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UNITED STATESSECURITIES 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 June 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 July 31, 2008Common Stock, $0.01 par value per share

72,151,518 shares




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Table of Contents

W. R. GRACE & CO. AND SUBSIDIARIES

Table of Contents



PagePart I.

Financial InformationItem 1.

Financial Statements

1Report of Independent Registered Public Accounting Firm

2Consolidated Statements of Operations

3Consolidated Statements of Cash Flows

4Consolidated Balance Sheets

5Consolidated Statements of Shareholders' Equity (Deficit)

6Consolidated Statements of Comprehensive Income (Loss)

6Notes to Consolidated Financial Statements

7Item 2.

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

51Item 3.

Quantitative and Qualitative Disclosures About Market Risk

73Item 4.

Controls and Procedures

74Part II.

Other InformationItem 1.

Legal Proceedings

75Item 1A.

Risk Factors

75Item 6.

Exhibits

76


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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.

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Table of Contents

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 six months ended June 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.

1

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Table of Contents

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 June 30, 2008, and the
related consolidated statements of operations, shareholders' equity (deficit), and comprehensive income (loss) for each of the three-month and six-month periods ended June 30, 2008
and June 30, 2007 and the consolidated statements of cash flows for the six-month periods ended June 30, 2008 and June 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. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2007, is
fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.

/s/
PricewaterhouseCoopers LLP
McLean, Virginia
August 8, 2008

2

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Table of Contents

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

Three Months
Ended
June 30,

Six Months
Ended
June 30,2008

2007

2008

2007Net sales

$
900.0

$
812.8

$
1,659.2

$
1,528.4Cost of goods sold


635.3


552.9


1,162.5


1,050.6Selling, general and administrative expenses


153.6


146.0


296.4


281.2Research and development expenses


21.2


18.7


42.9


37.4Defined benefit pension expense


14.0


13.1


28.3


25.8Interest expense and related financing costs


14.5


20.3


29.6


39.7Provision for environmental remediation





12.0


5.9


12.0Chapter 11 expenses, net of interest income


18.0


23.6


36.4


41.4Other (income) expense, net


(7.2
)

(7.7
)

(24.5
)

(15.7
)849.4


778.9


1,577.5


1,472.4Income before income taxes and minority interest


50.6


33.9


81.7


56.0Provision for income taxes


(21.5
)

(9.3
)

(37.1
)

(24.2
)Minority interest in consolidated entities


(4.1
)

(4.1
)

(6.0
)

(6.5
)Net income

$
25.0

$
20.5

$
38.6

$
25.3Basic earnings per share:Net income

$
0.35

$
0.29

$
0.54

$
0.36Weighted average number of basic shares


72.1


70.1


71.9


69.8Diluted earnings per share:Net income

$
0.34

$
0.29

$
0.53

$
0.35Weighted average number of diluted shares


72.9


71.8


72.6


71.4


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

3

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Table of Contents

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

Six Months
Ended
June 30,2008

2007OPERATING ACTIVITIESNet income

$
38.6

$
25.3Reconciliation to net cash provided by (used for) operating activities:Depreciation and amortization


60.9


55.2Chapter 11 expenses, net of interest income


36.4


41.4Provision for income taxes


37.1


24.2Income taxes paid, net of refunds


(32.4
)

(18.5
)Minority interest in consolidated entities


6.0


6.5Dividends paid to minority interests in consolidated entities


(13.3
)

(11.8
)Interest accrued on pre-petition liabilities subject to compromise


26.8


38.8Net (gain) loss on sales of investments and disposals of assets


(0.6
)

(3.6
)Defined benefit pension expense


28.3


25.8Payments under defined benefit pension arrangements


(42.5
)

(57.0
)Net payments under postretirement benefit plans


(3.3
)

(3.1
)Net income from life insurance policies


(1.8
)

(2.5
)Provision for uncollectible receivables


0.3


1.4Provision for environmental remediation


5.9


12.0Expenditures for environmental remediation


(1.2
)

(4.8
)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)


(40.4
)

(34.2
)Other accruals and non-cash items


(65.6
)

(43.3
)Net cash provided by operating activities before Chapter 11 expenses and settlements


39.1


51.0Cash paid to resolve contingencies subject to Chapter 11


(101.6
)

(10.3
)Chapter 11 expenses paid


(36.7
)

(35.5
)Net cash provided by (used for) operating activities


(99.2
)

5.2INVESTING ACTIVITIESCapital expenditures


(58.7
)

(52.3
)Investments in short-term debt securities





(25.0
)Proceeds from sales of investment securities


46.7


Purchase of equity investment


(3.0
)

(6.3
)Proceeds from termination of life insurance policies


8.1


Net investment in life insurance policies


0.1


0.2Proceeds from disposals of assets


2.6


3.0Net cash used for investing activities


(4.2
)

(80.4
)FINANCING ACTIVITIESNet (repayments) borrowings under credit arrangements


(0.9
)

9.6Fees paid under debtor-in-possession credit facility


(1.3
)

(1.3
)Proceeds from exercise of stock options


9.6


19.4Net cash provided by financing activities


7.4


27.7Effect of currency exchange rate changes on cash and cash equivalents


10.9


5.5Decrease in cash and cash equivalents


(85.1
)

(42.0
)Cash and cash equivalents, beginning of period


480.5


536.3Cash and cash equivalents, end of period

$
395.4

$
494.3


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

4

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Table of Contents

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

June 30,
2008

December 31,
2007(unaudited)ASSETSCurrent AssetsCash and cash equivalents

$
395.4

$
480.5Investment securities


50.5


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


70.7


77.1Trade accounts receivable, less allowance of $5.1 (2007-$5.2)


534.9


500.6Inventories


368.7


303.5Deferred income taxes


97.0


37.7Other current assets


85.9


80.8Total Current Assets


1,603.1


1,578.5Properties and equipment, net of accumulated depreciation and amortization of $1,625.5 (2007-$1,545.0)


724.4


706.1Goodwill


126.7


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


3.9


3.9Deferred income taxes


707.2


767.5Asbestos-related insurance


500.0


500.0Overfunded defined benefit pension plans


58.0


54.1Other assets


135.5


136.6Total Assets

$
3,858.8

$
3,869.0LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)Liabilities Not Subject to CompromiseCurrent LiabilitiesDebt payable within one year

$
3.8

$
4.7Accounts payable


228.9


191.3Other current liabilities


436.9


325.1Total Current Liabilities


669.6


521.1Debt payable after one year


0.3


0.3Deferred income taxes


35.0


32.7Minority interest in consolidated entities


62.7


70.8Underfunded defined benefit pension plans


173.8


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


138.4


137.9Other liabilities


51.6


46.2Total Liabilities Not Subject to Compromise


1,131.4


978.1Liabilities Subject to CompromiseNote 2Pre-petition bank debt plus accrued interest


805.1


783.0Drawn letters of credit plus accrued interest


29.5


26.9Income tax contingencies


100.8


89.3Asbestos-related contingencies


1,700.0


1,700.0Environmental contingencies


147.7


368.6Postretirement benefits


165.3


172.7Other liabilities and accrued interest


115.1


137.0Total Liabilities Subject to Compromise


3,063.5


3,277.5Total Liabilities


4,194.9


4,255.6Commitments and ContingenciesShareholders' Equity (Deficit)Common stock issued, par value $0.01; 300,000,000 shares authorized; outstanding: 2008-72,151,518 (2007-71,627,901)


0.8


0.8Paid-in capital


434.9


431.5Accumulated deficit


(366.5
)

(405.1
)Treasury stock, at cost: shares: 2008-4,828,242; (2007-5,351,859)


(57.5
)

(63.7
)Accumulated other comprehensive income (loss)


(347.8
)

(350.1
)Total Shareholders' Equity (Deficit)


(336.1
)

(386.6
)Total Liabilities and Shareholders' Equity (Deficit)

$
3,858.8

$
3,869.0


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

5

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Table of Contents

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, March 31, 2008

$
435.7

$
(391.5
)
$
(58.2
)
$
(342.7
)
$
(356.7
)Net income





25.0








25.0Stock plan activity








0.7





0.7Other comprehensive income (loss)











(5.1
)

(5.1
)Balance, June 30, 2008

$
435.7

$
(366.5
)
$
(57.5
)
$
(347.8
)
$
(336.1
)Balance, December 31, 2007

$
432.3

$
(405.1
)
$
(63.7
)
$
(350.1
)
$
(386.6
)Net income





38.6








38.6Stock plan activity


3.4





6.2





9.6Other comprehensive income (loss)











2.3


2.3Balance, June 30, 2008

$
435.7

$
(366.5
)
$
(57.5
)
$
(347.8
)
$
(336.1
)


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

Three Months
Ended
June 30,

Six Months
Ended
June 30,2008

2007

2008

2007Net income

$
25.0

$
20.5

$
38.6

$
25.3Other comprehensive income (loss):Foreign currency translation adjustments


(4.5
)

8.9


(2.6
)

14.6Gain (loss) from hedging activities, net of income taxes


1.8


(1.2
)

4.0


(0.1
)Defined benefit pension and other postretirement plans, net of income taxes (see Note 12)


(2.4
)

39.4


0.9


39.0Total other comprehensive income (loss)


(5.1
)

47.1


2.3


53.5Comprehensive income (loss)

$
19.9

$
67.6

$
40.9

$
78.8


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

6

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Table of Contents

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

7

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Table of Contents

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)

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 proceeding.

Effect of New Accounting StandardsIn May 2008, the Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("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.

In
April 2008, the FASB issued 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 (GAAP). This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years.

8

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Table of Contents

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 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 FASB Staff Position ("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
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 ProceedingsThree creditors' committees, two representing asbestos claimants,
the Official Committee of Asbestos Personal Injury Claimants (the

9

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Table of Contents

W. R. Grace & Co. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited) (Continued)

2. Chapter 11Related Information (Continued)

"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, and a legal representative of future asbestos claimants, 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 of the
representative of future asbestos claimants, including those of their counsel and financial advisors.

As
discussed below, the Debtors, supported by the committee representing general unsecured creditors and the Equity Committee, as co-proponents, have filed a plan of
reorganization with the Bankruptcy Court. The PI Committee and the FCR, as co-proponents, also have filed a separate plan of reorganization with the Bankruptcy Court. Each of these plans
of
reorganization is designed to address all pending and future asbestos-related claims and all other pre-petition claims as outlined therein. Subsequent to these filings, on April 6,
2008, the Debtors, the Equity Committee, the PI Committee and the FCR entered into an agreement in principle that would settle all present and future asbestos-related personal injury claims. The
committee representing general unsecured creditors and the PD Committee are not parties to this agreement in principle. The Debtors, Equity Committee, PI Committee and FCR contemplate that a joint
plan of reorganization reflecting the terms of the agreement in principle would be filed with the Bankruptcy Court and would supersede the existing plans on file.

Plans of ReorganizationOn November 13, 2004, Grace filed a 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 "Debtors Plan") and related documents to address certain objections of creditors and other interested parties. At the time it was filed, the Debtors 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 FCR.

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 FCR filed a proposed plan of reorganization (the "PI Plan", and with the Debtors Plan, the "Plans") with the Bankruptcy Court. Copies
of the Plans are available from the Bankruptcy Court. The filing did not include a disclosure statement, trust distribution procedures, exhibits, or other supporting documents.

On
April 6, 2008, the Debtors reached an agreement in principle with the PI Committee, the FCR, and the Equity Committee that would settle all present and future asbestos-related
personal injury claims, as further described below (the "PI Settlement"). The PI Settlement contemplates that the Debtors, the PI Committee, the FCR and the Equity Committee would file a new joint
plan of reorganization with the Bankruptcy Court reflecting the terms and conditions of the PI Settlement. The drafting and negotiation of the joint plan and related documentation is in progress. The
committee representing general unsecured creditors and the PD Committee are not parties to the PI Settlement. Neither the PI Settlement nor a joint plan of reorganization reflecting its terms has been
filed with the Bankruptcy Court.

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2. Chapter 11Related Information (Continued)

The
Bankruptcy Court had previously 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.

Any
plan of reorganization, including either of the Plans, a plan reflecting the PI Settlement 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.

Each
of the Plans and the PI Settlement assumes that Cryovac, Inc. ("Cryovac"), a wholly-owned subsidiary of Sealed Air Corporation ("Sealed Air"), will pay $512.5 million
in cash (plus interest at 5.5% compounded annually from December 21, 2002) and will issue 18 million shares (reflecting a two-for-one stock split) of common stock
of Sealed Air to an asbestos trust 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 Sealed
Air Settlement has been approved by the Bankruptcy Court, but remains subject to the fulfillment of specified conditions.

