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Table of Contents



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, 2009ORo

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to
be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes o    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, 2009Common Stock, $0.01 par value per share

72,182,118 shares




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Table of Contents



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



Part I.

Financial InformationItem 1.

Financial Statements (unaudited)

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)

7Notes to Consolidated Financial Statements1.

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

82.

Chapter 11Related Information

123.

Asbestos-Related Litigation

254.

Life Insurance

295.

Inventories

306.

Debt

317.

Fair Value Measurements

318.

Income Taxes

369.

Pension Plans and Other Postretirement Benefit Plans

3810.

Other Balance Sheet Accounts

4111.

Commitments and Contingent Liabilities

4112.

Restructuring Expenses

4513.

Other (Income) Expense, net

4614.

Comprehensive Income (Loss)

4615.

Earnings Per Share

4916.

Operating Segment Information

4917.

Noncontrolling Interests in Consolidated Entities

51Item 2.

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

53Item 3.

Quantitative and Qualitative Disclosures About Market Risk

78Item 4.

Controls and Procedures

78Part II.

Other InformationItem 1.

Legal Proceedings

80Item 1A.

Risk Factors

80Item 6.

Exhibits

80


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Unless
the context otherwise indicates, in this Report 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. Grace®, the Grace® logo
and, except as otherwise indicated, the other product names used in the text of this report are trademarks, service marks, and/or trade names of operating units of W. R. Grace & Co. or
its affiliates and/or subsidiaries.

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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
quarter ended June 30, 2009, 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, 2009, and the related consolidated statements
of operations, shareholders' equity (deficit), and comprehensive income (loss) for the three-month and six-month periods ended June 30, 2009 and 2008 and the consolidated statements
of cash flows for the six-month periods ended June 30, 2009 and 2008. 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
previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2008,
and the related consolidated statements of operations, shareholders' equity (deficit), comprehensive income (loss), and of cash flows for the year then ended (not presented herein), and in our report
dated February 27, 2009, we expressed an unqualified opinion on those consolidated financial statements with an explanatory paragraph relating to the Company's ability to continue as a going
concern. As discussed in Note 1 to the accompanying consolidated financial statements, the Company changed its method of accounting for noncontrolling interests. The accompanying
December 31, 2008 consolidated balance sheet reflects this change.

PricewaterhouseCoopers LLP
McLean, Virginia
August 7, 2009

2

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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 30,2009

2008

2009

2008Net sales

$
711.0

$
900.0

$
1,393.1

$
1,659.2Cost of goods sold


470.4


624.3


983.7


1,144.1Selling, general and administrative expenses


139.4


148.2


289.1


291.0Restructuring expenses


5.9


5.2


25.0


5.2Research and development expenses


17.6


21.2


36.2


42.9Defined benefit pension expense


20.5


14.0


42.4


28.3Interest expense and related financing costs


9.6


14.5


18.8


29.6Provision for environmental remediation








0.7


5.9Chapter 11 expenses, net of interest income


8.0


18.0


18.0


36.4Other (income) expense, net


0.1


(7.2
)

1.9


(24.5
)671.5


838.2


1,415.8


1,558.9Income (loss) before income taxes


39.5


61.8


(22.7
)

100.3Benefit from (provision for) income taxes


(16.8
)

(25.3
)

6.6


(43.2
)Net income (loss)


22.7


36.5


(16.1
)

57.1Less: Net income attributable to noncontrolling interests


(3.4
)

(4.4
)

(3.5
)

(7.3
)Net income (loss) attributable to W. R. Grace & Co. shareholders

$
19.3

$
32.1

$
(19.6
)
$
49.8Earnings Per Share Attributable to W. R. Grace & Co. ShareholdersBasic earnings per share:Net income (loss)

$
0.27

$
0.45

$
(0.27
)
$
0.69Weighted average number of basic shares


72.2


72.1


72.2


71.9Diluted earnings per share:Net income (loss)


0.26

$
0.44

$
(0.27
)
$
0.69Weighted average number of diluted shares


72.9


72.9


72.2


72.6


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 30,2009

2008OPERATING ACTIVITIESNet income (loss)

$
(16.1
)
$
57.1Reconciliation to net cash provided by (used for) operating activities:Depreciation and amortization


56.3


60.9Chapter 11 expenses, net of interest income


18.0


36.4(Benefit from) provision for income taxes


(6.6
)

43.2Income taxes paid, net of refunds


0.4


(32.4
)Interest accrued on pre-petition liabilities subject to compromise


17.7


26.8Net gain on sales of investments and disposals of assets


(3.0
)

(0.6
)Restructuring expenses


25.0


5.2Defined benefit pension expense


42.4


28.3Payments under defined benefit pension arrangements


(24.1
)

(42.5
)Payments under postretirement benefit plans


(0.9
)

(3.3
)Net income from life insurance policies


(1.2
)

(1.8
)Provision for uncollectible receivables


2.3


0.3Provision for environmental remediation


0.7


5.9Expenditures for environmental remediation


(3.7
)

(1.2
)Expenditures for retained obligations of divested businesses





(0.1
)Changes in assets and liabilities, excluding effect of businesses acquired/divested and foreign currency translation:Working capital items (trade accounts receivable, inventories and accounts payable)


74.9


(59.1
)Other accruals and non-cash items


(38.4
)

(70.7
)Net cash provided by operating activities before Chapter 11 expenses and settlements


143.7


52.4Cash paid to resolve contingencies subject to Chapter 11





(101.6
)Chapter 11 expenses paid


(25.1
)

(36.7
)Net cash provided by (used for) operating activities


118.6


(85.9
)INVESTING ACTIVITIESCapital expenditures


(36.5
)

(58.7
)Proceeds from sales of investment securities


8.3


46.7Purchases of equity investments


(1.0
)

(3.0
)Proceeds from termination of life insurance policies


68.8


8.1Net investment in life insurance policies


(0.4
)

0.1Proceeds from disposals of assets


5.4


2.6Net cash provided by (used for) investing activities


44.6


(4.2
)FINANCING ACTIVITIESDividends paid to noncontrolling interests in consolidated entities


(13.7
)

(13.3
)Net repayments under credit arrangements


(5.0
)

(0.9
)Fees paid under debtor-in-possession credit facility


(0.9
)

(1.3
)Proceeds from exercise of stock options





9.6Net cash used for financing activities


(19.6
)

(5.9
)Effect of currency exchange rate changes on cash and cash equivalents


4.0


10.9Increase (decrease) in cash and cash equivalents


147.6


(85.1
)Cash and cash equivalents, beginning of period


460.1


480.5Cash and cash equivalents, end of period

$
607.7

$
395.4


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

4

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

June 30,
2009

December 31,
2008ASSETSCurrent AssetsCash and cash equivalents

$
607.7

$
460.1Investment securities


14.2


21.6Cash value of life insurance policies, net of policy loans





67.2Trade accounts receivable, less allowance of $6.4 (2008$5.0)


452.2


462.6Inventories


275.4


354.8Deferred income taxes


43.1


45.8Other current assets


65.7


86.1Total Current Assets


1,458.3


1,498.2Properties and equipment, net of accumulated depreciation and amortization of $1,578.0 (2008$1,545.3)


688.5


710.6Goodwill


118.1


117.1Deferred income taxes


877.8


851.7Asbestos-related insurance


500.0


500.0Overfunded defined benefit pension plans


37.9


48.6Other assets


134.5


149.3Total Assets

$
3,815.1

$
3,875.5LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)Liabilities Not Subject to CompromiseCurrent LiabilitiesDebt payable within one year

$
6.3

$
11.2Accounts payable


213.4


230.4Other current liabilities


261.4


291.5Total Current Liabilities


481.1


533.1Debt payable after one year


0.5


0.6Deferred income taxes


6.7


7.1Underfunded defined benefit pension plans


380.4


392.3Unfunded pay-as-you-go defined benefit pension plans


136.9


136.7Other liabilities


33.8


46.6Total Liabilities Not Subject to Compromise


1,039.4


1,116.4Liabilities Subject to CompromiseNote 2Pre-petition bank debt plus accrued interest


836.8


823.5Drawn letters of credit plus accrued interest


30.6


30.0Income tax contingencies


121.6


121.0Asbestos-related contingencies


1,700.0


1,700.0Environmental contingencies


149.2


152.2Postretirement benefits


169.5


169.7Other liabilities and accrued interest


119.7


116.5Total Liabilities Subject to Compromise


3,127.4


3,112.9Total Liabilities


4,166.8


4,229.3Commitments and ContingenciesShareholders' Equity (Deficit)Common stock issued, par value $0.01; 300,000,000 shares authorized; outstanding: 200972,160,218 (200872,157,518)


0.8


0.8Paid-in capital


439.7


436.6Accumulated deficit


(266.2
)

(246.6
)Treasury stock, at cost: shares: 20094,819,542; (20084,822,242)


(57.4
)

(57.4
)Accumulated other comprehensive income (loss)


(531.7
)

(560.3
)Total W. R. Grace & Co. Shareholders' Equity (Deficit)


(414.8
)

(426.9
)Noncontrolling interests in consolidated entities


63.1


73.1Total Shareholders' Equity (Deficit)


(351.7
)

(353.8
)Total Liabilities and Shareholders' Equity (Deficit)

$
3,815.1

$
3,875.5


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

5

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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)

Noncontrolling
Interests

Total
Shareholders'
Equity
(Deficit)Balance, March 31, 2009

$
438.7

$
(285.5
)
$
(57.4
)
$
(529.8
)
$
59.1

$
(374.9
)Net income





19.3








3.4


22.7Stock plan activity


1.8














1.8Other comprehensive income (loss)











(1.9
)

0.6


(1.3
)Balance, June 30, 2009

$
440.5

$
(266.2
)
$
(57.4
)
$
(531.7
)
$
63.1

$
(351.7
)Balance, December 31, 2008

$
437.4

$
(246.6
)
$
(57.4
)
$
(560.3
)
$
73.1

$
(353.8
)Net income (loss)





(19.6
)







3.5


(16.1
)Stock plan activity


3.1














3.1Other comprehensive income (loss)











28.6


0.2


28.8Dividends paid














(13.7
)

(13.7
)Balance, June 30, 2009

$
440.5

$
(266.2
)
$
(57.4
)
$
(531.7
)
$
63.1

$
(351.7
)


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

6

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

Three Months
Ended
June 30,

Six Months
Ended
June 30,2009

2008

2009

2008Net income (loss)

$
22.7

$
36.5

$
(16.1
)
$
57.1Other comprehensive income (loss):Foreign currency translation adjustments


31.0


(4.5
)

19.2


(2.6
)Gain from hedging activities, net of income taxes


3.3


1.8


2.5


4.0Defined benefit pension and other postretirement plans, net of income taxes


(37.0
)

(2.4
)

6.1


0.9Unrealized holding gain on available-for-sale securities


0.8





0.8


Total other comprehensive income (loss) attributable to W. R. Grace & Co. shareholders


(1.9
)

(5.1
)

28.6


2.3Total other comprehensive income (loss) attributable to noncontrolling interests


0.6


0.2


0.2


(0.7
)Total other comprehensive income (loss)


(1.3
)

(4.9
)

28.8


1.6Comprehensive income (loss)

$
21.4

$
31.6

$
12.7

$
58.7


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

7

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Table of Contents



Notes to Consolidated Financial Statements



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 FilingDuring 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 ("Chapter 11") 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 PresentationThe interim Consolidated Financial Statements presented herein are unaudited and should be read in
conjunction with the
Consolidated Financial Statements presented in the Company's 2008 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 except for the impacts of adopting
new accounting standards as discussed below. 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.

8

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Table of Contents

Notes to Consolidated Financial Statements (Continued)

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

The
results of operations for the six-month interim period ended June 30, 2009 are not necessarily indicative of the results of operations for the year ending
December 31, 2009.

ReclassificationsCertain amounts in prior years' Consolidated Financial Statements have been reclassified to conform to the
2009 presentation. Such
reclassifications have not materially affected previously reported amounts in the Consolidated Financial Statements.

Use of EstimatesThe preparation of financial statements in conformity with U.S. Generally Accepted Accounting Principles
("U.S. GAAP")
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 June 2009, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standards
("SFAS") No. 167, "Amendments to FASB Interpretation No. 46(R)". The objective of this Statement is to improve financial reporting by enterprises involved with variable interest
entities. The Statement is effective as of the beginning of each reporting entity's first annual reporting period that begins after November 15, 2009, for interim periods within that first
annual reporting period, and for interim and annual reporting periods thereafter. Grace will adopt this standard for 2010.

In
May 2009, the FASB issued SFAS No. 165, "Subsequent Events." The objective of this Statement is to establish general standards of accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are issued or are available to be issued. This Statement is effective for interim or annual financial periods ending after
June 15, 2009, and accordingly, Grace has adopted this Standard. FAS 165 requires that public entities evaluate subsequent events through the date that the financial statements are
issued. We have evaluated subsequent events through the time of filing these financial statements with the SEC on August 7, 2009.

9

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Table of Contents

Notes to Consolidated Financial Statements (Continued)

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

In
April 2009, the FASB issued FASB Staff Position ("FSP") No. FAS 107-1 and APB 28-1, "Interim Disclosures about Fair Value of Financial
Instruments." This FSP amends FASB Statement No. 107,Disclosures about Fair Value of Financial Instruments,to require disclosures about fair
value of financial instruments for interim reporting periods of publicly traded companies as well as for annual financial statements. This FSP also amends APB Opinion No. 28, Interim Financial Reporting,to require those disclosures in summarized financial information at interim reporting periods. This FSP is effective for
interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. Grace has adopted this standard.

In
April 2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2, "Recognition and Presentation of Other-Than-Temporary
Impairments." This FSP changed the method for determining whether an other-than-temporary impairment exists for debt securities and the amount of an impairment charge to be
recorded in earnings. The FSP is effective for interim and annual periods ending after June 15, 2009 with early adoption permitted for periods ending after March 15, 2009. Grace has
adopted this standard, and it has not had a material effect on the Consolidated Financial Statements.

In
January 2009, the FASB Emerging Issues Task Force ("EITF") issued EITF 99-20-1, "Amendments to the Impairment Guidance of EITF Issue
No. 99-20". The objective of this FSP is to achieve more consistent determination of whether an other-than-temporary impairment has occurred, and to retain
and emphasize the objective of an other-than-temporary impairment assessment and the related disclosure requirements in FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities,and other related guidance. The FSP is effective for interim and annual reporting
periods ending after December 15, 2008, and applies prospectively. Grace has adopted this standard in 2009.

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. In March 2009, the FASB issued FSP No. FAS 141(R)-1, "Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise
from Contingencies." This FSP amends and clarifies SFAS No. 141(R), to address application issues on initial recognition and measurement, subsequent measurement and accounting, and disclosure
of assets and liabilities arising from contingencies in a business combination. This FSP is effective for assets or liabilities arising from contingencies in business combinations for which the
acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Grace has adopted this standard in 2009.

In
December 2008, the FASB issued FSP No. FAS 132(R)-1 "Disclosures about Postretirement Benefit Plan Assets." This FSP amends FASB Statement No. 132 (revised
2003), Employers' Disclosures about Pensions and Other Postretirement Benefits, to provide guidance on an employer's disclosures about plan assets of a defined benefit pension or other postretirement
plan. This FSP shall be effective for fiscal years ending after December 15, 2009. Grace will adopt these disclosure requirements for its 2009 Annual Report on Form 10-K.

In
May 2008, FASB issued SFAS No. 162, "The Hierarchy of U.S. GAAP." SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the
principles to be

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

used
in the preparation of financial statements of nongovernmental entities that are presented in conformity with U.S. GAAP. In June 2009, the FASB issued SFAS 168, "The FASB Accounting
Standards Codification TM and the Hierarchy of Generally Accepted Accounting Principles- a replacement of FAS No. 162. TheFASB Accounting Standards
Codification (Codification) will become the source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities. On the
effective date of this Statement, the Codification will supersede all then-existing non-SEC accounting and reporting standards. All other nongrandfathered non-SEC
accounting literature not included in the Codification will become nonauthoritative. This Statement is effective for financial statements issued for interim and annual periods ending after
September 15, 2009. Grace will adopt this standard for its 2009 Third Quarter 10-Q.

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 SFAS No. 141(R), and other
U.S. GAAP. This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Grace has adopted this
standard, and it did not materially impact the 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 and interim periods within those fiscal years. Grace has adopted these disclosure requirements.

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.
Grace has adopted this standard, and has modified its Consolidated Financial Statements where applicable.

In
September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." SFAS No. 157 defines fair value, establishes a framework for measuring fair value, and expands
disclosures about fair value measurements. In February 2008, the FASB issued FSP 157-1, "Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting
Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13", and FSP 157-2, "Effective Date of FASB Statement
No. 157". FSP 157-1 amends SFAS No. 157 to remove certain leasing transactions from its scope. FSP 157-2 delays the effective date of SFAS No. 157 for all
non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least
annually), until fiscal years beginning after November 15, 2008. In October 2008, the FASB issued FSP No. FAS 157-3 "Determining the Fair Value of a Financial Asset When the
Market for That Asset Is Not Active." This FSP clarifies the application of SFAS No. 157 and illustrates key considerations in determining the fair value of a financial asset when the market
for that financial asset is not active. Grace adopted SFAS No. 157 and the related FSPs in the first

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

quarter
of 2008, and the adoption for Grace's financial assets and liabilities did not have a material impact on its Consolidated Financial Statements. In April 2009, the FASB issued FSP No.
FAS 157-4 "Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly."
This FSP provides additional guidance and expands on the factors that should be considered in estimating fair value when there has been a significant decrease in market activity for a financial asset.
This FSP is effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. Grace has adopted this standard,
and it has not had a material impact on its Consolidated Financial Statements. See Note 7 for further discussion of SFAS No. 157.

