**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

** **

**FORM 10-Q**

**(Mark One)**
| **x**      | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d)**  | ** ** |   |
|------------|------------|--------------------------------------------------------|------------|--------|
| ** ** |       | **OF THE  SECURITIES EXCHANGE ACT OF 1934**            |       |   |
| ** ** |       | ** **                                             |       |   |
| ** ** |       | **FOR THE  QUARTERLY PERIOD ENDED JUNE 30, 2007**      |       |   |
| ** ** |       | ** **                                             |       |   |
| ** ** |       | **OR**                                                 |       |   |
| ** ** |       | ** **                                             |       |   |
| **o**      |       | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d)** |       |   |
| ** ** |       | **OF THE  SECURITIES EXCHANGE ACT OF 1934**            |       |   |

 

**Commission File Number1-13953**

**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 ofprincipal executive offices)

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.
|                             |   | Yes  x |   |                             |   |                             |   | No  o |   |                             |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,or a non-accelerated filer.  Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2 ofthe Exchange Act.

 

| Large accelerated filer  o |   | Accelerated filer  x |   | Non-accelerated filer  o |
|--------------------------------------|--------|--------------------------------|--------|------------------------------------|

 

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).

 
|                             |   | Yes  o |   |                             |   |                             |   | No  x |   |                             |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

70,133,018 shares of Common Stock, $0.01 par value,were outstanding at July 31, 2007.

 

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**W. R. GRACE &CO. AND SUBSIDIARIES**

**Table of Contents**
|               | ** ** | ** **                                                                                  | ** ** | **Page No.** |
|---------------|------------|---------------------------------------------------------------------------------------------|------------|--------------|
| **Part  I.**  |       | **Financial  Information**                                                                  |       |         |
| Item  1.      |       | Financial  Statements                                                                       |       | I-1          |
|          |       | Report of Independent Registered Public Accounting  Firm                                    |       | I-2          |
|          |       | Consolidated Statements of Operations                                                       |       | I-3          |
|          |       | Consolidated Statements of Cash Flows                                                       |       | I-4          |
|          |       | Consolidated  Balance Sheets                                                                |       | I-5          |
|          |       | Consolidated Statements of Shareholders’ Equity  (Deficit)                             |       | I-6          |
|          |       | Consolidated Statements of Comprehensive Income (Loss)                                      |       | I-6          |
|          |       | Notes to Consolidated Financial Statements                                                  |       | I-7          |
| Item 2.       |       | Management’s Discussion and Analysis of Financial  Condition and Results of Operations |       | I-32         |
| Item 3.       |       | Quantitative and Qualitative Disclosures About Market  Risk                                 |       | I-52         |
| Item 4.       |       | Controls and Procedures                                                                     |       | I-52         |
| **Part  II.** |       | **Other  Information**                                                                      |       |         |
| Item  1.      |       | Legal  Proceedings                                                                          |       | II-1         |
| Item  1A.     |       | Risk  Factors                                                                               |       | II-2         |
| Item 6.       |       | Exhibits                                                                                    |       | II-2         |

 

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**PART I.  FINANCIAL INFORMATION**

**Item 1.  FINANCIAL STATEMENTS**

**Review byIndependent Registered Public Accounting Firm**

A review of the interimconsolidated financial statements included in this Quarterly Report on Form10-Q for the three and six months ended June 30, 2007 and 2006 has beenperformed by PricewaterhouseCoopers LLP, the company’s independent registeredpublic accounting firm. Their report on the interim consolidated financialstatements follows.  This report is notconsidered a “report” within the meaning of Sections 7 and 11 of the SecuritiesAct of 1933, and, therefore, the independent accountants’ liability underSection 11 does not extend to it.

I-1

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**Report ofIndependent 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, 2007, and the relatedconsolidated statements of operations, shareholders’ equity (deficit) andcomprehensive income (loss) for each of the three-month and six-month periodsended June 30, 2007 and June 30, 2006 and the consolidated statements of cashflows for the six-month periods ended June 30, 2007 and June 30, 2006. Theseinterim financial statements are the responsibility of the Company’smanagement.

Weconducted our review in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). A review of interim financialinformation consists principally of applying analytical procedures and makinginquiries of persons responsible for financial and accounting matters. It issubstantially less in scope than an audit conducted in accordance with thestandards of the Public Company Accounting Oversight Board (United States), theobjective of which is the expression of an opinion regarding the financialstatements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modificationsthat should be made to the accompanying interim consolidated financialstatements for them to be in conformity with accounting principles generallyaccepted in the United States of America.

The accompanying interim consolidated financial statements have beenprepared assuming that the Company will continue as a going concern.  As discussed in Notes 1 and 2 to the interimconsolidated financial statements, on April 2, 2001, the Company andsubstantially all of its domestic subsidiaries voluntarily filed for protectionunder Chapter 11 of the United States Bankruptcy Code, which raises substantialdoubt about the Company’s ability to continue as a going concern in its presentform.  Management’s intentions withrespect to this matter are also described in Notes 1 and 2.  The accompanying interim consolidatedfinancial statements do not include any adjustments that might result from theoutcome of this uncertainty.

We have previously audited, in accordance with the standards of thePublic Company Accounting Oversight Board (United States), the consolidatedbalance sheet as of December 31, 2006, and the related consolidated statementsof operations, cash flows, shareholders’ equity (deficit) and comprehensiveincome (loss) for the year then ended, management’s assessment of theeffectiveness of the Company’s internal control over financial reporting as ofDecember 31, 2006 and the effectiveness of the Company’s internal control overfinancial reporting as of December 31, 2006; and in our report dated March 1,2007, we expressed (i) an unqualified opinion on those consolidated financialstatements with an explanatory paragraph relating to the Company’s ability tocontinue as a going concern and, (ii) unqualified opinions on management’sassessment of the effectiveness of the Company’s internal control over financialreporting and on the effectiveness of the Company’s internal control overfinancial reporting. The consolidated financial statements and management’sassessment of the effectiveness of internal control over financial reportingreferred to above are not presented herein. In our opinion, the information setforth in the accompanying consolidated balance sheet as of December 31, 2006,is fairly stated in all material respects in relation to the consolidatedbalance sheet from which it has been derived.