Each
of the Plans and the PI Settlement contemplate that a trust would be established under Section 524(g) of the Bankruptcy Code (the "Asbestos Trust") to which asbestos-related
personal injury claims would be channeled for resolution.

The
Debtors Plan and the PI Plan are 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 neither of the Plans, nor any plan that may be filed as contemplated by the PI Settlement, will be approved by the Bankruptcy Court. If a new joint plan of reorganization
reflecting the PI Settlement is not filed with the Bankruptcy Court, 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. Therefore, until an ultimate plan of reorganization is confirmed, the interests of the holders of Company common stock remain subject to substantial
dilution or cancellation, and the value of asbestos claims and non-asbestos claims could be materially different from that reflected in Grace's balance sheet. The value of Company common
stock and the extent of any recovery by non-asbestos-related creditors will depend principally on the amount of Grace's asbestos-related liability under a confirmed plan of reorganization.

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

Asbestos-Related Claims and Costs

All pending and future asbestos-related claims would be channeled to the Asbestos Trust for resolution. The Debtors Plan contemplates
that the Bankruptcy Court will conduct hearings to determine, among other things, the amount that would need to be paid into the Asbestos Trust on the effective date of the Debtors Plan to satisfy
Grace's asbestos-related liabilities and trust administration

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Notes to Consolidated Financial Statements (Unaudited) (Continued)

2. Chapter 11Related Information (Continued)

costs
and expenses over time. The Asbestos Trust would utilize specified trust distribution procedures to satisfy the following allowed asbestos-related claims and
costs:



The
claims arising from such proceedings would be subject to this classification process.

Asbestos
personal injury claimants, including holders of both PI-SE Claims and PI-AO Claims, would have the option either to litigate their claims against the
Asbestos Trust in federal court in Delaware or, if they meet specified eligibility criteria, accept a settlement amount based on the severity of their condition. Holders of PD Claims would be required
to present allowed claims to the Asbestos Trust or litigate their claims against the Asbestos Trust in federal court in Delaware. The Debtors Plan provides that, as a condition precedent to
confirmation, the maximum estimated aggregate funding amount for all asbestos-related liabilities (PI-SE Claims, PI-AO Claims and PD Claims) and trust administration costs and
expenses as determined by the Bankruptcy Court cannot exceed $1,613 million, which Grace believes would fund over $2 billion in claims, costs and expenses over time.

PI-SE
Claims, PD Claims and related trust administration costs and expenses would be funded with (1) cash and shares of Sealed Air common stock pursuant to the Sealed
Air Settlement; and (2) Company common stock. The number of shares of Company common stock required to satisfy these claims will depend on the price of Company common stock on the effective
date of the Debtors Plan, liability measures approved by the Bankruptcy Court, and the value of the Sealed Air Settlement.

PI-AO
Claims would be funded with warrants exercisable for that number of shares of Company common stock which, when added to the shares issued directly to the Asbestos Trust
on the effective date of the Debtors Plan, would represent 50.1% of Grace's voting securities. If the common stock issuable upon exercise of the warrants is insufficient to pay all PI-AO
Claims (the liability for which is uncapped under the Debtors Plan), then Grace would pay any additional liabilities in cash.

The
amounts to fund PI-SE Claims, PD Claims and trust administration costs and expenses would be capped at the amount determined by the Bankruptcy Court. Amounts required to
fund PI-AO Claims would not be capped, so if the amount funded in respect thereof later proved to be inadequate, Grace would be responsible for contributing additional funds into the
Asbestos Trust to satisfy PI-AO Claims. Because of the number and nature of the uncertainties involved, Grace is unable to determine

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Notes to Consolidated Financial Statements (Unaudited) (Continued)

2. Chapter 11Related Information (Continued)

the
extent to which, if any, the liability for PI-AO Claims may exceed the amount funded into the Asbestos Trust in respect thereof.

Other Claims

All allowed administrative or priority claims would be paid 100% in cash and all general unsecured claims, other than those covered by
the Asbestos Trust, would be paid 85% in cash and 15% in Company common stock. Grace would finance these payments with cash on hand, cash from Fresenius Medical Care Holdings, Inc.
("Fresenius") paid in settlement of asbestos and other Grace-related claims as described below (the "Fresenius Settlement"), new Grace debt, and Company common stock. Grace would satisfy other
non-asbestos related liabilities and claims (primarily certain environmental, tax, pension and retirement medical obligations) as they become due and payable over time using cash flow from
operations, insurance proceeds from policies and settlements covering asbestos-related liabilities, and new credit facilities. Proceeds from available product liability insurance applicable to
asbestos-related claims would supplement operating cash flow to service new debt and liabilities not paid on the effective date of the Debtors Plan.

Effect on Company Common Stock

The Debtors Plan provides that Company common stock will remain outstanding at the effective date of the Debtors Plan, but that the
interests of existing shareholders would be subject to dilution by additional shares of common stock issued under the Debtors Plan.

The
PI and PD Committees and the FCR have challenged the confirmability of the Debtors Plan, arguing that the Debtors Plan impairs the rights of asbestos creditors and impermissibly
denies them voting rights, and have asserted that Grace's asbestos-related liabilities exceed the fair value of Grace's assets.

PI Committee and FCR Plan of ReorganizationUnder the terms of the PI Plan, all pending and future asbestos-related personal
injury claims and demands ("PI Claims") would be channeled to the Asbestos Trust for resolution. The PI Plan contemplates that the Bankruptcy Court would determine, among other things, an estimate of
the value of all PI Claims. The PI Plan assumes that: cash would be available from insurers; cash would be available from Fresenius pursuant to the Fresenius Settlement; and cash and shares of Sealed
Air common stock would be available from Cryovac pursuant to the Sealed Air Settlement. As a condition precedent to the PI Plan, the Bankruptcy Court must determine that the estimated value of all PI
Claims, excluding to the extent applicable, post-petition interest, is not less than $4 billion. If the amount available for distribution pursuant to the PI Plan is more than the
principal amount of creditors' claims, creditors entitled to post-petition interest would be paid such interest in the form of Company equity securities and any remaining value would be
available to current Company shareholders in the form of new Company equity securities.

Under
the terms of the PI Plan, claims would be satisfied under the Chapter 11 Cases as follows:

Asbestos-Related Personal Injury Claims and Costs (PI Claims)

All pending and future PI Claims would be channeled to the Asbestos Trust for resolution. The PI Plan provides that claims arising from
such proceedings would be subject to specified trust distribution procedures, which have not been filed with the Bankruptcy Court.

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2. Chapter 11Related Information (Continued)

In
order to satisfy allowed PI Claims and the related trust administration costs and expenses, on the effective date of the PI Plan, the Asbestos Trust would be funded with:
(1) cash; (2) cash and shares of Sealed Air common stock pursuant to the Sealed Air Settlement; (3) personal injury liability insurance, unless it is valued at more than
$500 million, in which case it would remain with Grace; and (4) Company equity securities. The value of Company equity securities contributed to the Asbestos Trust would depend on the
enterprise value of Grace, the value of Grace's personal injury liability insurance and the value of the Sealed Air Settlement.

Asbestos-Related Property Damage Claims excluding ZAI (non-ZAI PD Claims)

Settled asbestos-related property damage claims excluding ZAI ("non-ZAI PD Claims") would be paid in a combination of cash
and Company equity securities on the effective date of the PI Plan. On the effective date of the PI Plan, Grace would establish a reserve consisting of cash and Company equity securities with a value
equal to the estimated amount of unresolved non-ZAI PD Claims. Unresolved non-ZAI PD Claims would remain in the mediation and litigation process and would be paid in cash and
Company equity securities from the reserve. If the reserve did not have sufficient assets to pay all unresolved non-ZAI PD Claims once the amounts were determined, Grace would be liable to
pay any amounts not funded from the reserve.

ZAI Claims

ZAI claims would remain in the litigation process and would be paid by Grace, if required.

Certain Environmental Claims

Certain allowed environmental claims would be paid in cash and Company equity securities on the effective date of the PI Plan. On the
effective date of the PI Plan, Grace would establish a reserve consisting of cash and Company equity securities with a value equal to the estimated amount of unresolved environmental claims.
Unresolved environmental claims would be determined by the Bankruptcy Court and would be paid in cash and Company equity securities from the reserve. If the reserve did not have sufficient assets to
pay all unresolved environmental claims once the amounts were determined, Grace would be liable to pay any amounts not funded from the reserve.

Other Claims

All allowed administrative or priority claims would be paid in cash (either on the effective date of the PI Plan or as they become due
and payable over time). General unsecured claims, other than those covered by the Asbestos Trust, would be paid in cash (either on the effective date of the PI Plan or as they become due and payable
over time) and Company equity securities. Certain environmental and general unsecured claims would be reinstated and the holders of such claims would retain all legal and other rights to which they
are entitled under such claims. Other non-asbestos-related liabilities and claims (primarily certain tax claims and employee-related claims such as pension and retirement medical
obligations) would be paid in cash as they become due and payable over time.

Effect on Company Common Stock

Outstanding Company common stock would be cancelled at the effective date of the PI Plan.

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Notes to Consolidated Financial Statements (Unaudited) (Continued)

2. Chapter 11Related Information (Continued)

PI SettlementUnder the terms of the PI Settlement, the Debtors, the PI Committee, the FCR, and the Equity Committee would
file a joint plan of reorganization. Under this plan, all present and future PI Claims would be channeled to the Asbestos Trust for resolution.

The
Asbestos Trust would be funded with:



Under
the terms of the PI Settlement, claims would be satisfied under the Chapter 11 Cases as follows:

Asbestos-Related Personal Injury Claims (PI Claims)

All pending and future PI Claims would be channeled to the Asbestos Trust for resolution. The Asbestos Trust would pay claims from
trust assets in accordance with a trust agreement and trust distribution procedures established by the PI Committee and the FCR, subject to the approval of the Bankruptcy Court.

Asbestos-Related Property Damage Claims, excluding ZAI (non-ZAI PD Claims)

Settled non-ZAI PD Claims would be paid in cash on the effective date of a plan of reorganization. A plan of reorganization
would set forth procedures for the allowance or disallowance of all non-ZAI PD Claims that are disputed as of the effective date of the plan.

ZAI Claims

The PI Settlement contemplates that the Bankruptcy Court would estimate the value of all ZAI claims prior to or in connection with the
confirmation of a plan of reorganization. ZAI claims would be paid up to the amount of the estimate in cash.

Other Claims

All allowed administrative or priority claims would be paid in cash. Secured claims would be paid in cash or by reinstatement. Allowed
general unsecured claims would be paid in cash, including any

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2. Chapter 11Related Information (Continued)

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%, 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 PI Settlement assumes that Company common stock will remain outstanding at the effective date of a plan of reorganization, but that
the interests of existing shareholders would be subject to dilution by additional shares of Company common stock issued under the warrant or in the event of default in respect of the deferred payments
by Grace-Conn. 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 asbestos-related personal injury claims or claims
related to ZAI.

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 for asbestos-related property damage, 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. These claims, if sustained, would require Grace to fund ongoing health monitoring
costs for qualified claimants. 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 June 30, 2008, of the approximately 4,035 asbestos property damage claims filed, 275 claims
have been resolved, approximately 3,570 claims have been expunged or withdrawn by claimants, leaving approximately 190 claims to be addressed through the property damage case management order
approved by the Bankruptcy Court. As of June 30, 2008, of the approximately 3,265 non-asbestos claims filed,

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Notes to Consolidated Financial Statements (Unaudited) (Continued)

2. Chapter 11Related Information (Continued)

approximately
1,855 have been expunged or withdrawn by claimants, approximately 1,140 have been resolved, and an additional approximately 270 claims are to be addressed through the claim objection
process and the dispute resolution procedures approved by the Bankruptcy Court.

Grace
believes that its recorded liabilities for 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 liability and are being accounted for in accordance with the conditions precedent under the Debtors Plan, as described in "Accounting Impact" below. Grace expects to adjust its recorded
asbestos-related liability as necessary: to reflect rulings made by the Bankruptcy Court; when a new joint plan of reorganization is filed to reflect the terms of the PI Settlement; and when
significant uncertainties have been resolved. Such adjustments may be material to Grace's consolidated financial position and results of operations.