2. Chapter 11Related Information

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

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

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

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

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

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Notes to Consolidated Financial Statements (Continued)

2. Chapter 11Related Information (Continued)

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

As
contemplated by the PI Settlement, on September 19, 2008, the Debtors, supported by the Equity Committee, the PI Committee and the PI FCR, as co-proponents, filed a
joint plan of reorganization with the Bankruptcy Court to reflect the terms of the PI Settlement.

On
October 17, 2008, the Ontario Superior Court of Justice, in the Grace Canada, Inc. proceeding pending under the Companies' Creditors Arrangement Act, approved an
agreement (the "Minutes of Settlement"), entered into by the Company, Grace Canada, Inc. and legal representatives of Canadian ZAI property damage claimants on September 2, 2008, that
would settle all Canadian ZAI property damage claims and demands. Under the Minutes of Settlement, all Canadian ZAI property damage claims and demands would be paid through a separate Canadian ZAI
property damage claims fund funded with CDN$6.5 million. The Minutes of Settlement are subject to the confirmation and effectiveness of the Joint Plan (as defined below). The Minutes of
Settlement provide that if the Bankruptcy Court does not issue a confirmation order with respect to the Joint Plan by October 31, 2009, the Minutes of Settlement will terminate.

On
November 21, 2008, the Debtors reached an agreement in principle (the "ZAI PD Term Sheet") with the Putative Class Counsel to the U.S. ZAI claimants, the PD FCR, and the Equity
Committee designed to resolve all present and future U.S. ZAI property damage claims and demands.

As
contemplated by the PI Settlement and the ZAI PD Term Sheet, the Debtors, supported by the Equity Committee, the PI Committee and the PI FCR, as co-proponents, amended the
joint plan of reorganization and several associated documents, including a disclosure statement, trust distribution procedures, exhibits and other supporting documents on December 18, 2008,
February 3, 2009 and February 27, 2009 through filings with the Bankruptcy Court. The joint plan of reorganization (as amended through February 27, 2009, the "Joint Plan") is
designed to address all pending and future asbestos-related claims and all other pre-petition claims as outlined therein. The Joint Plan supersedes the Prior Plan and the PI Plan. The
committee representing general unsecured creditors, the PD Committee and the PD FCR are not co-proponents of the Joint Plan.

Under
the Joint Plan, two asbestos trusts would be established under Section 524(g) of the Bankruptcy Code. All asbestos-related personal injury claims would be channeled for
resolution to one asbestos trust (the "PI Trust") and all asbestos-related property damage claims, including U.S and Canadian ZAI property damage claims, would be channeled to a separate asbestos
trust (the "PD Trust"). On March 9, 2009, the Bankruptcy Court approved the disclosure statement associated with the Joint Plan.

Any
plan of reorganization, including the Joint Plan and any plan of reorganization that may be filed in the future by a party-in-interest, will become effective
only after a vote of eligible creditors and with the approval of the Bankruptcy Court and the U.S. District Court for the District of Delaware. On March 9, 2009, the Bankruptcy Court approved
the disclosure statement associated with the Joint Plan. On March 31, 2009, Grace distributed the Joint Plan, exhibits and disclosure statement along with voting materials to all creditors
entitled to vote on the Joint Plan. The Bankruptcy Court required all creditors eligible to vote on the Joint Plan to submit their votes, and all

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2. Chapter 11Related Information (Continued)

parties-in-interest
who object to the Joint Plan to submit their objections, by May 20, 2009. All classes of creditors entitled to vote accepted the Joint Plan. The
class of general unsecured creditors, who voted on a provisional basis pending a determination by the Bankruptcy Court as to whether the class is impaired and therefore entitled to a vote, voted to
reject the Joint Plan. The objections filed generally relate to demands for interest at rates higher than provided for in the Joint Plan, assertions that the Joint Plan may impair insurers'
contractual rights, assertions that the Joint Plan discriminates against Libby, Montana personal injury claimants and the classification and treatment of claims under the Joint Plan. Grace believes
that the Joint Plan complies with the requirements for confirmation under the Bankruptcy Code and Grace intends to vigorously defend the Joint Plan against these and all other objections. If certain
objections were resolved adversely to Grace and the other Joint Plan proponents, or if rulings by the Bankruptcy Court resolving certain objections favorably to the Joint Plan proponents were
appealed, certain conditions to the Joint Plan, including for example, payments pursuant to the Sealed Air Settlement (as defined below) and the Fresenius Settlement (as defined below), might not be
satisfied and potential lenders might not be willing to provide the new financing that Grace seeks to fund the Joint Plan. The resolution of these objections and any related appeals could have a
material effect on the terms and timing of Grace's emergence from Chapter 11. Hearings to determine whether the Bankruptcy Court will approve the Joint Plan were held on the
22nd and 23rd of June 2009 and are scheduled to continue from the 8th through the 17th of September 2009. In
preparation for the September
hearings, the Joint Plan proponents and objecting creditors have been engaged in discovery proceedings and have submitted extensive briefs and other court filings.

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

The
Joint Plan is designed to address all pending and future asbestos-related claims and demands and all other pre-petition claims as outlined respectively therein. However,
it is possible that the Joint Plan will not be confirmed by the Bankruptcy Court, or become effective if it is confirmed. If the Joint Plan is not confirmed by the Bankruptcy Court or the U.S.
District Court for the District of Delaware or does not become effective, the Debtors would expect to resume the estimation trial, which was suspended in April 2008 due to the PI Settlement, to
determine the amount of its asbestos-related liabilities. Under those circumstances, a different plan of reorganization may ultimately be confirmed and become effective. Under that effective plan of
reorganization, the interests of holders of Company common stock could be substantially diluted or cancelled. The value of Company common stock following the effective date of any plan of
reorganization and the extent of any recovery by non-asbestos-related creditors would depend

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Notes to Consolidated Financial Statements (Continued)

2. Chapter 11Related Information (Continued)

principally
on the amount of Debtors' asbestos-related liability under such effective plan of reorganization.

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

Asbestos-Related Personal Injury Claims

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

The
PI Trust would be funded with:



Asbestos-Related Property Damage Claims

All pending and future asbestos-related property damage claims and demands ("PD Claims") would be channeled to the PD Trust for
resolution. The PD Trust would contribute CDN$6.5 million to a separate Canadian ZAI PD Claims fund through which Canadian ZAI PD Claims would be resolved. The PD Trust would generally resolve
U.S. ZAI PD Claims that qualify for payment by paying 55% of the claimed amount, but in no event would the PD Trust pay more than 55% of $7,500 (as adjusted for the increase in inflation each year
after the fifth anniversary of the effective date of the Joint Plan). The PD Trust would satisfy other allowed PD Claims pursuant to specified trust distribution procedures with cash payments in the
allowed settlement amount. Unresolved PD

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Notes to Consolidated Financial Statements (Continued)

2. Chapter 11Related Information (Continued)

Claims
and future PD claims would be litigated pursuant to procedures to be approved by the Bankruptcy Court and, to the extent such claims were determined to be allowed claims, would be paid in cash
by the PD Trust in the amount determined by the Bankruptcy Court.

The
PD Trust would contain two accounts, the PD account and the ZAI PD account. U.S. ZAI PD Claims would be paid from the ZAI PD account and other PD Claims would be paid from the PD
account. The separate Canadian ZAI PD Claims would be paid by a separate fund established in Canada. Each account would have a separate trustee and the assets of the accounts would not be commingled.
The two accounts would be funded as follows:

The
PD account would be funded with:



The
ZAI account would be funded as follows (the "ZAI Assets"):



All
payments to the PD Trust that were not to be paid on the effective date of the Joint Plan would be secured by the Company's obligation to issue 50.1% of its outstanding common stock
(measured as of the effective date of the Joint Plan) to the PD Trust in the event of default. Grace would have the right to conduct annual audits of the books, records and claim processing procedures
of the PD Trust.

Other Claims

All allowed administrative claims would be paid in cash and all allowed priority claims would be paid in cash with interest. Secured
claims would be paid in cash with interest or by reinstatement. Allowed general unsecured claims would be paid in cash, including any post-petition interest as follows: (i) for
holders of pre-petition bank credit facilities, post-petition interest at the rate of 6.09% from the Filing Date through December 31, 2005 and thereafter at floating
prime, in each case compounded quarterly; and (ii) for all other unsecured claims that are not subject to a settlement agreement providing otherwise, interest at 4.19% from the Filing Date,
compounded annually, or if pursuant to an existing contract, interest at the non-default contract rate. The general unsecured creditors that hold pre-petition bank credit
facilities have asserted that they are entitled to

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Notes to Consolidated Financial Statements (Continued)

2. Chapter 11Related Information (Continued)

post-petition
interest at the default rate specified under the terms of the underlying credit agreements which, if paid, would be materially greater than that reflected above. Grace has
asserted that such creditors are not entitled to interest at the default rate and has requested the Bankruptcy Court to determine the appropriate rate at which interest would be payable. Unsecured
employee- related claims such as pension, retirement medical obligations and workers compensation claims, would be reinstated.

Effect on Company Common Stock

The Joint Plan assumes that Company common stock will remain outstanding at the effective date of the Joint Plan, but that the
interests of existing shareholders would be subject to dilution by additional shares of Company common stock issued under the warrant or in the event of default in respect of the deferred payment
obligations to the PI Trust or the PD Trust under the Company's security obligation. In order to preserve significant tax benefits which are subject to elimination or limitation in the event of a
change in control (as defined by the Internal Revenue Code) of Grace, the Joint Plan provides that under certain circumstances, the Board of Directors would have the authority to impose restrictions
on the transfer of Grace stock with respect to certain 5% shareholders. These restrictions will generally not limit the ability of a person that holds less than 5% of Grace stock after emergence to
either buy or sell stock on the open market. In addition, the Bankruptcy Court has approved trading restrictions on Grace common stock until the effective date of a plan of reorganization. These
restrictions prohibit (without the consent of Grace) a person from acquiring more than 4.75% of the outstanding Grace common stock or, for any person already holding more than 4.75%, from increasing
such person's holdings. This summary of the stock transfer restrictions does not purport to be complete and is qualified in its entirety by reference to the order of the Bankruptcy Court, which has
been filed with the SEC.

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

Approximately
14,900 proofs of claim were filed by the March 31, 2003 bar date. Of these claims, approximately 9,400 were non-asbestos related, approximately 4,300
were PD Claims, and approximately 1,000 were for medical monitoring. The medical monitoring claims were made by individuals who allege exposure to asbestos through Grace's products or operations.
Under the Joint Plan, these claims would be channeled to the PI Trust for resolution. 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 to retain such benefits under the Joint Plan. 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 Chapter 11 Cases, 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

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2. Chapter 11Related Information (Continued)

supporting
documentation, or provide insufficient supporting documentation. As of June 30, 2009, of the approximately 4,300 non-ZAI PD Claims filed, approximately 360 claims have
been resolved, approximately 3,885 claims have been expunged, reclassified by the Debtors or withdrawn by claimants, leaving approximately 55 claims to be addressed through the property damage case
management order approved by the Bankruptcy Court and/or the Joint Plan or another plan of reorganization. As of June 30, 2009, of the approximately 3,285 non-asbestos claims filed,
approximately 1,895 have been expunged or withdrawn by claimants, approximately 1,165 have been resolved, and an additional approximately 225 claims are to be addressed through the claim objection
process and the dispute resolution procedures approved by the Bankruptcy Court.

Additionally,
by order dated June 17, 2008, the Bankruptcy Court established October 31, 2008 as the bar date for ZAI PD Claims related to property located in the U.S. As
of June 30, 2009, approximately 19,370 US ZAI PD Claims have been filed. In addition, on October 21, 2008, the Bankruptcy Court entered an order establishing August 31, 2009 as
the bar date for ZAI PD Claims
related to property located in Canada. The Joint Plan provides for the channeling of US ZAI PD Claims and Canadian ZAI PD Claims to the Asbestos PD Trust created under the Joint Plan, and the
subsequent transfer of Canadian ZAI PD Claims to a Canadian fund. No bar date has been set for personal injury claims related to ZAI. The Joint Plan provides that ZAI PI Claims would be channeled to
the Asbestos PI Trust created under the Joint Plan.

Grace
is continuing to analyze and review unresolved claims in relation to the Joint Plan. 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 PD Claims are considered as part of Grace's overall asbestos liability and are being accounted for in accordance with the conditions precedent under the Prior Plan, as
described in Note 3.

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

On
November 29, 2002, Sealed Air (and Cryovac) and Fresenius each announced that they had reached agreements in principle with the PI and PD Committees to settle asbestos,
successor liability and fraudulent transfer claims related to such transactions. Under the terms of the Fresenius Settlement, subject to the fulfillment of certain conditions, Fresenius would pay
$115.0 million to the Debtors' estate as directed by the Bankruptcy Court upon confirmation of the Debtors' plan of reorganization. In July 2003, the Fresenius Settlement was approved by the
Bankruptcy Court. Under the terms of the Sealed Air Settlement, subject to the fulfillment of certain conditions, Cryovac would make a payment of $512.5 million (plus interest at 5.5%
compounded annually, commencing on December 21, 2002) and nine million shares (now 18 million shares to reflect a two-for-one stock split) of Sealed Air common
stock (collectively valued at $1,059.0 million as of June 30, 2009), 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.

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Notes to Consolidated Financial Statements (Continued)

2. Chapter 11Related Information (Continued)

Debt CapitalAll of the Debtors' pre-petition debt is in default due to the Filing. The accompanying Consolidated Balance Sheets
reflect
the classification of the Debtors' pre-petition debt within "liabilities subject to compromise."

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.

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

Pursuant
to SOP 90-7, Grace's pre-petition and future liabilities that are subject to compromise are required to be reported separately on the balance
sheet at an estimate of the amount that will ultimately be allowed by the Bankruptcy Court. As of June 30, 2009, 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.

As
discussed in Note 3, Grace has not adjusted its accounting for asbestos-related liabilities to reflect the Joint Plan.

Grace
has not recorded the benefit of any assets that may be available to fund asbestos-related and other liabilities under the Fresenius Settlement and the Sealed Air Settlement, as
such agreements
are subject to conditions, which, although expected to be met, have not been satisfied and confirmed by the Bankruptcy Court and, under the Joint Plan, these assets would be transferred to the PI
Trust and the PD Trust. The estimated fair value available under the Fresenius Settlement and the Sealed Air Settlement as measured at June 30, 2009, was $1,174.0 million comprised of
$115.0 million in cash from Fresenius and $1,059.0 million in cash and stock from Cryovac under the Joint Plan. Payments under the Sealed Air Settlement will be made directly to the PI
Trust and the PD Trust by Cryovac.

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Notes to Consolidated Financial Statements (Continued)

2. Chapter 11Related Information (Continued)

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. GAAP. Changes to pre-petition liabilities subsequent to the Filing
Date reflect: (1) cash payments under approved court orders; (2) the terms of the Prior Plan, as discussed above and in Note 3, including the accrual of interest on
pre-petition debt and other fixed obligations; (3) accruals for employee- related programs; and (4) changes in estimates related to other pre-petition contingent
liabilities. The accounting for the asbestos-related liability component of "liabilities subject to compromise" is described in Note 3.

Components of liabilities subject to compromise are as follows:

(In millions)

June 30,
2009

December 31,
2008Pre-petition bank debt plus accrued interest

$
836.8

$
823.5Drawn letters of credit plus accrued interest


30.6


30.0Asbestos-related contingencies


1,700.0


1,700.0Income tax contingencies(1)


121.6


121.0Environmental contingencies


149.2


152.2Postretirement benefits other than pension


73.2


73.2Unfunded special pension arrangements


107.1


106.0Retained obligations of divested businesses


28.3


29.8Accounts payable


31.2


31.2Other accrued liabilities


60.2


55.5Reclassification to current liabilities(2)


(10.8
)

(9.5
)Total Liabilities Subject to Compromise

$
3,127.4

$
3,112.9






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 (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, 2009.

(In millions) (Unaudited)

Cumulative
Since FilingBalance, Filing Date April 2, 2001

$
2,366.0Cash disbursements and/or reclassifications under Bankruptcy Court orders:Payment of environmental settlement liabilityincluding Libby (see Note 11)


(252.0
)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


(364.9
)Expense/(income) items:Interest on pre-petition liabilities


414.5Employee-related accruals


72.3Provision for asbestos-related contingencies


744.8Provision for environmental contingencies


327.9Provision for income tax contingencies


0.1Balance sheet reclassifications


(36.5
)Balance, end of period

$
3,127.4


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, 2009 and 2008 were 3.25% and 5.65%, 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 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.

21

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Table of Contents

Notes to Consolidated Financial Statements (Continued)

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)

2009

2008

2009

2008Legal and financial advisory fees

$
8.0

$
19.3

$
18.2

$
38.0Interest income





(1.3
)

(0.2
)

(1.6
)Chapter 11 expenses, net of interest income

$
8.0

$
18.0

$
18.0

$
36.4


Pursuant
to SOP 90-7, interest income earned on the Debtors' cash balances must be offset against Chapter 11 expenses.

