements, the Company changed its method
of accounting from the Last-In-First-Out (LIFO) inventory valuation method for U.S. inventories to the First-In-First-Out (FIFO)
inventory valuation method. The accompanying December 31, 2007 consolidated balance sheet reflects this change.

/s/
PricewaterhouseCoopers LLP
McLean, Virginia
November 7, 2008

4

---





W. R. Grace & Co. and Subsidiaries        Consolidated Statements of Operations (Unaudited)        (In millions, except per share amounts)

Three Months
Ended
September 30,

Nine Months
Ended
September 30,2008

2007

2008

2007Net sales

$
889.4

$
783.1

$
2,548.6

$
2,311.5Cost of goods sold


633.4


532.6


1,777.2


1,564.7Selling, general and administrative expenses


150.8


150.6


447.2


431.8Research and development expenses


20.5


20.4


63.4


57.8Defined benefit pension expense


14.1


13.1


42.4


38.9Interest expense and related financing costs


13.1


17.3


42.8


57.1Provision for environmental remediation


2.9





8.8


12.0Chapter 11 expenses, net of interest income


12.0


21.3


48.4


62.7Other (income) expense, net


14.5


(4.9
)

(10.0
)

(20.6
)861.3


750.4


2,420.2


2,204.4Income before income taxes and minority interest


28.1


32.7


128.4


107.1Benefit from (provision for) income taxes


4.2


(8.6
)

(38.9
)

(36.7
)Minority interest in consolidated entities


(4.0
)

(5.0
)

(11.4
)

(18.8
)Net income

$
28.3

$
19.1

$
78.1

$
51.6Basic earnings per share:Net income

$
0.39

$
0.27

$
1.08

$
0.74Weighted average number of basic shares


72.2


70.2


72.0


69.9Diluted earnings per share:Net income

$
0.39

$
0.27

$
1.07

$
0.72Weighted average number of diluted shares


72.8


71.5


72.7


71.5


The
Notes to Consolidated Financial Statements are an integral part of these statements.

5

---





W. R. Grace & Co. and Subsidiaries        Consolidated Statements of Cash Flows (Unaudited)        (In millions)

Nine Months
Ended
September 30,2008

2007OPERATING ACTIVITIESNet income

$
78.1

$
51.6Reconciliation to net cash provided by (used for) operating activities:Depreciation and amortization


90.8


83.5Chapter 11 expenses, net of interest income


48.4


62.7Provision for income taxes


38.9


36.7Income taxes paid, net of refunds


(39.1
)

(35.8
)Minority interest in consolidated entities


11.4


18.8Dividends paid to minority interests in consolidated entities


(13.3
)

(12.0
)Interest accrued on pre-petition liabilities subject to compromise


38.8


56.2Net (gain) loss on sales of investments and disposals of assets


0.3


(2.8
)Defined benefit pension expense


42.4


38.9Payments under defined benefit pension arrangements


(57.4
)

(85.5
)Net payments under postretirement benefit plans


(4.7
)

(4.6
)Net income from life insurance policies


(2.0
)

(3.0
)Provision for uncollectible receivables


0.8


(0.4
)Provision for environmental remediation


8.8


12.0Expenditures for environmental remediation (excluding Libby environmental settlement)


(3.3
)

(7.1
)Expenditures for retained obligations of divested businesses


(0.1
)

(0.8
)Changes in assets and liabilities, excluding effect of foreign currency translation:Working capital items (trade accounts receivable, inventories and accounts payable)


(75.8
)

(69.1
)Other accruals and non-cash items


(40.1
)

(7.3
)Net cash provided by operating activities before Chapter 11 expenses and settlements


122.9


132.0Cash paid to resolve contingencies subject to Chapter 11(including Libby environmental settlement)


(252.0
)

(10.3
)Chapter 11 expenses paid


(52.9
)

(55.9
)Net cash provided by (used for) operating activities


(182.0
)

65.8INVESTING ACTIVITIESCapital expenditures


(93.1
)

(89.8
)Investments in short-term debt securities





(25.0
)Proceeds from sales of investment securities


61.5


Cash proceeds from sale of business





21.8Purchase of equity investment


(3.0
)

(6.3
)Businesses acquired, net of cash acquired





(5.5
)Proceeds from termination of life insurance policies


8.1


Net investment in life insurance policies


(0.2
)

(1.2
)Proceeds from disposals of assets


2.8


5.5Net cash used for investing activities


(23.9
)

(100.5
)FINANCING ACTIVITIESProceeds from (repayments of) life insurance policy loans


40.0


(0.1
)Net borrowings under credit arrangements


1.5


0.7Fees paid under debtor-in-possession credit facility


(1.6
)

(2.0
)Proceeds from exercise of stock options


9.6


20.2Net cash provided by financing activities


49.5


18.8Effect of currency exchange rate changes on cash and cash equivalents


1.1


14.6Decrease in cash and cash equivalents


(155.3
)

(1.3
)Cash and cash equivalents, beginning of period


480.5


536.3Cash and cash equivalents, end of period

$
325.2

$
535.0


The Notes to Consolidated Financial Statements are an integral part of these statements.

6

---





W. R. Grace & Co. and Subsidiaries        Consolidated Balance Sheets (Unaudited)        (In millions, except par value and shares)

September 30,
2008

December 31,
2007ASSETSCurrent AssetsCash and cash equivalents

$
325.2

$
480.5Investment securities


35.1


98.3Cash value of life insurance policies, net of policy loans


30.8


77.1Trade accounts receivable, less allowance of $4.6 (2007-$5.2)


531.1


500.6Inventories


431.4


362.9Deferred income taxes


48.7


37.7Other current assets


84.9


80.8Total Current Assets


1,487.2


1,637.9Properties and equipment, net of accumulated depreciation and amortization of $1,591.4 (2007-$1,545.0)


710.1


706.1Goodwill


122.0


122.3Cash value of life insurance policies, net of policy loans


4.3


3.9Deferred income taxes


723.6


747.5Asbestos-related insurance


500.0


500.0Overfunded defined benefit pension plans


64.8


54.1Other assets


142.2


136.6Total Assets

$
3,754.2

$
3,908.4LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)Liabilities Not Subject to CompromiseCurrent LiabilitiesDebt payable within one year

$
6.1

$
4.7Accounts payable


219.4


191.3Other current liabilities


291.6


325.1Total Current Liabilities


517.1


521.1Debt payable after one year


0.3


0.3Deferred income taxes


33.3


32.7Minority interest in consolidated entities


69.7


73.2Underfunded defined benefit pension plans


173.1


169.1Unfunded pay-as-you-go defined benefit pension plans


121.8


137.9Other liabilities


37.5


46.2Total Liabilities Not Subject to Compromise


952.8


980.5Liabilities Subject to CompromiseNote 2Pre-petition bank debt plus accrued interest


815.2


783.0Drawn letters of credit plus accrued interest


30.0


26.9Income tax contingencies


88.7


89.3Asbestos-related contingencies


1,700.0


1,700.0Environmental contingencies


148.1


368.6Postretirement benefits


151.4


172.7Other liabilities and accrued interest


116.6


137.0Total Liabilities Subject to Compromise


3,050.0


3,277.5Total Liabilities


4,002.8


4,258.0Commitments and ContingenciesShareholders' Equity (Deficit)Common stock issued, par value $0.01; 300,000,000 shares authorized; outstanding: 2008-72,157,518 (2007-71,627,901)


0.8


0.8Paid-in capital


434.9


431.5Accumulated deficit


(290.0
)

(368.1
)Treasury stock, at cost: shares: 2008-4,822,242; (2007-5,351,859)


(57.4
)

(63.7
)Accumulated other comprehensive income (loss)


(336.9
)

(350.1
)Total Shareholders' Equity (Deficit)


(248.6
)

(349.6
)Total Liabilities and Shareholders' Equity (Deficit)

$
3,754.2

$
3,908.4


The Notes to Consolidated Financial Statements are an integral part of these statements.

7

---





W. R. Grace & Co. and Subsidiaries        Consolidated Statements of Shareholders' Equity (Deficit) (Unaudited)        (In millions)

Common
Stock and
Paid-in
Capital

Accumulated
Deficit

Treasury
Stock

Accumulated
Other
Comprehensive
Income (Loss)

Total
Shareholders'
Equity (Deficit)Balance, June 30, 2008

$
435.7

$
(318.3
)
$
(57.5
)
$
(347.8
)
$
(287.8
)Net income





28.3








28.3Stock plan activity








0.1





0.1Other comprehensive income (loss)











10.9


10.8Balance, September 30, 2008

$
435.7

$
(290.0
)
$
(57.4
)
$
(336.9
)
$
(248.6
)Balance, December 31, 2007

$
432.4

$
(368.1
)
$
(63.7
)
$
(350.1
)
$
(349.5
)Net income





78.1








78.1Stock plan activity


3.3





6.3





9.6Other comprehensive income (loss)











13.2


13.2Balance, September 30, 2008

$
435.7

$
(290.0
)
$
(57.4
)
$
(336.9
)
$
(248.6
)


W. R. Grace & Co. and Subsidiaries        Consolidated Statements of Comprehensive Income (Loss) (Unaudited)        (In millions)

Three Months
Ended
September 30,

Nine Months
Ended
September 30,2008

2007

2008

2007Net income

$
28.3

$
19.1

$
78.1

$
51.6Other comprehensive income (loss):Foreign currency translation adjustments


(1.8
)

19.8


(4.4
)

34.4Gain (loss) from hedging activities, net of income taxes


(7.5
)

(0.2
)

(3.5
)

(0.3
)Defined benefit pension and other postretirement plans, net of income taxes (see Note 13)


20.2


6.5


21.1


45.5Total other comprehensive income (loss)


10.9


26.1


13.2


79.6Comprehensive income (loss)

$
39.2

$
45.2

$
91.3

$
131.2


The
Notes to Consolidated Financial Statements are an integral part of these statements.

8

---





W. R. Grace & Co. and Subsidiaries        Notes to Consolidated Financial Statements (Unaudited)

1. Basis of Presentation and Summary of Significant Accounting and Financial Reporting Policies

W. R. Grace & Co., through its subsidiaries, is engaged in specialty chemicals and specialty materials businesses on a worldwide basis through two operating segments:
"Grace Davison," which includes specialty catalysts and materials used in a wide range of energy, refining, consumer, industrial, packaging and life sciences applications; and "Grace Construction
Products," which includes specialty chemicals and materials used in commercial, infrastructure and residential construction.

W.
R. Grace & Co. conducts substantially all of its business through a direct, wholly-owned subsidiary, W. R. Grace & Co.-Conn.
("Grace-Conn."). Grace-Conn. owns substantially all of the assets, properties and rights of W. R. Grace & Co. on a consolidated basis, either directly or through
subsidiaries.

As
used in these notes, the term "Company" refers to W. R. Grace & Co. The term "Grace" refers to the Company and/or one or more of its subsidiaries and, in certain cases,
their respective predecessors.

Voluntary Bankruptcy FilingDuring 2000 and the first quarter of 2001, Grace experienced several adverse developments in its asbestos-related litigation, including:
a significant increase in personal injury claims, higher than expected costs to resolve personal injury and certain property damage claims, and class action lawsuits alleging damages from Zonolite
Attic Insulation ("ZAI"), a former Grace attic insulation product.

After
a thorough review of these developments, Grace's Board of Directors concluded that a federal court-supervised bankruptcy process provided the best forum available to achieve
fairness in resolving these claims and on April 2, 2001 (the "Filing Date"), Grace and 61 of its United States subsidiaries
and affiliates, including Grace-Conn. (collectively, the "Debtors"), filed voluntary petitions for reorganization (the "Filing") under Chapter 11 of the United States Bankruptcy
Code in the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"). The cases were consolidated and are being jointly administered under case
number 01-01139 (the "Chapter 11 Cases"). Grace's non-U.S. subsidiaries and certain of its U.S. subsidiaries were not included in the Filing.

Under
Chapter 11, the Debtors have continued to operate their businesses as debtors-in-possession under court protection from creditors and claimants,
while using the Chapter 11 process to develop and implement a plan for addressing the asbestos-related claims. Since the Filing, all motions necessary to conduct normal business activities have
been approved by the Bankruptcy Court. (See Note 2 for Chapter 11Related Information.)

Basis of PresentationThe interim Consolidated Financial Statements presented herein are unaudited and should be read in conjunction with the Consolidated Financial
Statements presented in the Company's 2007 Annual Report on Form 10-K. Such interim Consolidated Financial Statements reflect all adjustments that, in the opinion of management, are
necessary for a fair presentation of the results of the interim periods presented; all such adjustments are of a normal recurring nature. Potential accounting adjustments discovered during normal
reporting and accounting processes are evaluated on the basis of materiality, both individually and in the aggregate, and are recorded in the accounting period discovered, unless a restatement of a
prior period is necessary. All significant intercompany accounts and transactions have been eliminated.

The
results of operations for the nine-month interim period ended September 30, 2008 are not necessarily indicative of the results of operations for the year ending
December 31, 2008.

9

---



W. R. Grace & Co. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited) (Continued)

1. Basis of Presentation and Summary of Significant Accounting and Financial Reporting Policies (Continued)

Change in Accounting PrincipleIn the third quarter of 2008, Grace changed its method of accounting for the cost of its U.S inventories from the
last-in/first-out method, or LIFO, to the first-in/first-out method, or FIFO. Grace decided to make this change in order to achieve a consistent
inventory costing method for both U.S. and non-U.S. inventories. Grace has retrospectively restated the prior periods' financial statements for all periods presented herein to account for
all inventories using FIFO in compliance with Statement of Financial Accounting Standards ("SFAS") 154. See Note 7 for further discussion.

ReclassificationsCertain amounts in prior years' Consolidated Financial Statements have been reclassified to conform to the 2008 presentation. In the fourth
quarter of 2007, Grace completed the transfer of its packaging technologies product group to the Grace Davison segment in an effort better to capture operating synergies. All 2007 segment information
herein has been retrospectively restated to reflect this realignment of the packaging technologies product group. The former Grace Performance Chemicals segment has been renamed "Grace Construction
Products" as a result of the transfer. Other than the realignment of operating segments, reclassifications have not materially affected previously reported amounts in the Consolidated Financial
Statements.

Use of EstimatesThe preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements, and the reported amounts
of revenues and expenses for the periods presented. Actual amounts could differ from those estimates, and the differences could be material. Changes in estimates are recorded in the period identified.
Grace's accounting measurements that are most affected by management's estimates of future events are:



The
accuracy of management's estimates may be materially affected by the uncertainties arising under Grace's Chapter 11 Cases.

Effect of New Accounting StandardsIn May 2008, the Financial Accounting Standards Board ("FASB") issued SFAS No. 162, "The Hierarchy of Generally Accepted
Accounting Principles." SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with generally accepted accounting principles. This statement is effective 60 days following the SEC's approval of the Public Company
Accounting Oversight Board amendments to AU section 411,The Meaning of Present Fairly in Conformity With Generally Accepted Accounting
Principles.

10

---



W. R. Grace & Co. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited) (Continued)

1. Basis of Presentation and Summary of Significant Accounting and Financial Reporting Policies (Continued)

In
April 2008, the FASB issued FASB Staff Position ("FSP") No. FAS 142-3, "Determination of the Useful Life of Intangible Assets." FSP 142-3 will improve
the consistency between the useful life of a recognized intangible asset under Statement 142 and the period of expected cash flows used to measure the fair value of the asset under FASB Statement
No. 141 (revised 2007),Business Combinations, and other U.S. generally accepted accounting principles. This FSP is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years.

In
April 2008, the FASB issued FSP No. SOP 90-7-1, "An Amendment of AICPA Statement of Position 90-7." FSP No.
SOP 90-7-1 resolves the conflict between the guidance requiring early adoption of new accounting standards for entities required to follow fresh-start reporting under
AICPA Statement of Position 90-7,Financial Reporting by Entities in Reorganization Under the Bankruptcy Code, and other authoritative
accounting standards that expressly prohibit early adoption. This FSP is effective for financial statements issued after April 24, 2008, and is not expected to impact Grace's Consolidated
Financial Statements.

In
March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activitiesan amendment of FASB Statement No. 133." SFAS
No. 161 expands the current disclosure framework by requiring entities to provide qualitative disclosures about the objectives and strategies for using derivatives, quantitative data about the
fair value of and gains and losses on derivative contracts, and details of credit-risk-related contingent features in their hedged positions. SFAS No. 161 is effective
for fiscal years beginning after November 15, 2008.

In
December 2007, the FASB issued SFAS No. 141(R), "Business Combinations." SFAS No. 141(R) will require the acquirer in a business combination to recognize the assets
acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as
of that date, with acquisition-related costs recognized separately from the acquisition. SFAS No. 141(R) applies prospectively to business combinations occurring on or after the beginning of
the first annual reporting period beginning on or after December 15, 2008.

In
December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements." SFAS No. 160 establishes new accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 is effective for fiscal years beginning on or after December 15, 2008.

In
September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." SFAS No. 157 defines fair value, establishes a framework for measuring fair value, and expands
disclosures about fair value measurements. In February 2008, the FASB issued FSP 157-1, "Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting
Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13", and FSP 157-2, "Effective Date of FASB Statement
No. 157". FSP 157-1 amends SFAS No. 157 to remove certain leasing transactions from its scope. FSP 157-2 delays the effective date of SFAS No. 157 for all
non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least
annually), until fiscal years beginning after November 15, 2008. Grace adopted SFAS No. 157 and the related FSPs in the first quarter of 2008, and the adoption for Grace's financial
assets and liabilities did not have a material impact on its Consolidated Financial Statements. Grace does not believe the adoption of SFAS No. 157 for its

11

---



W. R. Grace & Co. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited) (Continued)

1. Basis of Presentation and Summary of Significant Accounting and Financial Reporting Policies (Continued)

non-financial
assets and liabilities, effective January 1, 2009, will have a material impact on its Consolidated Financial Statements. See Note 6 for further discussion of
SFAS No. 157.

2. Chapter 11Related Information

Official Parties to Grace's Chapter 11 CasesThree creditors' committees, two representing asbestos claimants, the Official Committee of Asbestos Personal
Injury Claimants (the "PI Committee") and the Official Committee of Asbestos Property Damage Claimants (the "PD Committee"), and the third representing other unsecured creditors, and the Official
Committee of Equity Security Holders (the "Equity Committee"), have been appointed in the Chapter 11 Cases. These committees, a legal representative of future asbestos personal injury claimants
(the "PI FCR") and a legal representative of future asbestos property damage claimants (the "PD FCR"), have the right to be heard on all matters that come before the Bankruptcy Court and have
important roles in the Chapter 11 Cases. The Debtors are required to bear certain costs and expenses of the committees and the representatives of future asbestos claimants, including those of
their counsel and financial advisors.

As
discussed below, the Debtors, the Equity Committee, the PI Committee and the PI FCR have filed a joint plan of reorganization with the Bankruptcy Court that is designed to address all
pending and future asbestos-related claims and all other pre-petition claims as outlined therein. The committee representing general unsecured creditors, the PD Committee and the PD FCR
are not co-proponents of this plan.

Plans of ReorganizationOn November 13, 2004, Grace filed a proposed plan of reorganization, as well as several associated documents, including a disclosure
statement, trust distribution procedures, exhibits and other supporting documents, with the Bankruptcy Court. On January 13, 2005, Grace filed an amended plan of reorganization (the "Prior
Plan") and related documents to address certain objections of creditors and other interested parties. At the time it was filed, the Prior Plan was supported by the committee representing general
unsecured creditors and the Equity Committee, but was not supported by the PI Committee, the PD Committee or the PI FCR. At the time of filing of the Prior Plan, the PD FCR had not been appointed.

On
July 26, 2007, the Bankruptcy Court terminated Grace's exclusive rights to propose a plan of reorganization and solicit votes thereon. As a result of the termination of these
rights, any party-in-interest may propose a competing plan of reorganization. On November 5, 2007, the PI Committee and the PI FCR filed a proposed plan of
reorganization (the "PI Plan") with the Bankruptcy Court.

On
April 6, 2008, the Debtors reached an agreement in principle with the PI Committee, the PI FCR, and the Equity Committee designed to settle all present and future
asbestos-related personal injury claims (the "PI Settlement").

Prior
to the PI Settlement, the Bankruptcy Court entered a case management order for estimating liability for pending and future asbestos personal injury claims. A trial for estimating
liability for such claims began in January 2008 but was suspended in April 2008 as a result of the PI Settlement.

As
contemplated by the PI Settlement, on September 19, 2008, the Debtors, supported by the Equity Committee, the PI Committee and the PI FCR, as co-proponents, filed a
joint plan of

12

---



W. R. Grace & Co. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited) (Continued)

2. Chapter 11Related Information (Continued)

reorganization
(the "Joint Plan"), as well as several associated documents, including a disclosure statement, trust distribution procedures, exhibits and other supporting documents, with the
Bankruptcy Court that is designed to address all pending and future asbestos-related claims and all other pre-petition claims as outlined therein. The Joint Plan supersedes the Prior Plan
and the PI Plan. The committee representing general unsecured creditors, the PD Committee and the PD FCR are not co-proponents of the Joint Plan.