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 AG 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 (the "litigation settlement agreements"). 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 $1,031.2 million as of June 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

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2. Chapter 11Related Information (Continued)

ultimately
be allowed by the Bankruptcy Court. As of June 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 litigation settlements with Sealed Air and Fresenius, 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 these litigation settlement
agreements as measured at June 30, 2008, was $1,146.2 million comprised of $115.0 million in cash from Fresenius and $1,031.2 million in cash and stock from Cryovac.
Payments under the Sealed Air Settlement will be made directly to the Asbestos 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. The bases for the asbestos-related liability
component of "liabilities subject to compromise" are described in Note 3. Changes to the recorded amount of such liabilities will be based on developments in the Chapter 11 Cases and
management's assessment of the claim amounts that will ultimately be allowed by the Bankruptcy Court. Changes to pre-petition liabilities subsequent to the Filing Date reflect:
1) cash payments under approved court orders; 2) the terms of Grace's proposed plan of reorganization, as discussed above, 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.

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2. Chapter 11Related Information (Continued)

Components
of liabilities subject to compromise are as follows:

(In millions)

June 30,
2008

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

$
805.1

$
783.0Drawn letters of credit plus accrued interest


29.5


26.9Asbestos-related contingencies


1,700.0


1,700.0Income taxes(1)


100.8


89.3Environmental contingencies(2)


147.7


368.6Postretirement benefits other than pension


77.8


84.0Unfunded special pension arrangements


99.6


100.8Retained obligations of divested businesses


30.8


30.9Accounts payable


31.2


31.7Other accrued liabilities(2)


53.1


74.4Reclassification to current liabilities(3)


(12.1
)

(12.1
)Total Liabilities Subject to Compromise

$
3,063.5

$
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.

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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 June 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Libby (see Note 13)


(101.6
)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


(361.4
)Expense/(income) items:Interest on pre-petition liabilities


374.3Employee-related accruals


59.2Provision for asbestos-related contingencies


744.8Provision for environmental contingencies


318.5Provision for income tax contingencies


(3.7
)Balance sheet reclassifications:Reclassification of environmental settlement liabilityLibby (see Note 13)


(150.0
)Other balance sheet reclassifications


(37.8
)Balance, end of period

$
3,063.5


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 six months ended June 30, 2008 and 2007 were 5.65% and 8.25%, 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 contract between the Grace
entity and the claimant or such rate as may otherwise apply under applicable non-bankruptcy law.

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2. Chapter 11Related Information (Continued)

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
June 30,

Six Months
Ended
June 30,(In millions)

2008

2007

2008

2007Legal and financial advisory fees

$
19.3

$
26.1

$
38.0

$
46.1Interest income


(1.3
)

(2.5
)

(1.6
)

(4.7
)Chapter 11 expenses, net

$
18.0

$
23.6

$
36.4

$
41.4


Pursuant
to SOP 90-7, interest income earned on the Debtors' cash balances is offset against Chapter 11 expenses. In the first quarter of 2008, interest income
was reduced by a $1.2 million charge related to the change in fair value of investment securities held by the Debtors.

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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)

Six Months Ended
June 30,2008

2007Net sales, including intercompany

$
799.4

$
744.2Cost of goods sold, including intercompany, exclusive of depreciation and amortization shown separately below


592.5


516.8Selling general and administrative expenses, exclusive of defined benefit pension expense shown separately below


148.1


151.3Research and development expenses


22.8


21.1Depreciation and amortization


29.2


26.9Defined benefit pension expense


18.7


19.2Interest expense and related financing costs


29.3


39.0Other (income) expense, net


(56.2
)

(25.2
)Provision for environmental remediation


5.9


12.0Chapter 11 expenses, net of interest income


36.4


41.5826.7


802.6Loss before income taxes and equity in net income of non-filing entities


(27.3
)

(58.4
)Benefit from (provision for) income taxes


(16.8
)

12.6Loss before equity in net income of non-filing entities


(44.1
)

(45.8
)Equity in net income of non-filing entities


82.7


71.1Net income

$
38.6

$
25.3


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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)

Six Months Ended
June 30,2008

2007Operating ActivitiesNet income

$
38.6

$
25.3Reconciliation to net cash used for operating activities:Chapter 11 expenses, net of interest income


36.4


41.5(Benefit from) provision for income taxes


16.8


(12.6
)Equity in net income of non-filing entities


(82.7
)

(71.1
)Depreciation and amortization


29.2


26.9Interest on pre-petition liabilities subject to compromise


26.8


38.8Provision for environmental remediation


5.9


12.0Other non-cash items, net


(2.4
)

(6.1
)Contributions to defined benefit pension plans


(35.2
)

(39.4
)Cash paid to resolve contingencies subject to Chapter 11


(101.6
)

(10.3
)Chapter 11 expenses paid


(36.7
)

(35.5
)Changes in other assets and liabilities, excluding the effect of businesses acquired/divested


(62.1
)

(57.8
)Net cash used for operating activities


(167.0
)

(88.3
)Investing ActivitiesCapital expenditures


(33.8
)

(33.9
)Loan repayments from non-filing entities


131.0


54.5Other investing activities


47.1


46.0Net cash provided by investing activities


144.3


66.6Net cash provided by financing activities


8.3


18.1Net decrease in cash and cash equivalents


(14.4
)

(3.6
)Cash and cash equivalents, beginning of period


206.8


233.8Cash and cash equivalents, end of period

$
192.4

$
230.2


23

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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)

June 30,
2008

December 31,
2007ASSETSCurrent AssetsCash and cash equivalents

$
192.4

$
206.8Investment securities


50.5


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


70.7


77.1Trade accounts receivable, net


124.7


108.3Receivables from non-filing entities, net


142.0


103.2Inventories


93.0


82.6Other current assets


107.9


47.1Total Current Assets


781.2


723.4Properties and equipment, net


403.4


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


3.9


3.9Deferred income taxes


688.0


745.7Asbestos-related insurance


500.0


500.0Loans receivable from non-filing entities, net


444.0


524.2Investment in non-filing entities


458.8


395.4Overfunded defined benefit pension plans


0.5


1.5Other assets


76.0


77.7Total Assets

$
3,355.8

$
3,375.6LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)Liabilities Not Subject to CompromiseCurrent liabilities

$
365.9

$
224.0Minority interest in consolidated entities


53.5


62.1Underfunded defined benefit pension plans


164.2


159.6Other liabilities


44.8


39.0Total Liabilities Not Subject to Compromise


628.4


484.7Liabilities Subject to Compromise


3,063.5


3,277.5Total Liabilities


3,691.9


3,762.2Shareholders' Equity (Deficit)


(336.1
)

(386.6
)Total Liabilities and Shareholders' Equity (Deficit)

$
3,355.8

$
3,375.6


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 available to the public through
the Bankruptcy Court. 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

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W. R. Grace & Co. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited) (Continued)

2. Chapter 11Related Information (Continued)

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.

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 claims for property damage (one of which has since been dismissed), and the remainder involving 129,191 claims for personal injury. 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 property damage and personal injury claimants, respectively, and the FCR, representing the
interests of future personal injury claimants, 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 property damage 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 property damage 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 property damage 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 June 30, 2008, following the reclassification, withdrawal or expungement of claims, approximately 460 property damage claims remain outstanding. The Bankruptcy Court has
approved settlement agreements covering approximately 275 property damage claims for an aggregate allowed amount of $82 million.

Eight
of the ZAI cases were filed as purported class action lawsuits in 2000 and 2001. In addition, ten lawsuits were filed as purported class actions in 2004 and 2005 with respect to
persons and homes

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W. R. Grace & Co. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited) (Continued)

3. Asbestos-Related Litigation (Continued)

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.

Based
on Grace's investigation of the claims described in these lawsuits, and testing and analysis of this product by Grace and others, Grace believes that the product 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 13) dispute Grace's position on the safety of ZAI. On October 18, 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. On December 14, 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 District Court in 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 ZAI claims and approved a related notice program that requires persons with a ZAI claim to submit individual proofs of claim no later than October 31, 2008. At
the same time as the Debtors' request, the ZAI Claimants asked the Bankruptcy Court for various forms of relief: (1) to take such actions as would finalize the December 14 order and
permit an appeal to be taken; (2) to allow the ZAI 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 June 30, 2008 assumes the risk of loss from ZAI litigation is not probable. If Grace's view as to risk of loss is not sustained, Grace believes
the cost to resolve the matter would be material.

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 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 claims were disposed of (through settlements and judgments) for a total
of $645.6 million. As of the Filing Date, 129,191 claims for personal injury were pending against Grace. Grace believes that a substantial number of additional personal injury claims would have
been received between the Filing Date and June 30, 2008 had such claims not been stayed by the Bankruptcy Court.

The
Bankruptcy Court has entered separate case management orders for estimating liability for pending and future personal injury claims and adjudicating pending property damage claims,
excluding

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W. R. Grace & Co. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited) (Continued)

3. Asbestos-Related Litigation (Continued)

ZAI
claims. A trial for estimating liability for personal injury 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 June 30, 2008 and December 31,
2007 was $1,700 million and is included in "liabilities subject to compromise" in the accompanying Consolidated Balance Sheets. Grace adjusted its asbestos-related liability in the fourth
quarter of 2004 based on the filing of the Debtors Plan as discussed in Note 2. The amount recorded at June 30, 2008 and December 31, 2007 includes the $1,613 million
maximum amount reflected as a condition precedent to the Debtors Plan and $87 million related to pre-Chapter 11 contractual settlements and judgments.

Pursuant
to the Debtors Plan, Grace requested that the Bankruptcy Court determine the aggregate dollar amount, on a net present value basis, that must be funded on the effective date of
the Debtors Plan into the Asbestos Trust (established under Section 524(g) of the Bankruptcy Code) to pay all asbestos-related personal injury and property damage claims (including ZAI)
entitled to payment under the Debtors Plan and related trust administration costs and expenses on the later of the effective date of the Debtors Plan or when allowed (the "Funding Amount"). It is a
condition to confirmation of the Debtors Plan that the Bankruptcy Court shall conclude that the Funding Amount is not greater than $1,613 million. This amount, which should be sufficient to
fund over $2 billion in pending and future claims, was based in part on Grace's 2004 evaluation of (1) existing but unresolved personal injury and property damage claims,
(2) actuarially-based estimates of future personal injury claims, (3) the risk of loss from ZAI litigation, (4) proposed claim payments reflected in the Debtors Plan, and
(5) the cost of trust administration and litigation. Based upon these and other factors, Grace is prepared to settle its asbestos-related claims at this amount as part of a consensual plan of
reorganization. As part of the estimation and litigation process, if it continues, the amounts proposed to or adopted by the Bankruptcy Court may be materially different than this amount.

For
personal injury claims, the Bankruptcy Court ordered that all claimants with claims pending as of the Filing Date (other than settled but unpaid claims) must complete detailed
questionnaires providing information on, among other things, their medical condition, including diagnostic support, exposure to Grace and non-Grace asbestos-containing products, employment
history, and pending lawsuits against other companies. The Bankruptcy Court required questionnaires to be completed on or before July 12, 2006 and supplemental questionnaires to be completed on
or before January 12, 2007.

The
Bankruptcy Court also established procedures and deadlines for filing proofs of claims for asbestos personal injury claims pending as of the Filing Date. Claimants asserting claims
subject to enforceable written settlement agreements dated prior to the Filing Date, which have not been fully paid or
satisfied, were required to file proofs of claim by October 16, 2006. Claimants asserting claims that are not subject to such settlement agreements were required to file proofs of claim by
November 15, 2006.

Grace
has catalogued and analyzed the information furnished with the proofs of claim and questionnaires. This information and other information, including Grace's claims and settlement
history, the experience of other defendants in asbestos-related litigation, and post-petition developments in asbestos-related litigation generally, have been analyzed and reviewed by
experts; and Grace, the PI Committee and the FCR have submitted expert reports that each party has relied upon to support its respective estimate of Grace's asbestos personal injury liability. Copies
of Grace's and the PI Committee's expert reports and portions of the FCR's expert report are available through the

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W. R. Grace & Co. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited) (Continued)

3. Asbestos-Related Litigation (Continued)

Bankruptcy
Court. These expert reports (since supplemented, rebutted and made the subject of discovery) are based on data, methodologies and assumptions that may or may not be accepted by the
Bankruptcy Court.

For
property damage claims, the case management order provides that estimation will be preceded by litigation on certain common threshold issues affecting a substantial majority of
claims. Such litigation will consist of determining, among other things, (1) whether asbestos-containing products formerly manufactured by Grace are hazardous in place, and
(2) compliance with the applicable statute of limitations. Grace has asked the Bankruptcy Court to rule on Grace's specific objections to individual claims and groups of claims.