Condensed financial information of the Debtors

W. R. Grace & Co.Chapter 11 Filing Entities  Debtor-in-Possession Statements of Operations

Six Months
Ended
June 30,(In millions) (Unaudited)

2009

2008Net sales, including intercompany

$
693.2

$
799.4Cost of goods sold, including intercompany, exclusive of depreciation and amortization shown separately below


501.3


577.0Selling general and administrative expenses


160.7


145.2Restructuring expenses


11.3


2.9Research and development expenses


18.7


22.8Depreciation and amortization


27.8


29.2Defined benefit pension expense


34.7


18.7Interest expense and related financing costs


18.3


29.3Other income, net


(28.2
)

(56.2
)Provision for environmental remediation


0.7


5.9Chapter 11 expenses, net of interest income


18.0


36.4763.3


811.2Loss before income taxes and equity in net income of non-filing entities


(70.1
)

(11.8
)Benefit from (provision for) income taxes


21.2


(22.9
)Loss before equity in net income of non-filing entities


(48.9
)

(34.7
)Equity in net income of non-filing entities


29.3


84.5Net income (loss)

$
(19.6
)
$
49.8


22

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Table of Contents

Notes to Consolidated Financial Statements (Continued)

2. Chapter 11Related Information (Continued)

W. R. Grace & Co.Chapter 11 Filing Entities  Debtor-in-Possession Statements of Cash Flows

Six Months
Ended
June 30,(In millions) (Unaudited)

2009

2008Operating ActivitiesNet income (loss)

$
(19.6
)
$
49.8Reconciliation to net cash used for operating activities:Chapter 11 expenses, net of interest income


18.0


36.4(Benefit from) provision for income taxes


(21.2
)

22.9Equity in net income of non-filing entities


(29.3
)

(84.5
)Depreciation and amortization


27.8


29.2Interest on pre-petition liabilities subject to compromise


17.7


26.8Provision for environmental remediation


0.7


5.9Other non-cash items, net


(4.2
)

(2.4
)Contributions to defined benefit pension plans


(18.7
)

(35.2
)Cash paid to resolve contingencies subject to Chapter 11





(101.6
)Chapter 11 expenses paid


(25.1
)

(36.7
)Restructuring expenses


11.3


2.9Changes in other assets and liabilities, excluding the effect of businesses acquired/divested


35.8


(94.1
)Net cash used for operating activities


(6.8
)

(180.6
)Investing ActivitiesCapital expenditures


(21.0
)

(33.8
)Loan repayments and other


110.5


191.7Net cash provided by investing activities


89.5


157.9Net cash provided by (used for) financing activities


(0.9
)

8.3Net increase (decrease) in cash and cash equivalents


81.8


(14.4
)Cash and cash equivalents, beginning of period


218.1


206.8Cash and cash equivalents, end of period

$
299.9

$
192.4


23

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Table of Contents

Notes to Consolidated Financial Statements (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,
2009

December 31,
2008ASSETSCurrent AssetsCash and cash equivalents

$
299.9

$
218.1Investment securities


14.2


21.6Cash value of life insurance policies, net of policy loans





67.2Trade accounts receivable, net


119.8


115.0Receivables from non-filing entities, net


77.9


69.9Inventories


98.9


122.1Other current assets


48.3


57.4Total Current Assets


659.0


671.3Properties and equipment, net


401.3


417.1Deferred income taxes


853.0


834.4Asbestos-related insurance


500.0


500.0Loans receivable from non-filing entities, net


390.0


399.1Investment in non-filing entities


491.6


492.0Overfunded defined benefit pension plans


0.2


0.2Other assets


83.6


97.8Total Assets

$
3,378.7

$
3,411.9LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)Liabilities Not Subject to CompromiseCurrent liabilities

$
217.1

$
239.5Underfunded defined benefit pension plans


368.3


380.6Other liabilities


27.3


41.6Total Liabilities Not Subject to Compromise


612.7


661.7Liabilities Subject to Compromise


3,127.4


3,112.9Total Liabilities


3,740.1


3,774.6Total W. R. Grace & Co. Shareholders' Equity (Deficit)


(414.8
)

(426.9
)Noncontrolling interests in Chapter 11 filing entities


53.4


64.2Total Shareholders' Equity (Deficit)


(361.4
)

(362.7
)Total Liabilities and Shareholders' Equity (Deficit)

$
3,378.7

$
3,411.9


In
addition to Grace's financial reporting obligations as prescribed by the 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 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.

24

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Table of Contents

Notes to Consolidated Financial Statements (Continued)

3. Asbestos-Related Litigation

Grace is a defendant in property damage and personal injury lawsuits relating to previously sold asbestos-containing products. As of the Filing Date, Grace was a defendant in 65,656
asbestos-related lawsuits, 17 involving 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
asbestos personal injury and asbestos property damage claimants, respectively, and the PI FCR and PD FCR, representing the interests of future asbestos personal injury and property damage claimants,
respectively, have been appointed in the Chapter 11 Cases. Grace's obligations with respect to present and future claims will be determined through the Chapter 11 process.

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

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

Approximately
4,300 additional PD claims were filed prior to the March 31, 2003 claims bar date established by the Bankruptcy Court. (The bar date did not apply to ZAI claims.)
Such claims were reviewed in detail by Grace, categorized into claims with sufficient information to be evaluated or claims that require additional information and, where sufficient information
existed, the estimated cost of resolution was considered as part of Grace's recorded asbestos-related liability. Approximately 200 claims did not contain sufficient information to permit an
evaluation. Grace objected to virtually all PD claims on a number of different bases, including: no authorization to file a claim; the claim was previously settled or adjudicated; no or insufficient
documentation; failure to identify a Grace product; the 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, 2009, following the reclassification, withdrawal or expungement of claims, approximately 415 PD Claims subject to the March 31, 2003 bar date remain
outstanding. The Bankruptcy Court has approved settlement agreements covering approximately 360 of such claims for an aggregate allowed amount of $93 million.

Eight
of the ZAI cases were filed as purported class action lawsuits in 2000 and 2001. In addition, 10 lawsuits were filed as purported class actions in 2004 and 2005 with respect to
persons and homes in Canada. These cases seek damages and equitable relief, including the removal, replacement and/or disposal of all such insulation. The plaintiffs assert that this product is in
millions

25

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Table of Contents

Notes to Consolidated Financial Statements (Continued)

3. Asbestos-Related Litigation (Continued)

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 ZAI was and continues to be
safe for its intended purpose and poses little or no threat to human health. The plaintiffs in the ZAI lawsuits dispute Grace's position on the safety of ZAI. In October, 2004, the Bankruptcy Court
held a hearing on motions filed by the parties to address a number of important legal and factual issues regarding the ZAI claims. In December, 2006, the Bankruptcy Court issued an opinion and order
holding that, although ZAI is contaminated with asbestos and can release asbestos fibers when disturbed, there is no unreasonable risk of harm from ZAI. The ZAI claimants sought an interlocutory
appeal of the opinion and order with the U.S. District Court for the District of Delaware, but that request was denied. In the event the Joint Plan is not confirmed, the ZAI claimants have reserved
their right to appeal such opinion and order if and when it becomes a final order.

At
the Debtors' request, in July 2008, the Bankruptcy Court established a bar date for U.S. ZAI PD Claims and approved a related notice program that required any person with a
U.S. ZAI PD Claim to submit an individual proof of claim no later than October 31, 2008. Approximately 16,200 U.S. ZAI PD Claims were filed prior to the October 31, 2008 claims bar date
and, as of June 30, 2009 an additional 3,170 U.S. ZAI PD Claims were filed. As described above, on October 17, 2008, the Ontario Superior Court of Justice, in the Grace
Canada, Inc. proceeding pending under the Companies' Creditors Arrangement Act, approved the Minutes of Settlement that would settle all Canadian ZAI PD Claims on the terms of the Joint Plan.
On October 20, 2008, the Bankruptcy Court established August 31, 2009 as the bar date for Canadian ZAI PD Claims.

As
described above, on November 21, 2008, the Debtors, the Putative Class Counsel to the U.S. ZAI property damage claimants, the PD FCR, and the Equity Committee reached an
agreement in principle designed to resolve all present and future U.S. ZAI PD Claims. The terms of the U.S. and Canadian ZAI agreements in principle have been incorporated into the terms of the Joint
Plan and related documents. As described below, Grace's recorded asbestos related liability does not include the agreements in principle to settle the ZAI liability that is part of the Joint Plan. The
asbestos related liability at June 30, 2009, which is based on the Prior Plan, assumes the risk of loss from ZAI litigation is not probable. If the Joint Plan or another plan of reorganization
reflecting the agreements in principle is not confirmed or does not become effective and Grace's view as to risk of loss from ZAI litigation is not sustained, Grace believes the cost to resolve the
U.S. ZAI litigation may be material.

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

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

26

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Table of Contents

Notes to Consolidated Financial Statements (Continued)

3. Asbestos-Related Litigation (Continued)

judgments)
for a total of $645.6 million. As of the Filing Date, 129,191 PI claims for personal injury were pending against Grace. Grace believes that a substantial number of additional PI
Claims would have been received between the Filing Date and June 30, 2009 had such PI Claims not been stayed by the Bankruptcy Court.

The
Bankruptcy Court has entered a case management order for estimating liability for pending and future PI Claims. A trial for estimating liability for PI Claims began in
January 2008 but was suspended in April 2008 as a result of the PI Settlement.

Asbestos-Related LiabilityThe total recorded asbestos-related liability as of June 30, 2009 and December 31, 2008,
including
pre-Filing Date and post-Filing Date settlements, 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 Prior Plan. The Prior Plan contained a condition precedent that the Bankruptcy Court
determine that $1,613 million (this amount, plus $87 million of prepetition settlements and judgments, "the Funding Amount") was sufficient to pay, on a net present value basis, all PI
Claims and PD Claims entitled to payment and related trust administration costs and expenses. Therefore, prior to the PI Settlement, the U.S. and Canadian ZAI agreements in principle and the filing of
the Joint Plan, Grace was prepared to settle its asbestos-related claims at the Funding Amount as part of a consensual plan of reorganization and recorded its asbestos-related liability on that basis.
The treatment of asbestos-related liabilities is significantly different under the Joint Plan than under the Prior Plan. Grace has not adjusted its accounting for asbestos-related liabilities to
reflect the Joint Plan. At this time, Grace is unable to determine a reasonable estimate of the value of certain consideration payable to the PI Trust and the PD Trust under the Joint Plan. These
values will ultimately be determined on the effective date of the Joint Plan. Grace expects to adjust its accounting for the Joint Plan when the consideration can be measured and material conditions
to the Joint Plan are satisfied. Grace expects that such adjustments may be material to Grace's consolidated financial position and results of operations.

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

Insurance RightsGrace 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

27

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Table of Contents

Notes to Consolidated Financial Statements (Continued)

3. Asbestos-Related Litigation (Continued)

commercially
available to Grace. As discussed in Note 2, pursuant to the Joint Plan, insurance policies that provide coverage for asbestos-related claims and proceeds, including interest,
received after the date of the PI Settlement, would be assigned to the PI Trust.

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

Grace
has entered into settlement agreements with various excess insurance carriers. These settlements involve amounts paid and to be paid to Grace. The unpaid maximum aggregate amount
available under these settlement agreements is approximately $440 million. With respect to asbestos-related personal injury claims, the settlement agreements generally require that the claims
be spread over the claimant's exposure period and that each insurer pay a pro rata portion of each claim based on the amount of coverage provided during each year of the total exposure period.

Presently,
Grace has no agreements in place with insurers with respect to approximately $483 million of excess coverage. Such policies are at layers of coverage that have not yet
been triggered, but certain layers would be triggered if the Prior Plan were approved at the recorded asbestos-related liability of $1,700 million. In estimating 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 also would be covered under the policies discussed above to the extent they relate to installations of ZAI occurring after July 1, 1973.

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.

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 in respect of claims for which Grace was provided coverage under the affected policies. The escrow account balance at June 30, 2009 was
approximately $97.2 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, as subsequently amended, provides that unless Grace confirms a plan of
reorganization by December 31, 2008, at the option of the underwriter, exercisable at any time prior to September 30, 2009, the escrow amount with interest must be returned to the
underwriter. On July 17, 2009, Grace and the underwriter entered into an amendment to the settlement agreement that provides that: unless Grace confirms a plan of reorganization by
December 31, 2013, at the option of the underwriter, exercisable at any time prior to April 30, 2014, the escrow amount with interest must be returned to the underwriter; funds in the

28

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Table of Contents

Notes to Consolidated Financial Statements (Continued)

3. Asbestos-Related Litigation (Continued)

escrow
account will be distributed from this account to the PI Trust as set forth in the Joint Plan; fifty-two (52) percent of the interest accrued on the settlement amount as of
March 31, 2009 will be transferred to an agent of the underwriter upon Grace's emergence from Chapter 11; and the underwriter shall have certain indemnification rights against Grace and
the PI Trust with respect to certain claims. To become effective, the amendment to the settlement agreement must be approved by the Bankruptcy Court. Due to the open contingencies for the release of
such amount, Grace has not recorded the amount in the escrow account or reduced its asbestos insurance receivable balance. Under the Joint Plan, the amount in the escrow account would be assigned to
the PI Trust.

As
of June 30, 2009, including the settlement discussed above and after subtracting previous reimbursements by insurers and allowing for discounts pursuant to certain settlement
agreements, there remains approximately $923 million of excess coverage from 53 presently solvent insurers. Grace estimates that eligible claims would have to exceed $4 billion to access
total coverage. Grace further estimates that, assuming the resolution value of asbestos-related claims is equal to the recorded liability of $1,700 million (which should fund claim payments in
excess of $2 billion), it should be entitled to approximately $500 million of insurance recovery, including the escrow described above. This amount was determined by estimating the
aggregate and per year payout for claims over time and applying the expected insurance recovery factor to such claims. However, the ultimate amount of insurance recovered on such claims will depend on
a number of factors that will only be determined at the time claims are paid including: the nature of the claim (PI Claim, PD Claim or ZAI PD Claim), the relevant exposure years, the timing of
payment, the solvency of insurers and the legal status of policy rights. Accordingly, Grace's estimate of insurance recovery may differ materially from actual amounts received by Grace, or, if the
Joint Plan is confirmed and becomes effective, the PI Trust.

4. Life Insurance

Grace is the beneficiary of corporate-owned life insurance ("COLI") policies on certain current and former employees with net cash surrender values of $4.2 million and
$71.4 million at June 30, 2009 and December 31, 2008, respectively. The following tables summarize activity in these policies for the six months ended June 30, 2009 and
2008, and the components of net cash value at June 30, 2009 and December 31, 2008:

Life InsuranceActivity Summary

Six Months
Ended
June 30,(In millions)

2009

2008Earnings on policy assets

$
1.4

$
1.9Interest on policy loans


(0.2
)

(0.1
)Proceeds from termination of life insurance policies


(68.8
)

(8.1
)Net investing activity


0.4


(0.1
)Change in net cash value

$
(67.2
)
$
(6.4
)Tax-free proceeds received

$
0.6

$
0.1


29

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Table of Contents

Notes to Consolidated Financial Statements (Continued)

4. Life Insurance (Continued)

Components of Net Cash Value

(In millions)

June 30,
2009

December 31,
2008Gross cash value

$
9.4

$
77.5Principalpolicy loans


(5.0
)

(5.0
)Accrued interestpolicy loans


(0.2
)

(1.1
)Total net cash value

$
4.2

$
71.4Less: current portion





(67.2
)Net cash valuelong-term

$
4.2

$
4.2Insurance benefits in force

$
18.8

$
120.7


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
March 2009, Grace surrendered and terminated life insurance policies and received approximately $68.8 million of net cash value from the terminations. As a result of the
terminations, Grace's insurance benefits in force was reduced by approximately $102.4 million from December 31, 2008.

5. Inventories

Inventories are stated at the lower of cost or market, and cost is determined using FIFO. Inventories consisted of the following at June 30, 2009 and December 31, 2008:

(In millions)

June 30,
2009

December 31,
2008Raw materials

$
53.1

$
63.6In process


43.8


42.1Finished products


146.3


212.1Other


32.2


37.0$
275.4

$
354.8


30

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Table of Contents

Notes to Consolidated Financial Statements (Continued)



6. Debt

Components of Debt

(In millions)

June 30,
2009

December 31,
2008Debt payable within one year

$
6.3

$
11.2Debt payable after one yearOther long-term borrowings

$
0.5

$
0.6Debt Subject to CompromiseBank borrowings

$
500.0

$
500.0Accrued interest on bank borrowings


336.8


323.5Drawn letters of credit


25.6


25.6Accrued interest on drawn letters of credit


5.0


4.4867.4

$
853.5Full-year weighted average interest rates on total debt


3.3
%

5.2
%


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 the London Interbank Offered Rate (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, 2009, the Debtors had no revolving loans and had $63.7 million of standby letters of credit issued and outstanding under the DIP facility. The letters
of credit were issued mainly for trade-related matters such as performance bonds, as well as certain insurance and environmental matters.

At
June 30, 2009, the fair value of Grace's debt payable within one year not subject to compromise approximated the recorded value of $6.3 million. Fair value is determined
based on expected future cash flows (discounted at market interest rates), quotes from financial institutions and other appropriate valuation methodologies. At June 30, 2009, the carrying value
of Grace's bank debt subject to compromise plus interest was $867.4 million. The estimated fair value of the bank debt is lower than the carrying value; however, because such debt is subject to
compromise in Grace's Chapter 11 proceeding, neither carrying values nor market values may reflect ultimate liquidation value.