/s/PricewaterhouseCoopers LLP

McLean,Virginia

August 8, 2007

I-2

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***W. R. Grace & Co. andSubsidiariesConsolidated Statements of Operations (Unaudited)***In millions, except pershare amounts

* *
| ** **                                                                                                                                | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                                                                | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net sales                                                                                                                                 | ** ** | **$**                                           | **812.8**  |                                          | $          | 729.1 | ** ** | **$** | **1,528.4** |   | $ | 1,387.7 |   |
|                                                                                                                                      |       |                                            |       |                                          |       |   |   |   |   |
| Cost of goods sold,  exclusive of depreciation and amortization shown separately below                                                    |       | **533.9**                                       | ** ** | 470.0                                         | ** ** | **1,012.6** |   | 907.8 |   |
| Selling, general and  administrative expenses, exclusive of net pension expense and depreciation  and amortization shown separately below | ** ** | **138.4**                                       |       | 142.3                                         | ** ** | **265.9** |   | 271.3 |   |
| Depreciation and  amortization                                                                                                            | ** ** | **27.6**                                        |       | 28.4                                          | ** ** | **55.2** |   | 56.5 |   |
| Research and  development expenses                                                                                                        | ** ** | **17.7**                                        |       | 14.5                                          | ** ** | **35.5** |   | 29.4 |   |
| Net pension expense                                                                                                                       | ** ** | **13.1**                                        |       | 16.8                                          | ** ** | **25.8** |   | 31.6 |   |
| Interest expense and  related financing costs                                                                                             | ** ** | **20.3**                                        |       | 19.9                                          | ** ** | **39.7** |   | 35.7 |   |
| Provision for  environmental remediation                                                                                                  | ** ** | **12.0**                                        |       | 30.0                                          | ** ** | **12.0** |   | 30.0 |   |
| Chapter 11 expenses,  net of interest income                                                                                              | ** ** | **23.6**                                        |       | 11.5                                          | ** ** | **41.4** |   | 20.2 |   |
| Other (income) expense,  net                                                                                                              | ** ** | **(7.7**                                        | **)**      | (13.9                                         | )          | **(15.7** | **)** | (15.8 | ) |
|                                                                                                                                      | ** ** | **778.9**                                       |       | 719.5                                         | ** ** | **1,472.4** |   | 1,366.7 |   |
| Income (loss) before  income taxes and minority interest                                                                                  | ** ** | **33.9**                                        |       | 9.6                                           | ** ** | **56.0** |   | 21.0 |   |
| Benefit from (provision  for) income taxes                                                                                                | ** ** | **(9.3**                                        | **)**      | (3.3                                          | )          | **(24.2** | **)** | (7.8 | ) |
| Minority interest in  consolidated entities                                                                                               | ** ** | **(4.1**                                        | **)**      | (11.5                                         | )          | **(6.5** | **)** | (18.3 | ) |
| **Net  income (loss)**                                                                                                                    | ** ** | **$**                                           | **20.5**   |                                          | $          | (5.2 | ) | **$** | **25.3** |   | $ | (5.1 | ) |
|                                                                                                                                      |       |                                            |       |                                          |       |   |   |   |   |
| **Basic earnings (loss) per  share:**                                                                                                     |       |                                            |       |                                          |       |   |   |   |   |
| Net income  (loss)                                                                                                                        | ** ** | **$**                                           | **0.29**   |                                          | $          | (0.08 | ) | **$** | **0.36** |   | $ | (0.08 | ) |
| Weighted average  number of basic shares                                                                                                  | ** ** | **70.1**                                        |       | 67.9                                          | ** ** | **69.8** |   | 67.5 |   |
| ** **                                                                                                                                |       |                                            |       |                                          |       |   |   |   |   |
| **Diluted earnings (loss) per  share:**                                                                                                   |       |                                            |       |                                          |       |   |   |   |   |
| Net income  (loss)                                                                                                                        | ** ** | **$**                                           | **0.29**   |                                          | $          | (0.08 | ) | **$** | **0.35** |   | $ | (0.08 | ) |
| Weighted average number  of diluted shares                                                                                                | ** ** | **71.8**                                        |       | 67.9                                          | ** ** | **71.4** |   | 67.5 |   |

 

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

I-3

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

* *
| ** **                                                                                                             | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                                             | ** ** | **2007**                                      | ** ** | **2006** | ** ** |
| **OPERATING  ACTIVITIES**                                                                                              | ** ** | ** **                                    |       |   |   |
| Net income  (loss)                                                                                                     | ** ** | **$**                                         | **25.3**   |   | $ | (5.1 | ) |
| Reconciliation  to net cash provided by (used for) operating activities:                                               | ** ** | ** **                                    |       |   |   |
| Chapter 11 expenses, net of interest income                                                                            | ** ** | **41.4**                                      |       | 20.2 |   |
| (Benefit from) provision for income taxes                                                                              | ** ** | **24.2**                                      |       | 7.8 |   |
| Minority interest in consolidated entities                                                                             | ** ** | **6.5**                                       |       | 18.3 |   |
| Depreciation and amortization                                                                                          | ** ** | **55.2**                                      |       | 56.5 |   |
| Interest accrued on pre-petition liabilities subject  to compromise                                                    | ** ** | **38.8**                                      |       | 34.7 |   |
| Net (gain) loss on sales of investments and  disposals of assets                                                       | ** ** | **(3.6**                                      | **)**      | (2.8 | ) |
| Net pension expense                                                                                                    | ** ** | **25.8**                                      |       | 31.6 |   |
| Payments under defined benefit pension arrangements                                                                    | ** ** | **(57.0**                                     | **)**      | (39.6 | ) |
| Payments under postretirement benefit plans                                                                            | ** ** | **(3.1**                                      | **)**      | (6.5 | ) |
| Net income from life insurance policies                                                                                | ** ** | **(2.5**                                      | **)**      | (1.7 | ) |
| Provision for uncollectible receivables                                                                                | ** ** | **1.4**                                       |       | 0.5 |   |
| Provision for environmental remediation                                                                                | ** ** | **12.0**                                      |       | 30.0 |   |
| Expenditures for environmental remediation                                                                             | ** ** | **(4.8**                                      | **)**      | (3.4 | ) |
| Expenditures for retained obligations of divested  businesses                                                          | ** ** | **(0.8**                                      | **)**      | (1.3 | ) |
| Dividends paid to minority interests in consolidated  entities                                                         | ** ** | **(11.8**                                     | **)**      | — |   |
| 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)                                   | ** ** | **(34.2**                                     | **)**      | (86.2 | ) |
| Other accruals and non-cash items                                                                                      | ** ** | **(43.3**                                     | **)**      | (3.7 | ) |
| Income taxes paid, net of refunds                                                                                      | ** ** | **(18.5**                                     | **)**      | (17.8 | ) |
| **Net cash provided by (used for) operating  activities before Chapter 11 expenses and settlements**                   | ** ** | **51.0**                                      |       | 31.5 |   |
| Cash paid to  resolve contingencies subject to Chapter 11                                                              | ** ** | **(10.3**                                     | **)**      | — |   |
| Chapter 11  expenses paid                                                                                              | ** ** | **(35.5**                                     | **)**      | (20.4 | ) |
| **Net cash provided by (used for) operating  activities**                                                              | ** ** | **5.2**                                       |       | 11.1 |   |
| ** **                                                                                                             | ** ** | ** **                                    |       |   |   |
| **INVESTING  ACTIVITIES**                                                                                              | ** ** | ** **                                    |       |   |   |
| Capital  expenditures                                                                                                  | ** ** | **(52.3**                                     | **)**      | (51.9 | ) |
| Purchase of  short-term investment                                                                                     | ** ** | **(25.0**                                     | **)**      | — |   |
| Purchase of  equity investment                                                                                         | ** ** | **(6.3**                                      | **)**      | — |   |
| Proceeds from  sales of investments and disposals of assets                                                            | ** ** | **3.0**                                       |       | 7.2 |   |
| Businesses  acquired, net of cash acquired                                                                             | ** ** | **—**                                    |       | (20.0 | ) |
| Net investment  in life insurance policies                                                                             | ** ** | **0.2**                                       |       | (0.1 | ) |
| **Net cash provided by (used for) investing  activities**                                                              | ** ** | **(80.4**                                     | **)**      | (64.8 | ) |
| ** **                                                                                                             | ** ** | ** **                                    | ** ** |   |   |
| **FINANCING  ACTIVITIES**                                                                                              | ** ** | ** **                                    |       |   |   |
| Net (repayments)  borrowings under credit arrangements                                                                 | ** ** | **9.6**                                       |       | 0.6 |   |
| Fees under debtor-in-possession  credit facility                                                                       | ** ** | **(1.3**                                      | **)**      | (1.1 | ) |
| Proceeds from  exercise of stock options                                                                               | ** ** | **19.4**                                      |       | 15.8 |   |
| **Net cash provided by (used for) financing  activities**                                                              | ** ** | **27.7**                                      |       | 15.3 |   |
| Effect of  currency exchange rate changes on cash and cash equivalents                                                 | ** ** | **5.5**                                       |       | 6.9 |   |
| **Increase (decrease) in cash and cash equivalents**                                                                   | ** ** | **(42.0**                                     | **)**      | (31.5 | ) |
| Cash and cash  equivalents, beginning of period                                                                        | ** ** | **536.3**                                     |       | 474.7 |   |
| Cash and cash  equivalents, end of period                                                                              | ** ** | **$**                                         | **494.3**  |   | $ | 443.2 |   |