Any
plan of reorganization, including the Joint Plan and any plan of reorganization that may be filed in the future by a party-in-interest, will become effective
only after a vote of eligible creditors and with the approval of the Bankruptcy Court and the U.S. District Court for the District of Delaware. Votes on a plan of reorganization may not be solicited
until the Bankruptcy Court approves a related disclosure statement.

Under
the Joint Plan, two asbestos trusts would be established under Section 524(g) of the Bankruptcy Code. All asbestos-related personal injury claims would be channeled for
resolution to one asbestos trust (the "PI Trust") and all asbestos-related property damage claims, including ZAI property damage claims, would be channeled to a separate asbestos trust (the "PD
Trust").

The
Joint Plan assumes that Cryovac, Inc. ("Cryovac"), a wholly-owned subsidiary of Sealed Air Corporation ("Sealed Air"), will fund the PI Trust and the PD Trust with an
aggregate of: (i) $512.5 million in cash (plus interest at 5.5% compounded annually from December 21, 2002); and (ii) 18 million shares (reflecting a
two-for-one stock split) of common stock of Sealed Air, pursuant to the terms of a settlement agreement resolving asbestos-related, successor liability and fraudulent transfer
claims against Sealed Air and Cryovac, as further described below (the "Sealed Air Settlement"). The value of the Sealed Air Settlement changes daily with the accrual of interest and the trading value
of Sealed Air common stock. The Joint Plan also assumes that Fresenius AG ("Fresenius") will fund the PI Trust and the PD Trust with an aggregate of $115.0 million pursuant to the terms of a
settlement agreement resolving asbestos-related, successor liability and fraudulent transfer claims against Fresenius, as further described below (the "Fresenius Settlement"). The Sealed Air
Settlement and the Fresenius Settlement have been approved by the Bankruptcy Court, but remain subject to the fulfillment of specified conditions.

The
Joint Plan is designed to address all pending and future asbestos-related claims and all other pre-petition claims as outlined respectively, therein. However, it is
possible that the Joint Plan will not be approved by the Bankruptcy Court. If the Joint Plan is not confirmed by the Bankruptcy Court or the U.S. District Court for the District of Delaware or does
not become effective, the Debtors would expect to resume the estimation trial, which was suspended in April due to the PI Settlement, to determine the amount of its asbestos-related liabilities. Under
those circumstances, a different plan of reorganization may ultimately be confirmed and become effective. Under that effective plan of reorganization, the interests of holders of Company common stock
could be substantially diluted or cancelled. The value of Company common stock following the effective date of any plan of reorganization and the extent of any recovery by
non-asbestos-related creditors would depend principally on the amount of Debtors' asbestos-related liability under such effective plan of reorganization.

13

---



W. R. Grace & Co. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited) (Continued)

2. Chapter 11Related Information (Continued)

Joint Plan of ReorganizationUnder the terms of the Joint Plan, claims will be satisfied under the Chapter 11 Cases as follows:

Asbestos-Related Personal Injury Claims

All pending and future asbestos-related personal injury claims and demands ("PI Claims") would be channeled to the PI Trust for
resolution. The PI Trust would utilize specified trust distribution procedures to satisfy allowed PI Claims.

The
PI Trust would be funded with:



Asbestos-Related Property Damage Claims

All pending and future asbestos-related property damage claims and demands ("PD Claims") would be channeled to the PD Trust for
resolution. The PD Trust would satisfy allowed asbestos-related claims and demands pursuant to specified trust distribution procedures and, solely with respect to Canadian ZAI PD Claims, pursuant to
the Minutes of Settlement described in Note 3.

All
PD Claims other than Canadian ZAI PD Claims would be paid in cash by the PD Trust in the allowed settlement amount. Unresolved PD Claims and U.S. ZAI PD Claims would be litigated
before the Bankruptcy Court pursuant to procedures to be approved by the Bankruptcy Court and, to the extent such claims were determined to be allowed claims, would be paid in cash by the PD Trust in
the amount determined by the Bankruptcy Court.

14

---



W. R. Grace & Co. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited) (Continued)

2. Chapter 11Related Information (Continued)

Pursuant
to the Minutes of Settlement, all Canadian ZAI PD Claims would be paid through a separate Canadian ZAI property damage claims fund to which the PD Trust would contribute
CDN$6.5 million.

The
PD Trust would be funded with:



Other Claims

All allowed administrative claims would be paid in cash and all allowed priority claims would be paid in cash with interest. Secured
claims would be paid in cash with interest or by reinstatement. Allowed general unsecured claims would be paid in cash, including any post-petition interest as follows: (i) for
holders of pre-petition bank credit
facilities, post-petition interest at the rate of 6.09% from the Filing Date through December 31, 2005 and thereafter at floating prime, in each case compounded quarterly; and
(ii) for all other unsecured claims that are not subject to a settlement agreement providing otherwise, interest at 4.19% from the Filing Date, compounded annually, or if pursuant to an
existing contract, interest at the non-default contract rate. The general unsecured creditors that hold pre-petition bank credit facilities have asserted that they are entitled
to post-petition interest at the default rate specified under the terms of the underlying credit agreements which, if paid, would be materially greater than that reflected above. Grace has
asserted that such creditors are not entitled to interest at the default rate and has requested the Bankruptcy Court to determine the appropriate rate at which interest would be payable. Unsecured
employee-related claims such as pension, retirement medical obligations and workers compensation claims, would be reinstated.

Effect on Company Common Stock

The Joint Plan assumes that Company common stock will remain outstanding at the effective date of the Joint Plan, but that the
interests of existing shareholders would be subject to dilution by additional shares of Company common stock issued under the warrant, in the event of default in respect of the deferred payments by
Grace-Conn. under the Company's security obligation and in the event of default in respect of the PD Obligation under the Company's security obligation.

Claims FilingsThe Bankruptcy Court established a bar date of March 31, 2003 for claims of general unsecured creditors, asbestos-related property damage
claims (other than ZAI claims) and medical monitoring claims related to asbestos. The bar date did not apply to PI Claims or claims related to ZAI.

15

---



W. R. Grace & Co. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited) (Continued)

2. Chapter 11Related Information (Continued)

Approximately
14,900 proofs of claim were filed by the March 31, 2003 bar date. Of these claims, approximately 9,400 were non-asbestos related, approximately 4,300
were PD Claims, and approximately 1,000 were for medical monitoring. The medical monitoring claims were made by individuals who allege exposure to asbestos through Grace's products or operations.
Under the Joint Plan, medical monitoring would be channeled to the PI Trust. In addition, approximately 800 proofs of claim were filed after the bar date.

Approximately
7,000 of the non-asbestos related claims involve claims by employees or former employees for future retirement benefits such as pension and retiree medical
coverage. Grace views most of these claims as contingent and has proposed a plan of reorganization that would retain such benefits. The remaining non-asbestos claims include claims for
payment of goods and services, taxes, product warranties, principal and interest under pre-petition credit facilities, amounts due under leases and other contracts, leases and other
executory contracts rejected in the Bankruptcy Court, environmental remediation, pending non-asbestos-related litigation, and non-asbestos-related personal injury. Claims for
indemnification or contribution to actual or potential codefendants in asbestos-related and other litigation were also filed.

The
Debtors analyzed the claims filed pursuant to the March 31, 2003 bar date and found that many are duplicates, represent the same claim filed against more than one of the
Debtors, lack any supporting documentation, or provide insufficient supporting documentation. As of October 30, 2008, of the approximately 4,300 non-ZAI PD Claims filed, 310 claims
have been resolved, approximately 3,585 claims have been expunged or withdrawn by claimants, leaving approximately 140 claims to be addressed through the property damage case management order approved
by the Bankruptcy Court and/or the Joint Plan or another plan of reorganization. As of September 30, 2008, of the approximately 3,270 non-asbestos claims filed, approximately 1,860
have been expunged or withdrawn by claimants, approximately 1,145 have been resolved, and an additional approximately 265 claims are to be addressed through the claim objection process and the dispute
resolution procedures approved by the Bankruptcy Court.

By
order dated June 17, 2008, the Bankruptcy Court established October 31, 2008 as the bar date for U.S. ZAI PD Claims. Approximately 16,200 U.S. ZAI PD Claims were filed
by the bar date. In addition, on October 20, 2008, the Bankruptcy Court established August 31, 2009 as the bar date for Canadian ZAI PD Claims. The Joint Plan provides for the channeling
of U.S. ZAI PD Claims and Canadian ZAI PD Claims to the PD Trust. U.S. ZAI PD Claims would be resolved pursuant to specified trust distribution procedures. Canadian ZAI PD Claims would be resolved
through a separate Canadian ZAI PD Claims fund to which the PD Trust would contribute CDN$6.5 million as described in Note 3. The Joint Plan provides that any ZAI PI Claims would be
channeled to the PI Trust.

The
Debtors are continuing to analyze and review the filed claims in relation to the Joint Plan. Grace believes that its recorded liabilities for non-asbestos related claims subject to
the March 31, 2003 bar date represent a reasonable estimate of the ultimate allowable amount for claims that are not in dispute or have been submitted with sufficient information to both
evaluate the merit and estimate the value of the claim. The asbestos-related claims are considered as part of Grace's overall asbestos-related liability and are accounted for as described in
Note 3.

16

---



W. R. Grace & Co. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited) (Continued)

2. Chapter 11Related Information (Continued)

Litigation Proceedings in Bankruptcy CourtIn September 2000, Grace was named in a purported class action lawsuit filed in California Superior Court for the County
of San Francisco, alleging that the 1996 reorganization involving a predecessor of Grace and Fresenius and the 1998 reorganization involving a predecessor of Grace and Sealed Air were fraudulent
transfers(Abner, et al., v. W.R. Grace & Co., et al.). The Bankruptcy Court authorized the PI and PD Committees to proceed with claims
against Fresenius and Sealed Air and Cryovac on behalf of the Debtors' bankruptcy estate.

On
November 29, 2002, Sealed Air (and Cryovac) and Fresenius each announced that they had reached agreements in principle with the PI and PD Committees to settle asbestos,
successor liability and fraudulent transfer claims related to such transactions. Under the terms of the Fresenius Settlement, subject to the fulfillment of certain conditions, Fresenius would pay
$115.0 million to the Debtors' estate as directed by the Bankruptcy Court upon confirmation of the Debtors' plan of reorganization. In July 2003, the Fresenius Settlement was approved by the
Bankruptcy Court. Under the terms of the Sealed Air Settlement, subject to the fulfillment of certain conditions, Cryovac would make a payment of $512.5 million (plus interest at 5.5%
compounded annually, commencing on December 21, 2002) and nine million shares (now 18 million shares to reflect a two-for-one stock split) of Sealed Air common
stock (collectively valued at $1,094.2 million as of September 30, 2008), as directed by the Bankruptcy Court upon confirmation of a plan of reorganization. In June 2005, the Sealed Air
Settlement was approved by the Bankruptcy Court.

Accounting ImpactThe accompanying Consolidated Financial Statements have been prepared in accordance with Statement of Position 90-7
("SOP 90-7"), "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code," promulgated by the American Institute of Certified Public Accountants.
SOP 90-7 requires that financial statements of debtors-in-possession be prepared on a going concern basis, which contemplates continuity of operations,
realization of assets and liquidation of liabilities in the ordinary course of business. However, as a result of the Filing, the realization of certain of the Debtors' assets and the liquidation of
certain of the Debtors' liabilities are subject to significant uncertainty. While operating as debtors-in-possession, the Debtors may sell or otherwise dispose of assets and
liquidate or settle liabilities for amounts other than those reflected in the Consolidated Financial Statements. Further, the ultimate plan of reorganization could materially change the amounts and
classifications reported in the Consolidated Financial Statements.

Pursuant
to SOP 90-7, Grace's pre-petition and future liabilities that are subject to compromise are required to be reported separately on the balance
sheet at an estimate of the amount that will ultimately be allowed by the Bankruptcy Court. As of September 30, 2008, such pre-petition liabilities include fixed obligations (such
as debt and contractual commitments), as well as estimates of costs related to contingent liabilities (such as asbestos-related litigation, environmental remediation, and other claims). Obligations of
Grace subsidiaries not covered by the Filing continue to be classified on the Consolidated Balance Sheets based upon maturity dates or the expected dates of payment. SOP 90-7 also
requires separate reporting of certain expenses, realized gains and losses, and provisions for losses related to the Filing as reorganization items. Grace presents reorganization items as
"Chapter 11 expenses, net of interest income," a separate caption in its Consolidated Statements of Operations.

Grace
has not recorded the benefit of any assets that may be available to fund asbestos-related and other liabilities under the Fresenius Settlement and the Sealed Air Settlement, as
such agreements are subject to conditions, which, although expected to be met, have not been satisfied and confirmed by the Bankruptcy Court. The value available under the Fresenius Settlement and the
Sealed Air

17

---



W. R. Grace & Co. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited) (Continued)

2. Chapter 11Related Information (Continued)

Settlement
as measured at September 30, 2008, was $1,209.2 million comprised of $115.0 million in cash from Fresenius and $1,094.2 million in cash and stock from Cryovac.
Payments under the Sealed Air Settlement will be made directly to the PI Trust and the PD Trust by Cryovac.

Grace's
Consolidated Balance Sheets separately identify the liabilities that are "subject to compromise" as a result of the Chapter 11 proceedings. In Grace's case, "liabilities
subject to compromise" represent both pre-petition and future liabilities as determined under U.S. generally accepted accounting principles. Changes to pre-petition liabilities
subsequent to the Filing Date reflect: (1) cash payments under approved court orders; (2) the terms of the Prior Plan, as discussed above and in Note 3, including the accrual of
interest on pre-petition debt and other fixed obligations; (3) accruals for employee-related programs; and (4) changes in estimates related to other pre-petition
contingent liabilities. The accounting for the asbestos-related liability component of "liabilities subject to compromise" is described in Note 3.

Components
of liabilities subject to compromise are as follows:

(In millions)

September 30,
2008

December 31,
2007Pre-petition bank debt plus accrued interest

$
815.2

$
783.0Drawn letters of credit plus accrued interest


30.0


26.9Asbestos-related contingencies


1,700.0


1,700.0Income taxes(1)


88.7


89.3Environmental contingencies(2)


148.1


368.6Postretirement benefits other than pension


69.2


84.0Unfunded special pension arrangements


94.5


100.8Retained obligations of divested businesses


30.8


30.9Accounts payable


31.2


31.7Other accrued liabilities(2)


54.6


74.4Reclassification to current liabilities(3)


(12.3
)

(12.1
)Total Liabilities Subject to Compromise

$
3,050.0

$
3,277.5






Note
that the unfunded special pension arrangements reflected above exclude non-U.S. pension plans and qualified U.S. pension plans that became underfunded subsequent to the
Filing. Contributions to qualified U.S. pension plans are subject to Bankruptcy Court approval.

18

---



W. R. Grace & Co. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited) (Continued)

2. Chapter 11Related Information (Continued)

Change in Liabilities Subject to Compromise

The following table is a reconciliation of the changes in pre-filing date liability balances for the period from the Filing
Date through September 30, 2008:

(In millions)

Cumulative
Since FilingBalance, Filing Date April 2, 2001

$
2,366.0Cash disbursements and/or reclassifications under Bankruptcy Court orders:Payment of environmental settlement liabilityincluding Libby (see Note 14)


(252.9
)Freight and distribution order


(5.7
)Trade accounts payable order


(9.1
)Resolution of contingencies subject to Chapter 11


(130.0
)Other court orders including employee wages and benefits, sales and use tax, and customer programs


(365.4
)Expense/(income) items:Interest on pre-petition liabilities


386.3Employee-related accruals


48.0Provision for asbestos-related contingencies


744.8Provision for environmental contingencies


321.4Provision for income tax contingencies


(15.4
)Balance sheet reclassifications:Other balance sheet reclassifications


(38.0
)Balance, end of period

$
3,050.0


Additional
liabilities subject to compromise may arise due to the rejection of executory contracts or unexpired leases, or as a result of the Bankruptcy Court's allowance of contingent
or disputed claims.

For
the holders of pre-petition bank credit facilities, beginning January 1, 2006, Grace agreed to pay interest on pre-petition bank debt at the prime
rate, adjusted for periodic changes, and compounded quarterly. The effective rates for the nine months ended September 30, 2008 and 2007 were 5.43% and 8.23%, respectively. From the Filing Date
through December 31, 2005, Grace
accrued interest on pre-petition bank debt at a negotiated fixed annual rate of 6.09%, compounded quarterly. The general unsecured creditors that hold pre-petition bank credit
facilities have asserted that they are entitled to post-petition interest at the default rate specified under the terms of the underlying credit agreements which, if paid, would be
materially greater than that reflected above. Grace has asserted that such creditors are not entitled to interest at the default rate and has requested the Bankruptcy Court to determine the
appropriate rate at which interest would be payable.

For
the holders of claims who, but for the Chapter 11 filing, would be entitled under a contract or otherwise to accrue or be paid interest on such claim in a
non-default (or non-overdue payment) situation under applicable non-bankruptcy law, Grace accrues interest at the rate provided in the

19

---



W. R. Grace & Co. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited) (Continued)

2. Chapter 11Related Information (Continued)

contract
between the Grace entity and the claimant or such rate as may otherwise apply under applicable non-bankruptcy law.

For
all other holders of allowed general unsecured claims, Grace accrues interest at a rate of 4.19% per annum, compounded annually, unless otherwise negotiated during the claim
settlement process.

Chapter 11 Expenses

Three Months
Ended
September 30,

Nine Months
Ended
September 30,(In millions)

2008

2007

2008

2007Legal and financial advisory fees

$
12.0

$
24.3

$
50.0

$
70.5Interest income





(3.0
)

(1.6
)

(7.8
)Chapter 11 expenses, net

$
12.0

$
21.3

$
48.4

$
62.7


Pursuant
to SOP 90-7, interest income earned on the Debtors' cash balances is offset against Chapter 11 expenses. For the nine months ended September 30,
2008, interest income was reduced by a $1.8 million charge related to the change in fair value of investment securities held by the Debtors.

20

---



W. R. Grace & Co. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited) (Continued)

2. Chapter 11Related Information (Continued)

Condensed Financial Information of the Debtors

W. R. Grace & Co.Chapter 11 Filing Entities
Debtor-in-Possession Statements of Operations
(In millions) (unaudited)

Nine Months Ended
September 30,2008

2007Net sales, including intercompany

$
1,194.8

$
1,129.1Cost of goods sold, including intercompany, exclusive of depreciation and amortization shown separately below


864.7


789.1Selling general and administrative expenses, exclusive of defined benefit pension expense shown separately below


225.7


234.4Research and development expenses


33.3


32.2Depreciation and amortization


43.2


40.9Defined benefit pension expense


28.0


28.8Interest expense and related financing costs


42.2


56.5Other (income) expense, net


(62.5
)

(40.1
)Provision for environmental remediation


8.8


12.0Chapter 11 expenses, net of interest income


48.4


62.81,231.8


1,216.6Loss before income taxes and equity in net income of non-filing entities


(37.0
)

(87.5
)Benefit from (provision for) income taxes


(11.8
)

9.3Loss before equity in net income of non-filing entities


(48.8
)

(78.2
)Equity in net income of non-filing entities


126.9


129.8Net income

$
78.1

$
51.6


21

---



W. R. Grace & Co. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited) (Continued)

2. Chapter 11Related Information (Continued)

W. R. Grace & Co.Chapter 11 Filing Entities
Debtor-in-Possession Condensed Statements of Cash Flows
(In millions) (unaudited)

Nine Months Ended
September 30,2008

2007Operating ActivitiesNet income

$
78.1

$
51.6Reconciliation to net cash used for operating activities:Chapter 11 expenses, net of interest income


48.4


62.8(Benefit from) provision for income taxes


11.8


(9.3
)Equity in net income of non-filing entities


(126.9
)

(129.8
)Depreciation and amortization


43.2


40.9Interest on pre-petition liabilities subject to compromise


38.8


56.2Provision for environmental remediation


8.8


12.0Other non-cash items, net


(1.7
)

(5.8
)Contributions to defined benefit pension plans


(47.1
)

(65.0
)Cash paid to resolve contingencies subject to Chapter 11


(252.0
)

(10.3
)Chapter 11 expenses paid


(52.9
)

(55.9
)Changes in other assets and liabilities, excluding the effect of businesses acquired/divested


28.5


(26.2
)Net cash used for operating activities


(223.0
)

(78.8
)Investing ActivitiesCapital expenditures


(52.0
)

(55.2
)Loan repayments from non-filing entities


133.1


85.1Other investing activities


46.8


41.6Net cash provided by investing activities


127.9


71.5Net cash provided by financing activities


8.0


18.2Net (decrease) increase in cash and cash equivalents


(87.1
)

10.9Cash and cash equivalents, beginning of period


206.8


233.8Cash and cash equivalents, end of period

$
119.7

$
244.7


22

---



W. R. Grace & Co. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited) (Continued)

2. Chapter 11Related Information (Continued)

W. R. Grace & Co.Chapter 11 Filing Entities
Debtor-in-Possession Balance Sheets
(In millions) (unaudited)

September 30,
2008

December 31,
2007ASSETSCurrent AssetsCash and cash equivalents

$
119.7

$
206.8Investment securities


35.1


98.3Cash value of life insurance policies, net of policy loans


30.8


77.1Trade accounts receivable, net


126.5


108.3Receivables from non-filing entities, net


100.3


103.2Inventories


171.8


136.7Other current assets


55.5


47.1Total Current Assets


639.7


777.5Properties and equipment, net


405.0


403.8Cash value of life insurance policies, net of policy loans


4.3


3.9Deferred income taxes


711.3


725.6Asbestos-related insurance


500.0


500.0Loans receivable from non-filing entities, net


409.0


524.2Investment in non-filing entities


530.4


400.8Overfunded defined benefit pension plans


0.3


1.5Other assets


86.6


77.7Total Assets

$
3,286.6

$
3,415.0LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)Liabilities Not Subject to CompromiseCurrent liabilities

$
228.9

$
224.0Minority interest in consolidated entities


61.1


64.5Underfunded defined benefit pension plans


163.9


159.6Other liabilities


31.3


39.0Total Liabilities Not Subject to Compromise


485.2


487.1Liabilities Subject to Compromise


3,050.0


3,277.5Total Liabilities


3,535.2


3,764.6Shareholders' Equity (Deficit)


(248.6
)

(349.6
)Total Liabilities and Shareholders' Equity (Deficit)

$
3,286.6

$
3,415.0


In
addition to Grace's financial reporting obligations as prescribed by the U.S. Securities and Exchange Commission ("SEC"), the Debtors are also required, under the
rules and regulations of the Bankruptcy Code, to periodically file certain statements and schedules and a monthly operating report with the Bankruptcy Court. This information is not included in or
incorporated into this Report. This information is prepared in a format that may not be comparable to information in Grace's quarterly and annual financial statements as filed with the SEC. The
monthly operating reports are not audited, do not purport to represent the financial position or results of operations of Grace on a consolidated basis, and should not be relied on for such purposes.