7. Fair Value Measurements

Certain of Grace's assets and liabilities are reported at fair value. 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 uses principal market data, whenever available, to value assets and

31

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Table of Contents

Notes to Consolidated Financial Statements (Continued)

7. Fair Value Measurements (Continued)

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 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 primarily in the Columbia Strategic Cash Portfolio
Fund (the "Columbia Fund"). In the six months ended June 30, 2009 and 2008, $8.3 million and $46.7 million, respectively, of Grace's account balance was distributed to Grace in
cash. Grace has elected to maintain its investment in the Columbia Fund pending the orderly liquidation of the portfolio and to value its account based on the value of the underlying securities as
determined by the fund principals. Grace has determined the value of the fund using a market approach, which consists of matrix pricing techniques based on widely available market data and comparables
as provided by the fund principals. Grace's investment in the Columbia Fund was valued at $14.2 million and $21.6 million at June 30, 2009 and December 31, 2008,
respectively.

Grace
recorded an increase in fair value of its Columbia Fund account of $0.8 million for the six months ended June 30, 2009. The increase in fair value is recorded as an
unrealized holding gain in other comprehensive income (loss).

32

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Table of Contents

Notes to Consolidated Financial Statements (Continued)

7. Fair Value Measurements (Continued)

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 2008 and 2009, Grace used 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. Commodity
fixed-rate swaps with maturities of not more than 12 months are used and designated as cash flow hedges of forecasted purchases of natural gas. Current open contracts hedge
forecasted transactions until June 2010. The effective portion of the gain or loss on the commodity contracts is recorded in accumulated other comprehensive income (loss) and reclassified into income
in the same period or periods that the underlying commodity purchase affects income. At June 30, 2009, the contract volume, or notional amount, of the commodity contracts was 2.6 million
British thermal units (MMBtu).

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
uses foreign currency exchange rate forward 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. dollar deposits; and
(3) discount rates used to present value future cash flows, which are based on the London Interbank Offered Rate (LIBOR) curve.

In
November 2007, Grace purchased foreign currency forward contracts to mitigate the effect of foreign currency risk with respect to intercompany loans between its principal
U.S. subsidiary and a German subsidiary. As of June 30, 2009, the total amount outstanding under the foreign currency forward contracts was €248.9 million.

33

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Table of Contents

Notes to Consolidated Financial Statements (Continued)

7. Fair Value Measurements (Continued)

The
following tables present the fair value hierarchy for financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2009 and December 31,
2008:

Fair Value Measurements at June 30, 2009 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

$
14.2

$


$
14.2

$
Currency derivatives


9.3





9.3


Total Assets

$
23.5

$


$
23.5

$
LiabilitiesCurrency derivatives

$
1.3

$


$
1.3

$
Commodity derivatives


7.4





7.4


Total Liabilities

$
8.7

$


$
8.7

$





Fair Value Measurements at December 31, 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

$
21.6

$


$
21.6

$
Currency derivatives


21.0





21.0


Total Assets

$
42.6

$


$
42.6

$
LiabilitiesCurrency derivatives

$
3.7

$


$
3.7

$
Commodity derivatives


10.8





10.8


Total Liabilities

$
14.5

$


$
14.5

$



34

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Table of Contents

Notes to Consolidated Financial Statements (Continued)

7. Fair Value Measurements (Continued)

The
following table presents the location and fair values of derivative instruments included in the Consolidated Balance Sheet as of June 30, 2009:

Asset Derivatives

Liability DerivativesFair Values of Derivative Instruments at June 30, 2009
(In millions)

Balance Sheet
Location

Fair
Value

Balance Sheet
Location

Fair
ValueDerivatives designated as hedging instruments under SFAS No. 133Commodity contracts

Other assets

$


Other current liabilities

$
7.4Derivatives not designated as hedging instruments under SFAS No. 133Currency contracts

Other assets

$
9.3

Other current liabilities

$
1.3Total derivatives



$
9.3



$
8.7


The
following tables present the location and amount of gains and losses on derivative instruments and related hedged items included in the Consolidated Statement of Operations or, when
applicable, gains and losses initially recognized in other comprehensive income (loss) ("OCI") for the three and six month periods ended June 30, 2009:

The Effect of Derivative Instruments on the Consolidated Statement of Operations for the Three Months Ended June 30, 2009
(In millions)

Amount of Gain
or (Loss)
Recognized in
OCI on Derivative
(Effective Portion)

Location of Gain
or (Loss)
Reclassified from
Accumulated OCI
into Income
(Effective Portion)

Amount of Gain
or (Loss)
Reclassified from
Accumulated OCI
into Income
(Effective Portion)Derivatives in SFAS No. 133 cash flow hedging relationships:Commodity contracts

$
(0.5
)
Cost of goods sold

$
(5.4
)Location of Gain
or (Loss)
Recognized in
Income on
Derivative

Amount of Gain
or (Loss)
Recognized in
Income on
DerivativeDerivatives not designated as hedging instruments under SFAS No. 133:Currency contracts




Other income (expense)

$
(18.0
)


35

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Table of Contents

Notes to Consolidated Financial Statements (Continued)

7. Fair Value Measurements (Continued)



The Effect of Derivative Instruments on the Consolidated Statement of Operations for the Six Months Ended June 30, 2009
(In millions)

Amount of Gain
or (Loss)
Recognized in
OCI on Derivative
(Effective Portion)

Location of Gain
or (Loss)
Reclassified from
Accumulated OCI
into Income
(Effective Portion)

Amount of Gain
or (Loss)
Reclassified from
Accumulated OCI
into Income
(Effective Portion)Derivatives in SFAS No. 133 cash flow hedging relationships:Commodity contracts

$
(8.1
)
Cost of goods sold

$
(11.7
)Location of Gain
or (Loss)
Recognized in
Income on
Derivative

Amount of Gain
or (Loss)
Recognized in
Income on
DerivativeDerivatives not designated as hedging instruments under SFAS No. 133:Currency contracts




Other income (expense)

$
(9.6
)




8. Income Taxes

As of June 30, 2009, the total amount of unrecognized tax benefits was $135.7 million compared to $134.6 million as of December 31, 2008. If Grace favorably resolves
the tax issues related to such uncertain tax positions and recognizes the June 30, 2009 amount in full, Grace expects that $15.8 million related to alternative minimum tax credit
carryforwards, that Grace has recorded as deferred tax assets, would no longer be available. In such event, Grace's effective tax rate would be
reduced by the June 30, 2009 amount net of the effect of such reduction in alternative minimum tax credit carryforwards.

Grace
accrues potential interest and any associated penalties related to uncertain tax positions in "benefit from (provision for) income taxes". The total amount of interest and
penalties accrued on uncertain tax positions was $80.6 million ($55.1 million net of applicable tax benefits) and $78.4 million ($53.4 million net of applicable tax
benefits) as of June 30, 2009 and December 31, 2008, respectively. The total amount of interest and penalties expense for the quarter ended June 30, 2009 was $1.3 million
($1.0 million net of applicable tax benefits).

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 income tax returns

36

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Table of Contents

Notes to Consolidated Financial Statements (Continued)

8. Income Taxes (Continued)

for
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Federal(2)

1997-2001


2005-2008United StatesState

1994-2006


2007-2008Germany

None


2006-2008United Kingdom

None


2003-2008Singapore

None


2002-2008France

None


2007-2008Canada

2002-2003


2004-2008






Grace
believes there may be a material change to Grace's aggregate recorded liabilities for uncertain tax positions within the next 12 months due to expected examinations of Grace
income tax returns for tax years that remain subject to examination, the expected expiration of statutes of limitations applicable to certain issues reflected as uncertain tax positions and the
matters described below:



37

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Table of Contents

Notes to Consolidated Financial Statements (Continued)

8. Income Taxes (Continued)



As
of June 30, 2009, Grace has prior-year tax credit carryforwards of $84.6 million consisting of $65.0 million of foreign tax credit carryforwards with
expiration dates through 2017, $0.6 million of general business credit carryforwards with expiration dates through 2025 and $18.9 million of alternative minimum tax credit carryforwards
with no expiration dates. The $18.9 million of alternative minimum tax credit carryforwards includes $15.8 million which Grace does not expect will be available if Grace is successful in
resolving certain issues reflected as uncertain tax positions.

Grace
anticipates generating U.S. net operating loss ("NOL") carryforwards upon emergence from Chapter 11. Because Grace did not pay a significant amount of
U.S. tax in prior years and/or has already received or applied for tax refunds from available NOL carryback years, Grace expects to carryforward most of the NOLs after emergence from
Chapter 11. 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, as a result of, or after emergence from, the Chapter 11 Cases. 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. Nevertheless, Grace can provide no assurance that
these limitations will prevent an ownership change or that Grace's ability to utilize NOLs will not be significantly limited as a result of the Chapter 11 Cases.

9. Pension Plans and Other Postretirement Benefits Plans

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

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

At
the December 31, 2008 measurement date for Grace's defined benefit pension plans, the projected benefit obligation ("PBO") was approximately $1,380 million as measured
under U.S. GAAP. The PBO basis reflects the present value (using a 6.25% discount rate for U.S. plans and a 6.24% weighted average discount rate for
non-U.S. plans as of December 31, 2008) of vested and non-vested benefits earned from employee service to date, based upon current services and estimated future
pay increases for active employees.

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,

38

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Table of Contents

Notes to Consolidated Financial Statements (Continued)

9. Pension Plans and Other Postretirement Benefits Plans (Continued)

2008
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, 2009, Grace decreased the discount rate for the U.S. qualified pension
plans from 7.25% at March 31, 2009 to 6.25% at June 30, 2009 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 89% of the benefit obligation of the non-U.S. pension plans as of December 31, 2008. Based on review of
the yield curve analyses for these plans as of June 30, 2009, Grace changed the discount rate for the United Kingdom from 6.75% at March 31, 2009 to 6.25% at June 30, 2009, for
Germany from 6.00% at March 31, 2009 to 5.75% at June 30, 2009, and for Canada from 8.50% at March 31, 2009 to 6.75% at June 30, 2009. The funded status as of
June 30, 2009 reflects a decrease in total assets of approximately $14 million and an increase in total liabilities of approximately $111 million as compared to March 31,
2009, resulting from the change in discount rates (including the postretirement plan). After tax effects, total assets increased from March 31, 2009 to June 30, 2009 by approximately
$29 million, total liabilities increased by approximately $111 million and shareholders' equity decreased by approximately $82 million. The funded status as of June 30,
2009 reflects a decrease in total assets of approximately $8 million and an increase in total liabilities of approximately $1 million as compared to December 31, 2008, resulting
from the change in discount rates (including the postretirement plan). After tax effects, total assets decreased from December 31, 2008 to June 30, 2009 by approximately
$5 million, total liabilities increased by approximately $1 million and shareholders' equity decreased by approximately $6 million.

At
June 30, 2009, Grace's recorded pension liability for underfunded and unfunded plans was $631.6 million ($380.4 million included in "underfunded defined benefit
pension plans", $136.9 million included in "unfunded pay-as-you-go defined benefit pension plans", $12.6 million included in "other current
liabilities", and $101.7 million related to noncurrent supplemental pension benefits, included in "liabilities subject to compromise"). The recorded liability reflects 1) the shortfall
between plan assets and the PBO of underfunded plans ($380.4 million); and 2) the PBO of unfunded pay-as-you-go plans ($251.2 million).

Three Months Ended June 30,2009

2008Pension



PensionComponents of Net Periodic Benefit Cost (Income)
(In millions)

U.S.

Non-U.S.

Other

U.S.

Non-U.S.

OtherService cost

$
3.9

$
1.6

$


$
3.9

$
2.2

$
0.1Interest cost


15.4


5.0


1.1


15.5


6.2


1.1Expected return on plan assets


(10.8
)

(3.6
)




(15.5
)

(5.1
)

Amortization of prior service cost (credit)


0.2





(0.9
)

0.4


0.2


(2.1
)Amortization of net deferred actuarial loss


8.0


0.8


0.1


4.9


1.3


0.4Net periodic benefit cost (income)

$
16.7

$
3.8

$
0.3

$
9.2

$
4.8

$
(0.5
)


39

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Table of Contents

Notes to Consolidated Financial Statements (Continued)

9. Pension Plans and Other Postretirement Benefits Plans (Continued)

Six Months Ended June 30,2009

2008Pension



PensionComponents of Net Periodic Benefit Cost (Income)
(In millions)

U.S.

Non-U.S.

Other

U.S.

Non-U.S.

OtherService cost

$
8.2

$
3.3

$
0.1

$
8.1

$
4.4

$
0.2Interest cost


31.5


9.9


2.2


31.1


12.1


2.4Expected return on plan assets


(22.0
)

(7.1
)




(31.0
)

(10.1
)

Amortization of prior service cost (credit)


0.5


0.1


(2.0
)

0.8


0.4


(4.3
)Amortization of net deferred actuarial loss


16.5


1.5


0.4


9.9


2.6


0.9Net periodic benefit cost (income)

$
34.7

$
7.7

$
0.7

$
18.9

$
9.4

$
(0.8
)


Plan Contributions and FundingSubject 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. GAAP. On June 24, 2009, Grace obtained Bankruptcy Court approval to fund minimum required payments under the U.S. qualified pension plans of
approximately $30 million for the period from July 2009 through January 2010. In that regard, Grace contributed approximately $8 million in July 2009 to the trusts
that hold assets of the U.S. qualified pension plans. While Grace intends to continue to fund all minimum required payments under the U.S. qualified pension plans, there can be no
assurance that the Bankruptcy Court will continue to approve these payments.

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.

Postretirement Benefits Other Than PensionsGrace 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
2009 measurement purposes, per capita costs, before retiree contributions, were assumed to initially increase at a rate of 8.0%. The rate is assumed to decrease gradually to 5%
through 2014 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

40

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Table of Contents

Notes to Consolidated Financial Statements (Continued)

9. Pension Plans and Other Postretirement Benefits Plans (Continued)

(impact
of less than $1 million) and would have a negligible impact on the aggregate of the service and interest cost components of net periodic benefit cost.

10. Other Balance Sheet Accounts

(In millions)

June 30,
2009

December 31,
2008Other AssetsDeferred charges

$
31.0

$
33.5Cash value of life insurance policies, net of policy loans


4.2


4.2Long-term receivables, less allowances of $0.0 (2008$0.0)


0.9


0.9Patents, licenses and other intangible assets, net


66.9


72.5Fair value of foreign exchange rate forward contracts


9.3


21.0Investments in unconsolidated affiliates and other


22.2


17.2$
134.5

$
149.3Other Current LiabilitiesAccrued compensation

$
73.2

$
88.1Customer volume rebates


23.1


37.7Accrued commissions


8.3


13.0Accrued Chapter 11 reorganization expenses


16.7


23.9Income tax payable


23.0


15.9Deferred tax liability


7.8


7.9Fair value of foreign exchange rate forward contracts


1.3


3.7Other accrued liabilities


108.0


101.3$
261.4

$
291.5


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.

11. Commitments and Contingent Liabilities

Asbestos-Related LiabilitySee Note 3

Environmental RemediationGrace 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.

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 proceedings.

41

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Table of Contents

Notes to Consolidated Financial Statements (Continued)

11. Commitments and Contingent Liabilities (Continued)

At
June 30, 2009, Grace's estimated liability for environmental investigative and remediation costs totaled $149.2 million, as compared with $152.2 million at
December 31, 2008. The amount is based on funding and/or remediation agreements in place, including the Multi-Site Agreement described below, and Grace's best estimate of its cost
for sites not subject to a formal remediation plan. Grace's estimated environmental liabilities are included in "liabilities subject to compromise" in the accompanying Consolidated Balance Sheets.

Net
cash expenditures charged against previously established reserves for the six months ended June 30, 2009 and 2008 were $3.7 million and $102.8 million,
respectively.

Multi-Site Settlement

The U.S. Environmental Protection Agency ("EPA") has filed proofs of claim with respect to potential contamination at
38 sites, including vermiculite related claims and non-vermiculite related claims. In June 2008, Grace entered into a multi-site settlement agreement (the
"Multi-Site Agreement") with the U.S. Government, on behalf of EPA and other federal agencies. Under the Multi-Site Agreement, Grace has agreed to pay approximately
$44 million to the U.S. Government and other
parties in settlement of 35 of these outstanding claims and the U.S. Government has agreed not to take action against Grace under the Comprehensive Environmental Response, Compensation, and
Liability Act with respect to these sites. Grace intends to separately fund or carry out remediation at two of the remaining sites. With respect to the third remaining site, Libby, Montana, EPA's
claims, excluding claims in respect of the Grace-owned Libby vermiculite mine, are resolved by the EPA Cost Recovery Agreement described below. Grace is working in cooperation with
EPA to investigate the Libby vermiculite mine.

Vermiculite Related Matters

During 2008, Grace paid $250 million plus accrued interest of approximately $2 million pursuant to an agreement (the
"EPA Cost Recovery Agreement"), between Grace and the U.S. Department of Justice to settle the EPA's cost recovery claims for all past and future remediation costs with respect to
Grace's former Libby operations, except for those relating to the Grace-owned Libby vermiculite mine.

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, at June 30, 2009 and December 31, 2008 was $47.5 million and $48.4 million, respectively, excluding interest. The estimated obligation as of each date
does not include the cost to remediate the Grace-owned Libby vermiculite mine, which is not currently estimable.