 

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

I-4

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**W. R. Grace & Co. and SubsidiariesConsolidated Balance Sheets***In millions, except parvalue and shares*

 
| ** **                                                                                                                      | ** ** | **June 30,** | ** **  | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|-------------|-----------------------|------------|
| ** **                                                                                                                      | ** ** | **2007**          | ** **  | **2006**              | ** ** |
| ** **                                                                                                                      | ** ** | **(unaudited)**   | ** **  | ** **            | ** ** |
| **ASSETS**                                                                                                                      | ** ** | ** **        |        |                  |       |
| **Current  Assets**                                                                                                             | ** ** | ** **        |        |                  |       |
| Cash and cash  equivalents                                                                                                      | ** ** | **$**             | **494.3**   |                  | $          | 536.3 |   |
| Marketable  securities                                                                                                          | ** ** | **28.1**          |        | 3.3                   |       |
| Trade accounts  receivable, less allowance of $7.7 (2006–$6.6)                                                             | ** ** | **493.8**         |        | 426.3                 |       |
| Inventories                                                                                                                     | ** ** | **287.0**         |        | 284.6                 |       |
| Deferred income  taxes                                                                                                          | ** ** | **36.8**          |        | 37.8                  |       |
| Other current  assets                                                                                                           | ** ** | **71.4**          |        | 80.5                  |       |
| **Total Current Assets**                                                                                                        | ** ** | **1,411.4**       |        | 1,368.8               |       |
|                                                                                                                            | ** ** | ** **        |        |                  |       |
| Properties and  equipment, net of accumulated depreciation and amortization of $1,565.3  (2006–$1,510.5)                   | ** ** | **671.1**         |        | 664.5                 |       |
| Goodwill                                                                                                                        | ** ** | **117.8**         |        | 116.5                 |       |
| Cash value of  life insurance policies, net of policy loans                                                                     | ** ** | **91.5**          |        | 89.2                  |       |
| Deferred income  taxes                                                                                                          | ** ** | **712.8**         |        | 728.5                 |       |
| Asbestos-related  insurance                                                                                                     | ** ** | **500.0**         |        | 500.0                 |       |
| Overfunded  defined benefit pension plans                                                                                       | ** ** | **62.5**          |        | 38.4                  |       |
| Other assets                                                                                                                    | ** ** | **139.3**         |        | 131.5                 |       |
| **Total Assets**                                                                                                                | ** ** | **$**             | **3,706.4** |                  | $          | 3,637.4 |   |
| ** **                                                                                                                      | ** ** | ** **        |        |                  |       |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY (DEFICIT)**                                                                        | ** ** | ** **        |        |                  |       |
| **Liabilities  Not Subject to Compromise**                                                                                      | ** ** | ** **        |        |                  |       |
| **Current  Liabilities**                                                                                                        | ** ** | ** **        |        |                  |       |
| Debt payable  within one year                                                                                                   | ** ** | **$**             | **12.8**    |                  | $          | 3.3 |   |
| Accounts payable                                                                                                                | ** ** | **200.2**         |        | 172.7                 |       |
| Other current  liabilities                                                                                                      | ** ** | **276.4**         |        | 272.6                 |       |
| **Total Current Liabilities**                                                                                                   | ** ** | **489.4**         |        | 448.6                 |       |
|                                                                                                                            | ** ** | ** **        |        |                  |       |
| Debt payable  after one year                                                                                                    | ** ** | **0.3**           |        | 0.2                   |       |
| Deferred income  taxes                                                                                                          | ** ** | **54.0**          |        | 58.9                  |       |
| Minority  interest in consolidated entities                                                                                     | ** ** | **59.7**          |        | 65.0                  |       |
| Underfunded and  unfunded defined benefit pension plans                                                                         | ** ** | **270.2**         |        | 349.6                 |       |
| Other  liabilities                                                                                                              | ** ** | **36.6**          |        | 43.3                  |       |
| **Total Liabilities Not Subject to Compromise**                                                                                 | ** ** | **910.2**         |        | 965.6                 |       |
|                                                                                                                            | ** ** | ** **        |        |                  |       |
| **Liabilities  Subject to Compromise—Note 2**                                                                              | ** ** | **3,245.6**       |        | 3,221.6               |       |
| **Total Liabilities**                                                                                                           | ** ** | **4,155.8**       |        | 4,187.2               |       |
| ** **                                                                                                                      | ** ** | ** **        |        |                  |       |
| **Commitments  and Contingencies**                                                                                              | ** ** | ** **        |        |                  |       |
| ** **                                                                                                                      | ** ** | ** **        |        |                  |       |
| **Shareholders’  Equity (Deficit)**                                                                                        | ** ** | ** **        |        |                  |       |
| Common stock  issued, par value $0.01; 300,000,000 shares authorized; outstanding: 2007–70,131,018  (2006–68,915,022) | ** ** | **0.8**           |        | 0.8                   |       |
| Paid-in capital                                                                                                                 | ** ** | **428.7**         |        | 423.8                 |       |
| Accumulated  deficit                                                                                                            | ** ** | **(460.1**        | **)**       | (487.6                | )          |
| Treasury stock,  at cost: shares: 2007–6,848,742; (2006–8,064,738)                                                    | ** ** | **(81.5**         | **)**       | (96.0                 | )          |
| Accumulated  other comprehensive income (loss)                                                                                  | ** ** | **(337.3**        | **)**       | (390.8                | )          |
| **Total Shareholders’ Equity (Deficit)**                                                                                   | ** ** | **(449.4**        | **)**       | (549.8                | )          |
| **Total  Liabilities and Shareholders’ Equity (Deficit)**                                                                  | ** ** | **$**             | **3,706.4** |                  | $          | 3,637.4 |   |