23

---



W. R. Grace & Co. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited) (Continued)

3. Asbestos Related Litigation

Grace is a defendant in property damage and personal injury lawsuits relating to previously-sold asbestos-containing products. As of the Filing Date, Grace was a defendant in
65,656 asbestos-related lawsuits, 17 involving PD Claims (one of which has since been dismissed), and the remainder involving 129,191 PI Claims. Due to the Filing, holders of asbestos-related claims
are stayed from continuing to prosecute pending litigation and from commencing new lawsuits against the Debtors. The PI and PD Committees, representing the interests of asbestos personal injury and
asbestos property damage claimants, respectively, and the PI FCR and PD FCR, representing the interests of future asbestos personal injury and property damage claimants, respectively, have been
appointed in the Chapter 11 Cases. Grace's obligations with respect to present and future claims will be determined through the Chapter 11 process.

Property Damage LitigationThe plaintiffs in asbestos property damage lawsuits generally seek to have the defendants pay for the cost of removing, containing or
repairing the asbestos-containing materials in the affected buildings. Various factors can affect the merit and value of PD Claims, including legal defenses, product identification, the amount and
type of product involved, the age, type, size and use of the building, the legal status of the claimant, the jurisdictional history of prior cases, the court in which the case is pending, and the
difficulty of asbestos abatement, if necessary.

Out
of 380 asbestos property damage cases (which involved thousands of buildings) filed prior to the Filing Date, 140 were dismissed without payment of any damages or settlement amounts;
judgments after trial were entered in favor of Grace in nine cases (excluding cases settled following appeals of judgments in favor of Grace); judgments after trial were entered in favor of the
plaintiffs in eight cases (one of which is on appeal) for a total of $86.1 million; 207 property damage cases were settled for a total of $696.8 million; and 16 cases remain outstanding
(including the one on appeal). Of the 16 remaining cases, eight relate to ZAI and eight relate to a number of former asbestos-containing products (two of which also are alleged to involve ZAI).

Approximately
4,035 additional PD Claims were filed prior to the March 31, 2003 claims bar date established by the Bankruptcy Court. (The bar date did not apply to ZAI claims.)
Such claims were reviewed in detail by Grace, categorized into claims with sufficient information to be evaluated or claims that require additional information and, where sufficient information
existed, the estimated cost of resolution was considered as part of Grace's recorded asbestos-related liability. Approximately 200 claims did not contain sufficient information to permit an
evaluation. Grace objected to virtually all PD Claims on a number of different bases, including: no authorization to file a claim; the claim was previously settled or adjudicated; no or
insufficient documentation; failure to identify a Grace product; expiration of the applicable statute of limitations and/or statute of repose, and/or laches; and a defense that the product in place is
not hazardous. As of October 20, 2008, following the reclassification, withdrawal or expungement of claims, approximately 445 PD Claims subject to the March 31, 2003 bar date remain
outstanding. The Bankruptcy Court has approved settlement agreements covering approximately 310 of such claims for an aggregate allowed amount of $92 million.

Eight
of the ZAI property damage cases were filed as purported class action lawsuits in 2000 and 2001. In addition, 10 lawsuits were filed as purported class actions in 2004 and 2005
with respect to persons and homes in Canada. These cases seek damages and equitable relief, including the removal, replacement and/or disposal of all such insulation. The plaintiffs assert that this
product is in millions of homes and that the cost of removal could be several thousand dollars per home. As a result of the Filing, the eight U.S. cases have been stayed.

24

---



W. R. Grace & Co. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited) (Continued)

3. Asbestos Related Litigation (Continued)

Based
on Grace's investigation of the claims described in these lawsuits, and testing and analysis of ZAI by Grace and others, Grace believes that ZAI was and continues to be safe for
its intended purpose and poses little or no threat to human health. The plaintiffs in the ZAI lawsuits (and the U.S. government in the Montana criminal proceeding described in Note 14) dispute
Grace's position on the safety of ZAI. In October, 2004, the Bankruptcy Court held a hearing on motions filed by the parties to address a number of important legal and factual issues regarding the ZAI
claims. In December 2006, the Bankruptcy Court issued an opinion and order holding that, although ZAI is contaminated with asbestos and can release asbestos fibers when disturbed, there is no
unreasonable risk of harm from ZAI. The ZAI claimants sought an interlocutory appeal of the opinion and order with the U.S. District Court for the District of Delaware, but that request was denied.
The ZAI claimants have indicated they still intend to appeal such opinion and order when it becomes a final order.

At
the Debtors' request, in July 2008, the Bankruptcy Court established a bar date for U.S. ZAI PD Claims and approved a related notice program that requires persons with a U.S. ZAI PD
Claim to submit individual proofs of claim no later than October 31, 2008. At the same time as the Debtors' request, the U.S. ZAI property damage claimants asked the Bankruptcy Court for
various forms of relief: (1) to take such actions as would finalize the December 2006 order and permit an appeal to be taken; (2) to allow the U.S. ZAI PD Claims to return to the state
court tort system; (3) to appoint an expert to estimate the number of homes containing ZAI; and (4) to certify a class claim on behalf of Washington state residents. The Bankruptcy Court
denied the first three requests and has taken the motion to certify a class claim under advisement. Grace's recorded asbestos-related liability at September 30, 2008 assumes the risk of loss
from U.S. ZAI litigation is not probable. If Grace's view as to risk of loss is not sustained, Grace believes the cost to resolve the U.S. ZAI litigation may be material.

On
September 2, 2008, the Company, Grace Canada and legal representatives of Canadian ZAI property damage claimants entered into an agreement (the "Minutes of Settlement") that
would settle all Canadian ZAI PD Claims. The Minutes of Settlement were approved by the Ontario Superior Court of Justice in the Grace Canada, Inc. proceeding pending under the Companies'
Creditors Arrangement Act, on October 17, 2008. Under the Minutes of Settlement, all CDN ZAI PD Claims would be paid through a separate Canadian ZAI PD Claims fund to which the PD Trust would
contribute CDN$6.5 million. The Minutes of Settlement are subject to the confirmation and effectiveness of the Joint Plan. On October 20, 2008, the Bankruptcy Court established
August 31, 2009 as the bar date for Canadian ZAI PD Claims.

Personal Injury LitigationAsbestos personal injury claimants allege adverse health effects from exposure to asbestos-containing products formerly manufactured by
Grace. Historically, Grace's cost to resolve such claims has been influenced by numerous variables, including the nature of the disease alleged, product identification, proof of exposure to a Grace
product, negotiation factors, the solvency of other former producers of asbestos containing products, cross-claims by co-defendants, the rate at which new claims are filed, the
jurisdiction in which the claims are filed, and the defense and disposition costs associated with these claims.

Cumulatively
through the Filing Date, 16,354 asbestos personal injury lawsuits involving approximately 35,720 PI Claims were dismissed without payment of any damages or settlement
amounts (primarily on the basis that Grace products were not involved) and approximately 55,489 lawsuits involving approximately 163,698 PI Claims were disposed of (through settlements and judgments)
for a

25

---



W. R. Grace & Co. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited) (Continued)

3. Asbestos Related Litigation (Continued)

total
of $645.6 million. As of the Filing Date, 129,191 PI Claims for personal injury were pending against Grace. Grace believes that a substantial number of additional PI Claims would have
been received between the Filing Date and September 30, 2008 had such PI Claims not been stayed by the Bankruptcy Court.

The
Bankruptcy Court has entered separate case management orders for estimating liability for pending and future PI Claims and adjudicating pending PD Claims, excluding ZAI claims. A
trial for estimating liability for PI Claims began in January 2008 but was suspended in April 2008 as a result of the PI Settlement.

Asbestos-Related LiabilityThe total recorded asbestos-related liability as of September 30, 2008 and December 31, 2007, including
pre-Filing Date and post-Filing Date settlements, was $1,700 million and is included in "liabilities subject to compromise" in the Consolidated Balance Sheets. Grace
adjusted its asbestos-related liability in the fourth quarter of 2004 based on the filing of the Prior Plan. The Prior Plan contained a condition precedent that the Bankruptcy Court determine that
$1,613 million (this amount, plus $87 million of prepetition settlements and judgments, "the Funding Amount") was sufficient to pay, on a net present value basis, all PI Claims and PD
Claims entitled to payment and related trust administration costs and expenses. Therefore, prior to the PI Settlement and the filing of the Joint Plan, Grace was prepared to settle its
asbestos-related claims at the Funding Amount as part of a consensual plan of reorganization and recorded its asbestos-related liability on that basis. The treatment of asbestos-related liabilities is
significantly different under the Joint Plan than under the Prior Plan. Grace has not adjusted its accounting for asbestos-related liabilities to reflect the Joint Plan. At this time, Grace is unable
to determine a reasonable estimate of the value of certain consideration payable to the PI Trust and the PD Trust under the Joint Plan. These values will ultimately be determined on the effective date
of the Joint Plan. Grace does not expect to adjust its recorded asbestos-related liability until material conditions to the Joint Plan are satisfied. Grace expects that such adjustments may be
material to Grace's consolidated financial position and results of operations.

If
the Joint Plan is not confirmed by the Bankruptcy Court, the Debtors would expect to resume the estimation trial, which was suspended in April 2008 due to the PI Settlement, to
determine the amount of its asbestos-related liabilities. Through the estimation process and the continued adjudication of PD Claims, Grace would seek to demonstrate that most claims have no value
because they fail to establish any significant property damage, health impairment or occupational exposure to asbestos from Grace's operations or products. If the Bankruptcy Court agreed with Grace's
position on the number of, and the amounts to be paid in respect of, allowed PI Claims and PD Claims, then Grace believes that the Funding Amount could be lower than $1,700 million. However,
this outcome would be highly uncertain
and would depend on a number of Bankruptcy Court rulings favorable to Grace's position. Conversely, the PI and PD Committees and the PI FCR have asserted that Grace's asbestos-related liabilities are
substantially higher than $1,700 million, and in fact are in excess of Grace's business value. If the Bankruptcy Court accepted the position of the PI and PD Committees and the PI FCR, then any
plan of reorganization likely would result in the loss of all or substantially all equity value by current shareholders. Grace believes that a resolution of its asbestos-related liabilities on terms
that are different from those set forth in the Prior Plan would require an adjustment to its recorded asbestos-related liabilities and that this adjustment might be material to its consolidated
financial position and results of operations.

26

---



W. R. Grace & Co. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited) (Continued)

3. Asbestos Related Litigation (Continued)

Insurance RightsGrace holds insurance policies that provide coverage for 1962 to 1985 with respect to asbestos-related lawsuits and claims. For the most part,
coverage for years 1962 through 1972 has been exhausted, leaving coverage for years 1973 through 1985 available for pending and future asbestos claims. Since 1985, insurance coverage for
asbestos-related liabilities has not been commercially available to Grace. As discussed in Note 2, pursuant to the Joint Plan, insurance policies that provide coverage for asbestos-related
claims and proceeds, including interest, received after the date of the PI Settlement, would be assigned to the PI Trust.

For
each insurance year, Grace's coverage consists of both primary and excess coverage. Primary coverage for an insurance year generally reimburses Grace for the portion of paid claims
allocated to that year starting at the first dollar paid (after any deductible) through the coverage limit. With one exception, coverage disputes regarding Grace's primary insurance policies have been
settled, and the settlement amounts have been paid in full. Excess insurance generally reimburses Grace for claims paid above a specified policy threshold through the coverage limit. For each
insurance year, Grace's insurance program includes multiple layers of excess coverage. A layer of excess coverage, which may include multiple insurers, is triggered once claim payments that can be
assigned to that insurance year are paid up to the threshold of that layer.

Grace
has entered into settlement agreements with various excess insurance carriers. These settlements involve amounts paid and to be paid to Grace. The unpaid maximum aggregate amount
available under these settlement agreements is approximately $433 million. With respect to PI Claims, the settlement agreements generally require that the PI Claims be spread over the
claimant's exposure period and that each insurer pay a pro rata portion of each claim based on the amount of coverage provided during each year of the total exposure period.

Presently,
Grace has no settlement agreements in place with insurers with respect to approximately $483 million of excess coverage. Such policies are at layers of coverage that
have not yet been triggered,
but certain layers would be triggered if the Prior Plan were approved at the recorded asbestos-related liability of $1,700 million. In estimating the ultimate insurance recovery, Grace has
assumed that the unsettled excess coverage would be available on terms that are substantially similar to the existing settlement agreements described above. Grace believes that any allowed ZAI PD
Claims also would be covered under the policies discussed above to the extent they relate to installations of ZAI occurring after July 1, 1973 but before June 30, 1985. Under the terms
of the Joint Plan, rights to all proceeds under all of the insurance policies that are available for payment of PI Claims, including amounts that would otherwise be available to fund ZAI PD Claims,
would be assigned to the PI Trust.

In
addition, Grace has approximately $254 million of excess coverage with insolvent or non-paying insurance carriers. Non-paying carriers are those that,
although technically solvent, are not currently meeting their obligations to pay claims. Grace has filed and continues to file claims in the insolvency proceedings of these carriers. Grace
periodically receives distributions from some of these insolvent carriers and expects to receive distributions in the future.

In
November 2006, Grace entered into a settlement agreement with an underwriter of a portion of its excess insurance coverage. The insurer paid a settlement amount of $90 million
directly to an escrow account for the benefit of the holders of claims for which Grace was provided coverage under the affected policies. The escrow account balance at September 30, 2008
approximated $96.7 million, including interest earned on the account. Funds will be distributed from this account directly to claimants at the direction of the escrow agent pursuant to the
terms of a confirmed plan of

27

---



W. R. Grace & Co. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited) (Continued)

3. Asbestos Related Litigation (Continued)

reorganization
or as otherwise ordered by the Bankruptcy Court. The settlement agreement provides that unless Grace confirms a plan of reorganization by December 31, 2008, at the option of the
insurer, exercisable at any time prior to April 30, 2009, the escrow amount with interest must be returned to the insurer. Due to the open contingencies for the release of such amount, Grace
has not recorded the amount in the escrow account or reduced its asbestos insurance receivable balance. Under the Joint Plan, the amount in the escrow account would be assigned to the PI Trust.

As
of September 30, 2008, including the settlement discussed above and after subtracting previous reimbursements by insurers and allowing for discounts pursuant to certain
settlement agreements, there remains approximately $916 million of excess coverage from 53 presently solvent insurers. Grace estimates that eligible claims would have to exceed
$4 billion to access total coverage. Grace further estimates that, assuming the resolution value of asbestos-related claims is equal to the recorded liability of $1,700 million (which
should fund claim payments in excess of $2 billion), it should be entitled to approximately $500 million of insurance recovery, including the escrow described above. This amount was
determined by estimating the aggregate and per year payout for claims over time and applying the expected insurance recovery factor to such claims. However, the ultimate amount of insurance recovered
on such claims will depend on a number of factors that will only be determined at the time claims are paid including: the nature of the asbestos claim (PI Claim, PD Claim or ZAI PD Claim), the
relevant exposure years, the timing of payment, the solvency of insurers and the legal status of policy rights. Accordingly, Grace's estimate of insurance recovery may differ materially from actual
amounts received by Grace, or if the Joint Plan is confirmed and becomes effective, the PI Trust.

4. Income Taxes

During the three months ended September 30, 2008, Grace decreased its liability for uncertain tax positions ("UTP") by the net amount of $9.5 million due primarily to the
final settlement of the 1993-1996 federal income tax audit offset by accrued interest on the UTP balances. As a result, the total amount of unrecognized tax benefits at September 30, 2008
decreased to $170.6 million from $180.1 million at June 30, 2008.

Grace
files U.S. federal income tax returns as well as income tax returns in various states and foreign jurisdictions. In many cases, Grace's uncertain tax positions are related
to tax years that remain subject to examination by the relevant taxing authorities. The following table summarizes these open tax years by major jurisdiction:

Tax Jurisdiction(1)

Examination in
Progress

Examination Not Yet
InitiatedUnited States(2)


1994-2006


2005-2007Germany


2002-2005


2006-2007United Kingdom


None


2002-2007Singapore


2001-2006


2007France


2004-2005


2006-2007Italy


None


2003-2007






28

---



W. R. Grace & Co. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited) (Continued)

4. Income Taxes (Continued)



Based
upon the outcome of these examinations, or as a result of the expiration of statute of limitations for specific jurisdictions, Grace expects that it may be required
to adjust its aggregate recorded liabilities for uncertain tax positions in the next twelve months and that such adjustments may be material. The outcomes of other ongoing tax examinations remain
uncertain, and it is possible that new issues will be raised by tax authorities, which may require an increase to the balance of unrecognized
benefits. An estimate of such increases cannot reasonably be made. The status of U.S. tax examinations is as follows:



Other Tax Matters

As of September 30, 2008, Grace has prior-year tax credit carryforwards of $71.1 million consisting of
$51.6 million of foreign tax credit carryforwards with expiration dates through 2017, $0.6 million of general business credit carryforwards with expiration dates through 2025 and
$18.9 million of alternative minimum tax credit ("AMTC") carryforwards with no expiration dates. However, the $18.9 million of AMTC carryforwards includes $15.8 million which
Grace does not expect will be available if Grace is successful in resolving certain issues reflected as uncertain tax positions.

Grace
anticipates generating U.S. net operating loss ("NOL") carryforwards upon emergence from bankruptcy. Because Grace did not pay a significant amount of U.S. taxes in
prior years and/or has already received or applied for tax refunds from available NOL carryback years, it expects to carryforward most of its NOLs after emergence from bankruptcy. Under federal income
tax law, a corporation is generally permitted to carryforward NOLs for a 20-year period for deduction against future taxable income. Grace's ability to deduct NOL carryforwards could be
significantly limited if it were to undergo an ownership change during, or as a result of, the Chapter 11 proceeding. The Bankruptcy Court has entered an order that places certain limitations
on trading in Grace common stock or options convertible into Grace common stock during the course of the Chapter 11 Cases. However, Grace can provide no assurance that these limitations will
prevent an ownership change or that its ability to utilize NOLs will not be significantly limited as a result of Grace's reorganization.

29

---



W. R. Grace & Co. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited) (Continued)

5. Other (Income) Expense

Components of other (income) expense, net are as follows:

Three Months Ended
September 30,

Nine Months Ended
September 30,Other (Income) Expense, net
(In millions)

2008

2007

2008

2007COLI income, net

$
(0.2
)
$
(0.5
)
$
(2.0
)
$
(3.0
)Interest income


(0.7
)

(1.6
)

(3.1
)

(5.3
)Net (gain) loss on sales of investments and disposals of assets


0.9


0.8


0.3


(2.8
)Currency translationintercompany loans


42.3


(6.8
)

4.5


(10.6
)Value of currency contracts


(29.4
)

6.0


(5.7
)

8.4Other currency transaction effects


3.4


0.9


4.3


2.9Interest income on joint venture cash balances


(0.2
)

(0.7
)

(0.4
)

(2.0
)Other miscellaneous income


(1.6
)

(3.0
)

(7.9
)

(8.2
)Total other (income) expense, net

$
14.5

$
(4.9
)
$
(10.0
)
$
(20.6
)


In
November 2007, Grace executed an intercompany loan in the amount of €250 million between Grace's principal U.S. operating subsidiary and a newly established
German subsidiary as part of a legal restructuring. In conjunction with the loan, Grace entered into a series of foreign currency forward contracts to attempt to minimize volatility from foreign
currency movements on the loan amount. The forward contracts are aligned with the payment schedule of the intercompany loan, which has annual principal and interest payments from November 2009 through
November 2013. This loan was not outstanding during the prior comparable period. The changes in fair values of the foreign currency forward contracts partially offset the foreign currency translation
gains or losses from the revaluation of the intercompany loan.