Montana Criminal ProceedingIn February, 2005, the United States Department of Justice announced the unsealing of a grand jury
indictment against
Grace and seven former senior level employees (one of whom died before the trial commenced)(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
accused 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 categorically denied any criminal wrongdoing.

42

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Table of Contents

Notes to Consolidated Financial Statements (Continued)

11. Commitments and Contingent Liabilities (Continued)

The
trial began in February 2009 and on May 8, 2009, a Montana jury unanimously acquitted Grace and three former employees on all counts. Charges against three other former
employees were dismissed.

The
Bankruptcy Court previously granted Grace's request to advance legal and defense costs to the employees involved in this case. For the six months ended June 30, 2009
and 2008, total expense for Grace and the employees was $34.7 million and $8.5 million, respectively, which amounts are included in selling, general and administrative expenses in the
accompanying Consolidated Statements of Operations.

New Jersey ClaimsIn 2005, the New Jersey Department of Environmental Protection ("NJDEP") filed a lawsuit against Grace and two former
employees,
which was removed at Grace's request to the U.S. District Court for the District of New Jersey(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 NJDEP 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 vermiculite expansion plant in Hamilton Township, New Jersey. In 2005, the Bankruptcy Court stayed
this lawsuit. In April 2008, the Bankruptcy Court issued a ruling stating that the lawsuit filed by the NJDEP was in violation of the automatic stay and enjoining further pursuit of all claims
in the lawsuit. In March 2009, the Delaware District Court upheld the Bankruptcy Court's ruling. In April 2009, the NJDEP appealed this ruling to the U.S. Court of Appeals for the
Third Circuit, which appeal remains pending. To the extent this lawsuit proceeds against the two former Grace employees, Grace may have an indemnification obligation.

In
April 2007, New Jersey filed a motion for leave to file a late proof of claim in the amount of $31 million with respect to substantially the same claims set forth in the
lawsuit described in the preceding paragraph. In August 2007, the Bankruptcy Court denied this motion and the Delaware District Court affirmed this ruling on appeal in March 2008. In April 2008, New
Jersey appealed this ruling to the Third Circuit, which appeal remains pending.

Non-Vermiculite Related Matters

At June 30, 2009 and December 31, 2008, Grace's estimated liability for remediation of sites not related to its former
vermiculite mining and processing activities was $101.7 million and $103.8 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 Agreement. As Grace receives new information and continues its claims evaluation process, its
estimated liability may change materially.

Purchase CommitmentsGrace 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.

43

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Table of Contents

Notes to Consolidated Financial Statements (Continued)

11. Commitments and Contingent Liabilities (Continued)

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



Financial AssurancesFinancial 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, 2009, Grace had gross financial assurances issued and outstanding of $246.5 million,
comprised of $102.2 million of surety bonds issued by various insurance companies, and $144.3 million of standby letters of credit and other financial assurances issued by various banks.
As discussed in Note 6, $63.7 million of these financial assurances have been issued under the DIP facility.

Accounting for ContingenciesAlthough 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. GAAP. 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, 2009.

44

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Table of Contents

Notes to Consolidated Financial Statements (Continued)



12. Restructuring Expenses

In 2009, Grace implemented cost reduction and restructuring programs to further improve productivity. Grace accrued $19.1 million and $5.9 million of restructuring expense
in the first and second quarters, respectively. The restructuring programs include world-wide involuntary restructuring programs and a U.S. voluntary early retirement restructuring
program. Grace expects to accrue additional restructuring expense of approximately $2.5 million in 2009 related to the involuntary programs as the final elements of these programs are
completed. Grace expects substantially all costs of these programs to be paid by December 31, 2009.

The
restructuring programs initiated in 2009 are expected to reduce total employment by over 400 employees by year-end 2009.

Three Months
Ended
June 30,

Six Months
Ended
June 30,(In millions)

2009

2008

2009

2008Restructuring Expenses:Severance and other employee related costs

$
5.9

$
5.2

$
24.8

$
5.2Asset Write-offs








0.2


Total Restructuring Expenses

$
5.9

$
5.2

$
25.0

$
5.2




Three Months
Ended
June 30,

Six Months
Ended
June 30,(In millions)

2009

2008

2009

2008Restructuring Liability:Beginning Balance

$
16.3

$


$
0.7

$
Accruals


5.9


5.2


25.0


5.2Payments


(3.9
)

(1.4
)

(7.4
)

(1.4
)Total Restructuring Liability

$
18.3

$
3.8

$
18.3

$
3.8




Three Months
Ended
June 30,

Six Months
Ended
June 30,2009

2008

2009

2008Employee Reduction by Operating Segment:Grace Davison


33





183


Grace Construction Products


104


121


214


121Corporate





8


40


8Total


137


129


437


129


45

---



Table of Contents

Notes to Consolidated Financial Statements (Continued)



13. Other (Income) Expense, net

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

Three Months
Ended
June 30,

Six Months
Ended
June 30,(In millions)

2009

2008

2009

2008Net income from life insurance policies

$
(0.1
)
$
(0.7
)
$
(1.2
)
$
(1.8
)Interest income


(0.6
)

(1.2
)

(0.8
)

(2.3
)Net (gain) loss on sales of investments and disposals of assets


(1.6
)

1.0


(3.0
)

(0.6
)Currency translationintercompany loans


(18.1
)

0.8


(1.8
)

(37.8
)Value of foreign currency forward contractsintercompany loans


17.7


(2.8
)

9.3


23.7Other currency transaction effects


2.3


0.1


4.4


0.9Interest income on joint venture cash balances





(0.1
)




(0.2
)Other miscellaneous (income) expense


0.5


(4.3
)

(5.0
)

(6.4
)Total other (income) expense, net


0.1

$
(7.2
)

1.9

$
(24.5
)




14. 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 and six months ended
June 30, 2009 and 2008:

Three Months Ended June 30, 2009
(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

$
(0.7
)
$
0.2

$
(0.5
)Amortization of net deferred actuarial loss included in net periodic benefit cost


8.9


(3.1
)

5.8Other changes in funded status


(63.8
)

21.5


(42.3
)Benefit plans, net


(55.6
)

18.6


(37.0
)Foreign currency translation adjustments


31.0





31.0Gain (loss) from hedging activities


4.9


(1.6
)

3.3Unrealized holding gain on available-for-sale securities


0.8





0.8Other comprehensive income (loss) attributable to W. R. Grace & Co. shareholders

$
(18.9
)
$
17.0

$
(1.9
)


46

---



Table of Contents

Notes to Consolidated Financial Statements (Continued)

14. Comprehensive Income (Loss) (Continued)



Six Months Ended June 30, 2009
(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

$
(1.4
)
$
0.5

$
(0.9
)Amortization of net deferred actuarial loss included in net periodic benefit cost


18.4


(6.4
)

12.0Other changes in funded status


(6.1
)

1.1


(5.0
)Benefit plans, net


10.9


(4.8
)

6.1Foreign currency translation adjustments


19.2





19.2Gain (loss) from hedging activities


3.6


(1.1
)

2.5Unrealized holding gain on available-for-sale securities


0.8





0.8Other comprehensive income (loss) attributable to W. R. Grace & Co. shareholders

$
34.5

$
(5.9
)
$
28.6




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) attributable to W. R. Grace & Co. shareholders

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


47

---



Table of Contents

Notes to Consolidated Financial Statements (Continued)

14. 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) attributable to W. R. Grace & Co. shareholders

$
3.6

$
(1.3
)
$
2.3


The
following table presents the components of Grace's accumulated other comprehensive income (loss) at June 30, 2009 and December 31, 2008:

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

June 30,
2009

December 31,
2008Defined benefit pension and other postretirement plans:Net prior service credit (net of tax)

$
(0.1
)
$
0.8Net deferred actuarial loss (net of tax)


(538.5
)

(545.5
)Benefit plans, net


(538.6
)

(544.7
)Foreign currency translation


10.7


(8.5
)Hedging activities, net of tax


(4.6
)

(7.1
)Unrealized holding gain on available-for-sale securities


0.8


Accumulated other comprehensive income (loss)

$
(531.7
)
$
(560.3
)


Accumulated
other comprehensive income (loss) related to the defined benefit pension and other postretirement plans at June 30, 2009 and December 31, 2008, respectively,
represents the accumulation of net actuarial losses of $538.5 million and $545.5 million as well as net prior service credits of $(0.1) million and $0.8 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, 2009 and 2008, the pre-tax benefit recognized related to prior service
credits was $1.4 million and $3.1 million, respectively, and the pre-tax expense recognized for amortization of accumulated actuarial losses was $18.4 million and
$13.4 million, respectively. In addition, $6.1 million and $10.3 million of pre-tax loss was recognized for changes in funded status during the six months ended
June 30, 2009 and 2008, 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 7 for a discussion of hedging activities.

48

---



Table of Contents

Notes to Consolidated Financial Statements (Continued)



15. 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)

2009

2008

2009

2008NumeratorsNet income (loss) attributable to W. R Grace & Co.

$
19.3

$
32.1

$
(19.6
)
$
49.8DenominatorsWeighted average common sharesbasic calculation


72.2


72.1


72.2


71.9Dilutive effect of employee stock options


0.7


0.8





0.7Weighted average common sharesdiluted calculation


72.9


72.9


72.2


72.6Basic earnings per share

$
0.27

$
0.45

$
(0.27
)
$
0.69Diluted earnings per share

$
0.26

$
0.44

$
(0.27
)
$
0.69


Stock
options that could potentially dilute basic earnings per share (that were excluded from the computation of diluted earnings per share because their exercise prices were greater
than the average market price of the common shares) were approximately 3.5 and 3.1 million for the three months and six months ended June 30, 2009. There were no
anti-dilutive options outstanding for the three months and six months ended June 30, 2008.

16. Operating Segment Information

Grace is a global producer of specialty chemicals and materials. It generates revenues from two operating segments: Grace Davison, which includes specialty catalysts and specialty
materials used in a wide range of refining, consumer industrial, packaging and life sciences applications; and Grace Construction Products, which includes specialty construction chemicals and building
materials used in commercial, infrastructure, and residential construction. Intersegment sales, eliminated in consolidation, are not material. The table below presents information related to Grace's
operating segments for the three months and six months ended June 30, 2009 and 2008, respectively. Only those corporate expenses directly related to the operating segments are allocated for
reporting purposes. All remaining corporate items are reported separately and labeled as such.

49

---



Table of Contents

Notes to Consolidated Financial Statements (Continued)

16. Operating Segment Information (Continued)

Operating Segment Data

Three Months
Ended
June 30,

Six Months
Ended
June 30,(In millions)

2009

2008

2009

2008Net SalesGrace Davison

$
477.9

$
584.8

$
955.7

$
1,081.9Grace Construction Products


233.1


315.2


437.4


577.3Total

$
711.0

$
900.0

$
1,393.1

$
1,659.2Pre-tax Operating Income (loss)Core OperationsGrace Davison

$
80.8

$
84.7

$
109.1

$
159.0Grace Construction Products


30.6


47.5


38.2


73.8Corporate costs


(21.0
)

(19.3
)

(42.2
)

(40.1
)Defined benefit pension expense


(16.0
)

(11.1
)

(34.1
)

(22.7
)Total

$
74.4

$
101.8

$
71.0

$
170.0


Restructuring
charges are included in the above operating segment results as follows: For the three months ended June 30, 2009, Grace Davison $1.0 million, Grace
Construction Products $3.4 million and Corporate $1.5 million. For the six months ended June 30, 2009, Grace Davison $12.7 million, Grace Construction Products
$8.1 million, and Corporate $3.2 million. An additional $1.0 million is reflected in pre-tax income (loss) from noncore activities. For the three months and six months
ended June 30, 2008, Grace Construction Product $4.7 million, and Corporate $0.5 million.

Corporate
costs include expenses of corporate headquarters functions incurred in support of core operations, such as corporate finance, legal services, human resources management,
communications and regulatory affairs and information technology.

In
the first quarter of 2009, Grace changed the manner in which it reviews the performance of its operating segments by excluding defined benefit pension expense from the calculation of
operating segment pre-tax operating income. Grace believes that the revised pre-tax operating income measures provide a better indicator of our operating segment performance as
defined benefit pension expense is not managed at a business segment level. Grace has retrospectively restated all prior period segment financial information to be consistent with the 2009
presentation.

The
following table presents information related to the geographic areas in which Grace operated for the three months and six months ended June 30, 2009 and 2008. Sales are
attributed to geographic areas based on customer location.

50

---



Table of Contents

Notes to Consolidated Financial Statements (Continued)

16. Operating Segment Information (Continued)

Geographic Area Data

Three Months
Ended
June 30,

Six Months
Ended
June 30,(In millions)

2009

2008

2009

2008Net SalesUnited States

$
221.7

$
273.1

$
461.4

$
523.4Canada and Puerto Rico


19.9


27.6


39.2


50.9Total North America

$
241.6

$
300.7

$
500.6

$
574.3Europe Africa


274.0


367.1


521.0


691.1Asia Pacific


132.1


175.1


253.3


287.3Latin America


63.3


57.1


118.2


106.5Total

$
711.0

$
900.0

$
1,393.1

$
1,659.2


The
pre-tax operating income for Grace's operating segments for the three months and six months ended June 30, 2009 and 2008 is reconciled below to income before
income taxes and noncontrolling interest presented in the accompanying Consolidated Statements of Operations.

Reconciliation of Operating Segment Data to Financial Statements

Three Months
Ended
June 30,

Six Months
Ended
June 30,(In millions)

2009

2008

2009

2008Pre-tax operating income (loss)core operations

$
74.4

$
101.8

$
71.0

$
170.0Noncontrolling interests in consolidated entities


3.4


4.4


3.5


7.3Chapter 11 expenses, net of interest income


(8.0
)

(18.0
)

(18.0
)

(36.4
)Net gain (loss) on sales of investments and disposals of assets


1.6


(1.0
)

3.0


0.6Provision for environmental remediation








(0.7
)

(5.9
)Translation effectsintercompany loans


18.1


(0.8
)

1.8


37.8Value of foreign currency forward contractsintercompany loans.


(17.7
)

2.8


(9.3
)

(23.7
)Legal defense costs


(10.1
)

(5.6
)

(34.7
)

(8.3
)Asbestos administration


(2.5
)

(1.9
)

(4.4
)

(3.6
)Net pension costsdivested businesses


(4.5
)

(2.9
)

(8.3
)

(5.6
)Interest expense and related financing costs


(9.6
)

(14.5
)

(18.8
)

(29.6
)Other, net


(5.6
)

(2.5
)

(7.8
)

(2.3
)Income (loss) before income taxes

$
39.5

$
61.8

$
(22.7
)
$
100.3




17. Noncontrolling Interests in Consolidated Entities

Grace conducts certain business activities in various countries through joint ventures with unaffiliated third parties, the financial results of which are included in Grace's
consolidated financial

51

---



Table of Contents

Notes to Consolidated Financial Statements (Continued)

17. Noncontrolling Interests in Consolidated Entities (Continued)

statements.
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)

2009

2008

2009

2008Sales

$
80.4

$
118.6

$
203.5

$
207.6Income before taxes


8.1


10.1


8.5


17.4Net income


8.2


9.8


8.4


15.6Noncontrolling interests in net income


3.4


4.4


3.5


7.3Dividends paid to noncontrolling interests

$


$
(13.3
)
$
(13.7
)
$
(13.3
)




(In millions)

June 30,
2009

December 31,
2008Cash

$
67.9

$
78.1Other current assets


106.2


153.3Total assets


195.0


252.8Total liabilities


51.1


84.1Shareholders' equity


144.0


168.7Noncontrolling interests in shareholders' equity

$
63.1

$
73.1


Noncontrolling
interests primarily pertains to Advanced Refining Technologies LLC ("ART"), a joint venture between Grace and Chevron Products Company in which Grace holds a 55%
economic interest.

52

---





Table of Contents



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

Results of Operations

Financial Summary

Following is a summary of our financial performance for the three and six month periods ended June 30, 2009 compared with the
corresponding prior year periods.



53

---



Table of Contents



Summary Description of Core Business

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

Grace Davisonincludes specialty catalysts and materials used in a wide range of industrial applications that we manage through the
following product groups:



Key
external factors for 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 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 construction chemicals and specialty building materials used in commercial, infrastructure
and residential construction that we manage by geographic region as follows:



Grace
Construction Products sales are heavily influenced by global non-residential construction activity and U.S. residential construction activity.

Global scope

We operate our business on a global scale with approximately 68% of our 2009 sales outside the United States. We conduct business in
over 40 countries and in more than 30 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.

Summary of Financial Information and Metrics

Set forth below are our key operating statistics with dollar and percentage changes for the three months and six months ended
June 30, 2009 and 2008. Please refer to this Analysis of Continuing Operations when reading Management's Discussion and Analysis of Financial Condition and Results of Operations.

54

---



Table of Contents

In
the Analysis of Continuing Operations, 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 review our results of operations by operating segment and separate "core operations" from
"noncore activities." Core operations include 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 include 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 Loss from Noncore Activities" for more information about noncore activities.

We
use Core EBIT and operating free cash flow as the performance measures in all significant business decisions and in determining certain incentive compensation. Core EBIT, Core EBIT as
a percentage of sales, Core EBIT before depreciation and amortization ("Core EBITDA"), pre-tax loss from noncore activities, net income excluding noncore activities and Chapter 11
expenses, and operating free cash flow do not purport to represent income or cash flow measures as defined under United States Generally Accepted Accounting Principles ("U.S. GAAP"),
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 and cash flows 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. We have also provided reconciliations of these non U.S. GAAP measures to their closest U.S. GAAP
measure.