 

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

I-5

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**W.R. Grace & Co. and SubsidiariesConsolidated Statements of Shareholders’ Equity (Deficit) (Unaudited)***Inmillions*

** **
| ** **                                                  | ** ** | **Common  Stock and  Paid-in  Capital** | ** ** | **Accumulated  Deficit** | ** ** | **Treasury  Stock** | ** ** | **Accumulated  Other  Comprehensive  Income (Loss)** | ** ** | **Total  Shareholders’  Equity  (Deficit)** | ** ** |
|-------------------------------------------------------------|------------|----------------------------------------------|------------|--------------------------|------------|---------------------|------------|-----------------------------------------------------------|------------|--------------------------------------------------|------------|
| **Balance,  March 31, 2007**                                |       | $                                            | 427.9      |                     | $          | (480.6              | )          | $                                                         | (85.1      | )                                                | $          | (384.4 | ) | $ | (522.2 | ) |
| Net income  (loss)                                          |       | —                                       |       | 20.5                     |       | —              |       | —                                                    |       | 20.5                                             |       |
| Stock plan  activity                                        |       | 1.6                                          |       | —                   |       | 3.6                 |       | —                                                    |       | 5.2                                              |       |
| Other  comprehensive income (loss)                          |       | —                                       |       | —                   |       | —              |       | 47.1                                                      |       | 47.1                                             |       |
| **Balance,  June 30, 2007**                                 | ** ** | **$**                                        | **429.5**  | ** **               | **$**      | **(460.1**          | **)**      | **$**                                                     | **(81.5**  | **)**                                            | **$**      | **(337.3** | **)** | **$** | **(449.4** | **)** |
|                                                        |       |                                         |       |                     |       |                |       |                                                      |       |                                             |       |
| **Balance,  December 31, 2006**                             |       | $                                            | 424.6      |                     | $          | (487.6              | )          | $                                                         | (96.0      | )                                                | $          | (390.8 | ) | $ | (549.8 | ) |
| Cumulative  effect of adoption of FASB Interpretation No.48 |       | —                                       |       | 2.2                      |       | —              |       | —                                                    |       | 2.2                                              |       |
| **Balance,  January 1, 2007**                               |       | $                                            | 424.6      |                     | $          | (485.4              | )          | $                                                         | (96.0      | )                                                | $          | (390.8 | ) | $ | (547.6 | ) |
| Net income  (loss)                                          |       | —                                       |       | 25.3                     |       | —              |       | —                                                    |       | 25.3                                             |       |
| Stock plan  activity                                        |       | 4.9                                          |       | —                   |       | 14.5                |       | —                                                    |       | 19.4                                             |       |
| Other  comprehensive income (loss)                          |       | —                                       |       | —                   |       | —              |       | 53.5                                                      |       | 53.5                                             |       |
| **Balance, June 30, 2007**                                  | ** ** | **$**                                        | **429.5**  | ** **               | **$**      | **(460.1**          | **)**      | **$**                                                     | **(81.5**  | **)**                                            | **$**      | **(337.3** | **)** | **$** | **(449.4** | **)** |

 

**W. R. Grace & Co. andSubsidiariesConsolidated Statements of Comprehensive Income (Loss) (Unaudited)***In millions*

*** ***
| ** **                                                                   | ** ** | **Three Months Ended  June 30,** | ** **   | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------------------------|------------|-------------------------------------------------|--------------|-----------------------------------------------|------------|
| ** **                                                                   | ** ** | **2007**                                        | ** **   | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Net  income (loss)**                                                       | ** ** | **$**                                           | **20.5**     | ** **                                    | $          | (5.2 | ) | **$** | **25.3** | ** ** | $ | (5.1 | ) |
|                                                                         | ** ** | ** **                                      | ** **   |                                          |       | ** ** | ** ** |   |   |
| **Other  comprehensive income (loss):**                                      | ** ** | ** **                                      | ** **   |                                          |       | ** ** | ** ** |   |   |
| Foreign currency  translation adjustments                                    | ** ** | **8.9**                                         | *** *** | 13.6                                          | * *   | **14.6** | *** *** | 14.6 | * * |
| Gain (loss) from  hedging activities, net of income taxes                    | ** ** | **(1.2**                                        | **)**        | 0.3                                           | * *   | **(0.1** | **)** | (0.3 | ) |
| Defined benefit  pension and other postretirement plans, net of income taxes | ** ** | **39.4**                                        | *** *** | —                                        | * *   | **39.0** | *** *** | — | * * |
| Total other  comprehensive income (loss)                                     | ** ** | **47.1**                                        | *** *** | 13.9                                          | * *   | **53.5** | *** *** | 14.3 | * * |
| **Comprehensive income (loss)**                                              | ** ** | **$**                                           | **67.6**     | ** **                                    | $          | 8.7 |   | **$** | **78.8** |   | $ | 9.2 |   |

 

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

 

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**W. R. Grace & Co. and Subsidiaries**

**Notes toConsolidated Financial Statements (Unaudited)**

**1.****              Basis ofPresentation and Summary of Significant Accounting and Financial ReportingPolicies**

W. R. Grace &Co., through its subsidiaries, is engaged in specialty chemicals and specialtymaterials businesses on a worldwide basis through two operating segments: “GraceDavison,” which includes silica- and alumina-based catalysts and materials usedin a wide range of industrial applications; and “Grace Performance Chemicals,”which includes specialty chemicals and materials used in commercial andresidential construction and in rigid food and beverage packaging.

W. R. Grace &Co. conducts substantially all of its business through a direct, wholly-ownedsubsidiary, 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 throughsubsidiaries.

As used in thesenotes, 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 certaincases, their respective predecessors.

***Voluntary Bankruptcy Filing***— During2000 and the first quarter of 2001, Grace experienced several adverse developmentsin its asbestos-related litigation, including: a significant increase inpersonal injury claims, higher than expected costs to resolve personal injuryand certain property damage claims, and class action lawsuits alleging damagesfrom Zonolite Attic Insulation (“ZAI”) a former Grace attic insulation product.

After a thoroughreview of these developments, the Board of Directors concluded that a federalcourt-supervised bankruptcy process provided the best forum available toachieve fairness in resolving these claims and on April 2, 2001 (the “Filing Date”), Graceand 61 of its United States subsidiaries and affiliates, including Grace-Conn.(collectively, the “Debtors”), filed voluntary petitions for reorganization(the “Filing”) under Chapter 11 of the United States Bankruptcy Code in theUnited States Bankruptcy Court for the District of Delaware (the “BankruptcyCourt”). The cases were consolidated and are being jointly administered undercase number 01-01139 (the “Chapter 11 Cases”). Grace’s non-U.S. subsidiariesand certain of its U.S. subsidiaries were not included in the Filing.