6. Fair Value Measurements

SFAS No. 157 defines fair value as the value that would be received at the measurement date in the principal or "most advantageous" market. Grace utilizes principal market data,
whenever available, to value assets and liabilities at fair value that are required to be reported at fair value. SFAS No. 157 prescribes three valuation techniques that shall be used to
measure fair value as follows:



One
or a combination of the approaches above can be used to calculate fair value, whichever results in the most representative fair value.

In
addition to the three valuation techniques, SFAS No. 157 prescribes a fair value hierarchy in order to increase consistency and comparability in fair value measurements and
related disclosures. The

30

---



W. R. Grace & Co. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited) (Continued)

6. Fair Value Measurements (Continued)

fair
value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels:

Level 1 Inputs



Quoted prices in active markets for identical assets or liabilities. A quoted price in an active market provides the most reliable evidence of fair value.Level 2 Inputs



Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly.Level 3 Inputs



Unobservable inputs for the asset or liability, which should reflect the reporting entity's own assumptions about the assumptions that market participants would use in pricing the asset or liability.


Grace
has identified the following financial assets and liabilities that are subject to the fair value analysis required by SFAS No. 157:

Investment Securities

Investment securities consist of direct or indirect investments in debt securities. Prior to the fourth quarter of 2007, Grace's
investment in the Columbia Strategic Cash Portfolio Fund (the "Columbia Fund") was classified in cash and cash equivalents, as redemptions were available in cash. In December 2007, the Columbia Fund
began an orderly liquidation that its principals expect will continue through 2009 and restricted redemptions to in-kind distribution of portfolio securities. In the nine months ended
September 30, 2008, $61.5 million of Grace's account balance was distributed to Grace in cash. Grace has elected to maintain its investment in the Columbia Fund pending the orderly
liquidation of the portfolio and to value its account based on the value of the underlying securities as determined by the fund principals. The fund principals have determined the value of the fund
using a market approach, which consists of matrix pricing techniques based on widely available market data and comparables. Grace's investment in the Columbia Fund was valued at $35.1 million
and $98.3 million at September 30, 2008 and December 31, 2007, respectively.

Grace
recorded a decrease in fair value of its Columbia Fund account of $1.8 million for the nine months ended September 30, 2008 due to unfavorable conditions in the
credit markets. The decrease in fair value is recorded as an offset to interest income earned by Grace on its balance in the Columbia Fund which is netted against Chapter 11 expenses in the
Consolidated Statements of Operations. This decrease in fair value was deemed to be other than temporary, and as such, was recorded in earnings.

Derivatives

From time to time, Grace enters into commodity derivatives such as forward contracts or option contracts directly with natural gas
suppliers, and fixed-rate swaps with financial institutions to mitigate the risk of volatility of natural gas prices. Under fixed-rate swaps, Grace locks in a fixed rate with a
financial institution for future natural gas purchases, purchases its natural gas from a supplier at the prevailing market rate, and then settles with the bank for any difference in the rates, thereby
"swapping" a variable rate for a fixed rate. In 2007 and 2008, Grace utilized fixed-rate swaps to mitigate the risk of natural gas price volatility. The valuation of Grace's
fixed-rate natural gas swaps was determined using a market approach, based on natural gas futures trading prices quoted on the New York Mercantile Exchange.

31

---



W. R. Grace & Co. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited) (Continued)

6. Fair Value Measurements (Continued)

As
part of its risk management program, Grace enters into foreign currency exchange rate forward and/or option contracts to mitigate the effects of exchange rate fluctuations. Grace also
utilizes foreign currency forward exchange rate and/or option contracts from time to time to hedge the value of its net investment in certain foreign entities. The valuation of Grace's foreign
currency exchange rate forward contracts was determined using both a market approach and an income approach. Inputs used to value foreign currency exchange rate forward contracts consist of:
(1) spot rates, which are quoted by various financial institutions; (2) forward points, which are primarily affected by changes in interest rates on Euro and $U.S. deposits; and
(3) discount rates used to present value future cash flows, which are based on the London Interbank Offered Rate (LIBOR) curve.

The
following table presents the fair value hierarchy for non-financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2008:

Fair Value Measurements at September 30, 2008 UsingItems Measured at Fair Value on a Recurring Basis
(In millions)

Total

Quoted Prices in
Active Markets for
Identical Assets or
Liabilities
(Level 1)

Significant Other
Observable Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)AssetsAvailable-for-sale securities

$
35.1

$


$
35.1

$
Currency derivatives


12.6





12.6


Total Assets

$
47.7

$


$
47.7

$
LiabilitiesCommodity derivatives

$
6.1

$


$
6.1

$
Total Liabilities

$
6.1

$


$
6.1

$



7. Inventories

Inventories are stated at the lower of cost or market, and cost is determined using FIFO. Inventories consisted of the following at September 30, 2008 and December 31,
2007:

(In millions)

September 30,
2008

December 31,
2007Raw materials

$
99.0

$
76.3In process


53.4


44.7Finished products


235.2


203.7General merchandise


43.8


38.2$
431.4

$
362.9


In
the third quarter of 2008, Grace changed its method of accounting for U.S. inventories from LIFO to FIFO (see Note 1 for further discussion). The accounting change has resulted
in

32

---



W. R. Grace & Co. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited) (Continued)

7. Inventories (Continued)

retrospectively
restated prior period consolidated statements of operations and balance sheet measures as follows:

Three Months Ended September 30, 2007Consolidated Statement of Operations
(In millions, except per share data)

As Restated

As Originally
Reported

$ Change

% ChangeCost of goods sold

$
532.6

$
537.6

$
(5.0
)

(0.9
)%Income before income taxes and minority interest


32.7


27.4


5.3


19.3
%Provision for income taxes


(8.6
)

(7.4
)

(1.2
)

16.2
%Minority interest in consolidated entities


(5.0
)

(3.3
)

(1.7
)

51.5
%Net income

$
19.1

$
16.7

$
2.4


14.4
%Diluted earnings per share

$
0.27

$
0.23

$
0.04


17.4
%




Nine Months Ended September 30, 2007Consolidated Statement of Operations
(In millions, except per share data)

As Restated

As Originally
Reported

$ Change

% ChangeCost of goods sold

$
1,564.7

$
1,588.2

$
(23.5
)

(1.5
)%Income before income taxes and minority interest


107.1


83.4


23.7


28.4
%Provision for income taxes


(36.7
)

(31.6
)

(5.1
)

16.1
%Minority interest in consolidated entities


(18.8
)

(9.8
)

(9.0
)

91.8
%Net income

$
51.6

$
42.0

$
9.6


22.9
%Diluted earnings per share

$
0.72

$
0.59

$
0.13


22.0
%




As of December 31, 2007Consolidated Balance Sheet
(In millions)

As Restated

As Originally
Reported

$ Change

% ChangeInventories

$
362.9

$
303.5

$
59.4


19.6
%Deferred income taxes


747.5


767.5


(20.0
)

(2.6
)%Total assets


3,908.4


3,869.0


39.4


1.0
%Minority interest in consolidated entities


73.2


70.8


2.4


3.4
%Total liabilities


4,258.0


4,255.6


2.4


0.1
%Accumulated deficit


(368.1
)

(405.1
)

37.0


9.1
%Total shareholders' (deficit)


(349.6
)

(386.6
)

37.0


9.6
%


In
the above table, the $0.3 million and $0.2 million difference between the change in cost of goods sold and the change in income before income taxes and minority interest
as originally reported and as restated for the three and nine month periods ended September 30, 2007, respectively, relates, for each period, to miscellaneous reclassifications and rounding
adjustments to other financial statement line items. The cumulative effect of the change from LIFO to FIFO was to reduce Grace's accumulated deficit by $37.0 million as of January 1,
2008. If Grace had not elected to change the accounting method
for U.S. inventories from LIFO to FIFO, net income for the three months and nine months ended September 30, 2008 would have been $22.9 million ($0.31 per diluted share) and
$61.6 million ($0.85 per share), respectively.

33

---



W. R. Grace & Co. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited) (Continued)

8. Other Balance Sheet Accounts

(In millions)

September 30,
2008

December 31,
2007Other AssetsDeferred charges

$
37.1

$
38.4Long-term receivables, less allowances of $0.0 (2007-$0.0)


1.1


1.3Patents, licenses and other intangible assets, net


75.6


82.2Fair value of foreign exchange rate forward contracts


12.6


2.5Investments in unconsolidated affiliates and other


15.8


12.2$
142.2

$
136.6Other Current LiabilitiesAccrued compensation

$
93.2

$
97.2Customer volume rebates


35.7


44.1Accrued commissions


12.4


11.6Accrued reorganization fees


23.1


27.5Income tax payable


22.4


30.4Deferred tax liability


8.9


8.8Fair value of foreign exchange rate forward contracts





13.6Other accrued liabilities


95.9


91.9$
291.6

$
325.1Other LiabilitiesLong-term self-insurance reserve

$
8.0

$
8.0Retained obligations of divested businesses


5.3


5.3Long-term incentive compensation


6.5


13.8Other accrued liabilities


17.7


19.1$
37.5

$
46.2


Accrued
compensation in the table above includes salaries and wages as well as estimated current amounts due under the annual and long-term incentive programs.

9. Life Insurance

Grace is the beneficiary of corporate-owned life insurance ("COLI") policies on certain current and former employees with a net cash surrender value of $35.1 million and
$81.0 million at September 30, 2008 and December 31, 2007, respectively. The policies were acquired to fund various employee benefit programs and other long-term
liabilities and are structured to provide cash flow (primarily tax-free) over an extended number of years.

34

---



W. R. Grace & Co. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited) (Continued)

9. Life Insurance (Continued)

The
following tables summarize activity in these policies for the nine months ended September 30, 2008 and 2007, and the components of net cash value at September 30, 2008
and December 31, 2007:

Nine Months Ended September 30,Life InsuranceActivity Summary
(In millions)

2008

2007Earnings on policy assets

$
2.5

$
3.6Interest on policy loans


(0.5
)

(0.6
)Proceeds from policy loans


(40.0
)

Premiums


0.4


1.7Policy loan repayments





0.1Proceeds from termination of life insurance policies


(8.1
)

Net investing activity


(0.2
)

(0.5
)Change in net cash value

$
(45.9
)
$
4.3Tax-free proceeds received

$
0.2

$
0.3




Components of Net Cash Value
(In millions)

September 30,
2008

December 31,
2007Gross cash value

$
80.4

$
85.8Principalpolicy loans


(45.0
)

(4.7
)Accrued interestpolicy loans


(0.3
)

(0.1
)Total net cash value


35.1


81.0Less: current portion


(30.8
)

(77.1
)Net cash valuelong-term

$
4.3

$
3.9Insurance benefits in force

$
123.7

$
141.1


Grace's
financial statements display income statement activity and balance sheet amounts on a net basis, reflecting the contractual interdependency of policy assets and liabilities.

In
August 2008, Grace received proceeds of $40.0 million through a loan against the cash value of its life insurance policies. In June 2008, Grace surrendered and terminated life
insurance policies and received approximately $8.1 million of net cash value from the terminations. As a result of the terminations, gross cash value of the policies was reduced by
approximately $8.1 million. Grace's insurance benefits in force was reduced by approximately $18.9 million.

35

---



W. R. Grace & Co. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited) (Continued)

10. Debt

Components of Debt
(In millions)

September 30,
2008

December 31,
2007Debt payable within one year

$
6.1

$
4.7Debt payable after one yearOther long-term borrowings

$
0.3

$
0.3$
0.3

$
0.3Debt Subject to CompromiseBank borrowings

$
500.0

$
500.0Accrued interest on bank borrowings


315.2


283.0Drawn letters of credit


25.9


23.6Accrued interest on drawn letters of credit


4.1


3.3$
845.2

$
809.9Full-year weighted average interest rates on total debt


5.5
%

8.1
%


The
Debtors have entered into a debtor-in-possession post-petition loan and security agreement, or DIP facility, with a syndicate of lenders that, as
amended effective April 1, 2008, provides for up to $165 million of revolving loans and face amount of letters of credit. The DIP facility is secured by a priority lien on substantially
all assets of the Debtors with the exclusion of the capital stock of non-U.S. subsidiaries, and bears interest based on LIBOR. The term of the DIP facility ends on the earlier of
April 1, 2010 or the Debtors' emergence from Chapter 11. The DIP facility permits the increase of commitments of existing lenders and/or commitments by new lenders up to an aggregate
maximum of $250 million.

As
of September 30, 2008 and December 31, 2007, the Debtors had no revolving loans and $64.8 million and $56.3 million, respectively, of standby letters of
credit issued and outstanding under the DIP facility. These letters of credit and other holdback provisions reduced the aggregate unused availability for revolving loans and letters of credit, as of
the April 1, 2008 effective date of the amended DIP facility, to $98.5 million. The letters of credit were issued mainly for trade-related matters such as performance bonds, as well as
certain insurance and environmental matters.

11. Shareholders' Equity (Deficit)

Under its Certificate of Incorporation, the Company is authorized to issue 300,000,000 shares of common stock, $0.01 par value. Of the common stock unissued at September 30, 2008,
3,195,416 shares were reserved for issuance pursuant to stock options and other stock incentives. During the nine months ended September 30, 2008 and 2007, 529,617 and 1,312,703 stock options
were exercised for aggregate proceeds of $9.6 million and $20.2 million, respectively.

36

---



W. R. Grace & Co. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited) (Continued)

12. Earnings Per Share

The following table shows a reconciliation of the numerators and denominators used in calculating basic and diluted earnings per share.

Three Months
Ended
September 30,

Nine Months
Ended
September 30,Earnings Per Share

2008

2007

2008

2007(In millions, except per share amounts)NumeratorsNet income

$
28.3

$
19.1

$
78.1

$
51.6DenominatorsWeighted average common sharesbasic calculation


72.2


70.2


72.0


69.9Dilutive effect of employee stock options


0.6


1.3


0.7


1.6Weighted average common sharesdiluted calculation


72.8


71.5


72.7


71.5Basic earnings per share

$
0.39

$
0.27

$
1.08

$
0.74Diluted earnings per share

$
0.39

$
0.27

$
1.07

$
0.72


There
were no anti-dilutive options outstanding for the three months and nine months ended September 30, 2008 and 2007.

13. Comprehensive Income (Loss)

The following tables present the pre-tax, tax, and after-tax components of Grace's other comprehensive income (loss) for the three months and nine months ended
September 30, 2008 and 2007:

Three Months Ended September 30, 2008
(In millions)

Pre-Tax
Amount

Tax Benefit/
(Expense)

After-Tax
AmountDefined benefit pension and other postretirement plans:Amortization of net prior service credit included in net periodic benefit cost

$
(1.6
)
$
0.6

$
(1.0
)Amortization of net deferred actuarial loss included in net periodic benefit cost


6.7


(2.3
)

4.4Other changes in funded status


24.4


(7.6
)

16.8Benefit plans, net


29.5


(9.3
)

20.2Foreign currency translation adjustments


(1.8
)




(1.8
)Gain (loss) from hedging activities


(11.5
)

4.0


(7.5
)Other comprehensive income (loss)

$
16.2

$
(5.3
)
$
10.9


37

---



W. R. Grace & Co. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited) (Continued)

13. Comprehensive Income (Loss) (Continued)



Nine Months Ended September 30, 2008
(In millions)

Pre-Tax
Amount

Tax Benefit/
(Expense)

After-Tax
AmountDefined benefit pension and other postretirement plans:Amortization of net prior service credit included in net periodic benefit cost

$
(4.7
)
$
1.7

$
(3.0
)Amortization of net deferred actuarial loss included in net periodic benefit cost


20.1


(6.9
)

13.2Other changes in funded status


14.1


(3.2
)

10.9Benefit plans, net


29.5


(8.4
)

21.1Foreign currency translation adjustments


(4.4
)




(4.4
)Gain (loss) from hedging activities


(5.3
)

1.8


(3.5
)Other comprehensive income (loss)

$
19.8

$
(6.6
)
$
13.2




Three Months Ended September 30, 2007
(In millions)

Pre-Tax
Amount

Tax Benefit/
(Expense)

After-Tax
AmountDefined benefit pension and other postretirement plans:Amortization of net prior service credit included in net periodic benefit cost

$
(1.7
)
$
0.6

$
(1.1
)Amortization of net deferred actuarial loss included in net periodic benefit cost


7.0


(2.4
)

4.6Other changes in funded status


4.0


(1.0
)

3.0Benefit plans, net


9.3


(2.8
)

6.5Foreign currency translation adjustments


19.8





19.8Gain (loss) from hedging activities


(0.8
)

0.6


(0.2
)Other comprehensive income (loss)

$
28.3

$
(2.2
)
$
26.1




Nine Months Ended September 30, 2007
(In millions)

Pre-Tax
Amount

Tax Benefit/
(Expense)

After-Tax
AmountDefined benefit pension and other postretirement plans:Amortization of net prior service credit included in net periodic benefit cost

$
(5.2
)
$
1.8

$
(3.4
)Amortization of net deferred actuarial loss included in net periodic benefit cost


21.1


(7.2
)

13.9Other changes in funded status


53.0


(18.0
)

35.0Benefit plans, net


68.9


(23.4
)

45.5Foreign currency translation adjustments


34.4





34.4Gain (loss) from hedging activities


(0.9
)

0.6


(0.3
)Other comprehensive income (loss)

$
102.4

$
(22.8
)
$
79.6


38

---



W. R. Grace & Co. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited) (Continued)

13. Comprehensive Income (Loss) (Continued)

The
following table presents the components of Grace's accumulated other comprehensive income (loss) at September 30, 2008 and December 31, 2007:

Components of Accumulated Other Comprehensive Income (Loss)
(In millions)

September 30,
2008

December 31,
2007Defined benefit pension and other postretirement plans:Net prior service credit (net of tax)

$
1.9

$
4.9Net deferred actuarial loss (net of tax)


(380.6
)

(404.7
)Benefit plans, net


(378.7
)

(399.8
)Foreign currency translation


45.8


50.2Hedging activities, net of tax


(4.0
)

(0.5
)Accumulated other comprehensive income (loss)

$
(336.9
)
$
(350.1
)


Accumulated
other comprehensive income (loss) related to the defined benefit pension and other postretirement plans at September 30, 2008 and December 31, 2007,
respectively, represents the accumulation of net actuarial losses of $380.6 million and $404.7 million as well as net prior service credits of $1.9 million and
$4.9 million. These amounts are net of tax and are amortized as a component of net periodic benefit cost. For the nine months ended September 30, 2008 and 2007, the pre-tax
benefit recognized related to prior service credits was $4.7 million and $5.2 million, respectively, and the pre-tax expense recognized for amortization of accumulated
actuarial losses was $20.1 million and $21.1 million, respectively. In addition, $14.1 million and $53.0 million of pre-tax income was recognized for changes in
funded status during the nine months ended September 30, 2008 and 2007, respectively.

Grace
is a global enterprise operating in over 40 countries with local currency generally deemed to be the functional currency for accounting purposes. The foreign currency translation
amount represents the adjustments necessary to translate the balance sheets valued in local currencies to the U.S. dollar as of the end of each period presented, and to translate revenues and expenses
at average exchange rates for each period presented.

See
Note 6 for a discussion of hedging activities.

14. Commitments and Contingent Liabilities



Environmental RemediationGrace is subject to loss contingencies resulting from extensive and evolving federal, state, local and foreign environmental laws and
regulations relating to the generation, storage, handling, discharge and disposition of hazardous wastes and other materials. Grace accrues for anticipated costs associated with investigative and
remediation efforts where an assessment has indicated that a probable liability has been incurred and the cost can be reasonably estimated. These accruals do not take into account any discounting for
the time value of money.

At
September 30, 2008, Grace's estimated liability for environmental investigative and remediation costs totaled $148.1 million, as compared with $368.6 million at
December 31, 2007. This amount is based on funding and/or remediation agreements in place and Grace's best estimate of its cost for sites not subject to a formal remediation plan.

39

---



W. R. Grace & Co. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited) (Continued)

14. Commitments and Contingent Liabilities (Continued)

In
June 2008, the Bankruptcy Court approved a multi-site settlement agreement that Grace executed with the U.S. Government, on behalf of the Environmental Protection Agency
("EPA") and other federal agencies. This agreement addresses 38 sites for which the EPA has filed a claim against Grace. Under this agreement, Grace is required to pay approximately $44 million
to the U.S. Government and other parties in settlement of 35 of these outstanding claims. In return, the U.S. Government has agreed not to take action against Grace under the Comprehensive
Environmental Response, Compensation, and Liability Act with respect to such sites. In July 2008, Grace paid $0.7 million in partial reimbursement of the U.S. Government's administrative costs
and is required to pay the remainder of the settlement at emergence. Grace intends to separately fund or carry out remediation at the three remaining sites, including remediation relating to Grace's
former vermiculite mining and processing site in Libby, Montana discussed below.

Net
cash payments made against previously established reserves for the nine months ended September 30, 2008 and 2007 were $255.3 million and $7.1 million,
respectively.