Under
the Debtors Plan, the Funding Amount would primarily be a function of the number of property damage and personal injury claims entitled to be paid, and the amount payable per
claim. Through the estimation process, Grace would seek to demonstrate that most claims have no value because they fail to establish any material property damage, health impairment or significant
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 personal
injury and property damage claims, then Grace believes that the Funding Amount could be less than $1,613 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 FCR have asserted that Grace's asbestos-related liabilities are substantially higher than $1,613 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 FCR, then any plan of reorganization likely would result in the loss of all or substantially
all equity value by current shareholders. Therefore, due to the significant uncertainties of the estimation process and asbestos litigation generally, Grace is not able to estimate a probable Funding
Amount that would be accepted by the Bankruptcy Court.

However,
as Grace is willing to proceed with confirmation of the Debtors Plan with a Funding Amount of up to $1,613 million (assuming that other conditions precedent to
confirmation of the Debtors Plan are satisfied, including the availability of the payment from Cryovac directly to the Asbestos Trust under the Sealed Air Settlement described in Note 2),
Grace's recorded asbestos-related liability reflects the maximum amount allowed as a condition precedent under the Debtors Plan. This amount, plus $87 million for
pre-Chapter 11 contractual settlements and judgments, brings the total recorded asbestos-related liability as of June 30, 2008 and December 31, 2007 to
$1,700 million. Any differences between the Debtors Plan as filed and the plan ultimately confirmed by the Bankruptcy Court could fundamentally change the accounting measurement of Grace's
asbestos-related liability and that change could be material.

On
April 6, 2008, the Debtors reached an agreement in principle, the PI Settlement, with the PI Committee, the FCR, and the Equity Committee that would settle all present and
future asbestos-related personal injury claims. As discussed in Note 2, the PI Settlement contemplates that the Debtors, the PI Committee, the FCR and the Equity Committee would file a new
joint plan of reorganization with the Bankruptcy Court reflecting the terms and conditions of the PI Settlement. The drafting and negotiation of the joint plan and related documentation is in
progress. The committee representing general unsecured creditors and the PD Committee are not parties to the PI Settlement.

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Notes to Consolidated Financial Statements (Unaudited) (Continued)

3. Asbestos-Related Litigation (Continued)

Neither
the PI Settlement nor a joint plan of reorganization reflecting its terms has been filed with the Bankruptcy Court.

As
a result of the PI Settlement, a trial for estimating liability for asbestos personal injury claims that began in January 2008 was suspended in April 2008.

Grace
has not adjusted its accounting for asbestos-related liabilities and other liabilities subject to compromise as of June 30, 2008
because:



If
a new joint plan of reorganization reflecting the PI Settlement is not filed with the Bankruptcy Court, 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. Grace expects to adjust its recorded asbestos-related liability as necessary: to reflect rulings made by
the Bankruptcy Court; when a new joint plan of reorganization is filed to reflect the terms of the PI Settlement; and when significant uncertainties have been resolved. Such adjustments may be
material to Grace's consolidated financial position and results of operations.

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 PI Settlement, insurance policies that provide
coverage for asbestos personal injury claims and proceeds, including interest, received after the date of the PI Settlement, would be assigned to the Asbestos 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 $434 million. With respect to asbestos-related personal injury claims, the settlement agreements generally require that the claims
be spread

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W. R. Grace & Co. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited) (Continued)

3. Asbestos-Related Litigation (Continued)

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 Debtors Plan were approved at the recorded asbestos-related liability of $1,700 million. In estimating its ultimate
insurance recovery, Grace has assumed that its unsettled excess coverage will be available on terms that are substantially similar to the existing settlement agreements described above. Grace believes
that any allowed ZAI claims (while not probable) 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. However, the terms of the PI Settlement would preclude Grace's ability to recover any amounts paid for ZAI claims under the excess policies.

In
addition, Grace has approximately $253 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. Settlement amounts are recorded as income when received.

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
June 30, 2008 approximated $96.2 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 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. Grace will record the
amount in the escrow account as an asset and reduce its asbestos insurance receivable balance if and when all contingencies for the release of such amount are satisfied.

As
of June 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 $917 million of excess coverage from 54 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 claim (PI, PD or ZAI), the relevant exposure years, the timing of payment, the solvency of
insurers and the legal status of policy rights. Accordingly, Grace's recorded estimate of insurance recovery may differ materially from actual amounts received.

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W. R. Grace & Co. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited) (Continued)

4. Income Taxes

During the three months ended June 30, 2008, Grace increased its liability for uncertain tax positions by $2.6 million due primarily to the accrual of interest. As a
result, the total amount of unrecognized tax benefits at June 30, 2008 increased to $180.1 million from $177.5 million at March 31, 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

1998-2001

2002-2007United Kingdom

None

2002-2007Singapore

2001-2006

2007France

2004-2006

2007Italy

None

2003-2007






Based
upon the outcome of these examinations, or as a result of the expiration of statute of limitations for specific jurisdictions, it is reasonably possible that there may be a
material change to Grace's aggregate recorded liabilities for uncertain tax positions in the next twelve months. A decrease in recorded liabilities of $7 million to $8 million may arise
as a result of settlement of the R&E credit issue described below. However, 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:



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Notes to Consolidated Financial Statements (Unaudited) (Continued)

4. Income Taxes (Continued)



Other Tax Matters

As of June 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 AMTC carryforwards with no expiration dates. However, the $18.9 million of AMTC carryforwards includes $15.8 million which will not be available
if Grace is successful in resolving certain issues reflected as uncertain tax positions.

Grace
has not yet recorded tax benefits of $14.6 million associated with stock option compensation that remained unrealized as of June 30, 2008. When realized, the benefits
will increase paid-in capital in our Consolidated Balance Sheet.

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.

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Notes to Consolidated Financial Statements (Unaudited) (Continued)

5. Other (Income) Expense, net

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

Three Months
Ended
June 30,

Six Months
Ended
June 30,Other (Income) Expense, net
(In millions)

2008

2007

2008

2007COLI income, net

$
(0.7
)
$
(0.5
)
$
(1.8
)
$
(2.5
)Interest income


(1.3
)

(1.6
)

(2.4
)

(3.7
)Net (gain) loss on sales of investments and disposals of assets


1.0


(3.4
)

(0.6
)

(3.6
)Currency translationintercompany loans


0.8


(1.0
)

(37.8
)

(3.8
)Value of currency contracts


(2.8
)

0.4


23.7


2.5Other currency transaction effects


0.1


1.5


0.9


1.9Interest income on joint venture cash balances


(0.1
)

(0.6
)

(0.2
)

(1.3
)Other miscellaneous income


(4.2
)

(2.5
)

(6.3
)

(5.2
)Total other (income) expense, net

$
(7.2
)
$
(7.7
)
$
(24.5
)
$
(15.7
)


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 in
November 2009 through November 2013. In the six months ended June 30, 2008, the Euro strengthened considerably against the U.S. dollar, which resulted in significant foreign
currency translation gains from the revaluation of the intercompany loan. This loan was not outstanding during the prior comparable period. The changes in fair values of the foreign currency forward
contracts partially offset the translation gains.

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

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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 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. In the six months ended June 30, 2008,
$46.7 million of the fund balance was distributed in cash. Grace has elected to remain in the fund and to value the fund based on the underlying securities as determined by the fund principals.
The valuation of the fund was determined using a market approach, which consisted of matrix pricing techniques based on widely available market data and comparables. The strategic cash investment fund
was valued at $50.5 million and $98.3 million at June 30, 2008 and December 31, 2007, respectively.

Grace
recorded a decrease in fair value of $1.2 million for the six months ended June 30, 2008 due to unfavorable conditions in the credit markets. The loss is recorded as
an offset to interest income earned on the Columbia Strategic Cash Fund by the Debtors, which is netted 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.

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.

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

34

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Table of Contents

W. R. Grace & Co. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited) (Continued)

6. Fair Value Measurements (Continued)

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 June 30, 2008:

Fair Value Measurements at June 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

$
50.5

$


$
50.5

$
Commodity derivatives


5.2





5.2


Total Assets

$
55.7

$


$
55.7

$
LiabilitiesCurrency derivatives

$
16.8

$


$
16.8

$
Total Liabilities

$
16.8

$


$
16.8

$



35

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Table of Contents

W. R. Grace & Co. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited) (Continued)

7. Other Balance Sheet Accounts

(In millions)

June 30,
2008

December 31,
2007Inventories(1)Raw materials

$
102.5

$
76.3In process


51.1


44.7Finished products


249.6


207.1General merchandise


47.3


38.2Less: Adjustment of certain inventories to a LIFO basis(2)


(81.8
)

(62.8
)$
368.7

$
303.5Other AssetsDeferred charges

$
37.7

$
40.9Long-term receivables, less allowances of $0.0 (2007-$0.0)


1.2


1.3Patents, licenses and other intangible assets, net


80.6


82.2Investments in unconsolidated affiliates and other


16.0


12.2$
135.5

$
136.6Other Current LiabilitiesEnvironmental settlement liabilityLibby (see Note 13)

$
150.0

$
Accrued compensation


81.0


97.2Customer volume rebates


31.8


44.1Accrued commissions


12.6


11.6Accrued reorganization fees


27.2


27.5Income tax payable


26.3


30.4Deferred tax liability


9.6


8.8Other accrued liabilities


98.4


105.5$
436.9

$
325.1Other LiabilitiesFair value of foreign exchange rate forward contracts

$
16.8

$
Long-term self-insurance reserve


8.0


8.0Retained obligations of divested businesses


5.3


5.3Long-term incentive compensation


3.3


13.8Other accrued liabilities


18.2


19.1$
51.6

$
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.

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Table of Contents

W. R. Grace & Co. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited) (Continued)

8. 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 $74.6 million and
$81.0 million at June 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.

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

Six Months
Ended
June 30,Life InsuranceActivity Summary
(In millions)

2008

2007Earnings on policy assets

$
1.9

$
2.8Interest on policy loans


(0.1
)

(0.3
)Policy loan repayments





Proceeds from termination of life insurance policies


(8.1
)

Net investing activity


(0.1
)

(0.2
)Change in net cash value

$
(6.4
)
$
2.3Tax-free proceeds received

$
0.1

$





Components of Net Cash Value
(In millions)

June 30,
2008

December 31,
2007Gross cash value

$
79.6

$
85.8Principalpolicy loans


(4.7
)

(4.7
)Accrued interestpolicy loans


(0.3
)

(0.1
)Total net cash value


74.6


81.0Less: current portion


(70.7
)

(77.1
)Net cash valuelong-term

$
3.9

$
3.9Insurance benefits in force

$
123.2

$
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
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.

37

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Table of Contents

W. R. Grace & Co. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited) (Continued)

9. Debt

Components of Debt
(In millions)

June 30,
2008

December 31,
2007Debt payable within one year

$
3.8

$
4.7Debt payable after one yearDIP facility

$


$
Other long-term borrowings


0.3


0.3$
0.3

$
0.3Debt Subject to CompromiseBank borrowings

$
500.0

$
500.0Accrued interest on bank borrowings


305.1


283.0Drawn letters of credit


25.7


23.6Accrued interest on drawn letters of credit


3.8


3.3$
834.6

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


5.6
%

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 June 30, 2008 and December 31, 2007, the Debtors had no revolving loans and $66.0 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
June 30, 2008 effective date of the amended DIP facility, to $92.3 million. The letters of credit were issued mainly for trade-related matters such as performance bonds, as well as
certain insurance and environmental matters.

10. 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 June 30, 2008,
1,245,946 shares were reserved for issuance pursuant to stock options and other stock incentives. Since the Filing Date, Grace has not granted any stock options. During the six months ended
June 30, 2008 and 2007, 523,617 and 1,215,996 stock options were exercised for aggregate proceeds of $9.6 million and $19.4 million, respectively.