Under Chapter 11, theDebtors have continued to operate their businesses as debtors-in-possessionunder court protection from creditors and claimants, while using the Chapter 11process to develop and implement a plan for addressing the asbestos-relatedclaims. Since the Filing, all motions necessary to conduct normal businessactivities have been approved by the Bankruptcy Court. (See Note 2 for Chapter11-Related Information.)

***Basis of Presentation*******— The interim Consolidated Financial Statementspresented herein are unaudited and should be read in conjunction with theConsolidated Financial Statements presented in the Company’s 2006 Annual Reporton Form 10-K.  Such interim ConsolidatedFinancial Statements reflect all adjustments that, in the opinion ofmanagement, are necessary for a fair presentation of the results of the interimperiods presented; all such adjustments are of a normal recurring nature.Potential accounting adjustments discovered during normal reporting andaccounting processes are evaluated on the basis of materiality, bothindividually and in the aggregate, and are recorded in the accounting perioddiscovered, unless a restatement of a prior period is necessary. Allsignificant intercompany accounts and transactions have been eliminated.

The results ofoperations for the six-month interim period ended June 30, 2007 are notnecessarily indicative of the results of operations for the year endingDecember 31, 2007.

***Reclassifications***—****Certain amounts in prior years’ Consolidated FinancialStatements have been reclassified to conform to the 2007 presentation.  Such reclassifications have not materiallyaffected previously reported amounts in the Consolidated Financial Statements.

***Use of Estimates***—****The preparation of financial statements inconformity with U.S. generally accepted accounting principles requires thatmanagement make estimates and assumptions affecting the assets and liabilitiesreported at the date of the Consolidated Financial Statements, and the revenuesand expenses reported for the periods presented. Actual amounts could differfrom those estimates, and the differences could be 

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material.  Changes in estimates are recorded in theperiod identified.  Grace’s accountingmeasurements that are most affected by management’s estimates of future eventsare:

·                  Contingentliabilities which depend on an assessment of the probability of loss and anestimate of ultimate resolution cost, such as asbestos-related matters (seeNotes 2 and 3), environmental remediation (see Note 12), income taxes (see Note4), and litigation (see Note 12);

·                  Pensionand postretirement liabilities that depend on assumptions regarding participantlife spans, future inflation, discount rates and total returns on investedfunds (see Note 13); and

·                  Realizationvalues of net deferred tax assets and insurance receivables, which depend onprojections of future income and cash flows and assessments of insurancecoverage and insurer solvency.

The accuracy ofmanagement’s estimates may be materially affected by the uncertainties arisingunder Grace’s Chapter 11 proceeding.

***Effect of New Accounting Standards*** —In June 2006, the FASB issued Interpretation No. 48, “Accounting forUncertainty in Income Taxes” (“FIN 48”), which prescribes a recognitionthreshold and measurement attribute for tax positions taken or expected to betaken in tax returns.  FIN 48 alsoprovides guidance on derecognition, classification, interest and penalties,accounting in interim periods, disclosure, and transition.  Grace adopted FIN 48 effective in the firstquarter of 2007.  See Note 4 for adiscussion of the impact of the adoption of FIN 48.

In February 2007, theFASB issued SFAS No. 159, “The Fair Value Option for Financial Assets andFinancial Liabilities.”  SFAS No. 159permits entities to measure many financial instruments and certain other itemsat fair value that are not currently required to be measured at fairvalue.  SFAS No. 159 is effective for thefirst quarter of 2008, and Grace is currently evaluating the impact on itsfinancial statements of adopting SFAS No. 159.

In September 2006, theFASB Emerging Issues Task Force (“EITF”) promulgated Issue No. 06-4, “Accountingfor Deferred Compensation and Postretirement Benefit Aspects of EndorsementSplit-Dollar Life Insurance Arrangements.” This Issue specifies that if a company provides a benefit to an employeeunder an endorsement split-dollar life insurance arrangement that extends topostretirement periods, it would have to recognize a liability and relatedcompensation costs.  In November 2006,the EITF promulgated Issue No. 06-10, “Accounting for Deferred Compensation andPostretirement Benefit Aspects of Collateral Assignment Split-Dollar LifeInsurance Arrangement.”  EITF 06-10,among other things, extends the guidance in EITF 06-4 to collateral assignmentsplit-dollar life insurance arrangements. Grace will adopt EITF 06-4 and EITF 06-10 effective in the first quarterof 2008, and has not yet assessed the impact of these Issues on itsConsolidated Financial Statements.

In September 2006, theFASB issued SFAS No. 157, “Fair Value Measurements.”  SFAS No. 157 defines fair value, establishesa framework for measuring fair value, and expands disclosures about fair valuemeasurements.  Grace will adopt SFAS No.157 effective in the first quarter of 2008, and has not yet assessed theestimated impact on its Consolidated Financial Statements.

**2.****              Chapter 11-RelatedInformation**

***Official Parties to Grace’s Chapter 11 Proceedings*****— Three creditors’ committees, tworepresenting asbestos claimants and the third representing other unsecuredcreditors, and a committee representing shareholders, have been appointed inthe Chapter 11 Cases. These committees, and a legal representative of futureasbestos claimants, have the right to be heard on all matters that come beforethe Bankruptcy Court and have important roles in the Chapter 11 Cases. TheDebtors are required to bear certain costs and expenses of the committees andof the representative of future asbestos claimants, including those of theircounsel and financial advisors.

***Plan of Reorganization***—**On November 13, 2004 Grace filed a planof reorganization, as well as several associated documents, including adisclosure statement, with the Bankruptcy Court.  On January 13, 2005, Grace filed an amendedplan of reorganization (the “Plan”) and related documents to address certainobjections of creditors and other interested parties. The Plan is supported bycommittees representing general unsecured creditors and equity holders, but isnot 

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supported bycommittees representing asbestos personal injury claimants and asbestosproperty damage claimants or the representative of future asbestos claimants.

Under the terms ofthe Plan, a trust would be established under Section 524(g) of the BankruptcyCode to which all pending and future asbestos-related claims would be channeledfor resolution.  The Plan contemplatesthat the Bankruptcy Court will conduct hearings to determine, among otherthings, the amount that would need to be paid into the trust on the effectivedate of the Plan to satisfy Grace’s asbestos-related liabilities and trustadministration costs and expenses over time. The Plan provides that Grace’sasbestos-related liabilities would be satisfied using cash and securities fromGrace and third parties.

The Plan willbecome effective only after a vote of eligible creditors and with the approvalof the Bankruptcy Court and the U.S. District Court for the District ofDelaware. Votes on the Plan may not be solicited until the Bankruptcy Courtapproves the disclosure statement. The Bankruptcy Court has currently deferredconsideration of the disclosure statement and Plan until after completion ofhearings on the amount of Grace’s asbestos-related liability (see Note 3).