Grace's
environmental liabilities are reassessed whenever circumstances become better defined or remediation efforts and their costs can be better estimated. These liabilities are
evaluated based on currently available information, including the progress of remedial investigation at each site, the current status of discussions with regulatory authorities regarding the method
and extent of remediation at each site, existing technology, prior experience in contaminated site remediation and the apportionment of costs among potentially responsible parties. Grace expects that
the funding of environmental remediation activities will be affected by the Chapter 11 Cases.

Vermiculite Related Matters

EPA Cost Recovery ClaimAs a result of a 2003 U.S. District Court ruling, Grace was required to reimburse the U.S. Government for $54.5 million (plus
interest) in costs expended through December 2001, and for all appropriate future costs to complete asbestos-related remediation relating to Grace's former vermiculite mining and processing activities
in the Libby, Montana area. These costs include cleaning and/or demolition of contaminated buildings, excavation and removal of contaminated soil, health screening of Libby residents and former mine
workers, and investigation and monitoring costs.

Grace
and the U.S. Department of Justice agreed to settle the EPA's cost recovery claims with respect to Grace's former Libby operations for a payment by Grace of $250 million
(including the $54.5 million referenced above). The settlement covers all past and future remediation costs in the Libby area, except for those relating to the Grace-owned mine. In return, the
EPA has agreed to take no action against Grace with respect to the Libby Asbestos Superfund Site. In June 2008, the Bankruptcy Court approved the settlement agreement. In June 2008, Grace paid
$100 million of the settlement amount plus accrued interest of approximately $1.6 million. In July 2008, Grace paid the remaining $150 million, plus approximately
$0.4 million of accrued interest.

Grace's
total estimated liability for asbestos remediation related to its former vermiculite operations in Libby, including the cost of remediation at vermiculite processing sites
outside of Libby, was $50.4 million and $270.8 million at September 30, 2008 and December 31, 2007, respectively, excluding interest. The estimated obligation at
September 30, 2008 and December 31, 2007 does not include the cost to remediate the Grace-owned mine site at Libby.

40

---



W. R. Grace & Co. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited) (Continued)

14. Commitments and Contingent Liabilities (Continued)

Montana Criminal ProceedingOn February 7, 2005, the United States Department of Justice announced the unsealing of a grand jury indictment against Grace and
seven current or former senior level employees(United States of America v. W. R. Grace & Co. et al)relating to Grace's former
vermiculite mining and processing activities in Libby, Montana. The indictment accuses the defendants of: (1) conspiracy to violate environmental laws and obstruct federal agency proceedings;
(2) violations of the federal Clean Air Act; and (3) obstruction of justice.

Grace
purchased the Libby mine in 1963 and operated it until 1990; vermiculite processing activities continued until 1992. The grand jury charges that the conspiracy took place from 1976
to 2002. According to the U.S. Department of Justice, Grace could be subject to fines in an amount equal to twice the after-tax profit earned from its Libby operations or twice the alleged
loss suffered by victims, plus additional amounts for restitution to victims. The indictment alleges that such after-tax profits were $140 million. Grace has categorically denied
any criminal wrongdoing and intends to vigorously defend itself at trial. The District Court has set a trial date of February 17, 2009 and has indicated that the trial could last three to five
months.

The
Bankruptcy Court previously granted Grace's request to advance legal and defense costs to the employees involved in this case, subject to a reimbursement obligation if it is later
determined that the employees did not meet the standards for indemnification set forth under the appropriate state corporate law. For the nine months ended September 30, 2008 and 2007, total
expense for Grace and the employees was $16.6 million and $11.2 million, respectively, which amounts are included in selling, general and administrative expenses in the accompanying
Consolidated Statements of Operations. Cumulative expenses to address this matter were $108.3 million through September 30, 2008.

Grace
will be unable to assess whether the indictment, or any conviction resulting therefrom, will have a material adverse effect on the results of operations or financial condition of
Grace or affect Grace's bankruptcy proceedings. For the remainder of 2008, Grace expects legal fees for this matter to be in the range of approximately $8 million to $10 million. Grace
intends to expense such costs as they are incurred.

New Jersey LawsuitOn June 1, 2005, the New Jersey Department of Environmental Protection ("DEP") filed a lawsuit against Grace and two former employees in
the Superior Court of New Jersey Law Division: Mercer County(N.J. Dept. of Environmental Protection v. W.R. Grace & Co. et al.)seeking
civil penalties for alleged misrepresentations and false statements made in a Preliminary
Assessment/Site Investigation Report and Negative Declarations submitted by Grace to the DEP in 1995 pursuant to the New Jersey Industrial Site Recovery Act. Grace submitted the report, which was
prepared by an independent environmental consultant, in connection with the closing of Grace's former plant in Hamilton Township, New Jersey. The State of New Jersey and the U.S. Department of Justice
also have conducted criminal investigations related to Grace's former operations of the Hamilton plant, but Grace is not aware of any recent activity related to such investigations.

Grace
purchased the Hamilton plant assets in 1963 and ceased operations in 1994. During the operating period, Grace produced spray-on fire protection products and other
vermiculite-based products at this plant. The current property owners have carried out remediation activities as directed by the EPA. The property owners and the EPA have filed proofs of claim against
Grace with respect to the Hamilton plant site. These claims were resolved as part of the multi-site settlement agreement described above for a total of approximately $4.1 million.

41

---



W. R. Grace & Co. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited) (Continued)

14. Commitments and Contingent Liabilities (Continued)

In
August 2007, the Bankruptcy Court denied the State of New Jersey's motion for leave to file a late proof of claim in the amount of $31 million. This ruling, which the
State of New Jersey has appealed, does not affect the claims against the former employees, for which Grace would have an indemnification obligation. On April 1, 2008, the Bankruptcy Court
issued an opinion and order directing New Jersey to dismiss its lawsuit against Grace with prejudice. New Jersey has appealed this decision.

Non-Vermiculite Related Matters

At September 30, 2008 and December 31, 2007, Grace's estimated liability for remediation of sites not related to its
former vermiculite mining and processing activities was $97.7 million and $97.8 million, respectively. This liability relates to Grace's current and former operations, including its
share of liability for off-site disposal at facilities where it has been identified as a potentially responsible party. Grace's estimated liability is based upon an evaluation of claims
for which sufficient information was available and the liabilities settled pursuant to the multi-site settlement agreement described above. As Grace receives new information, its estimated
liability may change materially.

Purchase CommitmentsGrace engages in purchase commitments to minimize the
volatility of major components of direct manufacturing costs including natural gas, certain metals, asphalt, amines and other materials. Such commitments are for quantities that Grace fully expects to
use in its normal operations.

Guarantees and Indemnification ObligationsGrace is a party to many contracts containing guarantees and indemnification obligations. These contracts primarily
consist of:



42

---





W. R. Grace & Co. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited) (Continued)

14. Commitments and Contingent Liabilities (Continued)

Financial AssurancesFinancial assurances have been established for a variety of purposes, including insurance and environmental matters, asbestos settlements and
appeals, trade-related commitments and other matters. At September 30, 2008, Grace had gross financial assurances issued and outstanding of $292.0 million, comprised of
$141.7 million of surety bonds issued by various insurance companies, and $150.3 million of standby letters of credit and other financial assurances issued by various banks. As discussed
in Note 10, $64.8 million of these financial assurances have been issued under the DIP facility.

In
connection with a 1994 divestment, Grace obtained a letter of credit in the maximum amount of $25.0 million to secure scheduled payments on bonds issued to fund the
transaction. Amounts drawn under this letter of credit aggregated $6.3 million through September 30, 2008. The last of the bonds matures in November 2016. Because the primary source of
bond payment funds is revenue from contracts under which timing and amounts of sales are variable, it is not possible to predict future draws.

Accounting for ContingenciesAlthough the outcome of each of the matters discussed above cannot be predicted with certainty, Grace has assessed its risk and has
made accounting estimates as required under U.S. generally accepted accounting principles. As a result of the Filing, claims related to certain of the items discussed above will be addressed as part
of Grace's Chapter 11 proceedings. Accruals recorded for such contingencies have been included in "liabilities subject to compromise" in the accompanying Consolidated Balance Sheets. The
amounts of these liabilities as ultimately determined through the Chapter 11 proceedings could be materially different from amounts recorded at September 30, 2008.

15. Pension Plans and Other Postretirement Benefit Plans

Pension PlansGrace maintains defined benefit pension plans covering employees of certain units who meet age and service requirements. Benefits are generally based
on final average salary and years of service. Grace funds its U.S. qualified pension plans ("U.S. qualified pension plans") in accordance with U.S. federal laws and regulations. Non-U.S.
pension plans ("non-U.S. pension plans") are funded under a variety of methods, as required under local laws and customs.

Grace
also provides, through nonqualified plans, supplemental pension benefits in excess of U.S. qualified pension plan limits imposed by federal tax law. These plans cover officers and
higher-level employees and serve to increase the combined pension amount to the level that they otherwise would have received under the U.S. qualified pension plans in the absence of such limits. The
nonqualified plans are unfunded and Grace pays the costs of benefits as they are incurred.

At
the December 31, 2007 measurement date for Grace's defined benefit pension plans, the projected benefit obligation ("PBO") was approximately $1,449 million as measured
under U.S. generally accepted accounting principles. The PBO basis reflects the present value (using a 6.25% discount rate for U.S. plans and a 5.81% weighted average discount rate for
non-U.S. plans as of December 31, 2007) of vested and non-vested benefits earned from employee service to date, based upon current services and estimated future pay
increases for active employees.

Beginning
in 2007, on a quarterly basis, Grace analyzes pension assets and pension liabilities along with the resulting funded status, and updates its estimate of these measures. Funded
status is adjusted for contributions, benefit payments, actual return on assets, current discount rates and other identifiable and material actuarial changes.

43

---



W. R. Grace & Co. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited) (Continued)

15. Pension Plans and Other Postretirement Benefit Plans (Continued)

The
assumed discount rate for pension plans reflects the market rates for high quality corporate bonds currently available and is subject to change based on changes in the overall market
interest rates. For the U.S. qualified pension plans, the assumed discount rate of 6.25% as of December 31, 2007 was selected by Grace, in consultation with its independent actuaries, based on
a yield curve constructed from a portfolio of high quality bonds for which the timing and amount of cash outflows approximate the estimated payouts of the plan. Based on review of an updated yield
curve analysis as of September 30, 2008, Grace increased the discount rate for the U.S. qualified pension plans from 6.75% at June 30, 2008 to 7.50% at September 30, 2008 based on
market rates at that time. Grace also evaluated the current discount rates for the pension plans in the United Kingdom, Germany and Canada, which combined represented approximately 90% of the benefit
obligation of the non-U.S. pension plans as of December 31, 2007. Based on review of the yield curve analyses for these plans as of September 30, 2008, Grace changed the
discount rate for the United Kingdom from 6.50% at June 30, 2008 to 7.00% at September 30, 2008, for Germany from 6.25% at June 30, 2008 to 6.75% at September 30, 2008, and
for Canada from 6.00% at June 30, 2008 to 6.50% at September 30, 2008. The funded status as of September 30, 2008 reflects an increase in total assets of approximately
$15 million, and a decrease in total liabilities of approximately $83 million as compared to June 30, 2008, resulting from the change in discount rates (including the
postretirement plan). After tax effects, total assets decreased from June 30, 2008 to September 30, 2008 by approximately $18 million, total liabilities decreased by approximately
$83 million and shareholders' equity increased by approximately $65 million. The funded status as of September 30, 2008 reflects an increase to total assets of approximately
$40 million and a decrease to total liabilities of approximately $149 million as compared to December 31, 2007, resulting from the change in discount rates (including the
postretirement plan). After tax effects, the total assets decreased from December 31, 2007 to
September 30, 2008 by approximately $23 million, total liabilities decreased by approximately $149 million and shareholders' equity increased by approximately $126 million.

At
September 30, 2008, Grace's recorded pension liability for underfunded and unfunded plans was $396.6 million ($173.1 million included in "underfunded defined
benefit pension plans", $121.8 million included in "unfunded pay-as-you-go defined benefit pension plans", $12.4 million included in "other current
liabilities", and $89.3 million related to noncurrent supplemental pension benefits, included in "liabilities subject to compromise"). The recorded liability reflects: (1) the shortfall
between dedicated assets and the PBO of underfunded plans ($173.1 million); and (2) the PBO of unfunded pay-as-you-go plans ($223.5 million).

Postretirement Benefits Other Than PensionsGrace provides postretirement health care and life insurance benefits for retired employees of certain U.S. business
units and certain divested units. The postretirement medical plan provides various levels of benefits to employees hired before 1991 who retire from Grace after age 55 with at least 10 years of
service. These plans are unfunded and Grace pays a portion of the costs of benefits under these plans as they are incurred. Grace applies SFAS No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions," which requires that the future costs of postretirement health care and life insurance benefits be accrued over the employees' years of service.

Retirees
and beneficiaries covered by the postretirement medical plan are required to contribute a minimum of 40% of the calculated premium for that coverage. During 2002, per capita
costs under the retiree medical plans exceeded caps on the amount Grace was required to contribute under a 1993

44

---



W. R. Grace & Co. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited) (Continued)

15. Pension Plans and Other Postretirement Benefit Plans (Continued)

amendment
to the plan. As a result, for 2003 and future years, retirees will bear 100% of any increase in premium costs.

For
2008 measurement purposes, per capita costs, before retiree contributions, were assumed to initially increase at a rate of 8.5%. The rate is assumed to decrease gradually to 5%
through 2012 and remain at that level thereafter. A one percentage point increase or decrease in assumed health care medical cost trend rates would not materially change Grace's postretirement benefit
obligations (impact of less than $1.0 million) and would have a negligible impact on the aggregate of the service and interest cost components of net periodic benefit cost.

The
components of net periodic benefit cost (income) for Grace's pension and postretirement plans for the three months and nine months ended September 30, 2008 and 2007 are as
follows:

Three Months Ended September 30,2008

2007Pension



PensionPost-
retirement

Post-
retirementComponents of Net Periodic Benefit Cost (Income)
(In millions)

U.S.

Non-U.S.

U.S.

Non-U.S.Service cost

$
4.1

$
2.2

$


$
3.9

$
2.1

$
Interest cost


15.5


5.9


1.2


14.5


5.3


1.1Expected return on plan assets


(15.4
)

(4.9
)




(14.6
)

(5.5
)

Amortization of prior service cost (credit)


0.3


0.1


(2.0
)

0.6


0.2


(2.4
)Amortization of net deferred actuarial loss


5.0


1.3


0.4


5.3


1.3


0.4Net periodic benefit cost (income)

$
9.5

$
4.6

$
(0.4
)
$
9.7

$
3.4

$
(0.9
)




Nine Months Ended September 30,2008

2007Pension



PensionPost-
retirement

Post-
retirementComponents of Net Periodic Benefit Cost (Income)
(In millions)

U.S.

Non-U.S.

U.S.

Non-U.S.Service cost

$
12.2

$
6.6

$
0.2

$
11.8

$
5.9

$
0.2Interest cost


46.6


18.0


3.6


43.5


15.4


3.4Expected return on plan assets


(46.4
)

(15.0
)




(43.8
)

(16.0
)

Amortization of prior service cost (credit)


1.1


0.5


(6.3
)

1.8


0.6


(7.5
)Amortization of net deferred actuarial loss


14.9


3.9


1.3


15.8


3.9


1.4Net periodic benefit cost (income)

$
28.4

$
14.0

$
(1.2
)
$
29.1

$
9.8

$
(2.5
)


Plan Contributions and FundingSubject to any required approval of the Bankruptcy Court, Grace intends to satisfy its funding obligations under the U.S. qualified
pension plans and to comply with all of the requirements of the Employee Retirement Income Security Act of 1974 ("ERISA"). For ERISA purposes, funded status is calculated on a different basis than
under U.S. generally accepted accounting principles. On June 18, 2008, Grace obtained Bankruptcy Court approval to fund minimum required payments of approximately $24 million for the
period from July 2008 through January 2009. In that regard, Grace contributed approximately $11 million in September 2008 and approximately $6 million in October 2008 to the trusts that
hold assets of the U.S. qualified pension plans. While Grace intends to continue to fund all minimum required payments under the U.S. qualified pension plans, there can be no assurance that the
Bankruptcy Court will continue to approve these payments.

45

---



W. R. Grace & Co. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited) (Continued)

15. Pension Plans and Other Postretirement Benefit Plans (Continued)

Contributions
to non-U.S. pension plans are not subject to Bankruptcy Court approval and Grace intends to fund such plans based on applicable legal requirements and actuarial
and trustee recommendations.

Grace
plans to pay benefits as they become due under virtually all pay-as-you-go plans and to maintain compliance with federal funding laws for its
U.S. qualified pension plans.

16. Operating Segment Information

Grace is a global producer of specialty chemicals and materials. It generates revenues from two operating segments: Grace Davison and Grace Construction Products. Intersegment sales,
eliminated in consolidation, are not material.

Grace's
reportable operating segments reflect the transfer of the packaging technologies product line to the Grace Davison operating segment, which was completed in the fourth quarter of
2007. The previous Grace Performance Chemicals operating segment has been renamed "Grace Construction Products" as a result of the transfer. Previously reported segment information contained herein
has been retrospectively restated to reflect this realignment.

Three Months
Ended
September 30,

Nine Months
Ended
September 30,Operating Segment Data
(In millions)

2008

2007

2008

2007Net SalesGrace Davison

$
579.7

$
491.5

$
1,661.6

$
1,483.3Grace Construction Products


309.7


291.6


887.0


828.2Total

$
889.4

$
783.1

$
2,548.6

$
2,311.5Pre-tax Operating IncomeGrace Davison

$
62.2

$
60.9

$
209.8

$
199.0Grace Construction Products


44.9


44.3


114.9


117.8Corporate Costs


(24.7
)

(27.2
)

(72.4
)

(74.5
)Total

$
82.4

$
78.0

$
252.3

$
242.3


The
following table presents information related to Grace's operating segments for the three-month and nine-month periods ended September 30, 2008 and 2007,
respectively. Only those corporate expenses directly related to the operating segments are allocated for reporting purposes. All remaining corporate items are reported separately and labeled as such.

If
Grace had not elected to change the accounting method for U.S. inventories from LIFO to FIFO, pre-tax operating income for the three months and nine months ended
September 30, 2008 would have been $55.3 million and $186.1 million for Grace Davison and $43.9 million and $113.5 million for Grace Construction Products,
respectively.

Corporate
costs include expenses of corporate headquarters functions incurred in support of core operations, such as corporate financial and legal services, human resources management,
communications and regulatory affairs. Corporate costs also include certain pension and postretirement

46

---



W. R. Grace & Co. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited) (Continued)

16. Operating Segment Information (Continued)

benefits,
including the amortization of deferred costs that are considered a core operating expense but not allocated to operating segments.

The
following table presents information related to the geographic areas in which Grace operated for the three months and nine months ended September 30, 2008 and 2007,
respectively. Sales are attributed to geographic areas based on customer location.

Three Months
Ended
September 30,

Nine Months
Ended
September 30,Geographic Area Data
(In millions)

2008

2007

2008

2007Net SalesUnited States

$
292.7

$
259.1

$
816.1

$
757.4Canada and Puerto Rico


28.8


24.5


79.7


69.7Total North America

$
321.5

$
283.6

$
895.8

$
827.1Europe Africa


338.1


324.0


1,029.2


953.4Asia Pacific


167.8


123.3


455.1


382.3Latin America


62.0


52.2


168.5


148.7Total

$
889.4

$
783.1

$
2,548.6

$
2,311.5


The
pre-tax operating income for Grace's operating segments for the three months and nine months ended September 30, 2008 and 2007, respectively, is reconciled below
to income before income taxes and minority interest presented in the accompanying Consolidated Statements of Operations.

Three Months
Ended
September 30,

Nine Months
Ended
September 30,Reconciliation of Operating Segment Data to Financial Statements
(In millions)

2008

2007

2008

2007Pre-tax operating incomecore operations

$
82.4

$
78.0

$
252.3

$
242.3Minority interest in consolidated entities


4.0


5.0


11.4


18.8Chapter 11 expenses, net of interest income


(12.0
)

(21.3
)

(48.4
)

(62.7
)Net gain (loss) on sales of investments and disposals of assets


(0.9
)

(0.8
)

(0.3
)

2.8Provision for environmental remediation


(2.9
)




(8.8
)

(12.0
)Interest expense and related financing costs


(13.1
)

(17.3
)

(42.8
)

(57.1
)Other, net


(29.4
)

(10.9
)

(35.0
)

(25.0
)Income before income taxes and minority interest

$
28.1

$
32.7

$
128.4

$
107.1


Minority
interest primarily pertains to Advanced Refining Technologies LLC ("ART"), a joint venture between Grace and Chevron Products Company where Grace has a 55% economic
interest.