Core
EBIT 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 costs, which have been material components of our net income. Core EBITDA 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 as measured under U.S. GAAP to present a complete analysis of our results of operations. You should evaluate Core EBIT and Core EBITDA in
conjunction with net income for a more complete analysis of our financial results.

Operating
free cash flow also has material limitations as an operating performance measure because it excludes cash paid for income taxes, cash payments under defined benefit pension
arrangements and post retirement benefit plans, and cash flows from our noncore activities, including, among other things, provisions for asbestos-related litigation and environmental remediation and
legal defense costs, and costs related to our Chapter 11 proceedings, which have been material components of our cash flow. We compensate for the limitations of this measure by using it
together with net cash flow provided by (used for) operating activities as defined under U.S. GAAP to present a complete analysis of our cash flows. You should evaluate operating free cash flow
in conjunction with net cash flow provided by (used for) operating activities for a more complete analysis of our cash flow results.

55

---



Table of Contents

Three Months Ended June 30,

Six Months Ended June 30,Analysis of Continuing Operations
(In millions)

2009

2008

$
Change
Fav
(Unfav)

%
Change
Fav
(Unfav)

2009

2008

$
Change
Fav
(Unfav)

%
Change
Fav
(Unfav)Net sales:Grace Davison

$
477.9

$
584.8

$
(106.9
)

(18.3
)%
$
955.7

$
1,081.9

$
(126.2
)

(11.7
)%Refining Technologies


246.9


285.8


(38.9
)

(13.6
)%

523.6


522.7


0.9


0.2
%Materials Technologies


146.9


194.6


(47.7
)

(24.5
)%

280.9


364.9


(84.0
)

(23.0
)%Specialty Technologies


84.1


104.4


(20.3
)

(19.4
)%

151.2


194.3


(43.1
)

(22.2
)%Grace Construction Products


233.1


315.2


(82.1
)

(26.0
)%

437.4


577.3


(139.9
)

(24.2
)%GCP Americas


119.9


163.4


(43.5
)

(26.6
)%

231.7


295.9


(64.2
)

(21.7
)%GCP Europe


80.1


113.4


(33.3
)

(29.4
)%

143.0


211.0


(68.0
)

(32.2
)%GCP Asia


33.1


38.4


(5.3
)

(13.8
)%

62.7


70.4


(7.7
)

(10.9
)%Total Grace net sales

$
711.0

$
900.0

$
(189.0
)

(21.0
)%
$
1,393.1

$
1,659.2

$
(266.1
)

(16.0
)%Net Sales by Region:North America

$
241.6

$
300.7

$
(59.1
)

(19.7
)%
$
500.6

$
574.3

$
(73.7
)

(12.8
)%Europe Africa


274.0


367.1


(93.1
)

(25.4
)%

521.0


691.1


(170.1
)

(24.6
)%Asia Pacific


132.1


175.1


(43.0
)

(24.6
)%

253.3


287.3


(34.0
)

(11.8
)%Latin America


63.3


57.1


6.2


10.9
%

118.2


106.5


11.7


11.0
%Total

$
711.0

$
900.0

$
(189.0
)

(21.0
)%
$
1,393.1

$
1,659.2

$
(266.1
)

(16.0
)%Pre-tax operating income:Grace Davison(a)

$
81.8

$
84.7

$
(2.9
)

(3.4
)%
$
121.8

$
159.0

$
(37.2
)

(23.4
)%Grace Construction Products(b)


34.0


52.2


(18.2
)

(34.9
)%

46.3


78.5


(32.2
)

(41.0
)%Corporate costs


(19.5
)

(18.8
)

(0.7
)

(3.7
)%

(39.0
)

(39.6
)

0.6


1.5
%Restructuring expenses(f)


(5.9
)

(5.2
)

(0.7
)

(13.5
)%

(24.0
)

(5.2
)

(18.8
)

NMDefined benefit pension expense(c)


(16.0
)

(11.1
)

(4.9
)

(44.1
)%

(34.1
)

(22.7
)

(11.4
)

(50.2
)%Core EBIT


74.4


101.8


(27.4
)

(26.9
)%

71.0


170.0


(99.0
)

(58.2
)%Pre-tax income (loss) from noncore activities(f)


(21.3
)

(13.1
)

(8.2
)

(62.6
)%

(61.2
)

(13.3
)

(47.9
)

NMInterest expense, net


(9.0
)

(13.3
)

4.3


32.3
%

(18.0
)

(27.3
)

9.3


34.1
%Income (loss) before Chapter 11 expenses and income taxes


44.1


75.4


(31.3
)

(41.5
)%

(8.2
)

129.4


(137.6
)

(106.3
)%Chapter 11 expenses, net of interest income


(8.0
)

(18.0
)

10.0


55.6
%

(18.0
)

(36.4
)

18.4


50.5
%Benefit from (provision for) income taxes


(16.8
)

(25.3
)

8.5


33.6
%

6.6


(43.2
)

49.8


115.3
%Net income (loss) attributable to W. R. Grace & Co. shareholders

$
19.3

$
32.1

$
(12.8
)

(39.9
)%
$
(19.6
)
$
49.8

$
(69.4
)

(139.4
)%


56

---



Table of Contents

Three Months Ended June 30,

Six Months Ended June 30,Analysis of Continuing Operations
(In millions)

2009

2008

$ Change
Fav
(Unfav)

% Change
Fav
(Unfav)

2009

2008

$ Change
Fav
(Unfav)

% Change
Fav
(Unfav)Reconciliation of Net Income (Loss) attributable to W. R. Grace & Co. shareholders to Net Income Excluding Noncore Activities and
Chapter 11 Expenses, net:Net income (loss) attributable to W. R. Grace & Co. shareholders

$
19.3

$
32.1

$
(12.8
)

(39.9
)%
$
(19.6
)
$
49.8

$
(69.4
)

(139.4
)%Pre-tax loss from noncore activities


21.3


13.1


8.2


62.6
%

61.2


13.3


47.9


NMChapter 11 expenses, net


8.0


18.0


(10.0
)

(55.6
)%

18.0


36.4


(18.4
)

(50.5
)Tax effects of noncore and Chapter 11 items


(6.9
)

(5.7
)

(1.2
)

(21.1
)%

(25.8
)

(6.7
)

(19.1
)

NMNet income excluding noncore activities and Chapter 11 expenses, net

$
41.7

$
57.5

$
(15.8
)

(27.5
)%
$
33.8

$
92.8

$
(59.0
)

(63.6
)%Reconciliation of Core EBIT to income (loss) before income taxes:Core EBIT

$
74.4

$
101.8

$
(27.4
)

(26.9
)%
$
71.0

$
170.0

$
(99.0
)

(58.2
)%Net income (loss) attributable to noncontrolling interests


3.4


4.4


(1.0
)

(22.7
)%

3.5


7.3


(3.8
)

(52.1
)%Interest expense, net


(9.0
)

(13.3
)

4.3


32.3
%

(18.0
)

(27.3
)

9.3


34.1
%Chapter 11 expenses


(8.0
)

(18.0
)

10.0


55.6
%

(18.0
)

(36.4
)

18.4


50.5
%Pre-tax income (loss) from noncore activities(f)


(21.3
)

(13.1
)

(8.2
)

(62.6
)%

(61.2
)

(13.3
)

(47.9
)

NMIncome (loss) before income taxes

$
39.5

$
61.8

$
(22.3
)

(36.1
)%
$
(22.7
)
$
100.3

$
(123.0
)

(122.6
)%Reconciliation of operating free cash flow to net cash provided by (used for) operating activities:Operating free cash flow













$
147.0

$
65.9

$
81.1Chapter 11 expenses paid














(25.1
)

(36.7
)

11.6Capital expenditures














36.5


58.7


(22.2
)Dividends paid to noncontrolling interests in consolidated entities














13.7


13.3


0.4Income taxes paid, net of refunds














0.4


(32.4
)

32.8Payments under defined benefit pension arrangements and postretirement benefit plans














(25.0
)

(45.8
)

20.8Cash paid to resolve contingencies subject to Chapter 11

















(101.6
)

101.6Cash paid for environmental and divestment reserves














(3.7
)

(1.3
)

(2.4
)Noncore and other activities














(25.2
)

(6.0
)

(19.2
)Net cash provided by (used for) operating activities













$
118.6

$
(85.9
)
$
204.5


57

---



Table of Contents



Three Months Ended June 30,

Six Months Ended June 30,Analysis of Continuing Operations
(In millions)

2009

2008

$ Change
Fav
(Unfav)

% Change
Fav
(Unfav)

2009

2008

$ Change
Fav
(Unfav)

% Change
Fav
(Unfav)Key Financial Measures:Core EBIT as a percentage of sales:Grace Davison


17.1
%

14.5
%
NM


2.6
pts

12.7
%

14.7
%

NM


(2.0
) ptsGrace Construction Products


14.6
%

16.6
%
NM


(2.0
) pts

10.6
%

13.6
%

NM


(3.0
) ptsTotal Core Operations


10.5
%

11.3
%
NM


(0.8
) pts

5.1
%

10.2
%

NM


(5.1
) ptsTotal Core Operations adjusted for profit sharing of joint ventures(d)


10.9
%

11.8
%
NM


(0.9
) pts

5.3
%

10.7
%

NM


(5.4
) ptsCore EBITDA

$
103.2

$
132.5

$(29.3)


(22.1
)%
$
127.3

$
230.9

$
(103.6
)

(44.9
)%As a percentage of sales


14.5
%

14.7
%
NM


(0.2
) pts

9.1
%

13.9
%

NM


(4.8
) ptsDepreciation and amortization

$
28.8

$
30.7

$1.9


6.2
%
$
56.3

$
60.9

$
4.6


7.6
%Gross profit percentage (sales less cost of goods sold as a percent of sales)(e):Grace Davison


32.3
%

28.2
%
NM


4.1
pts

27.3
%

29.4
%

NM


(2.1
) ptsGrace Construction Products


37.4
%

36.2
%
NM


1.2
pts

34.5
%

35.0
%

NM


(0.5
) ptsTotal Grace


33.8
%

30.6
%
NM


3.2
pts

29.4
%

31.0
%

NM


(1.6
) pts


---

NMNot Meaningful

58

---



Table of Contents

Grace Overview

Following is an overview of our financial performance for the three and six month periods ended June 30, 2009 as compared to the
corresponding prior year periods.

Net Sales

Grace Net SalesQuarter
($ in millions)

Grace Net SalesYTD
($ in millions)CHART

CHART


The
following table identifies the increase or decrease in sales attributable to changes in sales volume, product price and/or mix, metals volumes and prices, and the impact of foreign
currency translation for the three month period ended June 30, 2009 from the prior year period.

Three Months Ended June 30, 2009
as a Percentage Increase (Decrease) from
Three Months Ended June 30, 2008Net Sales Variance Analysis

Volume

Price/Mix

Currency
Translation

Metals

TotalGrace Davison


(9.8
)%

5.5
%

(7.7
)%

(6.3
)%

(18.3
)%Grace Construction Products


(21.5
)%

2.8
%

(7.3
)%

N/A


(26.0
)%Net sales


(13.9
)%

4.6
%

(7.6
)%

(4.1
)%

(21.0
)%By Region:North America


(22.7
)%

4.8
%

(0.7
)%

(1.1
)%

(19.7
)%Europe Africa


(13.3
)%

3.7
%

(13.2
)%

(2.6
)%

(25.4
)%Asia Pacific


(11.0
)%

5.0
%

(5.2
)%

(13.4
)%

(24.6
)%Latin America


19.6
%

8.1
%

(15.2
)%

(1.6
)%

10.9
%


Sales
for the three month period ended June 30, 2009 were unfavorably affected by the global economic slowdown, which resulted in reduced sales volumes, and by foreign currency
translation, partly offset by higher selling prices. Pricing actions were implemented primarily in the second half of 2008 to offset increased raw materials and energy costs and to reflect our upgrade
of product technologies.

Sales
volumes for the 2009 second quarter were up in all product lines except hydroprocessing catalysts, which are subject to uneven order patterns, from the 2009 first quarter.

59

---



Table of Contents

Six Months Ended June 30, 2009
as a Percentage Increase (Decrease) from
Six Months Ended June 30, 2008Net Sales Variance Analysis

Volume

Price/Mix

Currency
Translation

Metals

TotalGrace Davison


(7.7
)%

6.7
%

(6.7
)%

(4.0
)%

(11.7
)%Grace Construction Products


(20.5
)%

3.5
%

(7.2
)%

N/A


(24.2
)%Net sales


(12.2
)%

5.7
%

(6.9
)%

(2.6
)%

(16.0
)%By Region:North America


(18.0
)%

7.2
%

(0.8
)%

(1.2
)%

(12.8
)%Europe Africa


(14.7
)%

3.1
%

(11.6
)%

(1.4
)%

(24.6
)%Asia Pacific


(5.2
)%

6.8
%

(4.5
)%

(8.9
)%

(11.8
)%Latin America


16.2
%

11.1
%

(15.6
)%

(0.7
)%

11.0
%


Sales
for the six month period ended June 30, 2009 were unfavorably affected by the global economic slowdown, which resulted in reduced sales volumes, and by foreign currency
translation, partly offset by higher selling prices.

Pre-tax Income from Core Operations (Core EBIT)

Grace
Core EBITQuarter
($ in millions)

Grace
Core EBITYTD
($ in millions)CHART

CHART


Core
EBIT was $74.4 million for the three month period ended June 30, 2009 compared with $101.8 million for the prior year period, a 26.9% decrease. Core EBIT for
the three month period ended June 30, 2009 decreased compared to the prior year period due to the lower sales volumes
and unfavorable foreign currency translation, partly offset by the favorable impact of higher selling prices, lower raw material costs, and reduced operating expenses, resulting primarily from our
restructuring activities. Operating margin was 10.5% for the three month period ended June 30, 2009 compared to 11.3% for the prior year period.

Core
EBIT increased $77.8 million for the 2009 second quarter compared to the 2009 first quarter primarily due to higher sales volumes, lower raw material costs, and lower
operating expenses.

Core
EBIT for the six month period ended June 30, 2009 decreased from the prior year period due to lower sales volumes, unfavorable foreign currency translation, and higher
restructuring and pension expenses, partly offset by higher selling prices and reduced operating expenses. In addition, much of the inventory sold in the 2009 first quarter was manufactured in the
2008 fourth quarter, when raw material costs peaked and operating rates in our factories were lower, resulting in an

60

---



Table of Contents

unfavorable
effect on cost of goods sold of approximately $40 million in the first quarter. Operating margin was 5.1% for the six month period ended June 30, 2009 compared to 10.2% for
the prior year period.

We
implemented cost reduction and restructuring actions in our operating segments and corporate functions during the three and six month periods ended June 30, 2009, and recorded
pre-tax restructuring charges of $5.9 million and $24.0 million, respectively, related to these actions. In addition, we have contracted with IBM to manage a portion of our
information technology activities with the goals of improving the scalability of our IT resources and accelerating the implementation of innovations that improve business productivity. Transition
costs of $1.1 million related to this contract were recorded in selling, general and administrative expenses in the three month period ended June 30, 2009. We expect these actions,
together with cost reduction and restructuring actions completed in 2008 to produce over $50 million of annualized cost savings by 2010, of which we expect to realize approximately
$35 million in operating expenses and approximately $15 million in cost of goods sold. As a result of these and other actions, we expect to reduce our total workforce to approximately
5,900 employees by December 31, 2009. We expect to recognize an additional $3.8 million of expense in the 2009 third quarter, including $2.2 million of restructuring expenses and
$1.6 million of selling, general and administrative expenses, related to cost reduction and restructuring actions initiated in the 2009 second quarter.

Operating Free Cash Flow

We use operating free cash flow as an operating performance measure in evaluating our operating results. We use operating free cash
flow as a performance factor in
determining certain incentive compensation. We define operating free cash flow to be Core EBITDA plus pension expense of core operations plus or minus the change in net working capital and specified
other assets and liabilities of our core operations minus capital expenditures as set forth in the table below. Operating free cash flow excludes income taxes paid (net of refunds), payments under
defined benefit pension arrangements and post retirement benefit plans, cash paid for Chapter 11 expenses and contingencies, and cash paid for other noncore activities.

The
following table summarizes operating free cash flow for the six months ended June 30, 2009 and 2008.

Six Months Ended June 30,(In millions)

2009

2008

$ Change
Fav
(Unfav)Operating Free Cash Flow:Core EBITDA

$
127.3

$
230.9

$
(103.6
)Defined benefit pension expense of core operations


34.1


22.7


11.4Change in net working capital of core operations


54.1


(85.4
)

139.5Change in other assets and liabilities of core operations


(32.0
)

(43.6
)

11.6Capital expenditures


(36.5
)

(58.7
)

22.2Operating Free Cash Flow

$
147.0

$
65.9

$
81.1


Operating
free cash flow increased $81.1 million for the six month period ended June 30, 2009 as compared to the prior year period primarily due to an improvement in net
working capital of core operations offset by a decrease in pre-tax income from core operations before depreciation and amortization. We are focused on increasing operating free cash flow
to reduce our exit financing requirements.

61

---



Table of Contents

Operating Segment OverviewGrace Davison

Following is an overview of the financial performance of Grace Davison for the three and six month periods ended June 30, 2009
compared with the corresponding prior year periods.