38

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Table of Contents

W. R. Grace & Co. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited) (Continued)

11. 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
June 30,

Six Months
Ended
June 30,Earnings Per Share
(In millions, except per share amounts)

2008

2007

2008

2007NumeratorsNet income

$
25.0

$
20.5

$
38.6

$
25.3DenominatorsWeighted average common sharesbasic calculation


72.1


70.1


71.9


69.8Dilutive effect of employee stock options


0.8


1.7


0.7


1.6Weighted average common sharesdiluted calculation


72.9


71.8


72.6


71.4Basic earnings per share

$
0.35

$
0.29

$
0.54

$
0.36Diluted earnings per share

$
0.34

$
0.29

$
0.53

$
0.35


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

12. 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 six months ended
June 30, 2008 and 2007:

Three Months Ended June 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

$
(1.5
)
$
0.5

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


6.6


(2.2
)

4.4Other changes in funded status


(7.9
)

2.1


(5.8
)Benefit plans, net


(2.8
)

0.4


(2.4
)Foreign currency translation adjustments


(4.5
)




(4.5
)Gain (loss) from hedging activities


2.7


(0.9
)

1.8Other comprehensive income (loss)

$
(4.6
)
$
(0.5
)
$
(5.1
)


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Table of Contents

W. R. Grace & Co. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited) (Continued)

12. Comprehensive Income (Loss) (Continued)



Six Months Ended June 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

$
(3.1
)
$
1.1

$
(2.0
)Amortization of net deferred actuarial loss included in net periodic benefit cost


13.4


(4.6
)

8.8Other changes in funded status


(10.3
)

4.4


(5.9
)Benefit plans, net





0.9


0.9Foreign currency translation adjustments


(2.6
)




(2.6
)Gain (loss) from hedging activities


6.2


(2.2
)

4.0Other comprehensive income (loss)

$
3.6

$
(1.3
)
$
2.3




Three Months Ended June 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

$
(1.8
)
$
0.6

$
(1.2
)Amortization of net deferred actuarial loss included in net periodic benefit cost


7.4


(2.6
)

4.8Other changes in funded status


54.5


(18.7
)

35.8Benefit plans, net


60.1


(20.7
)

39.4Foreign currency translation adjustments


8.9





8.9Gain (loss) from hedging activities


(2.0
)

0.8


(1.2
)Other comprehensive income (loss)

$
67.0

$
(19.9
)
$
47.1




Six Months Ended June 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

$
(3.5
)
$
1.2

$
(2.3
)Amortization of net deferred actuarial loss included in net periodic benefit cost


14.1


(4.8
)

9.3Other changes in funded status


49.0


(17.0
)

32.0Benefit plans, net


59.6


(20.6
)

39.0Foreign currency translation adjustments


14.6





14.6Gain (loss) from hedging activities


(0.1
)




(0.1
)Other comprehensive income (loss)

$
74.1

$
(20.6
)
$
53.5


40

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Table of Contents

W. R. Grace & Co. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited) (Continued)

12. Comprehensive Income (Loss) (Continued)

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

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

June 30,
2008

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

$
2.9

$
4.9Net deferred actuarial loss (net of tax)


(401.8
)

(404.7
)Benefit plans, net


(398.9
)

(399.8
)Foreign currency translation


47.6


50.2Hedging activities, net of tax


3.5


(0.5
)Accumulated other comprehensive income (loss)

$
(347.8
)
$
(350.1
)


Accumulated
other comprehensive income (loss) related to the defined benefit pension and other postretirement plans at June 30, 2008 and December 31, 2007, respectively,
represents the accumulation of net actuarial losses of $401.8 million and $404.7 million as well as net prior service credits of $2.9 million and $4.9 million. These
amounts are net of tax and are amortized as a component of net periodic benefit cost. For the six months ended June 30, 2008 and 2007, the pre-tax benefit recognized related to
prior service credits was $3.1 million and $3.5 million, respectively, and the pre-tax expense recognized for amortization of accumulated actuarial losses was
$13.4 million and $14.1 million, respectively. In addition, $10.3 million of pre-tax loss and $49.0 million of pre-tax income was recognized for
changes in funded status during the six months ended June 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.

13. Commitments and Contingent Liabilities

Asbestos-Related LiabilitySee Note 3

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
June 30, 2008, Grace's estimated liability for environmental investigative and remediation costs totaled $297.7 million, as compared with $368.6 million at
December 31, 2007. Included in the June 30, 2008 liability is $150 million that is presented in "Other current liabilities" in the Consolidated Balance

41

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W. R. Grace & Co. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited) (Continued)

13. Commitments and Contingent Liabilities (Continued)

Sheet
(see below for discussion). 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.

In
June 2008, the Bankruptcy Court approved of one of the largest of these remediation agreements, 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 expenditures charged against previously established reserves for the six months ended June 30, 2008 and 2007 were $102.8 million and $4.8 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. Under the terms of the
settlement agreement, interest has accrued on the $250 million settlement amount since April 18, 2008. 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.

42

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W. R. Grace & Co. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited) (Continued)

13. Commitments and Contingent Liabilities (Continued)

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 $200.9 million and $270.8 million at June 30, 2008 and December 31, 2007, respectively, excluding interest. The estimated obligation as of each date
includes $150 million and $250 million, respectively, for the settlement of Libby remediation costs and does not include the cost to remediate the Grace-owned mine site at Libby.

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.

In
July 2006, the U.S. District Court for the District of Montana dismissed a portion of the conspiracy count of a superseding indictment alleging conspiracy to knowingly endanger
residents of the Libby area and others in violation of the Clean Air Act. In August 2006, the District Court granted a motion by the defendants to exclude as evidence sample results that
included minerals that do not constitute asbestos under the Clean Air Act. The Government appealed these and other rulings to the Ninth Circuit Court of Appeals. In September 2007, the Ninth
Circuit overturned the July 2006 and August 2006 District Court rulings. In December 2007, Grace's petition for rehearing concerning these rulings was denied. Grace appealed the
Ninth Circuit's ruling to the Supreme Court in April 2008 and the appeal was denied in June 2008. The District Court has scheduled a status hearing for October 24, 2008. A trial
date has not been scheduled.

The
U.S. 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 six months ended June 30, 2008 and 2007, total
expense for Grace and the employees was $8.5 million and $6.3 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 $100.2 million through June 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 per
quarter. Grace intends to expense such costs as they are incurred.

43

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Table of Contents

W. R. Grace & Co. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited) (Continued)

13. Commitments and Contingent Liabilities (Continued)

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 seeking approximately $4.2 million 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.

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 June 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 $96.8 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:



44

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Table of Contents

W. R. Grace & Co. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited) (Continued)

13. 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 June 30 2008, Grace had gross financial assurances issued and outstanding of
$291.2 million, comprised of $140.7 million of surety bonds issued by various insurance companies, and $150.5 million of standby letters of credit and other financial assurances
issued by various banks. As discussed in Note 9, $66.0 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 June 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
June 30, 2008.

14. 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

45

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Table of Contents

W. R. Grace & Co. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited) (Continued)

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

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.

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 June 30, 2008, Grace increased the discount rate for the U.S. qualified pension plans from 6.50% at March 31, 2008 to 6.75% at June 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 June 30, 2008, Grace changed the discount
rate for the United Kingdom from 6.75% at March 31, 2008 to 6.50% at June 30, 2008, and for Germany from 6.00% at March 31, 2008 to 6.25% at June 30, 2008. Grace did not
change the discount rate for Canada from the 6.00% rate in effect on March 31, 2008. The funded status as of June 30, 2008 reflects a decrease in total assets of approximately
$7 million, and a decrease in total liabilities of approximately $28 million as compared to March 31, 2008, resulting from the change in discount rates (including the
postretirement plan). After tax effects, total assets decreased from March 31, 2008 to June 30, 2008 by approximately $15 million, total liabilities decreased by approximately
$28 million and shareholders' equity increased by approximately $13 million. The funded status as of June 30, 2008 reflects an increase to total assets of approximately
$25 million and a decrease to total liabilities of approximately $66 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 June 30, 2008 by approximately $5 million, total liabilities decreased by
approximately $66 million and shareholders' equity increased by approximately $61 million.

46

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Table of Contents

W. R. Grace & Co. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited) (Continued)

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

At
June 30, 2008, Grace's recorded pension liability for underfunded and unfunded plans was $419.7 million ($173.8 million included in "underfunded defined benefit
pension plans", $138.4 million included in "unfunded pay-as-you-go defined benefit pension plans", $13.0 million included in "other current
liabilities", and $94.5 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 ($173.8 million); and 2) the PBO of unfunded pay-as-you-go plans ($245.9 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 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 six months ended June 30, 2008 and 2007 are as follows:

Three Months Ended June 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

$
3.9

$
2.2

$
0.1

$
3.7

$
1.8

$
0.1Interest cost


15.5


6.2


1.1


14.6


5.1


1.2Expected return on plan assets


(15.5
)

(5.1
)




(14.4
)

(5.3
)

Amortization of prior service cost (credit)


0.4


0.2


(2.1
)

0.6


0.2


(2.6
)Amortization of net deferred actuarial loss


4.9


1.3


0.4


5.6


1.2


0.6Net periodic benefit cost (income)

$
9.2

$
4.8

$
(0.5
)
$
10.1

$
3.0

$
(0.7
)


47

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Table of Contents

W. R. Grace & Co. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited) (Continued)

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



Six Months Ended June 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

$
8.1

$
4.4

$
0.2

$
7.9

$
3.8

$
0.2Interest cost


31.1


12.1


2.4


29.0


10.1


2.3Expected return on plan assets


(31.0
)

(10.1
)




(29.2
)

(10.5
)

Amortization of prior service cost (credit)


0.8


0.4


(4.3
)

1.2


0.4


(5.1
)Amortization of net deferred actuarial loss


9.9


2.6


0.9


10.5


2.6


1.0Net periodic benefit cost (income)

$
18.9

$
9.4

$
(0.8
)
$
19.4

$
6.4

$
(1.6
)


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. 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.

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.

15. 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.

The
following table presents information related to Grace's operating segments for the three-month and six-month periods ended June 30, 2008 and 2007, respectively.
Only those corporate

48

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Table of Contents

W. R. Grace & Co. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited) (Continued)

15. Operating Segment Information (Continued)

expenses
directly related to the operating segments are allocated for reporting purposes. All remaining corporate items are reported separately and labeled as such.

Three Months Ended
June 30,

Six Months Ended
June 30,Operating Segment Data
(In millions)

2008

2007

2008

2007Net SalesGrace Davison

$
584.8

$
524.2

$
1,081.9

$
991.8Grace Construction Products


315.2


288.6


577.3


536.6Total

$
900.0

$
812.8

$
1,659.2

$
1,528.4Pre-tax Operating IncomeGrace Davison

$
68.5

$
73.1

$
130.8

$
127.5Grace Construction Products


44.8


46.1


69.5


72.9Corporate costs


(22.9
)

(26.1
)

(47.7
)

(46.7
)Total

$
90.4

$
93.1

$
152.6

$
153.7


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 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 six months ended June 30, 2008 and 2007, respectively.
Sales are attributed to geographic areas based on customer location.

Three Months Ended
June 30,

Six Months Ended
June 30,Geographic Area Data
(In millions)

2008

2007

2008

2007Net SalesUnited States

$
273.1

$
252.6

$
523.4

$
498.3Canada and Puerto Rico


27.6


24.2


50.9


45.2Total North America

$
300.7

$
276.8

$
574.3

$
543.5Europe Africa


367.1


334.4


691.1


629.4Asia Pacific


175.1


148.4


287.3


259.0Latin America


57.1


53.2


106.5


96.5Total

$
900.0

$
812.8

$
1,659.2

$
1,528.4


49

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Table of Contents

W. R. Grace & Co. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited) (Continued)

15. Operating Segment Information (Continued)

The
pre-tax operating income for Grace's operating segments for the three months and six months ended June 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
June 30,

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

2008

2007

2008

2007Pre-tax operating incomecore operations

$
90.4

$
93.1

$
152.6

$
153.7Minority interest in consolidated entities


4.1


4.1


6.0


6.5Chapter 11 expenses, net of interest income


(18.0
)

(23.6
)

(36.4
)

(41.4
)Net gain (loss) on sales of investments and disposals of assets


(1.0
)

3.4


0.6


3.6Provision for environmental remediation





(12.0
)

(5.9
)

(12.0
)Interest expense and related financing costs


(14.5
)

(20.3
)

(29.6
)

(39.7
)Other, net


(10.4
)

(10.8
)

(5.6
)

(14.7
)Income before income taxes and minority interest

$
50.6

$
33.9

$
81.7

$
56.0


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.

16. 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
June 30,

Six Months Ended
June 30,(In millions)

2008

2007

2008

2007Sales

$
118.6

$
120.6

$
207.6

$
215.9Income before taxes


9.3


9.9


14.3


15.7Net income


9.3


9.0


13.6


14.6Minority interests in net income


4.1


4.1


6.0


6.5Dividends paid to minority interests


(13.3
)




(13.3
)

(11.8
)




(In millions)

June 30,
2008

December 31,
2007Cash

$
53.0

$
57.0Other current assets


154.2


157.0Total assets


228.0


233.1Total liabilities


84.8


74.5Shareholders' equity


143.2


158.6Minority interests in shareholders' equity


62.7


70.8


50

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Table of Contents

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

Financial Summary for June 30, 2008

Following is a summary of key financial measures of our performance for the three months and six months ended June 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."