47

---



W. R. Grace & Co. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited) (Continued)

17. Minority Interest in Consolidated Entities

Within both Grace Davison and Grace Construction Products, Grace conducts certain business activities in various countries through joint ventures with unaffiliated third parties. The
following tables present summary financial statistics for Grace's combined businesses subject to profit sharing:

Three Months
Ended
September 30,

Nine Months
Ended
September 30,(In millions)

2008

2007

2008

2007Sales

$
144.8

$
90.0

$
352.4

$
305.8Income before taxes


9.3


11.9


26.6


43.8Net income


8.0


11.0


24.7


41.9Minority interests in net income


4.0


5.0


11.4


18.8Dividends paid to minority interests





(0.2
)

(13.3
)

(12.0
)




(In millions)

September 30,
2008

December 31,
2007Cash

$
53.2

$
57.0Other current assets


171.9


162.8Total assets


245.9


238.7Total liabilities


86.0


74.7Shareholders' equity


159.9


164.0Minority interests in shareholders' equity


69.7


73.2


48

---





Item 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Financial Summary for September 30, 2008

Following is a summary of key financial measures of our performance for the three months and nine months ended September 30,
2008 compared with the respective prior year periods. Our reportable operating segments reflect the transfer of our packaging technologies product line to our Grace Davison operating segment, which we
completed in the fourth quarter of 2007. We have renamed our previous Grace Performance Chemicals operating segment as "Grace Construction Products" as a result of the transfer. We have
retrospectively restated all segment information contained herein to reflect this realignment. Net results for each period have been primarily affected by: the performance of our
businesseswhich we categorize as "core operations;" and the impact of legal contingencies and other nonoperating liabilitieswhich we categorize as "noncore activities."



49

---





See
the Analysis of Continuing Operations table, "Results of Operations" and "Operating Segment Overview" sections below for analyses of our operating results on a consolidated basis, as
well as by operating segment. See "Analysis of Cash Flows" below for further discussion of cash flows.

We
are attempting to resolve noncore liabilities and contingencies through our Chapter 11 proceeding. Our noncore liabilities include asbestos-related litigation, environmental
remediation, tax disputes and business litigation. Our operating statements include periodic adjustments to account for changes in estimates of such liabilities and developments in our
Chapter 11 case. These liabilities and contingencies may result in continued volatility in net income in the future.

Description of Core Business

We are engaged in specialty chemicals and specialty materials businesses on a worldwide basis through two operating segments:

Grace Davisonincludes:



50

---





Hydroprocessing
catalysts are sold through Advanced Refining Technologies, LLC, ART, our joint venture with Chevron Products Company. We report 100% of the revenues of the ART
joint venture, but only receive 55% of the income after minority interest is allocated to Chevron.

Key
external factors affecting our Refining Technologies product group are the economics of the petroleum refining industry, specifically the impacts of demand for transportation fuels
and petrochemical products, and crude oil supply. FCC catalysts and some hydroprocessing catalysts are consumed at a relatively steady rate and replaced regularly, while other hydroprocessing
catalysts are consumed over a period of years and replaced in an irregular pattern.

Sales
of our Materials Technologies and Specialty Technologies product groups are affected by global economic conditions, including the underlying growth rate of targeted
end-use applications.

Grace Construction Productsincludes specialty chemicals and building materials, including concrete admixtures and fibers used to improve
the durability and working properties of concrete, additives used in cement processing to improve energy efficiency, enhance the characteristics of finished cement and improve ease of use, building
materials used in commercial, infrastructure and residential construction and renovation to protect buildings from water, vapor and air penetration, and fire protection materials used to protect
buildings in the event of fire.

Construction
Products sales are primarily impacted by global non-residential construction activity and U.S. residential construction activity.

We
manage the Construction Products operating segment by geographic region as follows:



Global scopeWe operate our business on a global scale with approximately 68% of our revenue (see following table) and over
50% of our operating properties outside the United States. We conduct business in 41 countries and in more than 20 currencies. We manage our operating segments on a global basis, to serve global
markets. Currency fluctuations in relation to the U.S. dollar affect our reported earnings, net assets and cash flows.

51

---



The
table below shows the sales in each of our operating segments, and domestic and international sales, as a percentage of our total sales.

Three Months Ended
September 30,

Nine Months Ended
September 30,Percentage of Total Grace Sales
(In millions)

2008

2007

2008

2007Grace Davison


65.2
%

62.8
%

65.2
%

64.2
%Grace Construction Products


34.8
%

37.2
%

34.8
%

35.8
%Total


100.0
%

100.0
%

100.0
%

100.0
%Grace U.S.


32.9
%

33.1
%

32.0
%

32.8
%Grace non-U.S.


67.1
%

66.9
%

68.0
%

67.2
%Total


100.0
%

100.0
%

100.0
%

100.0
%


Chapter 11 Case

As described under "Voluntary Bankruptcy Filing" in Notes 1 and 2 to the Consolidated Financial Statements, Grace and our
principal U.S. operating subsidiary are debtors-in-possession under Chapter 11 of the U.S. Bankruptcy Code under the supervision of the United States Bankruptcy Court
for the District of Delaware. Our non-U.S. subsidiaries, although not part of the Chapter 11 filing, are owned directly or indirectly by our principal operating subsidiary or other
filing entities. Under Chapter 11, we have continued to operate our businesses as debtors-in-possession under court protection from creditors and claimants, while using
the Chapter 11 process to develop and implement a plan for addressing the asbestos-related claims. Since the Chapter 11 filing, the Bankruptcy Court has approved all motions necessary to
conduct normal business activities.

Critical Accounting Estimates

See the "Critical Accounting Estimates" heading in Item 7 of our Form 10-K for the year ended
December 31, 2007 for a discussion of our critical accounting estimates.

Recent Accounting Pronouncements

See Note 1 to the Consolidated Financial Statements for a discussion of recent accounting pronouncements and their effect on us.

Summary Financial Information and Metrics

Set forth below is a chart that lists our key operating statistics, and dollar and percentage changes for the three-month and
nine-month periods ended September 30, 2008 and 2007. Please refer to this Analysis of Continuing Operations chart when reading Management's Discussion and Analysis of Financial
Condition and Results of Operations.

In
the Analysis of Continuing Operations chart, as well as in the financial information presented throughout Management's Discussion and Analysis of Financial Condition and Results of
Operations, we present our financial results in the same manner as results are reviewed internally. We break out our results of operations by operating segment and between "core operations" and
"noncore activities." Core operations comprise the financial results of Grace Davison, Grace Construction Products, and the costs of corporate activities that directly or indirectly support our
business operations. In contrast, noncore activities comprise all other events and transactions not directly related to the generation of operating revenue or the support of our core operations and
generally relate to our former operations and products. See "Pre-tax Income (Loss) from Noncore Activities" for more information about noncore activities. We use pre-tax income
from core operations as the performance factor in

52

---



determining
certain incentive compensation and as the profitability factor in all significant business decisions.

Pre-tax
income from core operations, pre-tax income (loss) from noncore activities, pre-tax income from core operations as a percentage of sales, and
pre-tax income from core operations before depreciation and amortization do not purport to represent income or cash flow measures as defined under U.S. generally accepted accounting
principles, and you should not consider them an alternative to such measures as an indicator of our performance. We provide these measures so you can distinguish the operating results of our current
business base from the income and expenses of our past businesses, discontinued products, and corporate legacies, and the effect of our Chapter 11 proceedings, and to ensure that you understand
the key data that management uses to evaluate our results of operations.

Pre-tax
income from core operations has material limitations as an operating performance measure because it excludes income and expenses that comprise our noncore activities,
which include, among other things, provisions for asbestos-related litigation and environmental remediation, income from insurance settlements, and legal defense costs, all of which have been material
components of our net income (loss). Pre-tax income from core operations before depreciation and amortization also has material limitations as an operating performance measure since it
excludes the impact of depreciation and amortization expense. Our business is substantially dependent on the successful deployment of our capital assets; therefore, depreciation and amortization
expense is a necessary element of our costs and ability to generate revenue. We compensate for the limitations of these measurements by using these indicators together with net income (loss) as
measured under U.S. generally accepted accounting principles to present a complete analysis of our results of operations. You should evaluate pre-tax income from core operations and
pre-tax income from core operations before depreciation and amortization in conjunction with net income (loss) for a more complete analysis of our financial results.

53

---



Three Months Ended September 30,

Nine Months Ended September 30,Analysis of Continuing Operations
(In millions)

2008

2007

$ Change
Fav
(Unfav)

% Change
Fav
(Unfav)

2008

2007

$ Change
Fav
(Unfav)

% Change
Fav
(Unfav)Net sales:Grace Davison

$
579.7

$
491.5

$
88.2


17.9
%
$
1,661.6

$
1,483.3

$
178.3


12.0
%Refining Technologies


305.3


228.9


76.4


33.4
%

828.0


705.0


123.0


17.4
%Materials Technologies


183.4


169.6


13.8


8.1
%

548.3


499.3


49.0


9.8
%Specialty Technologies


91.0


93.0


(2.0
)

(2.2
)%

285.3


279.0


6.3


2.3
%Grace Construction Products


309.7


291.6


18.1


6.2
%

887.0


828.2


58.8


7.1
%Americas


164.4


154.9


9.5


6.1
%

460.3


442.4


17.9


4.0
%Europe


106.1


99.2


6.9


7.0
%

317.1


283.6


33.5


11.8
%Asia


39.2


37.5


1.7


4.5
%

109.6


102.2


7.4


7.2
%Total Grace net sales

$
889.4

$
783.1

$
106.3


13.6
%
$
2,548.6

$
2,311.5

$
237.1


10.3
%Pre-tax operating income:Grace Davison(1)

$
62.2

$
60.9

$
1.3


2.1
%
$
209.8

$
199.0

$
10.8


5.4
%Grace Construction Products(2)


44.9


44.3


0.6


1.4
%

114.9


117.8


(2.9
)

(2.5
)%Corporate costs:Support functions


(11.3
)

(11.8
)

0.5


4.2
%

(35.0
)

(35.2
)

0.2


0.6
%Pension, performance-related compensation, and other


(13.4
)

(15.4
)

2.0


13.0
%

(37.4
)

(39.3
)

1.9


4.8
%Total Corporate costs


(24.7
)

(27.2
)

2.5


9.2
%

(72.4
)

(74.5
)

2.1


2.8
%Pre-tax income from core operations


82.4


78.0


4.4


5.6
%

252.3


242.3


10.0


4.1
%Pre-tax loss from noncore activities


(33.9
)

(13.3
)

(20.6
)

(154.9
)%

(47.2
)

(39.5
)

(7.7
)

(19.5
)%Interest expense


(13.1
)

(17.3
)

4.2


24.3
%

(42.8
)

(57.1
)

14.3


25.0
%Interest income


0.7


1.6


(0.9
)

(56.3
)%

3.1


5.3


(2.2
)

(41.5
)%Income before Chapter 11 expenses and income taxes


36.1


49.0


(12.9
)

(26.3
)%

165.4


151.0


14.4


9.5
%Chapter 11 expenses, net of interest income


(12.0
)

(21.3
)

9.3


43.7
%

(48.4
)

(62.7
)

14.3


22.8
%Benefit from (provision for) income taxes


4.2


(8.6
)

12.8


148.8
%

(38.9
)

(36.7
)

(2.2
)

(6.0
)%Net income

$
28.3

$
19.1

$
9.2


48.2
%
$
78.1

$
51.6

$
26.5


51.4
%Key Financial Measures:Pre-tax income from core operations as a percentage of sales:Grace Davison


10.7
%

12.4
%

NM


(1.7
)pts

12.6
%

13.4
%

NM


(0.8
)ptsGrace Construction Products


14.5
%

15.2
%

NM


(0.7
)pts

13.0
%

14.2
%

NM


(1.2
)ptsTotal Core Operations


9.3
%

10.0
%

NM


(0.7
)pts

9.9
%

10.5
%

NM


(0.6
)ptsTotal Core Operations adjusted for profit sharing of joint ventures(3)


9.7
%

10.6
%

NM


(0.9
)pts

10.3
%

11.3
%

NM


(1.0
)ptsPre-tax income from core operations before depreciation and amortization

$
112.3

$
106.3

$
6.0


5.6
%
$
343.1

$
325.8

$
17.3


5.3
%As a percentage of sales


12.6
%

13.6
%

NM


(1.0
)pts

13.5
%

14.1
%

NM


(0.6
)ptsDepreciation and amortization

$
29.9

$
28.3

$
(1.6
)

(5.7
)%
$
90.8

$
83.5

$
(7.3
)

(8.7
)%Gross profit percentage (sales less cost of goods sold as a percent of sales)(4):Grace Davison


25.5
%

29.0
%

NM


(3.5
)pts

28.0
%

29.9
%

NM


(1.9
)ptsGrace Construction Products


35.1
%

37.7
%

NM


(2.6
)pts

35.1
%

37.0
%

NM


(2.0
)ptsTotal Grace


28.8
%

32.0
%

NM


(3.2
)pts

30.3
%

32.3
%

NM


(2.0
)ptsNet Consolidated Sales by Region:North America

$
321.5

$
283.6

$
37.9


13.4
%
$
895.8

$
827.1

$
68.7


8.3
%Europe Africa


338.1


324.0


14.1


4.4
%

1,029.2


953.4


75.8


8.0
%Asia Pacific


167.8


123.3


44.5


36.1
%

455.1


382.3


72.8


19.0
%Latin America


62.0


52.2


9.8


18.8
%

168.5


148.7


19.8


13.3
%Total

$
889.4

$
783.1

$
106.3


13.6
%
$
2,548.6

$
2,311.5

$
237.1


10.3
%


---

NM = Not meaningful

54

---



Results of Operations

The following is an overview of our financial performance for the three months and nine months ended September 30, 2008 compared
with the prior year periods.

Net SalesThe following tables identify the period-over-period increase or decrease in sales attributable to changes in product volume,
product price and/or mix, and the impact of foreign currency translation and metals.

Three Months Ended September 30, 2008
as a Percentage Increase (Decrease) from
Three Months Ended September 30, 2007Net Sales Variance Analysis

Volume

Price/Mix

Currency Translation

Metals

TotalGrace Davison


2.9
%

5.4
%

5.1
%

4.5
%

17.9
%Grace Construction Products


(2.5
)%

5.1
%

3.6
%

N/A


6.2
%Net sales


0.9
%

5.3
%

4.6
%

2.8
%

13.6
%By Region:North America


1.9
%

7.2
%

0.2
%

4.1
%

13.4
%Europe Africa


(6.3
)%

3.9
%

8.9
%

(2.0
%)

4.4
%Asia Pacific


15.5
%

4.8
%

1.9
%

13.5
%

36.1
%Latin America


5.4
%

5.0
%

7.8
%

0.6
%

18.8
%


Grace
Davison:    Third quarter sales were $579.7 million, up 17.9% from the prior year quarter. Sales were positively affected by higher selling prices in all product
groups and regions (which offset higher raw materials and energy costs), favorable foreign currency translation, and higher commodity metal costs. Volume growth was affected by slowing customer
demand, particularly in Europe Africa, Hurricanes Gustav and Ike, which adversely affected sales in Refining Technologies and Specialty Technologies, and a 2007 product line divestiture in Specialty
Technologies. Our contractual arrangements with certain customers provide for the pass through of certain commodity metals costs. The cost of these commodity metals can significantly fluctuate based
on market factors and therefore can have a significant impact on sales.

Grace
Construction Products:    Third quarter sales were $309.7 million, up 6.2% from the prior year quarter. Sales were positively affected by higher selling prices in
all major geographic regions and product groups and favorable foreign currency translation. Sales volumes were unfavorably impacted in North America and Western Europe by slowing customer demand for
concrete admixtures in the commercial construction markets and by continuing weakness in residential construction. Higher sales of waterproofing protection products continue to partially offset lower
volumes of other products.

55

---



Nine Months Ended September 30, 2008
as a Percentage Increase (Decrease) from
Nine Months Ended September 30, 2007Net Sales Variance Analysis

Volume

Price/Mix

Currency
Translation

Metals

TotalGrace Davison


0.9
%

4.6
%

5.6
%

0.9
%

12.0
%Grace Construction Products


(0.6
)%

3.1
%

4.6
%

N/A


7.1
%Net sales


0.4
%

4.1
%

5.2
%

0.6
%

10.3
%By Region:North America


0.4
%

4.9
%

0.4
%

2.6
%

8.3
%Europe Africa


(2.7
)%

3.0
%

10.0
%

(2.2
%)

8.0
%Asia Pacific


6.7
%

4.8
%

3.2
%

4.0
%

19.0
%Latin America


4.3
%

4.5
%

6.1
%

(1.7
%)

13.3
%


Grace
Davison:    Sales for the nine months ended September 30, 2008 were $1,661.6 million, up 12.0% over the comparable prior year period. Sales were positively
affected by favorable foreign currency translation and higher selling prices in all product groups and regions. Sales volume increased in all regions with the exception of Europe Africa which
experienced lower customer demand. Sales volume was also unfavorably affected by the 2007 divestiture in Specialty Technologies.

Grace
Construction Products:    Sales for the nine months ended September 30, 2008 were $887.0 million, up 7.1% over the comparable prior year period.
Construction Products sales for the nine months ended September 30, 2008 were favorably affected by foreign currency translation and higher selling prices in all major geographic regions and
product groups. Strong sales of waterproofing protection products, mainly in North America and Middle East, offset the unfavorable impact of slowing customer demand for concrete and admixtures in the
commercial construction markets in North America and Western Europe.

Pre-tax Income from Core OperationsOperating profit for the three months and nine months ended September 30, 2008 increased mainly due to
selling price increases and higher volumes, partially offset by inflation on raw materials and energy costs.

We
attempt to mitigate commodity-driven price volatility through hedging techniques such as layering our required supply under fixed delivery contracts, implementing customer pricing
strategies, entering into commodity option and swap contracts with suppliers and financial institutions and entering into long-term supply contracts. Major raw materials that we consider
for these arrangements include natural gas, certain metals, petroleum-based materials and certain industrial chemicals. The actual cost to us of raw materials under these arrangements can differ
significantly from spot prices at any point in time. These contracts and programs can span a few months to several years. Our reported gross profit for the periods presented has been favorably
affected by certain raw material supply arrangements and unfavorably affected by others relative to the then-current market price.

We
also attempt to mitigate the effects of volatility in the prices of commodity metals by entering into sales contracts with certain customers that provide for the full or partial
pass-through of market prices for certain volatile commodity metals. Under these "pass-through" contracts, higher or lower market prices for commodity metals will increase or
decrease net sales but will generally not affect pre-tax operating income to the same extent.

Corporate
costs include corporate functional costs (such as finance, legal services, human resources, communications and information technology), the cost of corporate governance
(including directors and officers liability insurance) and pension costs related to both corporate employees and to the effects of changes in assets and liabilities for all of our pension plans.
Corporate costs for the three months and nine months ended September 30, 2008 decreased primarily due to lower expenses for pensions and other employment-related costs.

56

---



In
the third quarter of 2008, we changed our method of accounting for the cost of our U.S inventories from the last-in/first-out method, or LIFO, to the
first-in/first-out method, or FIFO. We made this change in order to achieve a consistent inventory costing method for both U.S. and non-U.S. inventories. We have
retrospectively restated the prior periods' financial statements to account for all inventories using FIFO. See Note 7 for further discussion.

Within
both Grace Davison and Grace Construction Products, we conduct certain business activities in various countries through joint ventures with unaffiliated third parties. Minority
interest in consolidated entities decreased due to lower earnings of our joint ventures, particularly ART, our largest joint venture. ART's year-over-year pre-tax
net income can change materially based on refill order patterns of customers and changes in commodity-based raw materials.