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

Asbestos-Related Claimsand Costs

Under the Plan, atrust would be established under Section 524(g) of the Bankruptcy Code to whichall pending and future asbestos-related claims would be channeled forresolution.  The trust would utilizespecified trust distribution procedures to satisfy the following allowedasbestos-related claims and costs:

*Personalinjury claims that meet specified exposure and medical criteria (PersonalInjury-Symptomatic Eligible or “PI-SE” Claims)**—*In order to qualify for this class,claimants would have to prove that their health is impaired from meaningfulexposure to asbestos-containing products formerly manufactured by Grace.

*Personalinjury claims that do not meet the exposure and medical criteria necessary toqualify as PI-SE Claims (Personal Injury-Asymptomatic and Other or “PI-AO”Claims)**—*Thisclass would contain all asbestos-related personal injury claims against Gracethat do not meet the specific requirements to be PI-SE Claims, but do meetcertain other specified exposure and medical criteria.

*Propertydamage claims, including claims related to ZAI (“PD Claims”)* —In order to qualify for this class, claimants would have to prove Graceliability for loss of property value or remediation costs related to productsformerly manufactured by Grace that claimants allege contained asbestos.

*Trustadministration costs and legal expenses*

The pendingasbestos-related legal proceedings are described in “Asbestos-RelatedLitigation” (see Note 3). The claims arising from such proceedings would besubject to this classification process as part of the Plan.

The BankruptcyCourt has entered separate case management orders for estimating liability forpending and future personal injury claims and adjudicating pending propertydamage claims, excluding ZAI claims. A trial for estimating liability for personal injury claims iscurrently scheduled to begin in the first quarter of 2008.  Hearings for the adjudication of variousissues regarding certain property damage claims are scheduled for the secondand third quarters of 2007.  The Debtorsexpect that the estimated liability for all asbestos-related claims may providethe basis for determining the amount to be paid into a trust on the effectivedate of a plan of reorganization.

Under the Plan,asbestos personal injury claimants, including both PI-SE and PI-AO claims,would have the option either to litigate their claims against the trust infederal court in Delaware or, if they meet specified eligibility criteria,accept a settlement amount based on the severity of their condition. Under thePlan, asbestos property damage claimants would be required to litigate theirclaims against the trust in federal court in Delaware. The Plan provides that,as a condition precedent to confirmation, the maximum estimated aggregatefunding amount for all asbestos-related liabilities (PI-SE, PI-AO and PD includingZAI) and trust administration costs and expenses as determined by theBankruptcy Court cannot exceed $1,613 million, which Grace believes would fundover $2 billion in claims, costs and expenses over time.

The PI-SE Claims,the PD Claims and the related trust administration costs and expenses would befunded with (1) a payment of $512.5 million in cash (plus interest at 5.5%compounded annually from 

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December 21, 2002)and 18 million shares (reflecting a two-for-one stock split) of common stock ofSealed Air Corporation (“Sealed Air”) to be made directly by Cryovac, Inc., awholly owned subsidiary of Sealed Air (“Cryovac”), to the asbestos trustpursuant to the terms of a settlement agreement resolving asbestos-related,successor liability and fraudulent transfer claims against Sealed Air andCryovac and (2) Grace common stock. The number of shares of Grace common stockrequired to satisfy these claims will depend on the price of Grace common stockon the effective date of the Plan, liability measures approved by theBankruptcy Court, and the value of the Sealed Air settlement, which changesdaily with the accrual of interest and the trading value of Sealed Air commonstock. The Sealed Air settlement agreement has been approved by the BankruptcyCourt, but remains subject to the fulfillment of specified conditions.

The PI-AO Claimswould be funded with warrants exercisable for that number of shares of Gracecommon stock which, when added to the shares issued directly to the trust onthe effective date of the Plan, would represent 50.1% of Grace’s votingsecurities. If the common stock issuable upon exercise of the warrants isinsufficient to pay all PI-AO Claims (the liability for which is uncapped underthe Plan), then Grace would pay any additional liabilities in cash.

Under the Plan,the amounts to fund PI-SE Claims, PD Claims and the expense of trustadministration would be capped at the amount determined by the BankruptcyCourt. Amounts required to fund PI-AO Claims would not be capped, so if theamount funded in respect thereof later proved to be inadequate, Grace would beresponsible for contributing additional funds into the asbestos trust tosatisfy PI-AO Claims.  Because of thenumber and nature of the uncertainties involved, Grace is unable to determinethe extent to which, if any, the liability under the Plan for PI-AO claims mayexceed the amount funded into the trust in respect thereof.

Other Claims

The Plan provides that all allowed administrative or priority claimswould be paid 100% in cash and all general unsecured claims, other than thosecovered by the asbestos trust, would be paid 85% in cash and 15% in Gracecommon stock. Grace estimates that claims with a recorded value ofapproximately $1,293 million, including interest accrued through June 30, 2007,would be satisfied in this manner at the effective date of the Plan. Gracewould finance these payments with cash on hand, cash from Fresenius MedicalCare Holdings, Inc. (“Fresenius”) paid in settlement of asbestos and otherGrace-related claims, new Grace debt, and Grace common stock.  Grace would satisfy other non-asbestosrelated liabilities and claims (primarily certain environmental, tax, pensionand retirement medical obligations) as they become due and payable over time usingcash flow from operations, insurance proceeds from policies and settlementagreements covering asbestos-related liabilities, and new credit facilities. Proceeds from available product liabilityinsurance applicable to asbestos-related claims would supplement operating cashflow to service new debt and liabilities not paid on the effective date of thePlan.

Effect on Grace CommonStock

The Plan providesthat Grace common stock will remain outstanding at the effective date of thePlan, but that the interests of existing shareholders would be subject todilution by additional shares of common stock issued under the Plan. Inaddition, in order to preserve significant tax benefits from net operating losscarryforwards (“NOLs”) and certain future deductions, which are subject toelimination or limitation in the event of a change in control (as defined bythe Internal Revenue Code) of Grace, the Plan places restrictions on thepurchase of Grace common stock. The restrictions would prohibit (without theconsent of Grace), for a period of three years after the effective date of thePlan, a person or entity from acquiring more than 4.75% of the outstandingGrace common stock or, for those persons already holding more than 4.75%,prohibit them from increasing or decreasing their holdings. The BankruptcyCourt has approved the trading restrictions described above, excluding therestriction on sales, until the effective date of the Plan.

Grace intends toaddress all pending and future asbestos-related claims and all otherpre-petition claims as outlined in the Plan. However, the Plan may not beultimately approved by the Bankruptcy Court and other interested parties. Forexample, the asbestos creditors committees and representative of futureasbestos claimants have challenged the confirmability of the Plan, arguing thatthe Plan impairs the rights of asbestos creditors and impermissibly denies themvoting rights, and have asserted that Grace’s asbestos-related liabilitiesexceed the fair value of Grace’s assets. As a result of these challenges and other Bankruptcy Court rulings, amaterially different plan 

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of reorganizationmay ultimately be approved and, under the ultimate plan of reorganization, theinterests of the Company’s shareholders could be substantially diluted orcancelled. The value of Grace common stock following a plan of reorganization,and the extent of any recovery by non-asbestos-related creditors, will dependprincipally on the amount of Grace’s asbestos-related liability under aconfirmed plan of reorganization.