Net Sales

Grace Davison
Net SalesQuarter
($ in millions)

Grace Davison
Net SalesYTD
($ in millions)CHART

CHART


Grace
Davison operating segment sales are reported in the following product groups:

Three Months Ended June 30

Six Months Ended June 30,(In millions)

2009

2008

$ Change
Fav
(Unfav)

% Change
Fav
Unfav)

2009

2008

$ Change
Fav
(Unfav)

% Change
Fav
(Unfav)Refining Technologies

$
246.9

$
285.8

$
(38.9
)

(13.6
)%
$
523.6

$
522.7

$
0.9


0.2
%Materials Technologies


146.9


194.6


(47.7
)

(24.5
)%

280.9


364.9


(84.0
)

(23.0
)%Specialty Technologies


84.1


104.4


(20.3
)

(19.4
)%

151.2


194.3


(43.1
)

(22.2
)%Total Grace Davison Revenue

$
477.9

$
584.8

$
(106.9
)

(18.3
)%
$
955.7

$
1,081.9

$
(126.2
)

(11.7
)%


Sales
of Grace Davison for the three and six month periods ended June 30, 2009 were unfavorably affected by the global economic slowdown which resulted in reduced sales volumes
and by foreign currency translation effects, partly offset by higher selling prices. As the global economy grew in 2007 and through most of 2008, costs for raw materials and energy used to produce our
products increased significantly, especially in the first two quarters of 2008. We raised prices, primarily in 2008, to offset these increased costs and to reflect our upgrade of product technologies.

Sales
volumes for the 2009 second quarter were up in FCC catalysts and the Materials Technologies and Specialty Technologies product groups as compared, in each case, to the 2009 first
quarter; however, the favorable effect of these volume increases was offset by a decrease in sales volume of hydroprocessing catalysts in the 2009 second quarter from the 2009 first quarter caused by
uneven order patterns.

Sales
of Grace Davison are reported by product group as follows:



62

---



Table of Contents





63

---





Table of Contents

Operating Income and Margin

Grace Davison
Operating Income and MarginQuarter
($ in millions)

Grace Davison
Operating Income and MarginYTD
($ in millions)CHART

CHART


Pre-tax
operating income (excluding restructuring costs) for the three month period ended June 30, 2009 decreased 3.4% compared to the prior year period. The favorable
impact of price increases implemented primarily in 2008, lower raw material costs and lower operating
expenses was offset by lower sales volume and unfavorable foreign currency translation. After adjusting for the negative effect of foreign currency translation, pre-tax operating income
for the three month period ended June 30, 2009 was up 7.2% from the prior year period. Operating margin for the three month period ended June 30, 2009 was 17.1%, up from
14.5% in the prior year period.

Pre-tax
operating income (excluding restructuring costs) for the six month period ended June 30, 2009 decreased 23.4% from the prior year period. The unfavorable
effects of sales of high-cost inventory produced in the fourth quarter of 2008, lower sales volume and unfavorable foreign currency translation more than offset the favorable effects of
price increases, lower raw material costs and lower operating expenses. After adjusting for the negative effect of foreign currency translation, pre-tax operating income (excluding
restructuring costs) for the six month period ended June 30, 2009 was down 14.6% from the prior year period. Operating margin was 12.7% for the six month period ended
June 30, 2009 compared with 14.7% for the prior year period.

Gross
profit percentage for the three month period ended June 30, 2009 was 32.3%, up from 28.2% for the prior year period. Gross profit percentage for the 2009 second
quarter increased by 9.9 points over the 2009 first quarter. Gross profit percentage for the six month period ended June 30, 2009 was 27.3%, down from 29.4% for the prior year
period. As demand for our products started to slow in late 2008, we implemented cost reduction and restructuring actions in our manufacturing plants to reduce fixed costs and increase operational
efficiency. We have continued and expanded these efforts through the first half of 2009 by reducing employment and curtailing spending on product lines that sell to the automotive, housing and
construction industries. In addition, over the past few quarters, we have reduced energy consumption and waste disposal through better recycling and recovery and decreased usage. Notwithstanding our
cost reduction efforts, we have continued research and development to rejuvenate existing products and improve performance for our customers. These actions were a major contributor to increased gross
profit margins in the quarter ended June 30, 2009 and have positioned us to operate on a lower cost basis while preserving growth opportunities.

64

---



Table of Contents

We capitalized high-cost inventory in the 2008 fourth quarter and sold that inventory in 2009. The high cost of inventory produced in the 2008 fourth
quarter was primarily caused by the increase in costs of certain raw materials and energy during 2008. In addition, due to the slowdown in the global economy, we reduced production rates at our
manufacturing operations which increased the per unit cost of our inventory. These factors contributed to the decrease in our margins in the 2009 first quarter and the six month period ended
June 30, 2009 as compared to the prior year periods. Though we experienced deflation in most of our raw material and energy costs for products produced and sold in the six month period
ended June 30, 2009 as compared to the prior year period, we experienced some inflation in certain specialty raw materials such as rare earth.

Operating Segment OverviewGrace Construction Products

Following is an overview of the financial performance of Grace Construction Products for the three and six month periods ended
June 30, 2009 compared with the corresponding prior year periods.

Net Sales

Grace Construction Products
Net SalesQuarter
($ in millions)

Grace Construction Products
Net SalesYTD
($ in millions)CHART

CHART


Grace
Construction Products sales are reported by geographic regions as follows:

Three Months Ended June 30

Six Months Ended June 30,(In millions)

2009

2008

$ Change
Fav
(Unfav)

% Change
Fav
(Unfav)

2009

2008

$ Change
Fav
(Unfav)

% Change
Fav
(Unfav)GCP Americas

$
119.9

$
163.4

$
(43.5
)

(26.6
)%
$
231.7

$
295.9

$
(64.2
)

(21.7
)%GCP Europe Africa*


80.1


113.4


(33.3
)

(29.4
)%

143.0


211.0


(68.0
)

(32.2
)%GCP Asia Pacific


33.1


38.4


(5.3
)

(13.8
)%

62.7


70.4


(7.7
)

(10.9
)%Total GCP Revenue

$
233.1

$
315.2

$
(82.1
)

(26.0
)%
$
437.4

$
577.3

$
(139.9
)

(24.2
)%


---

65

---



Table of Contents

The following table presents Grace Construction Products sales of similar products by end-use market.

Three Months Ended June 30

Six Months Ended June 30,(In millions)

2009

2008

$ Change
Fav
(Unfav)

% Change
Fav
(Unfav)

2009

2008

$ Change
Fav
(Unfav)

% Change
Fav
(Unfav)Specialty Construction Chemicals*

$
151.9

$
204.4

$
(52.5
)

(25.7
)%
$
279.0

$
373.3

$
(94.3
)

(25.3
)%Specialty Building Materials**


81.2


110.8


(29.6
)

(26.7
)%

158.4


204.0


(45.6
)

(22.4
)%Total GCP Revenue

$
233.1

$
315.2

$
(82.1
)

(26.0
)%
$
437.4

$
577.3

$
(139.9
)

(24.2
)%


---

Sales of Grace Construction Products for the three and six month periods ended June 30, 2009 continue to be unfavorably affected by
the global construction slowdown which resulted in reduced sales volumes in both product groups and most geographic regions, particularly Europe and North America, and by foreign currency
translation, partly offset by higher selling prices in all major geographic regions and product groups. Sales for the six month period ended June 30, 2009 were also adversely affected by
disruption in credit markets which impacted the financing of construction projects in most parts of the world. As the global economy grew in 2007 and through most of 2008, costs for raw materials used
to produce our products increased significantly, especially in the first two quarters of 2008. We raised prices to offset these rising costs. These price increases partially offset the effect of
declining volumes on sales for the three and six month periods ended June 30, 2009.

Although
sales volumes for the 2009 second quarter were up approximately 10% over the 2009 first quarter, this increase was less then the normal seasonal increase experienced in prior
years.

Sales
of Grace Construction Products are reported by geographic region as follows:







66

---



Table of Contents



In
order to improve economic conditions, governments in many countries have announced various types of fiscal stimulus programs, with a portion aimed at infrastructure spending. Our
sales were not materially affected by these programs in the three and six month periods ended June 30, 2009.

Operating Income and Margin

Grace Construction Products
Operating Income and MarginQuarter
($ in millions)

Grace Construction Products
Operating Income and MarginYTD
($ in millions)CHART

CHART


Pre-tax
operating income (excluding restructuring costs) for the three month period ended June 30, 2009 decreased 34.9% compared to the prior year period reflecting
continued
weakness in the global construction market and foreign currency translation that more than offset the impact of price increases and lower operating expenses. After adjusting for the negative effect of
foreign currency translation, pre-tax operating income (excluding restructuring costs) for the three month period ended June 30, 2009 was down 28.0% from the prior year period.
Operating margin for the three month period ended June 30, 2009 was 14.6%, down from 16.6% for the prior year period.

Pre-tax
operating income (excluding restructuring costs) for the six month period ended June 30, 2009 decreased 41.0% compared to the prior year period reflecting
continued weakness in

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the
global construction market and foreign currency translation that more than offset the impact of price increases and lower operating expenses. After adjusting for the negative effect of foreign
currency translation, pre-tax operating income (excluding restructuring costs) was down 33.3% for the six month period ended June 30, 2009 from the prior year period.
Operating margin for the six month period ended June 30, 2009 was 10.6%, down from 13.6% for the prior year period.

Gross
profit percentage for the three month period ended June 30, 2009 was 37.4%, up from 36.2% for the prior year period. Gross profit percentage for the 2009 second quarter
increased by 6.3 points over the 2009 first quarter. Gross profit percentage for the six month period ended June 30, 2009 was 34.5%, down from 35.0% for the prior year period. As the
global economy grew in 2007 and through most of 2008, costs for raw materials used to produce our products increased significantly, especially in the first half of 2008. We raised prices to offset
these rising costs. As demand for most of our raw materials declined due to the ongoing economic slowdown, we reduced our raw material costs in all three regions for the three and six month
periods ended June 30, 2008 from the prior year periods.

In
response to slowing demand for our products, in 2008 and 2009, we implemented cost reduction and restructuring actions in all geographic regions. We designed these actions to provide
sustainable improvement in our gross profit and operating margins. These actions include workforce reductions, curtailed operating schedules and geographic optimization of production. Notwithstanding
these actions, we have continued to invest in growth regions, such as Latin America, Middle East, India, and Asia Pacific, and research and development to support both product groups.

Corporate Overview

Corporate Operating ExpensesQuarter
($ in millions)

Corporate Operating ExpensesYTD
($ in millions)CHART

CHART


Corporate
costs include corporate functional costs (such as finance, legal services, human resources, communications and information technology), and other corporate costs such as
insurance premiums and incentive compensation. Corporate functional costs (which exclude restructuring expenses) decreased for the three month period ended June 30, 2009 from the prior year
period, due primarily to reduced employment costs resulting from the cost reduction and restructuring programs implemented in 2008 and 2009. Other corporate costs which include $1.1 million of
information technology transition costs increased for the three month period ended June 30, 2009.

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Pension Expense

The following table presents the components of defined benefit pension expense for our 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)

2009

2008

2009

2008Annual pension benefits earned

$
5.5

$
6.1

$
11.5

$
12.5Interest on opening liabilityadvance-funded plans


16.9


18.0


34.4


36.0Expected return on plan assets


(14.4
)

(20.6
)

(29.1
)

(41.1
)Net financing cost (benefit) of advance-funded plans


2.5


(2.6
)

5.3


(5.1
)Interest on opening liabilitypay-as-you-go plans


3.5


3.7


7.0


7.2Net pension financing cost


6.0


1.1


12.3


2.1Amortization of:Plan changes related to prior service


0.2


0.6


0.6


1.2Accumulated differences between actual and assumed performance(1)


8.8


6.2


18.0


12.5Net pension catch-up expense


9.0


6.8


18.6


13.7Total Defined Benefit Pension Expense


20.5


14.0


42.4


28.3Less: noncore pension expense


(4.5
)

(2.9
)

(8.3
)

(5.6
)Total Core Pension Expense

$
16.0

$
11.1

$
34.1

$
22.7


---

Pension
costs include costs under domestic and foreign defined benefit pension plans that provide benefits to Grace Davison, Grace Construction Products, and corporate employees
(excludes estimated pension expense related to employees of divested businesses, which are reported as part of pre-tax loss from noncore activitiessee below).

Pension
expense increased significantly for the three and six month periods ended June 30, 2009 from the prior year periods primarily due to the significant decline in pension
asset values in 2008.

Pre-tax Loss from Noncore Activities

Pre-tax loss from noncore activities reflects financial matters unrelated to our core operations. We expect this category
of costs and income to be volatile as we address potentially material items through our Chapter 11 and other legal proceedings and the financial implications of our legal contingencies become
apparent. Some noncore activities are shown as separate items on the Consolidated Statements of Operations. Those not separately listed are primarily included in selling, general and administrative
expenses and in other (income) expense. The table below shows the

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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)

2009

2008

2009

2008Provision for environmental remediationvermiculite

$


$


$


$
(5.0
)Provision for environmental remediationother sites








(0.7
)

(0.9
)Total provision for environmental remediation








(0.7
)

(5.9
)COLI income, net


0.1


0.7


1.2


1.8Translation effectsintercompany loans


18.1


(0.8
)

1.8


37.8Value of foreign currency forward contractsintercompany loans


(17.7
)

2.8


(9.3
)

(23.7
)Other


(3.2
)

(1.3
)

(2.7
)

(0.5
)Total other income (expense), net


(2.7
)

1.4


(9.0
)

15.4Legal defense costs


(10.1
)

(5.6
)

(34.7
)

(8.3
)D&O insurance costportion related to Chapter 11


(0.9
)

(1.1
)

(1.7
)

(2.1
)Asbestos administration


(2.5
)

(1.9
)

(4.4
)

(3.6
)Postretirement benefit (cost) incomedivested businesses


(0.4
)

0.2


(0.8
)

0.2Other


(0.2
)

(3.2
)

(1.6
)

(3.4
)Total selling, general and administrative expenses


(14.1
)

(11.6
)

(43.2
)

(17.2
)Net pension costsdivested businesses


(4.5
)

(2.9
)

(8.3
)

(5.6
)Total defined benefit pension expense


(4.5
)

(2.9
)

(8.3
)

(5.6
)Total pre-tax loss from noncore activities

$
(21.3
)
$
(13.1
)
$
(61.2
)
$
(13.3
)


The
increase in the pre-tax loss from noncore activities for the three and six month periods ended June 30, 2009 from the prior year periods is primarily due to higher
legal spending and a net difference between the change in value of intercompany loans and the change in value of associated hedge contracts, as discussed below.

In
November 2007, we purchased foreign currency forward contracts to mitigate the effect of foreign currency risk with respect to intercompany loans between our principal U.S. subsidiary
and a German subsidiary. The change in value of the loans and the change in fair value of the hedge contracts resulted in a net loss of $7.8 million for the six month period ended
June 30, 2009 compared with a net gain of $9.8 million for the prior year period. The change in value of the intercompany loans and the hedge contracts is recorded as a component of
other (income) expense in the Consolidated Statements of Operations. These changes do not affect cash flow until the intercompany loans are repaid and the hedge contracts are settled.

Chapter 11 Expenses

Although we are unable to precisely measure the impact of our 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 representatives 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 these committees and representatives and their respective financial advisors. These costs fluctuate with the activity in our Chapter 11
proceedings.

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An
analysis of Chapter 11 costs follows:

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

2009

2008Costs related to:Grace as debtor-in-possession

$
6.2

$
22.7General Unsecured Committee


1.7


1.7Asbestos Property Damage Committee


0.5


0.8Asbestos Personal Injury Committee


5.1


5.8Future Asbestos Claims Representatives


4.1


5.8Equity Committee


0.5


1.2Total expenses


18.1


38.0Interest income on filing entity cash/investment balances


(0.1
)

(1.6
)Chapter 11 expenses, net

$
18.0

$
36.4


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

We
present the net costs of our reorganization under Chapter 11 of the U.S. Bankruptcy Code as "Chapter 11 expenses, net of interest income," a separate caption in our
Consolidated Statements of
Operations. We do not include Chapter 11 expenses in the measures of income from core operations or loss from noncore operations.

Interest Expense

Interest expense for the three and six month periods ended June 30, 2009 decreased from the prior year periods due primarily to
reductions in the prime rate and reduced interest accruals for certain pre-petition obligations, partially offset by the effect of compound interest on certain liabilities subject to
compromise over the course of the Chapter 11 proceeding.

The
average effective interest rates on pre-petition obligations for the six month periods ended June 30, 2009 and 2008 were 3.5% and 4.9%, respectively. Such interest
will not be paid until our proposed joint plan of reorganization or another plan of reorganization is confirmed and becomes effective.

Income Taxes

The income tax provision (benefit) at the federal corporate rate of 35% for the six month period ended June 30, 2009 and 2008
would have been $(7.9) million and $35.1 million, respectively. The primary differences in each period between these amounts and the recorded provision (benefit) for income taxes, $(6.6)
million and $43.2 million, respectively, are due to discrete adjustments related to provisions for tax contingencies, the non-deductibility of certain Chapter 11 expenses and
tax rate differences in foreign jurisdictions

Financial Condition, Liquidity, and Capital Resources

Following is an analysis of our financial condition, liquidity and capital resources at June 30, 2009. For additional
information regarding our Chapter 11 cases, see Note 2 to the Consolidated Financial Statements. For additional information regarding our asbestos-related litigation, see Note 3

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to
the Consolidated Financial Statements. For additional information regarding environmental matters, see Note 11 to the Consolidated Financial Statements.