Pre-tax Loss from Noncore ActivitiesPre-tax loss from noncore activities reflects financial matters unrelated to our core operations. This
category of costs and income is expected to be volatile as potentially material items are addressed through our Chapter 11 proceedings and/or as the financial implications of our legal
contingencies become apparent. Some noncore activities are shown as separate items on the Consolidated Statement of Operations. Those not separately listed are primarily included in selling, general
and administrative expenses and in other (income) expense. The following table shows the components of noncore activities, and the captions in which each component is presented in the Consolidated
Statements of Operations:

Three Months Ended
September 30,

Nine Months Ended
September 30,(In millions)

2008

2007

2008

2007Provision for environmental remediationvermiculite

$


$


$
(5.0
)
$
(9.4
)Provision for environmental remediationother sites


(2.9
)




(3.8
)

(2.6
)Total provision for environmental remediation

$
(2.9
)
$


$
(8.8
)
$
(12.0
)COLI income, net

$
0.2

$
0.5

$
2.0


3.0Translation effectsintercompany loans


(42.3
)

6.8


(4.5
)

10.6Value of currency contracts


29.4


(6.0
)

5.7


(8.4
)Gain on sale of real estate








1.5


1.1Other


(3.5
)

(1.2
)

(5.4
)

(1.8
)Total other income (expense), net

$
(16.2
)
$
0.1

$
(0.7
)
$
4.5D&O insurance costportion related to Chapter 11

$
(1.0
)
$
(1.5
)
$
(3.1
)
$
(4.5
)Asbestos administration


(2.5
)

(2.1
)

(6.1
)

(6.2
)Postretirement benefit incomedivested businesses


0.1


0.5


0.3


1.5Stock appreciation rights





(2.1
)




(2.1
)Legal defense costs


(8.2
)

(5.7
)

(16.5
)

(13.1
)Other


(0.5
)

(0.6
)

(4.0
)

(1.9
)Total selling, general and administrative expenses

$
(12.1
)
$
(11.5
)
$
(29.4
)
$
(26.3
)Net pension costsdivested businesses


(2.7
)

(1.9
)

(8.3
)

(5.7
)Total defined benefit pension expense

$
(2.7
)
$
(1.9
)
$
(8.3
)
$
(5.7
)Total pre-tax loss from noncore activities

$
(33.9
)
$
(13.3
)
$
(47.2
)
$
(39.5
)


In
March 2004, we began accounting for currency fluctuations on a €293 million intercompany loan between our subsidiaries in the United States and Germany as a
component of operating results instead of as a component of other comprehensive income. This change was prompted by an analysis of new tax laws in Germany and our cash flow planning in connection with
our Chapter 11 reorganization,

57

---



which
together indicated that we should no longer consider this loan as part of our permanent capital structure in Germany. In May 2004, we entered into a series of foreign currency forward contracts
with a U.S. bank to mitigate future currency fluctuations on the remaining loan balance. Contract amounts of €200.7 million were extended in June 2005 at varying rates and have
terms that coincide with loan repayments that were due periodically through December 2008. As part of the contract extension, we were required to pay a settlement premium of $9.3 million to the
bank. We have been recovering this settlement premium over time as the contracts settled at rates greater than the initial rates in the May 2004 foreign currency forward contracts. In June 2008, our
German subsidiary repaid to the United States the outstanding principal and accrued interest on this intercompany loan, ahead of the original payment schedule. For the nine months ended
September 30, 2008 and 2007, respectively, €61.6 million and €54.9 million of loan principal was repaid. For the nine months ended
September 30, 2008 and 2007, we recognized a $4.4 million and a $8.4 million contract loss, respectively, offset by an $8.0 million and a $10.6 million foreign
currency gain, respectively. As of September 30, 2008, we have accrued a current liability of $1.7 million, which represents the premium payable to the financial institution for settling
the hedge contract at the spot rates in effect at the date of settlement, which were more favorable rates than the original contract
terms. This liability is included in "Other current liabilities" in the Consolidated Balance Sheet at September 30, 2008 and we expect it will be paid by December 31, 2008.

In
November 2007, we executed an intercompany loan in the amount of €250 million between our principal U.S. operating subsidiary and a newly established German
subsidiary as part of a legal restructuring. In conjunction with the loan, our U.S. subsidiary entered into a series of foreign currency forward contracts to attempt to minimize volatility from
foreign currency movements on the loan amount. The forward contracts are aligned with the payment schedule of the intercompany loan, which has annual principal and interest payments in November 2009
through November 2013. While the intercompany loan is valued each period at the current exchange rate, the fair value of the hedge contract is determined by the net present value of the notional
contract amounts at the current exchange rate plus or minus forward points to the date of maturity of each contract. For the nine months ended September 30, 2008, the difference in the value of
the loan and the fair value of the hedge contract has resulted in a net loss of $2.6 million, of which approximately $1.3 million represents the change in forward points as interest rate
differentials narrowed between the U.S. dollar and the Euro. The change in value of the intercompany loan and the hedge contract is recorded as a component of other (income) expense in the
Consolidated Statements of Operations.

Chapter 11 ExpensesAlthough we are unable to precisely measure the impact of the Chapter 11 proceedings on our overall financial performance, we
incur significant added costs that are directly attributable to operating in Chapter 11. Net Chapter 11 expenses consist primarily of legal, financial and consulting fees that we, the
three creditors' committees, the equity committee and the legal representative of future asbestos claimants, incur, reduced by interest income earned on cash and cash equivalents held by our entities
subject to Chapter 11. We pay for the costs of all committees, and the committees' advisors. These costs fluctuate with the activity in our Chapter 11 proceedings.

58

---



An
analysis of Chapter 11 costs follows:

Three Months Ended
September 30,

Nine Months Ended
September 30,Chapter 11 Expenses, net
(In millions)

2008

2007

2008

2007Costs related to:Grace as debtor-in-possession

$
8.8

$
15.4

$
31.4

$
48.8General Unsecured Committee


1.0


1.7


2.8


4.1Asbestos Property Damage Committee


0.1


0.6


0.9


2.4Asbestos Personal Injury Committee


1.0


3.4


6.8


7.5Future Asbestos Claims Representative


0.8


2.4


6.6


6.0Equity Committee


0.3


0.8


1.5


1.7Total expenses


12.0


24.3


50.0


70.5Interest earned on filing entity cash balances





(3.0
)

(1.6
)

(7.8
)Chapter 11 expenses, net

$
12.0

$
21.3

$
48.4

$
62.7


The
decrease in interest earned on filing entity cash balances is primarily due to lower cash balances and lower interest rates in 2008 compared to 2007 and to a $1.5 million loss
during the three month period ended March 31, 2008 related to a decrease in value of investment securities. See "Cash Resources and Available Credit Facilities" below for further discussion of
Grace's investment securities.

We
incur numerous other indirect costs to manage the Chapter 11 proceedings such as: management time devoted to Chapter 11 matters; added cost of debt capital; added costs
of general business insurance, including D&O liability insurance premiums; and lost business and acquisition opportunities due to the complexities and restrictions of operating under
Chapter 11.

Interest ExpenseNet interest expense for the three months and nine months ended September 30, 2008 decreased compared with the prior year periods due to
reductions in the prime rate and reduced interest accruals for certain pre-petition obligations, partially offset by the effects of compounding interest on certain liabilities subject to
compromise over the course of the Chapter 11 proceeding. Our existing plan of reorganization states that each holder of an allowed general unsecured claim shall be paid in full, plus
post-petition interest. Post-petition interest shall accrue through the date of payment as follows:



59

---





The
average effective interest rates on pre-petition obligations for the nine months ended September 30, 2008 and 2007 were 4.82% and 6.70%, respectively. We do not
expect to pay such interest until the effective date of the proposed joint plan of reorganization discussed below.

Income TaxesThe income tax provision at the federal corporate rate of 35% for the nine months ended September 30, 2008 and 2007 would have been
$41.0 million and $30.9 million, respectively. The primary differences in each period between these amounts and the recorded provision for income taxes, $38.9 million and
$36.7 million, respectively, are due to discrete adjustments related to provisions for tax contingencies and the non-deductibility of certain Chapter 11 expenses.

Operating Segment Overview

The following is an overview of the financial performance of our operating segments for the three months and nine months ended
September 30, 2008 compared with the prior year periods.

Grace Davison

Sales



Three Months Ended September 30,Net Sales by Region
(In millions)

2008

2007

$ Change
Fav
(Unfav)

% Change
Fav
(Unfav)North America

$
174.9

$
141.4

$
33.5


23.7
%Europe Africa


236.6


229.0


7.6


33.2
%Asia Pacific


123.6


81.5


42.1


51.7
%Latin America


44.6


39.6


5.0


12.6
%Total Grace Davison

$
579.7

$
491.5

$
88.2


17.9
%


60

---





Nine Months Ended September 30,Net Sales by Region
(In millions)

2008

2007

$ Change
Fav
(Unfav)

% Change
Fav
(Unfav)North America

$
481.1

$
420.8

$
60.3


14.3
%Europe Africa


729.4


681.5


47.9


7.0
%Asia Pacific


327.2


267.9


59.3


22.1
%Latin America


123.9


113.1


10.8


9.5
%Total Grace Davison

$
1,661.6

$
1,483.3

$
178.3


12.0
%


In
the 2008 periods, sales in all geographic regions benefited from favorable currency translation and price increases.

For
the three months ended September 30, 2008, North America sales also benefited from volume growth in Refining Technologies. Europe Africa sales were negatively affected by
lower customer demand. Asia Pacific sales were positively affected by order patterns in hydroprocessing catalysts.

For
the nine months ended September 30, 2008, North America sales benefited from volume growth for FCC catalysts. Europe Africa sales were negatively affected by lower customer
demand. Asia Pacific sales were positively impacted by higher customer demand.

Operating Income and Margin

Pre-tax operating income of Grace Davison for the three months ended September 30, 2008 increased by 2.1% as
compared with the prior year period. Pricing actions initiated early in the quarter across all product groups yielded significant benefits by the end of the quarter. However, pre-tax
operating income for the three months ended September 30, 2008 was negatively affected by continued high raw material cost inflation, lost sales and higher production costs due to Hurricanes
Gustav and Ike, and isolated productspecific operational issues that were resolved during the quarter. Operating margin for the three months ended September 30, 2008 was 10.7%
compared with 12.4% for the prior year period.

Pre-tax
operating income for the nine months ended September 30, 2008 grew 5.4% over the prior year period. Higher raw material and energy costs more than offset
selling price increases and productivity efforts. Operating margin for the nine months ended September 30, 2008 was 12.6% compared with 13.4% for the prior year period. Certain of our
contractual arrangements with customers provide for the pass through of certain commodity metals costs. The pass through of higher commodity metals costs reduces our operating margin.

If
Grace had not elected to change the accounting method for U.S. inventories from LIFO to FIFO, pre-tax operating income for the Grace Davison operating segment for the
three months and nine months ended September 30, 2008 would have been $55.3 million and $186.1 million, respectively.

Grace Construction Products

Sales



61

---





Sales
in the three months and nine months ended September 30, 2008 were also favorably affected by foreign currency translation and higher selling prices in all major geographic
regions and product lines. Sales in the three months and nine months ended September 30, 2008 reflect continued weakness in the U.S. construction market.

Three Months Ended September 30,Net Sales by Product Group
(In millions)

2008

2007

$ Change
Fav
(Unfav)

% Change
Fav
(Unfav)Construction Chemicals

$
200.7

$
194.3

$
6.4


3.3
%Building Materials


109.0


97.3


11.7


12.0
%Total Grace Construction Products

$
309.7

$
291.6

$
18.1


6.2
%




Nine Months Ended September 30,Net Sales by Product Group
(In millions)

2008

2007

$ Change
Fav
(Unfav)

% Change
Fav
(Unfav)Construction Chemicals

$
573.9

$
552.9

$
21.0


3.8
%Building Materials


313.1


275.3


37.8


13.7
%Total Grace Construction Products

$
887.0

$
828.2

$
58.8


7.1
%


Construction
Chemicals product group sales include sales of specialty chemicals and fibers used in the manufacture of concrete and cement products. Sales of these products increased 3.3%
in the three months ended September 30, 2008 from the prior year period due to selling price increases, primarily in North America and Europe, and favorable foreign currency translation in
Europe and Latin America. Sales were negatively affected by lower volumes of concrete products in North America.

Building
Materials product group sales include sales of waterproofing and fire protection products. Sales of these products increased 12.0% in the three months ended September 30,
2008 from the prior year period due to increased volumes in the commercial market in North America and Europe and price increases in all regions, partly offset by lower sales into the residential
market due to continued U.S. market weakness.

The
increase in sales for the nine months ended September 30, 2008 is due primarily to the favorable effects of currency translation, and to a lesser extent, growth in Building
Materials sales in North America.

Operating Income and Margin

Pre-tax operating income of Grace Construction Products for the three months and nine months ended September 30,
2008 increased 1.4% and decreased 2.5%, respectively, from the prior year periods. Price increases and productivity gains offset the impact of higher raw material costs and lower

62

---



volumes.
Pre-tax operating income for the nine months ended September 30, 2008 includes the severance costs for the previously disclosed reduction in force. Operating margins for
the three months and nine months ended September 30, 2008 were 14.5% and 13.0%, respectively, compared with 15.2% and 14.2% for the respective prior year periods.

If
Grace had not elected to change the accounting method for U.S. inventories from LIFO to FIFO, pre-tax operating income for the Grace Construction Products operating
segment for the three months and nine months ended September 30, 2008 would have been $43.9 million and $113.5 million, respectively.

Operating Returns on Assets EmployedThe following tables set forth the Grace Davison and Grace Construction Products total asset position and pre-tax
return on average total assets as of September 30, 2008 and December 31, 2007. We use the measure pre-tax return on average total assets as an indicator of our efficiency in
using our assets and allocating our resources to generate earnings. We devote significantly higher capital to the manufacture of Grace Davison products than to the manufacture of Grace Construction
Products products. Conversely, non-manufacturing costs, particularly selling expenses, are significantly higher for Grace Construction Products than for Grace Davison.

Grace Davison
(In millions)

September 30,
2008

December 31,
2007Trade receivables

$
311.4

$
295.9Inventory


349.1


286.8Other current assets


39.9


31.6Total current assets


700.4


614.3Properties and equipment, net


486.8


484.7Goodwill and other intangible assets


111.8


116.4Other assets


18.0


17.4Total assets

$
1,317.0

$
1,232.8Pre-tax return on average total assets (trailing 12 months)


20.2
%

21.2
%


Grace
Davison's total assets increased by $84.2 million as of September 30, 2008. The increase was primarily due to higher inventory for raw materials and finished goods to
support 2008 planned sales.

Grace Construction Products
(In millions)

September 30,
2008

December 31,
2007Trade receivables

$
218.3

$
201.2Inventory


82.3


76.1Other current assets


9.4


9.5Total current assets


310.0


286.8Properties and equipment, net


198.1


194.6Goodwill and other intangible assets


85.9


88.2Other assets


8.4


4.2Total assets

$
602.4

$
573.8Pre-tax return on average total assets (trailing 12 months)


24.3
%

26.0
%


Grace
Construction Products' total assets increased by $28.6 million as of September 30, 2008. The increase was primarily due to higher trade receivables caused by
increased sales.

63

---



Noncore Liabilities

We have a number of financial exposures originating from past businesses, products and events. These obligations arose from
transactions and/or business practices that date to when Grace was a much larger company, when we produced products or operated businesses that are no longer part of our revenue base, when government
regulation was less stringent and when scientific knowledge with respect to such businesses and products was much less advanced than today.

The
following table summarizes our net noncore liabilities at September 30, 2008 and December 31, 2007:

Net Noncore Liabilities
(In millions)

September 30,
2008

December 31,
2007Asbestos-related liabilities

$
(1,700.0
)
$
(1,700.0
)Asbestos-related insurance receivable


500.0


500.0Asbestos-related liability, net


(1,200.0
)

(1,200.0
)Environmental remediation


(148.1
)

(368.6
)Postretirement benefits


(69.2
)

(84.0
)Income taxes


(88.7
)

(89.3
)Retained obligations and other


(36.1
)

(36.2
)Net noncore liability

$
(1,542.1
)
$
(1,778.1
)


The
decrease in noncore liabilities from year-end is primarily due to the settlement of certain environmental contingencies with the Environmental Protection Agency (see
Note 14 to the Consolidated Financial Statements). We expect to resolve certain of these noncore recorded and contingent liabilities through our Chapter 11 proceedings. The amounts of
these liabilities as ultimately determined through the Chapter 11 proceedings could be materially different from amounts we recorded at September 30, 2008.

Chapter 11 Recent Developments

For a discussion of the history of our Chapter 11 case, see Notes 1 and 2 to the Consolidated Financial Statements.

On
January 13, 2005, we filed a plan of reorganization and related documents, the Prior Plan, that amended our original plan of reorganization and disclosure statement filed on
November 13, 2004 to address certain objections of creditors and other interested parties. On July 26, 2007, the Bankruptcy Court terminated our exclusive rights to propose a plan of
reorganization and solicit votes thereon. As a result of the termination of these rights, any party-in-interest may propose a competing plan of reorganization. On
November 5, 2007, the committee representing asbestos personal injury claimants, the PI Committee, and the representative of future asbestos personal injury claimants, the PI FCR, filed a
competing plan of reorganization with the Bankruptcy Court, the PI Plan.

On
April 6, 2008, we reached an agreement in principle, the PI Settlement, with the PI Committee, the PI FCR, and the committee representing equity security holders, the Equity
Committee. As contemplated by the PI Settlement, on September 19, 2008, supported by the Equity Committee, the PI Committee and the PI FCR as co-proponents, we filed a proposed
joint plan of reorganization, as well as several associated documents including a disclosure statement, the Joint Plan, with the Bankruptcy Court. The Joint Plan is designed to address all pending and
future asbestos-related claims and all other pre-petition claims as outlined therein. The Joint Plan supersedes the Prior Plan and the PI Plan. The committees representing general
unsecured creditors and asbestos property damage claimants and the representative of future asbestos property damage claimants are not

64

---



co-proponents
of the Joint Plan. See Note 2 to the Consolidated Financial Statements for a description of the Joint Plan.

We
anticipate that we will require approximately $1.5 billion in new financing to fund the Joint Plan. The actual amount of new financing will generally depend on resolution costs
of our outstanding claims and contingent liabilities and our operating capital requirements. Until the current crisis in the global credit markets abates, traditional debt financing may be unavailable
to us on acceptable terms. If we are unable to obtain the required financing on acceptable terms, our emergence from Chapter 11 may be delayed.

Any
plan of reorganization, including the Joint Plan and any plan of reorganization that may be filed in the future by a party-in-interest, will become effective
only after a vote of eligible creditors and with the approval of the Bankruptcy Court and the U.S. District Court for the District of Delaware. Votes on a plan of reorganization may not be solicited
until the Bankruptcy Court approves a related disclosure statement.

Accounting and Tax Treatment of the Joint Plan of Reorganization

We adjusted our asbestos-related liability in the fourth quarter of 2004 based on the filing of the Prior Plan as discussed in
Notes 2 and 3 to the Consolidated Financial Statements.

As
described in Note 2 to the Consolidated Financial Statements, the Joint Plan contemplates that two asbestos trusts would be established under Section 524(g) of the
Bankruptcy Code. All asbestos-related personal injury claims would be channeled for resolution to one asbestos trust and all asbestos-related property damage claims would be channeled to another
asbestos trust. We expect to measure the
various forms of consideration that we would use to fund the asbestos trusts under the Joint Plan as follows:



The
treatment of asbestos-related liabilities is significantly different under the Joint Plan than under the Prior Plan. We have not adjusted our accounting for asbestos-related
liabilities to reflect the Joint Plan. At this time, we are unable to determine a reasonable estimate of the value of the warrants and deferred payments to be issued to the asbestos trusts under the
Joint Plan. These values will ultimately be determined on the effective date of the Joint Plan. We do not expect to adjust our recorded asbestos-related liabilities until material conditions to the
Joint Plan are satisfied. We expect that these adjustments may be material to our consolidated financial position and results of operations.

If
the Joint Plan is not confirmed by the Bankruptcy Court or the District Court or does not become effective, a different plan of reorganization may ultimately become effective. Under
that effective plan of reorganization, the interests of our shareholders could be substantially diluted or cancelled. The value of Grace common stock following the effective date of any plan of
reorganization and the extent of any recovery by non-asbestos-related creditors would depend principally on the amount of our asbestos-related liability under such effective plan of
reorganization. If the Joint Plan is

65

---



not
confirmed or does not become effective, we would expect to resume the estimation trial, which was suspended in April 2008 due to the PI Settlement, to determine the amount of our asbestos-related
liabilities.

We
believe that a resolution of our asbestos-related liabilities on terms that are different from those set forth in the Prior Plan would require an adjustment to our recorded
asbestos-related liabilities and that this adjustment might be material to our consolidated financial position and results of operations.

We
provided proforma financial information in our quarterly and annual filings from 2005, when the Prior Plan was filed with the Bankruptcy Court, to this year, when the PI Settlement
was signed, to describe the proforma effects of the Prior Plan. We provided proforma financial information for the Joint Plan in the exhibits to the Joint Plan in compliance with the requirements of
the Bankruptcy Code. That proforma financial information is not included in or incorporated into this Report. We have not updated the Joint Plan proforma financial information to reflect events
occurring after the filing of the Joint Plan with the Bankruptcy Court, nor do we expect to update it until we adjust our accounting for asbestos-related liabilities to reflect the Joint Plan.

For
tax purposes, the fair value of the warrants on the date of issuance would be treated as a deductible expense in the year of transfer. The deferred payment liability would be
deductible in full at the time of payment. Due to the payment of these and other deductible bankruptcy claims, we anticipate generating significant net operating losses, or NOLs, in the year of
emergence. Although we intend to implement tax planning strategies to preserve the NOLs, there is a risk that substantial NOLs will be utilized in structuring emergence financing through repatriation
of non-U.S. funds, as may be required to fund prepetition liabilities at emergence. The NOLs can also be lost or substantially reduced upon a change in the ownership of Grace common stock
as defined under U.S. tax rules.

Financial Condition, Liquidity, and Capital Resources

Financial ConditionOur balance sheet as of September 30, 2008, as compared with our balance sheet as of December 31, 2007, was impacted by the
following:



Chapter 11-Related InformationSee Note 2 to the Consolidated Financial Statements.

66

---



Asbestos-Related LitigationSee Note 3 to the Consolidated Financial Statements.

Environmental MattersSee Note 14 to the Consolidated Financial Statements.

Defined Contribution Retirement PlansWe sponsor a defined contribution retirement plan for our employees in the United States. This plan qualifies under
section 401(k) of the U.S. tax code. At the present time, we contribute an amount equal to 100% of employee contributions, up to 6% of an individual employee's salary or wages. Our costs
related to this benefit plan were $3.2 million and $3.2 million for the three-month periods ended September 30, 2008 and 2007 and $9.9 million and $9.5 million for
the nine-month periods ended September 30, 2008 and 2007.