51

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Table of Contents



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:



52

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Table of Contents



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 70% 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.

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
June 30,

Six Months Ended
June 30,Percentage of Total Grace Sales
(In millions)

2008

2007

2008

2007Grace Davison


65.0
%

64.5
%

65.2
%

64.9
%Grace Construction Products


35.0
%

35.5
%

34.8
%

35.1
%Total


100.0
%

100.0
%

100.0
%

100.0
%Grace U.S.


30.3
%

31.1
%

31.5
%

32.6
%Grace non-U.S.


69.7
%

68.9
%

68.5
%

67.4
%Total


100.0
%

100.0
%

100.0
%

100.0
%


53

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Table of Contents

Voluntary Bankruptcy Filing

In response to a sharply increasing number of asbestos-related personal injury claims, on April 2, 2001, Grace and 61 of our
United States subsidiaries and affiliates, including W. R. Grace & Co.Conn., filed voluntary petitions for reorganization under Chapter 11 of the United States
Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware. Our non-U.S. subsidiaries and certain of our U.S. subsidiaries were not included in the
Chapter 11 filing.

Under
Chapter 11, we have continued to operate 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.

On
January 13, 2005, we filed an amended plan of reorganization and related documents with the bankruptcy court. 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 can propose a competing
plan of reorganization.

On
November 5, 2007, the committee representing asbestos personal injury claimants and the representative of future asbestos claimants filed a proposed plan of reorganization with
the bankruptcy court. The filing did not include a disclosure statement, trust distribution procedures, exhibits, or other supporting documents.

On
April 6, 2008, we reached an agreement in principle, the PI Settlement, with the committee representing asbestos personal injury claimants, the representative of future
asbestos claimants, and the committee representing equity security holders that would settle all present and future asbestos-related personal injury claims. The committees representing general
unsecured creditors and property damage claimants are not parties to the PI Settlement.

See
Note 2 to the Consolidated Financial Statements for discussion of the plans of reorganization. See Note 2 to the Consolidated Financial Statements and
"Chapter 11 Recent Developments" below for discussion of the PI settlement.

Any
plan of reorganization 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 the related disclosure statement.

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 six month
periods ended June 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.

54

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Table of Contents

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 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.

55

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Table of Contents

Three Months Ended June 30,

Six Months Ended June 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

$
584.8

$
524.2

$
60.6


11.6
%
$
1,081.9

$
991.8

$
90.1


9.1
%Refining Technologies


285.8


256.2


29.6


11.6
%

522.7


476.1


46.6


9.8
%Materials Technologies


194.6


170.1


24.5


14.4
%

364.9


329.7


35.2


10.7
%Specialty Technologies


104.4


97.9


6.5


6.6
%

194.3


186.0


8.3


4.5
%Grace Construction Products


315.2


288.6


26.6


9.2
%

577.3


536.6


40.7


7.6
%Americas


163.4


152.2


11.2


7.4
%

295.9


287.5


8.4


2.9
%Europe


113.4


101.3


12.1


11.9
%

211.0


184.4


26.6


14.4
%Asia


38.4


35.1


3.3


9.4
%

70.4


64.7


5.7


8.8
%Total Grace net sales

$
900.0

$
812.8

$
87.2


10.7
%
$
1,659.2

$
1,528.4

$
130.8


8.6
%Pre-tax operating income:Grace Davison(1)

$
68.5

$
73.1

$
(4.6
)

(6.3
)%
$
130.8

$
127.5

$
3.3


2.6
%Grace Construction Products(2)


44.8


46.1


(1.3
)

(2.8
)%

69.5


72.9


(3.4
)

(4.7
)%Corporate costs:Support functions


(11.5
)

(12.2
)

0.7


5.7
%

(23.7
)

(23.3
)

(0.4
)

(1.7
)%Pension, performance-related compensation, and other


(11.4
)

(13.9
)

2.5


18.0
%

(24.0
)

(23.4
)

(0.6
)

(2.6
)%Total Corporate costs


(22.9
)

(26.1
)

3.2


12.3
%

(47.7
)

(46.7
)

(1.0
)

(2.1
)%Pre-tax income from core operations


90.4


93.1


(2.7
)

(2.9
)%

152.6


153.7


(1.1
)

(0.7
)%Pre-tax loss from noncore activities


(12.7
)

(21.0
)

8.3


39.5
%

(13.3
)

(26.8
)

13.5


50.4
%Interest expense


(14.5
)

(20.3
)

5.8


28.6
%

(29.6
)

(39.7
)

10.1


25.4
%Interest income


1.3


1.6


(0.3
)

(18.8
)%

2.4


3.7


(1.3
)

(35.1
)%Income before Chapter 11 expenses and income taxes


64.5


53.4


11.1


20.8
%

112.1


90.9


21.2


23.3
%Chapter 11 expenses, net of interest income


(18.0
)

(23.6
)

5.6


23.7
%

(36.4
)

(41.4
)

5.0


12.1
%Provision for income taxes


(21.5
)

(9.3
)

(12.2
)

(131.2
)%

(37.1
)

(24.2
)

(12.9
)

(53.3
)%Net income

$
25.0

$
20.5

$
4.5


22.0
%
$
38.6

$
25.3

$
13.3


52.6
%Key Financial Measures:Pre-tax income from core operations as a percentage of sales:Grace Davison


11.7
%

13.9
%

NM


(2.2
)pts

12.1
%

12.9
%

NM


(0.8
)ptsGrace Construction Products


14.2
%

16.0
%

NM


(1.8
)pts

12.0
%

13.6
%

NM


(1.6
)ptsTotal Core Operations


10.0
%

11.5
%

NM


(1.5
)pts

9.2
%

10.1
%

NM


(0.9
)ptsTotal Core Operations adjusted for profit sharing of joint ventures(3)


10.5
%

12.0
%

NM


(1.5
)pts

9.6
%

10.5
%

NM


(0.9
)ptsPre-tax income from core operations before depreciation and amortization

$
121.1

$
120.7

$
0.4


0.3
%
$
213.5

$
208.9

$
4.6


2.2
%As a percentage of sales


13.5
%

14.8
%

NM


(1.3
)pts

12.9
%

13.7
%

NM


(0.8
)ptsDepreciation and amortization

$
30.7

$
27.6

$
(3.1
)

(11.2
)%
$
60.9

$
55.2

$
(5.7
)

(10.3
)%Gross profit percentage (sales less cost of goods sold as a percent of sales)(4):Grace Davison


26.3
%

29.0
%

NM


(2.7
)pts

27.6
%

28.6
%

NM


(1.0
)ptsGrace Construction Products


36.2
%

37.8
%

NM


(1.6
)pts

35.1
%

36.6
%

NM


(1.5
)ptsTotal Grace


29.4
%

32.0
%

NM


(2.6
)pts

29.9
%

31.3
%

NM


(1.4
)ptsNet Consolidated Sales by Region:North America

$
300.7

$
276.8

$
23.9


8.6
%
$
574.3

$
543.5

$
30.8


5.7
%Europe Africa


367.1


334.4


32.7


9.8
%

691.1


629.4


61.7


9.8
%Asia Pacific


175.1


148.4


26.7


18.0
%

287.3


259.0


28.3


10.9
%Latin America


57.1


53.2


3.9


7.3
%

106.5


96.5


10.0


10.4
%Total

$
900.0

$
812.8

$
87.2


10.7
%
$
1,659.2

$
1,528.4

$
130.8


8.6
%


---

NM =
Not meaningful

56

---



Table of Contents

Results of Operations

The following is an overview of our financial performance for the three months and six months ended June 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.

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

Volume

Price/Mix

Currency
Translation

TotalGrace Davison


1.1
%

4.1
%

6.4
%

11.6
%Grace Construction Products


1.9
%

2.1
%

5.2
%

9.2
%Net sales


1.4
%

3.4
%

5.9
%

10.7
%By Region:North America


6.3
%

1.8
%

0.5
%

8.6
%Europe Africa


(5.5
)%

3.8
%

11.5
%

9.8
%Asia Pacific


10.4
%

3.8
%

3.8
%

18.0
%Latin America


(4.9
)%

6.7
%

5.5
%

7.3
%


Sales
for the three months ended June 30, 2008 were favorably impacted by currency translation, selling price increases (in response to higher raw material and energy costs), and
slightly higher volumes. Sales volume was negatively impacted by the uneven demand for our hydroprocessing catalysts particularly in Europe Africa and Latin America, as well as the net impact of
divestitures and acquisitions that occurred in 2007.

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

Volume

Price/Mix

Currency
Translation

TotalGrace Davison


(1.7
)%

4.9
%

5.9
%

9.1
%Grace Construction Products


0.5
%

2.0
%

5.1
%

7.6
%Net sales


(0.9
)%

3.9
%

5.6
%

8.6
%By Region:North America


1.6
%

3.6
%

0.5
%

5.7
%Europe Africa


(5.0
)%

4.1
%

10.7
%

9.8
%Asia Pacific


3.3
%

3.8
%

3.8
%

10.9
%Latin America


0.3
%

4.5
%

5.6
%

10.4
%


Sales
for the six months ended June 30, 2008 were favorably impacted by currency translation and selling price increases, but partially offset by lower sales volumes. Sales volume
was negatively impacted by uneven demand for our hydroprocessing catalysts in Europe Africa and the net impact of divestitures and acquisitions that occurred in 2007.

Pre-tax Income from Core OperationsOperating profit for the three months and six months ended June 30,
2008 was negatively affected by severance costs (related to a previously disclosed reduction in workforce) and inflation on raw materials and energy costs, which was only partially offset by selling
price increases and productivity gains. Gross profits as a percentage of sales decreased period over period for the three months and six months ended June 30, 2008 due to the same inflationary
factors. Total severance costs recorded for the six months ended June 30, 2008 were $5.2 million of which $4.7 million related to Grace Construction Products and
$0.5 million related to Corporate.

57

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Table of Contents

Corporate
costs include corporate functional costs (such as financial and 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 decreased 12.3% in the three months ended June 30, 2008 from the prior year period primarily due to lower pension expenses and other employment-related costs. Corporate costs
increased 2.1% in the six months ended June 30, 2008 from the prior year period due to higher incentive compensation and one-time employment-related costs, partially offset by
decreased pension expenses.

We
value our U.S. inventories under the last-in/first-out method, or LIFO, and our non-U.S. inventories under the first-in/first-out, or
FIFO, method. LIFO was selected in 1974 for U.S. financial reporting and tax purposes. If we valued our U.S. inventories using the FIFO method, consistent with our non-U.S. subsidiaries,
our pre-tax income from core operations would have been approximately 11.3% higher and 7.3% higher for the six months ended June 30, 2008 and 2007, respectively. The significant
change in inventory valuations between FIFO and LIFO relates primarily to price increases of raw materials, commodity metals, and energy used in Grace Davison products and production processes. As we
have grown our businesses outside the U.S., an increasing proportion of our inventories are valued under the FIFO method. As of June 30, 2008, 50.1% of our inventories are valued under the FIFO
method and 49.9% of our inventories are valued under the LIFO method. We are currently evaluating a change in our accounting policy to value all inventories using the FIFO method. Such a change would
provide for a consistent, global inventory valuation standard. If such a change is made, we will restate our financial statements retrospectively as required by SFAS No. 154.

We
attempt to mitigate price volatility through hedging techniques such as layering our required supply under fixed delivery contracts, entering into commodity option and swap contracts
with suppliers and financial institutions, and by negotiating sales contracts that permit the partial pass-through of market price increases for these volatile commodity items. We normally
attempt to lock in raw material costs through long-term supply contracts and targeted hedging programs. Arrangements and programs can span a few months to several years. Major raw
materials include natural gas, certain metals, petroleum-based materials and certain industrial chemicals. The actual cost of these raw materials can differ significantly from spot prices at any point
in time. Our reported gross profit for the periods presented has been favorably impacted by certain raw material supply arrangements and unfavorably affected by others, relative to the
then-current market price. We expect that new supply agreements and hedging arrangements will result in raw material costs that can be significantly favorable or unfavorable compared with
prior periods. We attempt to mitigate period-over-period commodity-driven cost changes through utilization and customer pricing strategies; however, gross profit margins are
still likely to be affected when compared over time.