On July 26, 2007,the Bankruptcy Court terminated Grace’s exclusive rights to propose a plan ofreorganization and solicit votes thereon. The termination of such rights will permit any party-in-interest topropose a competing plan of reorganization.

***Claims Filings*****— The Bankruptcy Court established a bardate of March 31, 2003 for claims of general unsecured creditors,asbestos-related property damage claims (other than ZAI claims) and medicalmonitoring claims related to asbestos. The bar date did not apply toasbestos-related personal injury claims or claims related to ZAI.

Approximately14,900 proofs of claim were filed by the March 31, 2003 bar date. Of theseclaims, approximately 9,400 were non-asbestos related, approximately 4,300 werefor asbestos-related property damage, and approximately 1,000 were for medicalmonitoring. The medical monitoring claims were made by individuals who allegeexposure to asbestos through Grace’s products or operations. These claims, ifsustained, would require Grace to fund ongoing health monitoring costs forqualified claimants. In addition, approximately 800 proofs of claim were filedafter the bar date.

Approximately7,000 of the non-asbestos related claims involve claims by employees or formeremployees for future retirement benefits such as pension and retiree medicalcoverage. Grace views most of these claims as contingent and has proposed aplan of reorganization that would retain such benefits. These claims includeclaims for payment of goods and services, taxes, product warranties, principaland interest under pre-petition credit facilities, amounts due under leases andother contracts, leases and other executory contracts rejected in theBankruptcy Court, environmental remediation, pending non-asbestos-related litigation,and non-asbestos-related personal injury. Claims for indemnification or contribution to actual or potentialcodefendants in asbestos-related and other litigation were also filed.

The Debtors have analyzed the claims filed pursuant tothe March 31, 2003 bar date and have found that many are duplicates, representthe same claim filed against more than one of the Debtors, lack any supportingdocumentation, or provide insufficient supporting documentation. As of June 30,2007, of the approximately 4,035 asbestos property damage claims filed, twoclaims have been resolved (these agreements are voidable depending on the termsof a confirmed plan of reorganization), approximately 3,565 claims have beenexpunged or withdrawn by claimants, leaving approximately 470 claims to beaddressed through the property damage case management order approved by theBankruptcy Court.  As of June 30, 2007,of the approximately 3,260 non-asbestos claims filed, approximately 1,780 havebeen expunged or withdrawn by claimants, approximately 1,115 have beenresolved, and an additional approximately 365 claims are to be addressedthrough the claim objection process and the dispute resolution proceduresapproved by the Bankruptcy Court.

Grace believesthat its recorded liabilities for claims subject to the March 31, 2003 bar daterepresent a reasonable estimate of the ultimate allowable amount for claimsthat are not in dispute or have been submitted with sufficient information toboth evaluate the merit and estimate the value of the claim. Theasbestos-related claims are considered as part of Grace’s overall asbestosliability and are being accounted for in accordance with the conditionsprecedent under the Plan, as described in “Accounting Impact” below. Grace willadjust its recorded asbestos-related liability, as necessary, to reflectrulings by the Bankruptcy Court.  Any such adjustments could be material to itsconsolidated financial position and results of operations.

***Litigation Proceedings in Bankruptcy Court*****— In September 2000, Grace was named in apurported class action lawsuit filed in California Superior Court for theCounty of San Francisco, alleging that the 1996 reorganization involving apredecessor of Grace and Fresenius AG and the 1998 reorganization involving apredecessor of Grace and Sealed Air were fraudulent transfers *(Abner, et al., v. W.R. Grace & Co., et al.)*.The Bankruptcy Court authorized the Official Committee of Asbestos PersonalInjury Claimants and the Official Committee of Asbestos Property Damage Claimantsto proceed with claims against Fresenius 

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and Sealed Air andCryovac on behalf of the Debtors’ bankruptcy estate.

On November 29,2002, Sealed Air (and Cryovac) and Fresenius each announced that they hadreached agreements in principle with such Committees to settle asbestos,successor liability and fraudulent transfer claims related to such transactions(the “litigation settlement agreements”). Under the terms of the Freseniussettlement, subject to the fulfillment of certain conditions, Fresenius wouldpay $115.0 million to the Debtors’ estate as directed by the Bankruptcy Courtupon confirmation of the Debtors’ plan of reorganization. In July 2003, theFresenius settlement was approved by the Bankruptcy Court. Under the terms ofthe 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 Aircommon stock (collectively valued at $1,211.4 million as of June 30, 2007), asdirected by the Bankruptcy Court upon confirmation of the Debtors’ plan ofreorganization. In June 2005, the Sealed Air settlement was approved by the BankruptcyCourt.

***Debt Capital***— All of the Debtors’pre-petition debt is in default due to the Filing. The accompanyingConsolidated Balance Sheets reflect the classification of the Debtors’pre-petition debt within “liabilities subject to compromise.”

The Debtors haveentered into a debtor-in-possession post-petition loan and security agreementwith Bank of America, N.A. (the “DIP facility”) in the aggregate amount of $250million.  The term of the DIP facilityexpires on April 1, 2008.

***Accounting Impact*** — The accompanyingConsolidated Financial Statements have been prepared in accordance withStatement of Position 90-7 (“SOP 90-7”), “Financial Reporting by Entities inReorganization Under the Bankruptcy Code,” promulgated by the AmericanInstitute of Certified Public Accountants. SOP 90-7 requires that financialstatements of debtors-in-possession be prepared on a going concern basis, whichcontemplates continuity of operations, realization of assets and liquidation ofliabilities in the ordinary course of business. However, as a result of the Filing, the realization of certain of theDebtors’ assets and the liquidation of certain of the Debtors’ liabilities aresubject to significant uncertainty. While operating as debtors-in-possession,the Debtors may sell or otherwise dispose of assets and liquidate or settleliabilities for amounts other than those reflected in the ConsolidatedFinancial Statements. Further, the ultimate plan of reorganization couldmaterially change the amounts and classifications reported in the ConsolidatedFinancial Statements.

Pursuant to SOP90-7, Grace’s pre-petition and future liabilities that are subject tocompromise are required to be reported separately on the balance sheet at anestimate of the amount that will ultimately be allowed by the Bankruptcy Court.As of June 30, 2007, such pre-petition liabilities include fixed obligations(such as debt and contractual commitments), as well as estimates of costsrelated to contingent liabilities (such as asbestos-related litigation, environmentalremediation, and other claims). Obligations of Grace subsidiaries not coveredby the Filing continue to be classified on the Consolidated Balance Sheetsbased upon maturity dates or the expected dates of payment. SOP 90-7 also requires separatereporting of certain expenses, realized gains and losses, and provisions forlosses related to the Filing as reorganization items.  Grace presents reorganization items as “Chapter11 expenses, net of interest income,” a separate caption in its ConsolidatedStatements of Operations.