Defined Benefit Pension PlansWe sponsor defined benefit pension plans for our employees in the United States, Canada, the United Kingdom, Australia, Germany,
Italy, France, Spain, Netherlands, Japan, Philippines, South Korea, Taiwan, South Africa, Brazil and Mexico and fund government sponsored programs in other countries where we operate. Certain of our
sponsored plans are advance-funded and others are pay-as-you-go. The advance-funded plans are administered by trustees who direct the management of plan assets and
arrange to have obligations paid when due out of a trust. The most significant advance-funded plans cover our salaried employees in the U.S. and U.K. and employees covered by collective bargaining
agreements at certain of our U.S. facilities.

The
following tables present the components of defined benefit pension expense and cash contributions for the advance-funded and pay-as-you-go plans:

Three Months Ended
September 30,

Nine Months Ended
September 30,Components of Defined Benefit Pension Expense
(In millions)

2008

2007

2008

2007Annual pension benefits earned

$
6.3

$
6.0

$
18.8

$
17.7Interest on opening liabilityadvance-funded plans


17.8


16.9


53.8


49.9Expected return on plan assets


(20.3
)

(20.1
)

(61.4
)

(59.8
)Net financing cost (benefit) of advance-funded plans


(2.5
)

(3.2
)

(7.6
)

(9.9
)Interest on opening liabilitypay-as-you-go plans


3.6


2.9


10.8


9.0Net pension financing cost (benefit)


1.1


(0.3
)

3.2


(0.9
)Amortization of:Plan changes related to prior service


0.4


0.8


1.6


2.4Accumulated differences between actual and assumed performance(1)


6.3


6.6


18.8


19.7Net pension catch-up expense


6.7


7.4


20.4


22.1Total Defined Benefit Pension Expense

$
14.1

$
13.1

$
42.4

$
38.9




Three Months Ended
September 30,

Nine Months Ended
September 30,Cash Contributions to Defined Benefit Pension Plans
(In millions)

2008

2007

2008

2007U.S. advance-funded plans

$
10.5

$
24.3

$
43.2

$
61.2U.S. pay-as-you-go plans


1.4


1.3


3.9


3.8Foreign advance-funded plans


1.3


1.3


4.4


15.8Foreign pay-as-you-go plans


1.7


1.6


5.9


4.7Total Cash Contributions

$
14.9

$
28.5

$
57.4

$
85.5


---

67

---



The
following table presents the funded status of fully-funded, underfunded and unfunded pension plans as determined under U.S. generally accepted accounting principles:

Fully-Funded(1)
Pension Plans

Underfunded(1)
Pension Plans

Unfunded(2)
Pension PlansFunded Status of Pension Plans
(In millions)

September 30,
2008

December 31,
2007

September 30,
2008

December 31,
2007

September 30,
2008

December 31,
2007Projected benefit obligation

$
206.3

$
254.8

$
842.8

$
948.3

$
223.5

$
245.9Fair value of plan assets


271.1


308.9


669.7


779.2





Funded status (PBO basis)

$
64.8

$
54.1

$
(173.1
)
$
(169.1
)
$
(223.5
)
$
(245.9
)


---

Fully-funded
plans include several defined benefit pension plans where the fair value of the plan assets exceeds the projected benefit obligation, or PBO. This group of plans was
overfunded by $64.8 million as of September 30, 2008, and the overfunded status is reflected as "overfunded defined benefit pension plans" in the Consolidated Balance Sheet. Underfunded
plans include a group of defined benefit pension plans that are underfunded on a PBO basis by a total of $173.1 million as of September 30, 2008. Additionally, we have several plans that
are funded on a pay-as-you-go basis, and therefore, the entire PBO of $223.5 million at September 30, 2008 is unfunded. The combined balance of the
underfunded and unfunded plans was $396.6 million as of September 30, 2008 and is presented as a liability on the Consolidated Balance Sheet as follows$12.4 million
in "other current liabilities," $173.1 million included in "underfunded defined benefit pension plans", $121.8 million included in "unfunded
pay-as-you-go defined benefit pension plans", and $89.3 million in "liabilities subject to compromise."

Beginning
in 2007, on a quarterly basis, we analyze pension assets and pension liabilities along with the resulting funded status and update our estimate of these measures. Funded status
is adjusted for contributions, benefit payments, actual return on assets, current discount rates, and other identifiable and material actuarial changes.

The
assumed discount rate for pension plans reflects the market rates for high quality corporate bonds currently available and is subject to change based on changes in the overall market
interest rates. For the U.S. qualified pension plans, the assumed discount rate of 6.25% as of December 31, 2007 was selected in consultation with our independent actuaries, based on a yield
curve constructed from a portfolio of high quality bonds for which the timing and amount of cash outflows approximate the estimated payouts of the plan. Based on review of an updated yield curve
analysis as of September 30, 2008, we increased the discount rate for the U.S. qualified pension plans from 6.75% at June 30, 2008 to 7.50% at September 30, 2008 based on market
rates at that time. In addition, we evaluated the current discount rates for the pension plans in the United Kingdom, Germany and Canada, which combined represented approximately 90% of the benefit
obligation of the non-U.S. pension plans as of December 31, 2007. Based on review of the yield curve analyses for these plans as of September 30, 2008, we changed the
discount rate for the United Kingdom from 6.50% at June 30, 2008 to 7.00% at September 30, 2008, and for Germany from 6.25% at June 30, 2008 to 6.75% at September 30, 2008,
and for Canada from 6.00% at June 30, 2008 to 6.50% at September 30, 2008. The funded status as of September 30, 2008 reflects an increase in total assets of approximately
$15 million, and a decrease in total liabilities of approximately $83 million as compared to June 30, 2008, resulting from the change in discount rates (including the
postretirement plan). After tax effects, total assets decreased from

68

---



June 30,
2008 to September 30, 2008 by approximately $18 million, total liabilities decreased by approximately $83 million and shareholders' equity increased by
approximately $65 million. The funded status as of September 30, 2008 reflects an increase to total assets of approximately $40 million and a decrease to total liabilities of
approximately $149 million as compared to December 31, 2007, resulting from the change in discount rates (including the postretirement plan). After tax effects, the total assets
decreased from December 31, 2007 to September 30, 2008 by approximately $23 million, total liabilities decreased by approximately $149 million and shareholders' equity
increased by approximately $126 million.

At
the December 31, 2007 measurement date for the U.S. advance-funded defined benefit pension plans, the PBO was approximately $932 million as measured under U.S. generally
accepted accounting principles. The PBO is measured as the present value (using a 6.25% discount rate as of December 31, 2007) of vested and non-vested benefits earned from employee
service to date, based upon current services and estimated future pay increases for active employees. Of the participants in the pension plans, approximately 82% are current retirees or employees of
our former businesses, which skews the payout pattern to the nearer term. Assets available to fund the PBO at December 31, 2007 were approximately $774 million, or approximately
$158 million less than the measured obligation.

Assets
available at September 30, 2008 to fund the PBO of the U.S. advance-funded defined benefit pension plans totaled approximately $662 million, down $112 million
from December 31, 2007, primarily as a result of negative equity market returns. It is our intention to satisfy obligations under the pension plans and to comply with the requirements of the
Employee Retirement Income Security Act of 1974. On June 18, 2008, we obtained Bankruptcy Court approval to fund minimum required payments of approximately $24 million for the period
from July 2008 through January 2009. In that regard, we contributed approximately $11 million in September 2008 and approximately $6 million in October 2008 to the trusts that hold
assets of the U.S. defined benefit pension plans. While we intend to continue to fund all minimum required payments under the U.S. defined benefit pension plans, there can be no
assurance that the Bankruptcy Court will continue to approve the funding needs of such plans. Contributions to non-U.S. plans are not subject to Bankruptcy Court approval and we intend to
fund such plans based on applicable legal requirements and actuarial and trustee recommendations; $10.3 million was funded during the nine months ended September 30, 2008.

We
expect total pension expense for 2008 to be approximately $57 million, and benefit payments to retirees to aggregate approximately $85 million for all pension programs
in 2008.

Postretirement Benefits Other Than PensionsWe provide certain health care and life insurance benefits for retired employees, a large majority of whom are retirees
of divested businesses. These plans are unfunded, and we pay the costs of benefits under these plans as they are incurred. Our share of the cost of benefits under this program was $1.4 million
and $5.1 million during the three months and nine months ended September 30, 2008 compared with $2.4 million and $8.3 million during the three months and nine months ended
September 30, 2007. We received Medicare subsidy payments of $0.4 million and $3.7 million during the nine months ended September 30, 2008 and 2007. Our recorded liability
for postretirement benefits of $69.2 million at September 30, 2008 is stated at net present value discounted at 7.50% (as discussed under Defined Benefit Pension Plans). Our proposed
plan of reorganization provides for the continuation of these benefits.

Tax MattersSee Note 4 to the Consolidated Financial Statements and "Income Taxes" above for further discussion of our tax accounting and tax contingencies.

Other ContingenciesSee Note 14 to the Consolidated Financial Statements for a discussion of our other contingent matters.

69

---



Cash Resources and Available Credit FacilitiesAt September 30, 2008, we had cash and cash equivalents of $325.2 million, short-term
investment securities of $35.1 million, and net cash value of life insurance of $35.1 million.

Investment
securities of $35.1 million and $98.3 million at September 30, 2008 and December 31, 2007 consist of direct or indirect investments in debt
securities. Prior to the fourth quarter of 2007, our investment in the Columbia Strategic Cash Portfolio Fund was classified in cash and cash equivalents as redemptions were available in cash. In
December 2007, the fund began an orderly liquidation that is expected to continue through 2009 and restricted redemptions to an in-kind distribution of securities held by the fund. We have
elected to remain in the fund and to value the fund based on the underlying securities as determined by the fund principals. We recorded a decrease in fair value of $1.8 million in the nine
months ended September 30, 2008 due to unfavorable conditions of the credit markets. The loss is recorded as an offset to interest income earned on the Columbia Strategic Cash Fund, which is
net against Chapter 11 expenses in the Consolidated Statements of Operations. This loss was deemed to be other than temporary, and as such, was recorded in earnings.

Net
cash value of life insurance represents the cash value of premiums paid by us for life insurance policies in the names of current and former executive officers. We have presented
$30.8 million and $77.1 million of the total value at September 30, 2008 and December 31, 2007 as current assets, as it is our expectation that this amount may be accessed
in 2008 as part of our reorganization financing.

Our
previous $250 million debtor-in-possession post-petition loan and security agreement, or DIP facility, expired on March 31, 2008. On
April 1, 2008, we entered into an amended DIP facility with a syndicate of lenders that provides for up to $165 million of revolving loans and face amount of letters of credit. The
amended DIP facility is secured by a priority lien on substantially all assets of our filing entities with the exclusion of the capital stock of non-U.S. subsidiaries, and bears interest
based on the London Interbank Offered Rate (LIBOR). The amended DIP facility permits the increase of commitments of existing lenders and/or commitments by new lenders up to an aggregate maximum of
$250 million.

The
following table summarizes our U.S. and non-U.S. credit facilities as of September 30, 2008, giving effect to the April 1, 2008 amendment to the DIP
facility:

Credit Facilities
(In millions)

Maximum
Borrowing
Amount

Amount
Available

Expiration
DateCountryU.S.

$
165.0

$
98.5


04/01/10
(1)Germany


73.2


60.0


12/31/09Germany


17.6


2.9


12/31/08France


5.3


5.3


12/31/08Argentina


0.3


0.3


12/31/08Brazil


1.1


1.1


12/31/08Singapore


4.8


2.6


03/31/09Venezuela


0.9


0.9


12/31/08Colombia


0.1


0.1


12/31/08Total

$
268.3

$
171.7






70

---







We believe that these funds and credit facilities will be sufficient to finance our operations and support our business strategy while in Chapter 11. We anticipate that we will
require up to $1.5 billion in new financing to fund the Joint Plan. The actual amount of new financing needed will generally depend on resolution costs of our outstanding claims and contingent
liabilities and our operating capital requirements. Until the current crisis in the global credit markets abates, traditional debt financing may be unavailable to us on acceptable terms. If we are
unable to obtain the required financing on acceptable terms, our emergence from Chapter 11 may be delayed.

Debt and Other Contractual ObligationsTotal debt outstanding at September 30, 2008 was $851.6 million including $319.3 million of accrued
interest on pre-petition debt. As a result of the Chapter 11 filing, we are now in default, under the terms of the relevant agreements, on $525.9 million of
pre-petition debt, which, together with accrued interest thereon, has been included in "liabilities subject to compromise" as of September 30, 2008. The amount of accrued interest
could be adjusted upward or downward consistent with the plan of reorganization ultimately approved by the Bankruptcy Court. The automatic stay provided under the bankruptcy code prevents our lenders
from taking any action to collect the principal amounts as well as related accrued interest. However, we will continue to accrue and report interest on such debt during the Chapter 11
proceedings unless further developments lead management to conclude that it is probable that such interest will be compromised.

See
Note 14 to the Consolidated Financial Statements for a discussion of financial assurances.

Analysis of Cash Flows

Our net cash used for operating activities for the nine months ended September 30, 2008 was $182.0 million, compared with
a net cash inflow of $65.8 million for the nine months ended September 30, 2007. The change in operating cash flow is primarily due to payments of $252.0 million to the
Environmental Protection Agency to settle the EPA's cost recovery claims related to environmental remediation activities in Libby, Montana, and higher cash taxes paid. These cash outflows were
partially offset by lower cash contributions to defined benefit pension plans. Net cash used for investing activities for the nine months ended September 30, 2008 and 2007 was
$23.9 million and $100.5 million, respectively. The change in investing cash flows is primarily related to proceeds from sales of investment securities and proceeds from the termination
of life insurance policies in the 2008 period, partially offset by the purchase of short-term debt securities in the 2007 period. Net cash inflow from financing activities for the nine
months ended September 30, 2008 and 2007 was $49.5 million and $18.8 million, respectively, primarily from a borrowing of $40.0 million against the COLI policies in the
2008 period and cash received from stock option exercises in both periods.

Forward-Looking Statements

This document contains, and our other public communications may contain, forward-looking information, that is, information related to
future, not past, events. Such information generally includes the words "believes," "plans," "intends," "targets," "will," "expects," "anticipates," or similar expressions. Forward-looking information
includes all statements regarding our Chapter 11 case; expected financial position; results of operations; cash flows; financing plans; business strategy; budgets; capital and other
expenditures; competitive positions; growth opportunities for existing products; benefits from new technology and cost reduction initiatives, plans and objectives; and markets for securities. For
these statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Factors that could cause actual results
to materially differ from those contained in the forward-looking statements include: our bankruptcy and proposed plan of reorganization, our recent settlement with certain creditors, our legal
proceedings, especially the Montana criminal proceeding and the environmental proceedings, the cost and availability of raw materials and energy, our unfunded pension obligations, risks related to
foreign operations, especially, security, regulation and currency risks, costs of compliance with environmental

71

---



regulation
and those factors set forth in our most recent Annual Report on Form 10-K, this quarterly report on Form 10-Q and current reports on
Form 8-K, which have been filed with the Securities and Exchange Commission. Like other businesses, we are subject to risks and uncertainties that could cause our actual results to
differ materially from our projections or that could cause other forward-looking information to prove incorrect. Further, our reported results should not be considered as an indication of our future
performance. Readers are
cautioned not to place undue reliance on our projections and forward-looking information, which speak only as of the date thereof. We undertake no obligation to publicly release any revisions to the
projections and forward-looking information contained in this document, or to update them to reflect events or circumstances occurring after the date of this document.

Item 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

With respect to information disclosed in the "Quantitative and Qualitative Disclosures About Market Risk" section of our Annual Report
on Form 10-K for the year ended December 31, 2007, more recent numerical measures and other information are available in the "Financial Statements" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" sections of this Report. These more recent measures and information are incorporated herein by reference.

Item 4.    CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

As of September 30, 2008, Grace carried out an evaluation of the effectiveness of the design and operation of its disclosure
controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Based upon that evaluation, Grace's Chief Executive
Officer and Chief Financial Officer concluded that Grace's disclosure controls and procedures are effective to ensure that information required to be disclosed in Grace's Exchange Act reports is
recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that material information relating to Grace is made known to management, including
Grace's Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

There were no changes in Grace's internal control over financial reporting during the quarter ended September 30, 2008 that have
materially affected, or are reasonably likely to materially affect, Grace's internal control over financial reporting.

72

---





PART II. OTHER INFORMATION

Item 1.    LEGAL PROCEEDINGS

Notes 2, 3 and 14 to the interim consolidated financial statements in Part 1 of this Report are incorporated herein by
reference.

Item 1A.    RISK FACTORS

With respect to certain risk factors disclosed in the "Risk Factors" section of our Annual Report on Form 10-K for
the year ended December 31, 2007, more recent numerical measures and other information are available in the "Financial Statements" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" sections of this Report and as set forth below. These more recent measures and information are incorporated herein by reference.

Our proposed joint plan of reorganization, if confirmed and effective, will substantially impact the value of currently outstanding shares of Grace common stock.

On September 19, 2008, supported by Official Committee of Equity Security Holders, the Official Committee of Asbestos Personal
Injury Claimants and the legal representative of future asbestos personal injury claimants, as co-proponents, we filed a proposed joint plan of reorganization, the Joint Plan, with the
Bankruptcy Court that is designed to address all pending and future asbestos-related claims and all other pre-petition claims as outlined therein. The Joint Plan would, if confirmed and
effective, substantially impact the value of the ownership interests of holders of currently outstanding Grace common stock. The Joint Plan is subject to the fulfillment of numerous conditions that
may not ultimately be fulfilled. Although it is supported by the parties thereto, other parties-in-interest in our Chapter 11 case have objected to several provisions of
the Joint Plan. As a result, it is possible that the Joint Plan will not be confirmed by the Bankruptcy Court or the District Court or become effective. Further, we anticipate that we will require
approximately $1.5 billion in new financing to fund the Joint Plan. Until the current crisis in the global credit markets abates, traditional debt financing may be unavailable to us on
acceptable terms. If we are unable to obtain the required financing on acceptable terms, our emergence from Chapter 11 may be delayed. No party currently has exclusive rights to propose a plan
of reorganization and solicit votes thereon, so any party-in-interest can propose a competing plan of reorganization at any time. Therefore, until an ultimate plan of
reorganization is confirmed and effective, the interests of the holders of Grace common stock remain subject to substantial dilution or cancellation. Accordingly, the value of Grace common stock is
highly speculative and any investment in Grace common stock poses a high degree of risk.

Our financial statements have not been updated to reflect the terms of the Joint Plan.

Our financial statements reflect accounting for asbestos-related liabilities that is based on the conditions precedent to the amended
plan of reorganization that we filed in 2005, the Prior Plan, rather than the Joint Plan. The Prior Plan and the Joint Plan would result in substantially different treatment of our asbestos-related
liabilities in our financial statements. We do not expect to adjust our recorded asbestos-related liability until material conditions to the Joint Plan are satisfied. When we adjust our accounting
based on the Joint Plan or another plan that is filed and/or confirmed, such adjustments could be material to our consolidated financial position and results of operations.

We have not updated the proforma and other financial information that we filed with the Bankruptcy Court as an exhibit to the Joint Plan to reflect events that have occurred
subsequent to the filing of the Joint Plan with the Bankruptcy Court.

We provided proforma financial information and other information including projections in the exhibits to the Joint Plan filed with the
Bankruptcy Court in compliance with the requirements of the

73

---



U.S.
Bankruptcy Code. That information is not included in or incorporated into this Report. We have not updated the Joint Plan proforma and other financial information to reflect events that have
occurred after the filing of the Joint Plan with the Bankruptcy Court, nor do we expect to update it until we adjust our accounting for asbestos-related liabilities to reflect the Joint Plan or as
otherwise required by the U.S. Bankruptcy Code or the Bankruptcy Court. Further, this information is prepared in a format that may not be comparable to information in our financial statements included
in this Report or other Reports filed with the Securities and Exchange Commission. As a result, investors in Grace common stock should not rely upon this proforma and other financial information.

Item 6.    EXHIBITS

The following is a list of Exhibits filed as part of this Quarterly Report on Form 10-Q:

Exhibit No.

Description of Exhibit15

Accountants' Awareness Letter18

Accountants' Preference Letter regarding Change in Accounting Principle31.(i).1

Certification of Periodic Report by Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 200231.(i).2

Certification of Periodic Report by Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 200232

Certification of Periodic Report by Chief Executive Officer and Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002


74

---





SIGNATURES

In accordance with the requirements of the Securities Exchange Act of 1934, the Registrant caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.

W. R. GRACE & CO. (Registrant)Date: November 7, 2008

By

/s/ A. E. FESTA A. E. Festa Chairman, President and
Chief Executive OfficerDate: November 7, 2008

By

/s/ HUDSON LA FORCE III Hudson La Force III Senior Vice President and
Chief Financial Officer
(Principal Accounting Officer)


75

---





EXHIBIT INDEX

Exhibit No.

Description of Exhibit15

Accountants' Awareness Letter18

Accountants' Preference Letter regarding Change in Accounting Principle31.(i).1

Certification of Periodic Report by Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 200231.(i).2

Certification of Periodic Report by Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 200232

Certification of Periodic Report by Chief Executive Officer and Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002


76

---



QuickLinks