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 table below shows

58

---



Table of Contents

the
components of noncore activities, and the captions in which each component is presented in the Consolidated Statements of Operations:

Three Months Ended
June 30,

Six Months Ended
June 30,(In millions)

2008

2007

2008

2007Provision for environmental remediationvermiculite

$


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





(2.6
)

(0.9
)

(2.6
)Total provision for environmental remediation

$


$
(12.0
)
$
(5.9
)
$
(12.0
)COLI income, net

$
0.7

$
0.5

$
1.8

$
2.5Translation effectsintercompany loans


(0.8
)

1.0


37.8


3.8Value of currency contracts


2.8


(0.4
)

(23.7
)

(2.5
)Gain on sale of real estate





0.6


1.5


1.1Other


(1.5
)

(1.4
)

(2.0
)

(1.7
)Total other income (expense), net

$
1.2

$
0.3

$
15.4

$
3.2D&O insurance costportion related to Chapter 11

$
(1.1
)
$
(1.5
)
$
(2.1
)
$
(3.0
)Asbestos administration


(1.7
)

(1.4
)

(3.5
)

(4.1
)Postretirement benefit incomedivested businesses


0.2


0.3


0.2


1.0Legal defense costs


(5.3
)

(3.8
)

(8.3
)

(6.4
)Other


(3.1
)

(1.2
)

(3.5
)

(1.7
)Total selling, general and administrative expenses

$
(11.0
)
$
(7.6
)
$
(17.2
)
$
(14.2
)Net pension costsdivested businesses


(2.9
)

(1.7
)

(5.6
)

(3.8
)Total defined benefit pension expense

$
(2.9
)
$
(1.7
)
$
(5.6
)
$
(3.8
)Total pre-tax loss from noncore activities

$
(12.7
)
$
(21.0
)
$
(13.3
)
$
(26.8
)


The
change in the pre-tax loss from noncore activities from 2007 to 2008 is attributable primarily to:



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, 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 six months ended June 30, 2008 and 2007, respectively, €61.6 million and €36.6 million of loan
principal was repaid. For the six months ended June 30, 2008 and 2007, we

59

---



Table of Contents

recognized
a $4.4 million and a $2.5 million contract loss, respectively, offset by an $8.0 million and a $3.8 million foreign currency gain, respectively. As of
June 30, 2008, we have accrued a current liability of $6.6 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
June 30, 2008 and 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 six months ended June 30, 2008, the difference
in the value of the loan and the fair value of the hedge contract has resulted in a net gain of $9.8 million, of which approximately $7 million represents the change in forward points as
interest rate differentials widened 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.

An
analysis of Chapter 11 costs follows:

Three Months
Ended
June 30,

Six Months
Ended
June 30,Chapter 11 Expenses, net
(In millions)

2008

2007

2008

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

$
12.1

$
18.3

$
22.7

$
33.3General Unsecured Committee


1.0


1.3


1.7


2.3Asbestos Property Damage Committee


0.7


1.1


0.8


1.9Asbestos Personal Injury Committee


2.5


2.3


5.8


4.1Future Asbestos Claims Representative


3.1


2.6


5.8


3.6Equity Committee


(0.1
)

0.5


1.2


0.9Total expenses


19.3


26.1


38.0


46.1Interest earned on filing entity cash balances


(1.3
)

(2.5
)

(1.6
)

(4.7
)Chapter 11 expenses, net

$
18.0

$
23.6

$
36.4

$
41.4


The
decrease in interest income earned on filing entity cash balances is primarily due to a $1.2 million loss 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

60

---



Table of Contents

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 six months ended June 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:



The
average effective interest rates on pre-petition obligations for the six months ended June 30, 2008 and 2007 were 4.88% and 7.02%, respectively. Such interest,
which under the existing plan of reorganization is payable 85% in cash and 15% in Grace common stock, will not be paid until the plan of reorganization is confirmed and funded.

Income TaxesIncome tax provision at the federal corporate rate of 35% for the six months ended June 30, 2008 and 2007
would have been $26.5 million and $17.3 million, respectively. The primary differences in each period between these amounts and the recorded provision for income taxes,
$37.1 million and $24.2 million, respectively, are due to provisions for tax contingencies and the non-deductibility of certain Chapter 11 expenses.

Operating Segment Overview

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

Grace Davison

Sales



61

---



Table of Contents



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

2008

2007

$ Change
Fav (Unfav)

% Change
Fav (Unfav)North America

$
152.6

$
137.3

$
15.3


11.1
%Europe Africa


254.1


232.9


21.2


9.1
%Asia Pacific


136.1


113.1


23.0


20.3
%Latin America


42.0


40.9


1.1


2.7
%Total Grace Davison

$
584.8

$
524.2

$
60.6


11.6
%




Six Months Ended
June 30,Net Sales by Region
(In millions)

2008

2007

$ Change
Fav (Unfav)

% Change
Fav (Unfav)North America

$
306.2

$
279.5

$
26.7


9.6
%Europe Africa


480.7


445.2


35.5


8.0
%Asia Pacific


215.8


193.6


22.2


11.5
%Latin America


79.2


73.5


5.7


7.8
%Total Grace Davison

$
1,081.9

$
991.8

$
90.1


9.1
%


For
the three months and six months ended June 30, 2008, all geographic regions' sales benefited from currency translation and price increases (in response to higher raw material
and energy costs). The North America sales increase was principally driven by higher Refining Technologies volumes and selling price increases. Europe Africa sales growth was principally driven by
currency translation and higher selling prices, partially offset by the uneven demand for our hydroprocessing catalysts. Asia Pacific sales were affected by higher demand for Refining Technologies
products and currency translation. Latin America sales increased primarily due to selling price increases and higher demand for Materials Technologies products and currency translation, partially
offset by lower volumes in Refining Technologies.

Operating Income and Margin

Pre-tax operating income of Grace Davison for the three months ended June 30, 2008 decreased by 6.3% as compared
with the prior year period, primarily driven by escalating raw material and energy costs, which outpaced price improvements and productivity gains. Operating margin for the three months ended
June 30, 2008 was 11.7% compared with 13.9% for the prior year period. Pre-tax operating income for the six months ended June 30, 2008 grew 2.6% over the prior year period,
which was at a lower rate than sales growth due to inflationary pressures that more than offset selling price increases and productivity efforts.

62

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Table of Contents

Grace Construction Products

Sales



Sales
in the 2008 periods were favorably affected by foreign currency translation and higher selling prices in all major geographic regions and product lines. Sales of Grace Construction
Products in the U.S. were up 5.9% in the three-month period ending June 30, 2008 compared with the prior year period, driven by higher sales of waterproofing and fire protection products.

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

2008

2007

$ Change
Fav (Unfav)

% Change
Fav (Unfav)Construction Chemicals

$
204.4

$
194.8

$
9.6


4.9
%Building Materials


110.8


93.8


17.0


18.1
%Total Grace Construction Products

$
315.2

$
288.6

$
26.6


9.2
%




Six Months Ended
June 30,Net Sales by Product Group
(In millions)

2008

2007

$ Change
Fav (Unfav)

% Change
Fav (Unfav)Construction Chemicals

$
373.2

$
358.6

$
14.6


4.1
%Building Materials


204.1


178.0


26.1


14.7
%Total Grace Construction Products

$
577.3

$
536.6

$
40.7


7.6
%


Construction
Chemicals product group sales include sales of specialty chemicals used in the manufacture of concrete and cement products. Sales of these products increased 4.9% from the
prior quarter due to overall higher volumes and selling price increases, most notably in Europe and Latin America, partially offset by decreased sales of concrete products in North America due to the
slower U.S. markets.

Building
Materials product group sales include sales of waterproofing and fire protection products. Sales of these products increased 18.1% from the prior year quarter due to increased
volumes in North America and Europe and price increases in all regions.

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

Operating Income and Margin

Pre-tax operating income of Grace Construction Products for the three months and six months ended June 30, 2008
decreased 2.8% and 4.7% from the prior year periods. Excluding severance costs

63

---



Table of Contents

of
$4.7 million related to a previously disclosed reduction in workforce, pre-tax operating income for the three months and six months ended June 30, 2008 was
$49.5 million and $74.2 million, approximately 7.4% and 1.8% higher than the prior year periods, respectively, reflecting price increases and productivity gains as partially offset by
higher raw material costs. Operating margins for the three months and six months ended June 30, 2008 were 14.2% and 12.0% compared with 16.0% and 13.6% in the prior year periods. Operating
margins excluding severance costs were 15.7% and 12.9% for the three months and six months ended June 30, 2008.

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 June 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)

June 30,
2008

December 31,
2007Trade receivables

$
297.1

$
295.9Inventory


298.6


239.7Other current assets


44.6


31.5Total current assets


640.3


567.1Properties and equipment, net


497.6


484.7Goodwill and other intangible assets


116.1


116.4Other assets


18.1


17.4Total assets

$
1,272.1

$
1,185.6Pre-tax return on average total assets (trailing 12 months)


20.1
%

21.1
%


Grace
Davison's total assets increased by $86.5 million as of June 30, 2008. The increase was primarily due to higher inventory for raw materials and finished goods to
support 2008 planned sales, coupled with $40.6 million in higher foreign currency translation effects reflecting a weaker U.S. dollar.

Grace Construction Products
(In millions)

June 30, 2008

December 31, 2007Trade receivables

$
236.6

$
201.2Inventory


70.0


63.9Other current assets


9.8


9.5Total current assets


316.4


274.6Properties and equipment, net


201.6


194.6Goodwill and other intangible assets


91.4


88.2Other assets


7.2


4.2Total assets

$
616.6

$
561.6Pre-tax return on average total assets (trailing 12 months)


24.5
%

26.1
%


64

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Table of Contents

Grace Construction Products' total assets increased by $55.0 million as of June 30, 2008. The increase was primarily due to higher trade
receivables, coupled with $15.5 million in higher foreign currency translation due to a weaker U.S. dollar.

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 June 30, 2008 and December 31, 2007:

Net Noncore Liabilities
(In millions)

June 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


(147.7
)

(368.6
)Postretirement benefits


(77.8
)

(84.0
)Income taxes


(100.8
)

(89.3
)Retained obligations and other


(36.1
)

(36.2
)Net noncore liability

$
(1,562.4
)
$
(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 13 to the Consolidated Financial Statements). We expect to resolve most 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 June 30, 2008.

Chapter 11 Recent Developments

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 bankruptcy code. 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. Consequently, we expect that any Chapter 11 plan of reorganization
will utilize the combined value of our global businesses and other assets to fund (with cash and/or securities) our obligations as adjudicated through the bankruptcy process. We have analyzed our cash
flow and capital needs to continue to fund our businesses and believe that, while in Chapter 11, sufficient cash flow and credit facilities are available to support our business strategy.

On
January 13, 2005, we filed a plan of reorganization and related documents, the Debtors 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.

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On
November 5, 2007, the committee representing asbestos personal injury claimants, the PI Committee, and the representative of future asbestos claimants, the FCR, filed a
competing plan of reorganization with the bankruptcy court, the PI Plan. This filing did not include a disclosure statement, trust distribution procedures, exhibits, or other supporting documents.

On
April 6, 2008, we reached an agreement in principle, the PI Settlement, with the PI Committee, the FCR, and the committee representing equity security holders, the Equity
Committee, that would settle all present and future asbestos-related personal injury claims. The PI Settlement contemplates that along with the PI Committee, the FCR and the Equity Committee, we would
file a new joint plan of reorganization with the bankruptcy court reflecting the terms and conditions of the PI Settlement. The drafting and negotiation of the joint plan and related documentation are
in progress. The committees representing general unsecured creditors and property damage claimants are not parties to the PI Settlement. We, along with the Equity Committee, PI Committee and FCR
contemplate that a joint
plan of reorganization reflecting the terms of the PI Settlement would be filed with the Bankruptcy Court and would supersede the existing plans on file.

See
Note 2 to the Consolidated Financial Statements for more information on these plans of reorganization and the PI Settlement.

As
a result of the PI Settlement, a trial for estimating liability for asbestos personal injury claims that began in January 2008 was suspended in April 2008.

Each
of the plans of reorganization that have been filed with the bankruptcy court and the PI Settlement contemplate that an asbestos trust would be established under
Section 524(g) of the Bankruptcy Code to which certain asbestos-related claims would be channeled for resolution.

Under
the terms of the PI Settlement, the asbestos trust would be funded with:



See
Notes 2 and 3 to the Consolidated Financial Statements for further discussion of the PI Settlement.

We
anticipate that we will require up to approximately $1.5 billion in new financing to fund a plan of reorganization under the terms of the PI Settlement. The actual amount of
new financing will generally depend on market factors, resolution costs of our outstanding claims and contingent liabilities, and our operating capital requirements.