Funding Emergence from Chapter 11

On September 19, 2008, we filed a joint plan of reorganization with the bankruptcy court and on December 18, 2008,
February 3, 2009, and February 27, 2009, we amended this joint plan of reorganization. We refer herein to the amended joint plan of reorganization as amended on February 27, 2009
as the Joint Plan. The Joint Plan and recently received objections thereto are described in Notes 1 and 2 to the Consolidated Financial Statements. The Joint Plan includes material conditions
to its confirmation and effectiveness. One of these conditions is that we obtain exit financing in an amount and on terms satisfactory to us. We are seeking $950 million in new financing to
fund the Joint Plan and we are in advanced discussions with potential lenders regarding the terms of this financing. The actual amount of new financing that we will need to fund the Joint Plan will
generally depend on the amount of our available cash resources, including net cash flow from our operating and investing activities prior to emergence, and the resolution costs of our outstanding
claims and contingent liabilities. We have no assurance that new financing will be available to us on acceptable terms. If we are unable to obtain the necessary financing on acceptable terms, our
emergence from Chapter 11 may be delayed.

Cash Resources and Available Credit Facilities

At June 30, 2009, we had available liquidity of $799.9 million, consisting of $607.7 million in cash and cash
equivalents, $14.2 million in short-term investment securities, approximately $101.3 million of available credit under our $165.0 million
debtor-in-possession, or DIP, loan facility and approximately $76.7 million of available credit under various non-U.S. credit facilities.

Investment
securities of $14.2 million and $21.6 million at June 30, 2009 and December 31, 2008, respectively, consist of direct or indirect investments in
debt securities. Prior to the fourth quarter of 2007, we classified our investment in the Columbia Strategic Cash Fund as cash and cash equivalents as redemptions were available in cash. In December
2007, the fund began a liquidation that is expected to continue through 2009 and restricted redemptions to in-kind distributions of securities held by the fund. We have elected to remain
in the fund and to value the fund based on the underlying securities as determined by the fund principals.

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 affiliates that were included in our Chapter 11 filing with the exclusion of the capital stock
of non-U.S. subsidiaries, and bears interest based on the London Interbank Offered Rate (LIBOR). Our non-U.S. credit facilities are extended to various subsidiaries and used by
them to issue bank guarantees supporting trade activity and to provide working capital during occasional cash shortfalls. Our largest non-U.S. credit facility is secured by third-party
accounts receivable, with availability determined on the basis of eligible outstanding receivables. Most of our other credit facilities are unsecured and are offered subject to annual review and
renewal.

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The following table summarizes our U.S. and non-U.S. credit facilities as of June 30, 2009:

Credit Facilities
(In millions)

Maximum
Borrowing
Amount

Amount
Available

Expiration
DateCountryU.S.

$
165.0

$
101.3


04/01/10
(1)Germany


70.4


62.7


12/31/09Germany


16.9


5.6


09/30/09Other Countries


13.8


8.4


Various
through 2010Total

$
266.1

$
178.0






We
believe that these funds and credit facilities will be sufficient to finance our operations and support our business strategy while we are in Chapter 11. We intend to renew
these facilities as they expire.

Analysis of Cash Flows

The following table summarizes our cash flows for the six months ended June 30, 2009 and 2008:

Six Months
Ended
June 30,(In millions)

2009

2008Net cash provided by (used for) operating activities

$
118.6

$
(85.9
)Net cash provided by (used for)investing activities


44.6


(4.2
)Net cash provided by (used for) financing activities


(19.6
)

(5.9
)Effect of currency exchange rate changes on cash and cash equivalents


4.0


10.9Increase (decrease) in cash and cash equivalents


147.6


(85.1
)Cash and cash equivalents, beginning of period


460.1


480.5Cash and cash equivalents, end of period

$
607.7

$
395.4


Net
cash provided by operating activities for the six month period ended June 30, 2009 was $118.6 million compared with $85.9 million used for operating activities
for the prior year period. Through our ongoing cash productivity initiatives, we reduced net working capital by $74.9 million during the six month period ended June 30, 2009. In June
2008, we paid $101.6 million to the Environmental Protection Agency ("EPA") in partial payment of the $250 million (plus accrued interest) settlement of the EPA's cost recovery claims
related to environmental remediation activities in Libby, Montana.

Net
cash provided by investing activities for the six month period ended June 30, 2009 was $44.6 million, compared with $4.2 million used for the prior year period.
The increase in net cash provided by investing activities is primarily due to proceeds of $68.8 million from the termination of life insurance policies on certain current and former employees.
Capital expenditures for the six month period ended June 30, 2009 were $36.5 million compared with $58.7 million for the prior year period. Net cash used for financing activities
for the six month period ended June 30, 2009 was $19.6 million compared with $5.9 million used for financing activities for the prior year period. The

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decrease
is primarily due to the repayments of borrowings under credit arrangements and reduced proceeds from the exercise of stock options.

Debt and Other Contractual Obligations

Total debt outstanding at June 30, 2009 was $874.2 million, including $341.8 million of accrued interest on
pre-petition debt. As a result of the Chapter 11 filing, we are now in default on $525.6 million of pre-petition debt, which, together with accrued interest
thereon, has been included in "liabilities subject to compromise" as of June 30, 2009. The automatic stay provided under the U.S. 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 in accordance with the Joint Plan on such debt during the Chapter 11
proceedings unless further developments lead our management to conclude that it is probable that such interest will be compromised. See Note 2 to the Consolidated Financial Statements for a
discussion of these rates.

See
Note 11 to the Consolidated Financial Statements for a discussion of financial assurances.

Employee Benefit Plans

Defined Contribution Retirement Plan

We sponsor a defined contribution retirement plan for our employees in the United States. This plan is qualified under
section 401(k) of the U.S. tax code. Currently, we contribute an amount equal to 100% of employee contributions, up to 6% of an individual employee's salary or wages. Our costs related to this
benefit plan for the three and six month periods ended June 30, 2009 were $3.1 million and $5.9 million compared with $3.2 million and $6.7 million for the prior
year periods.

Defined Benefit Pension Plans

We sponsor defined benefit pension plans for our employees in the U.S., Canada, the U.K., 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 defined benefit pension
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. Our 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. Our U.S. advance-funded plans are qualified under the U.S. tax code.

We
intend to satisfy obligations under our U.S. advance-funded plans and to comply with the requirements of the Employee Retirement Income Security Act of 1974, known generally as ERISA.
On June 24, 2009, we obtained bankruptcy court approval to fund minimum required payments under the plans of approximately $30 million for the period from July 2009 through January 2010.
In that regard, we contributed approximately $8 million in July 2009 to the trusts that hold assets of the U.S. advance-funded plans. While we intend to continue to fund all minimum required
payments under the U.S. advance-funded plans, there can be no assurance that the bankruptcy court will continue to approve the funding needs of such plans. We expect to fund our U.S. advance- funded
plans with approximately $38 million in 2009 based on the U.S. advance-funded plans' status as of January 1, 2009.

Contributions
to non-U.S. pension plans are not subject to bankruptcy court approval and we intend to fund such plans based upon applicable legal requirements and actuarial
and trustee recommendations. We contributed $5.4 million to these plans during the six month period ended June 30, 2009.

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The
following table presents the funded status of our fully-funded, underfunded, and unfunded pension plans:

Fully-Funded(1)
Pension Plans

Underfunded(1)
Pension Plans

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

June 30,
2009

December 31,
2008

June 30,
2009

December 31,
2008

June 30,
2009

December 31,
2008Projected benefit obligation

$
199.3

$
169.4

$
963.2

$
960.8

$
251.2

$
249.6Fair value of plan assets


237.2


218.0


582.8


568.5





Funded status (PBO basis)

$
37.9

$
48.6

$
(380.4
)
$
(392.3
)
$
(251.2
)
$
(249.6
)


---

Fully-funded
plans include several advance-funded plans where the fair value of the plan assets exceeds the projected benefit obligation, or PBO. This group of plans was overfunded by
$37.9 million as of June 30, 2009, and the overfunded status is reflected as "overfunded defined benefit pension plans" in the Consolidated Balance Sheet. Underfunded plans include a
group of advance-funded plans that are underfunded on a PBO basis by a total of $380.4 million as of June 30, 2009. Additionally, we have several plans that are funded on a
pay-as-you-go basis, and therefore, the entire PBO of $251.2 million at June 30, 2009 is unfunded. The combined balance of the underfunded and
unfunded plans was $631.6 million as of June 30, 2009 and is presented as a liability on the Consolidated Balance Sheet as follows: $12.6 million in "other current liabilities;"
$380.4 million included in "underfunded defined benefit pension plans;" $136.9 million included in "unfunded pay-as-you-go defined benefit pension
plans;" and $101.7 million in "liabilities subject to compromise."

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, 2008 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, 2009, we decreased the discount rate for the U.S. qualified pension plans from 7.25% at March 31, 2009 to 6.25% at June 30, 2009 based on market rates at
that time. We also evaluated the current discount rates for the pension plans in the U.K., Germany and Canada, which combined represented approximately 89% of the benefit obligation of the
non-U.S. pension plans as of December 31, 2008. Based on review of the yield curve analyses for these plans as of June 30, 2009, we changed the discount rate for the United
Kingdom from 6.75% at March 31, 2009 to 6.25% at June 30, 2009, for Germany from 6.00% at March 31, 2009 to 5.75% at June 30, 2009, and for Canada from 8.50% at
March 31, 2009 to 6.75% at June 30, 2009. The funded status as of June 30, 2009 reflects a decrease in total assets of approximately $14 million and an increase in total
liabilities of approximately $111 million as compared to March 31, 2009, resulting from the change in discount rates (including the postretirement plan). After tax effects, total assets
increased from March 31, 2009 to June 30, 2009 by approximately $29 million, total liabilities increased by approximately $111 million and shareholders' equity decreased by
approximately $82 million. The funded status as of June 30, 2009 reflects a decrease in total assets of approximately $8 million and

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an
increase in total liabilities of approximately $1 million as compared to December 31, 2008, resulting from the change in discount rates (including the postretirement plan). After tax
effects, total assets decreased from December 31, 2008 to June 30, 2009 by approximately $5 million, total liabilities increased by approximately $1 million and
shareholders' equity decreased by approximately $6 million.

Assets
available to fund the PBO of the U.S. advance-funded plans at June 30, 2009 were approximately $574 million, up $13 million from December 31, 2008,
primarily as a result of current year contributions.

The
following table presents the components of cash contributions for the advance-funded and pay-as-you-go plans:

Three Months
Ended
June 30,

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

2009

2008

2009

2008U.S. advance-funded plans

$
8.5

$
17.9

$
16.1

$
32.7U.S. pay-as-you-go plans


1.3


1.2


2.6


2.5Non-U.S. advance-funded plans


0.6


1.5


1.8


3.1Non-U.S. pay-as-you-go plans


2.0


2.4


3.6


4.2Total Cash Contributions

$
12.4

$
23.0

$
24.1

$
42.5


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 benefits under this program for the three and six month periods ended
June 30, 2009 was $2.5 million and $3.4 million compared with $2.2 million and $3.7 million for the prior year periods. We received Medicare subsidy payments of
$2.5 million during the six month period ended June 30, 2009 compared with $0.4 million for the prior year period. Our recorded liability for postretirement benefits of
$73.2 million at June 30, 2009 is stated at net present value discounted at 6.00%. Under our proposed Joint Plan, these benefits would continue.

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.

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The
following table summarizes our net noncore liabilities at June 30, 2009 and December 31, 2008:

Net Noncore Liabilities
(In millions)

June 30,
2009

December 31,
2008Asbestos-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


(149.2
)

(152.2
)Postretirement benefits


(73.2
)

(73.2
)Income taxes


(121.6
)

(121.0
)Retained obligations and other


(33.6
)

(35.1
)Net noncore liability

$
(1,577.6
)
$
(1,581.5
)


The
resolution of most of our noncore recorded and contingent liabilities will be determined through the 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, 2009. Our operating statements include periodic adjustments to account
for changes in estimates of these liabilities and developments in our Chapter 11 proceeding. These liabilities and contingencies may result in continued volatility in net results in the future.

Tax Matters

After emergence from Chapter 11 under our proposed Joint Plan, or another plan of reorganization that is ultimately confirmed,
we expect to have substantial future tax deductions. Upon emergence under the Joint Plan, we would expect future tax deductions in the aggregate of approximately $2 billion or more, primarily
relating to asbestos, environmental and other payments made at emergence and thereafter. The extent to which we will be able to use these deductions after emergence will depend on Section 382
of the Internal Revenue Code, which generally imposes an annual limitation on a corporation's use of its deductions when a corporation undergoes an "ownership change." An ownership change is generally
defined as a cumulative change of 50 percentage points or more in the ownership of certain stockholders owning 5% or more of the outstanding Grace common stock over a three year rolling period.
If we were to have a
change of ownership under Section 382 of the Code, approximately $2 billion of these future deductions could be severely restricted or even eliminated in whole or in part.

Accordingly,
the proposed charter for the reorganized corporation under the Joint Plan provides that in the event there has been a 25 percentage point change of ownership in
outstanding Grace stock after emergence, the Board of Directors will have the authority to impose restrictions on the transfer of Grace stock with respect to certain 5% shareholders. These transfer
restrictions will generally not impose any limitations on a person or other entity that holds less than 5% of the outstanding Grace stock after emergence to either buy or sell Grace stock on the open
market.

See
Note 8 to the Consolidated Financial Statements and "Income Taxes" above for further discussion of our tax accounting and tax contingencies.

Other Contingencies

See Note 11 to the Consolidated Financial Statements for a discussion of our other contingent matters.

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Critical Accounting Estimates

See the "Critical Accounting Estimates" heading in Item 7 of our Form 10-K for the year ended
December 31, 2008 for a discussion of our critical accounting estimates.

Recent Accounting Pronouncements

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

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," "suggests," "anticipates," or similar expressions. Forward-looking
information includes all statements regarding our Chapter 11 case; expected financial positions; 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, 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 performances. 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 revision 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, 2008, more recent numerical measures and other information are available in the "Financial Statements" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" sections of this Report. These more recent measures and information are incorporated herein by reference.

Item 4.    CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

As of June 30, 2009, 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

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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, 2009 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 11 to the interim consolidated financial statements in Part 1 of this Report are incorporated herein by
reference.

Item 1A.    RISK FACTORS

In addition to the other information set forth in this Report, you should carefully consider the risk factors discussed in the "Risk
Factors" section of our Annual Report on Form 10-K for the year ended December 31, 2008, which could materially affect our business, financial condition or future results.
The risks described in this Report and in our Annual Report on Form 10-K are not the only risks facing Grace. Additional risks and uncertainties not currently known to us or that we
currently deem to be immaterial also may materially adversely affect our business, financial condition or future results. With respect to certain risk factors discussed in our Annual Report on
Form 10-K, 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.

If objections to the Joint Plan are resolved adversely to Grace and the other proponents of the Joint Plan or if rulings resolving objections favorably to the
proponents of the Joint Plan are appealed, conditions to the effectiveness of the Joint Plan may not be satisfied and the timing and terms of our emergence from Chapter 11 could be materially
affected.

The
Bankruptcy Court required parties-in-interest who object to the Joint Plan to submit their objections by May 20, 2009. The objections filed generally
relate to demands for interest at rates higher than provided for in the Joint Plan, assertions that the Joint Plan impairs insurers' contractual rights, assertions that the Joint Plan discriminates
against Libby, Montana personal injury claimants, and the classification and treatment of claims under the Joint Plan. We believe that the Joint Plan complies with the requirements for confirmation
under the Bankruptcy Code and we intend to vigorously defend the Joint Plan against these and all other objections. If certain objections were resolved adversely to the Joint Plan proponents, or if
rulings by the Bankruptcy Court resolving certain objections favorably to the Joint Plan proponents were appealed, certain conditions to the effectiveness of the Joint Plan, including for example,
payments pursuant to the Sealed Air Settlement and the Fresenius Settlement, might not be satisfied and potential lenders might not be willing to provide the new financing that Grace seeks to fund the
Joint Plan. The resolution of these objections and any related appeals could have a material effect on the terms and timing of our emergence from Chapter 11.

Item 6.    EXHIBITS

In reviewing the agreements included as exhibits to this and other Reports filed by Grace with the Securities and Exchange Commission,
please remember they are included to provide you with information regarding their terms and are not intended to provide any other factual or disclosure information about Grace or other parties to the
agreements. The agreements generally contain representations and warranties by each of the parties to the applicable agreement. These representations and warranties have been made solely for the
benefit of the other parties to the applicable agreement. These representations and warranties:



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Accordingly,
these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time. Additional information about Grace may
be found elsewhere in this report and Grace's other public filings, which are available without charge through the Securities and Exchange Commission's website at http://www.sec.gov.

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 7, 2009

By

/s/ A. E. FESTA A. E. Festa Chairman, President and Chief Executive OfficerDate: August 7, 2009

By

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


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Exhibit List

|         |  |                                                                                                                                            
|-------- |  | -------------------------------------------------------------------------------------------------------------------------------------------
|
|15       |  | Accountants' Awareness Letter                                                                                                              
|31.(i).1 |  | Certification of Periodic Report by Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002                            
|31.(i).2 |  | Certification of Periodic Report by Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002                            
|32       |  | 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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