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We
expect to measure the various forms of consideration that we would fund the asbestos trust with under a plan of reorganization that reflects the terms of the PI Settlement as
follows:



Each
of the aforementioned items would impact our accounting for our asbestos personal injury liabilities, assuming they are ultimately resolved pursuant to a confirmed plan of
reorganization that reflects the terms of the PI Settlement.

The
U.S. tax treatment applying to each item transferred to the asbestos trust under the PI Settlement is described below. The fair value of the warrants on the date of issuance to the
asbestos trust 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 to the asbestos trust.

Due
to the payment of these and other deductible bankruptcy claims, we anticipate generating significant net operating losses, 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. 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.

We
have not adjusted our accounting for asbestos-related liabilities and other liabilities subject to compromise as of June 30, 2008
because:



If
a new joint plan of reorganization reflecting the PI Settlement is not filed with the bankruptcy court, we would expect to resume the estimation trial, which was suspended in April
due to the PI Settlement, to determine the amount of our asbestos-related liabilities. We expect to adjust our recorded asbestos-related liability as necessary: to reflect rulings made by the
bankruptcy court; when a new joint plan of reorganization is filed to reflect the terms of the PI Settlement; and when significant uncertainties have been resolved. Such adjustments may be material to
our consolidated financial position and results of operations.

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Since
our amended plan of reorganization was filed with the bankruptcy court in 2005, we have provided proforma financial statements in our quarterly and annual filings to describe the
proforma effects of the terms of our plan of reorganization. We presented proforma financial statements for our plan of reorganization in our Annual Report on Form 10-K for the year
ended December 31, 2007 in order to portray the financial effects of our plan of reorganization for a completed fiscal year. We expect to again provide proforma financial information when we
adjust our accounting for asbestos-related liabilities for a new joint plan of reorganization that reflects the PI Settlement.

Although
the existing plans remain on file with the bankruptcy court and we contemplate filing a new joint plan reflecting the terms of the PI Settlement, it is possible that none of
such plans will be approved by the bankruptcy court. Instead, a materially different plan of reorganization may ultimately be approved and, under the ultimate plan of reorganization, the interests of
our shareholders could be substantially diluted or cancelled. The value of Grace common stock following a plan of reorganization and the extent of any recovery by non-asbestos-related
creditors will depend principally on the amount of our asbestos-related liability under a confirmed plan of reorganization.

Any
resolution of our asbestos-related liabilities, other than as reflected in the Debtors Plan, could result in adjustments to such liabilities in our financial statements and such
adjustments could be material.

Financial Condition, Liquidity, and Capital Resources

Financial ConditionOur balance sheet as of June 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.

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

Environmental MattersSee Note 13 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

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individual
employee's salary or wages. Our costs related to this benefit plan were $3.2 million and $3.3 million for the three-month periods ended June 30, 2008 and 2007 and
$6.7 million and $6.3 million for the six-month periods ended June 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
June 30,

Six Months Ended
June 30,Components of Defined Benefit Pension Expense
(In millions)

2008

2007

2008

2007Annual pension benefits earned

$
6.1

$
5.5

$
12.5

$
11.7Interest on opening liabilityadvance-funded plans


18.0


16.5


36.0


33.0Expected return on plan assets


(20.6
)

(19.7
)

(41.1
)

(39.7
)Net financing cost (benefit) of advance-funded plans


(2.6
)

(3.2
)

(5.1
)

(6.7
)Interest on opening liabilitypay-as-you-go plans


3.7


3.2


7.2


6.1Net pension financing cost (benefit)


1.1





2.1


(0.6
)Amortization of:Plan changes related to prior service


0.6


0.8


1.2


1.6Accumulated differences between actual and assumed performance(1)


6.2


6.8


12.5


13.1Net pension catch-up expense


6.8


7.6


13.7


14.7Total Defined Benefit Pension Expense

$
14.0

$
13.1

$
28.3

$
25.8




Three Months Ended
June 30,

Six Months Ended
June 30,Cash Contributions to Defined Benefit Pension Plans
(In millions)

2008

2007

2008

2007U.S. advance-funded plans

$
17.9

$
20.7

$
32.7

$
36.9U.S. pay-as-you-go plans


1.2


1.2


2.5


2.5Foreign advance-funded plans


1.5


1.2


3.1


14.5Foreign pay-as-you-go plans


2.4


1.5


4.2


3.1Total Cash Contributions

$
23.0

$
24.6

$
42.5

$
57.0


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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)

June 30,
2008

December 31,
2007

June 30,
2008

December 31,
2007

June 30,
2008

December 31,
2007Projected benefit obligation

$
234.0

$
254.8

$
902.2

$
948.3

$
245.9

$
245.9Fair value of plan assets


292.0


308.9


728.4


779.2





Funded status (PBO basis)

$
58.0

$
54.1

$
(173.8
)
$
(169.1
)
$
(245.9
)
$
(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 $58.0 million as of June 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 $173.8 million as of June 30, 2008. Additionally, we have several plans that are funded
on a pay-as-you-go basis, and therefore, the entire PBO of $245.9 million at June 30, 2008 is unfunded. The combined balance of the underfunded and
unfunded plans was $419.7 million as of June 30, 2008 and is presented as a liability on the Consolidated Balance Sheet as follows$13.0 million in "other current
liabilities," $173.8 million included in "underfunded defined benefit pension plans", $138.4 million included in "unfunded
pay-as-you-go defined benefit pension plans", and $94.5 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 June 30, 2008, we increased the discount rate for the U.S. qualified pension plans from 6.50% at March 31, 2008 to 6.75% at June 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 June 30, 2008, we changed the discount rate for the
United Kingdom from 6.75% at March 31, 2008 to 6.50% at June 30, 2008, and for Germany from 6.00% at March 31, 2008 to 6.25% at June 30, 2008. We did not change the
discount rate for Canada from the 6.00% rate in effect on March 31, 2008. The funded status as of June 30, 2008 reflects a decrease in total assets of approximately $7 million,
and a decrease in total liabilities of approximately $28 million as compared to March 31, 2008, resulting from the change in discount rates (including the postretirement plan). After tax
effects, total assets decreased from March 31, 2008 to June 30, 2008 by approximately $15 million, total liabilities decreased by approximately $28 million and
shareholders' equity increased by approximately $13 million. The funded status as of June 30, 2008 reflects an increase to total assets of approximately $25 million and a decrease
to total liabilities of approximately $66 million as compared to December 31, 2007, resulting

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from
the change in discount rates (including the postretirement plan). After tax effects, the total assets decreased from December 31, 2007 to June 30, 2008 by approximately
$5 million, total liabilities decreased by approximately $66 million and shareholders' equity increased by approximately $61 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 June 30, 2008 to fund the PBO of the U.S. advance-funded defined benefit pension plans totaled approximately $721 million, down $53 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. 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; $7.3 million was funded during the six months ended June 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 $2.2 million and $3.7 million during the three months and six months ended June 30, 2008 compared with $2.9 million and $5.8 million during the
three months and six months ended June 30, 2007. We received Medicare subsidy payments of $0.4 million and $2.7 million during the six months ended June 30, 2008 and 2007.
Our recorded liability for postretirement benefits of $77.8 million at June 30, 2008 is stated at net present value discounted at 6.75% (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 13 to the Consolidated Financial Statements for a discussion of our other contingent
matters.

Cash Resources and Available Credit FacilitiesAt June 30, 2008, we had cash and cash equivalents of
$395.4 million, short-term investment securities of $50.5 million, and net cash value of life insurance of $74.6 million.

Investment
securities of $50.5 million and $98.3 million at June 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 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

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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
$1.2 million recorded in the six-months ended June 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
$70.7 million and $77.1 million of the total value at June 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
existing $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 June 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

$
92.3


04/01/10
(1)Germany


78.7


64.5


12/31/09Germany


18.9


7.6


09/30/08France


5.7


5.7


09/30/08Argentina


1.0


1.0


09/30/08Brazil


1.3


1.3


09/30/08Singapore


5.0


2.6


03/31/09Venezuela


0.9


0.9


09/30/08Colombia


0.2


0.2


09/30/08Total

$
276.7

$
176.1






We
believe that these funds and credit facilities will be sufficient to finance our operations and support our business strategy while in Chapter 11.

Debt and Other Contractual ObligationsTotal debt outstanding at June 30, 2008 was $838.7 million including
$308.9 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
$525.7 million of pre-petition debt, which, together with accrued interest thereon, has been included in "liabilities subject to compromise" as of June 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.

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See
Note 13 to the Consolidated Financial Statements for a discussion of financial assurances.

Analysis of Cash Flows

Our net cash used for operating activities for the six months ended June 30, 2008 was $99.2 million, compared with a net
cash inflow of $5.2 million for the six months ended June 30, 2007. The change in operating cash flow is primarily due to a June 2008 payment of $101.6 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 six months ended June 30, 2008 and 2007 was $4.2 million and
$80.4 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 six months ended June 30,
2008 and 2007 was $7.4 million and $27.7 million, respectively, primarily from 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 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.

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Item 4.    CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

As of June 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 June 30, 2008 that have
materially affected, or are reasonably likely to materially affect, Grace's internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1.    LEGAL PROCEEDINGS

Notes 2, 3 and 13 to the interim consolidated financial statements in Part 1 of this Report are incorporated herein by
reference.

ERISA LAWSUITS

In December 2006, the Massachusetts District Court dismissed theEvansclaims,
on grounds that theEvansplaintiffs lacked standing to bring suit. TheEvansplaintiffs' petitioned the
U.S. Court of Appeals for the First Circuit to reverse the District Court's dismissal of their claims and in July 2008, the First Circuit reversed the decision of the District Court reinstating
theEvansclaims. In July 2008, the District Court consolidated theSiamiscase into the Evanscase.

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 plan of reorganization as filed with the bankruptcy court, and any plan that we file to reflect our recent agreement in principle with parties in interest in
our Chapter 11 case, if confirmed, will substantially impact the value of currently outstanding shares of Grace common stock. An alternative plan that has been filed with the bankruptcy court
provides for the cancellation of currently outstanding shares of Grace common stock.

Our proposed plan of reorganization as filed with the bankruptcy court will, and any joint plan of reorganization that is filed with
the bankruptcy court to reflect our recent agreement in principle with the committees representing asbestos personal injury claimants and equity security holders and the legal representative of future
asbestos claimants, will substantially impact the value of the ownership interests of holders of currently outstanding Grace common stock. The committee representing asbestos personal injury claimants
and the legal representative of future asbestos claimants have filed an alternative plan of reorganization with the bankruptcy court that provides for the cancellation of the ownership interests of
holders of currently outstanding Grace common stock. Each of the filed plans is subject to the fulfillment of numerous conditions that may not ultimately be fulfilled. The agreement in principle
constitutes a broad overview of settled issues that are subject to substantial additional negotiation among the parties thereto before a joint plan reflecting its terms may be filed with the
bankruptcy court and although it is supported by the parties thereto, other parties-in-interest in our Chapter 11 case are not parties thereto and may
have objections to all or part thereof. As a result, it is possible that neither of the filed plans, nor any plan reflecting the agreement in principle, will be approved by the bankruptcy court. 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, 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.

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Our financial statements have not been updated to reflect the terms of our recent agreement in principle with the committees representing asbestos personal injury claimants
and equity security holders and the legal representative of future asbestos claimants.

Our financial statements reflect accounting for asbestos-related liabilities that is based on our proposed plan of reorganization as
filed with the bankruptcy court. Since the filing of our plan, the bankruptcy court has terminated Grace's exclusive rights to propose a plan of reorganization and solicit votes thereon, the committee
representing asbestos personal injury claimants and the legal representative of future asbestos claimants have filed a competing plan and we have entered into a agreement in principle with the
committees representing asbestos personal injury claimants and equity security holders and the legal representative of future asbestos claimants. Our plan, the competing plan and a plan based on the
agreement in principle would result in substantially different treatment of our asbestos-related liabilities in our financial statements. We expect to adjust our asbestos-related liability as
necessary: to reflect rulings made by the bankruptcy court; when a new joint plan of reorganization is filed to reflect the terms of the agreement in principle; and when significant uncertainties have
been resolved. When we adjust our accounting based on a revised plan of reorganization or another plan that is filed and/or confirmed, such adjustments could be material to our consolidated financial
position and results of operations.

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 Letter31.(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


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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: August 8, 2008

By

/s/A. E. FESTAA. E. Festa Chairman, President and
Chief Executive OfficerDate: August 8, 2008

By

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


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EXHIBIT INDEX

Exhibit No.

Description of Exhibit15

Accountants' Awareness Letter31.(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


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