Grace has notrecorded the benefit of any assets that may be available to fundasbestos-related and other liabilities under the litigation settlements withSealed Air and Fresenius, as such agreements are subject to conditions, which,although expected to be met, have not been satisfied and confirmed by theBankruptcy Court. The value available under these litigation settlementagreements as measured at June 30, 2007, was $1,326.4 million comprised of$115.0 million in cash from Fresenius and $1,211.4 million in cash and stockfrom Cryovac. Payments under the Sealed Air settlement will be made directly tothe asbestos trust by Cryovac, and will be accounted for as a satisfaction of aportion of Grace’s recorded asbestos-related liability and a credit toshareholders’ equity.

Grace’sConsolidated Balance Sheets separately identify the liabilities that are “subjectto compromise” as a result of the Chapter 11 proceedings. In Grace’s case, “liabilitiessubject to compromise” represent both pre-petition and future liabilities asdetermined under U.S. generally accepted accounting principles. The bases forthe asbestos-related liability component of “liabilities 

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subject tocompromise” are described in Note 3. Changes to the recorded amount of such liabilities will be based ondevelopments in the Chapter 11 Cases and management’s assessment of the claimamounts that will ultimately be allowed by the Bankruptcy Court. Changes topre-petition liabilities subsequent to the Filing Date reflect: 1) cashpayments under approved court orders; 2) the terms of Grace’s proposed plan ofreorganization, as discussed above, including the accrual of interest onpre-petition debt and other fixed obligations; 3) accruals for employee-relatedprograms; and 4) changes in estimates related to other pre-petition contingentliabilities.

Components of liabilitiessubject to compromise are as follows:

 
| ***(In millions)***                     | ** ** | **June 30,  2007** | ** **  | **December 31,  2006** | ** ** |
|----------------------------------------------|------------|-------------------------|-------------|-----------------------------|------------|
| Debt,  pre-petition plus accrued interest    | ** ** | **$**                   | **771.3**   |                        | $          | 739.5 |   |
| Asbestos-related  liability                  | ** ** | **1,700.0**             |        | 1,700.0                     |       |
| Income taxes(1)                              | ** ** | **96.5**                |        | 141.2                       |       |
| Environmental  remediation                   | ** ** | **368.3**               |        | 361.1                       |       |
| Postretirement  benefits other than pension  | ** ** | **78.5**                |        | 72.7                        |       |
| Unfunded special  pension arrangements       | ** ** | **98.9**                |        | 95.6                        |       |
| Retained  obligations of divested businesses | ** ** | **31.5**                |        | 18.0                        |       |
| Accounts payable                             | ** ** | **31.7**                |        | 31.7                        |       |
| Other accrued  liabilities                   | ** ** | **80.0**                |        | 71.2                        |       |
| Reclassification  to current liabilities(2)  | ** ** | **(11.1**               | **)**       | (9.4                        | )          |
| **Total Liabilities Subject to  Compromise** | ** ** | **$**                   | **3,245.6** |                        | $          | 3,221.6 |   |

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(1)                Amountsas of June 30, 2007 and December 31, 2006 are net of expected refunds of $73.6million and $15.0 million, respectively.

(2)                Asof June 30, 2007 and December 31, 2006, approximately $11.1 million and $9.4million, respectively, of certain pension and postretirement benefitobligations subject to compromise have been presented in other currentliabilities in the Consolidated Balance Sheets in accordance with SFAS No. 158.

Note that theunfunded special pension arrangements reflected above exclude non-U.S. pensionplans and qualified U.S. pension plans that became underfunded subsequent tothe Filing. Contributions to qualified U.S. pension plans are subject toBankruptcy Court approval.

***Change in Liabilities Subject to Compromise***

Set forth below is areconciliation of the changes in pre-filing date liability balances for theperiod from the Filing Date through June 30, 2007.

 
| ***(In millions)***                                                                            | ** ** | **Cumulative  Since Filing** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| Balance, Filing  Date April 2, 2001                                                                 |       | $                                 | 2,366.0    |   |
| Cash  disbursements and/or reclassifications under Bankruptcy Court orders:                         |       |                              |       |
| 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 |       | (341.2                            | )          |
| Expense/(income)  items:                                                                            |       |                              |       |
| Interest on pre-petition liabilities                                                                |       | 313.7                             |       |
| Employee-related accruals                                                                           |       | 48.7                              |       |
| Provision for asbestos-related contingencies                                                        |       | 744.8                             |       |
| Provision for estimate of environmental  contingencies                                              |       | 307.6                             |       |
| Provision for estimate of income tax contingencies                                                  |       | (12.4                             | )          |
| Balance sheet  reclassifications                                                                    |       | (36.8                             | )          |
| Balance, end of period                                                                              |       | $                                 | 3,245.6    |   |

 

Additionalliabilities subject to compromise may arise due to the rejection of executorycontracts or unexpired leases, or as a result of the Bankruptcy Court’sallowance of contingent or disputed claims.

For the holders ofpre-petition bank credit facilities, beginning January 1, 2006, Grace agreed topay interest on pre-petition bank debt at the prime rate, adjusted for periodicchanges, and compounded quarterly. The effective rates for the six months endedJune 30, 2007 and 2006 were 8.25% and 7.66%, respectively.  From the Filing Date through December 31,2005, Grace accrued interest on pre-petition bank debt at a negotiated fixedannual rate of 6.09%, compounded quarterly.

For the holders ofclaims who, but for the Chapter 11 filing, would be entitled under a contractor otherwise to accrue or be paid interest on such claim in a non-default (ornon-overdue payment) situation under applicable non-bankruptcy law, Graceaccrues interest at the rate provided in the contract between the Grace entityand the claimant or such rate as may otherwise apply under applicablenon-bankruptcy law.

For all otherholders of allowed general unsecured claims, Grace accrues interest at a rateof 4.19% per annum, compounded annually.

I-13

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***Chapter 11 Expenses***

* *
| ** **                         | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ***(In millions)***           | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| Legal and financial  advisory fees | ** ** | **$**                                           | **26.1**   |                                          | $          | 13.3 | ** ** | **$** | **46.1** |   | $ | 24.1 |   |
| Interest income                    | ** ** | **(2.5**                                        | **)**      | (1.8                                          | )          | **(4.7** | **)** | (3.9 | ) |
| Chapter 11 expenses, net           | ** ** | **$**                                           | **23.6**   |                                          | $          | 11.5 | ** ** | **$** | **41.4** |   | $ | 20.2 |   |

 

Pursuant to SOP90-7, interest income earned on the Debtors’ cash balances must be offsetagainst Chapter 11 expenses.

***Condensed Financial Information of the Debtors***

**W. R. Grace & Co.—Chapter 11 Filing EntitiesDebtor-in-PossessionStatements of Operations***(In millions)*

 
| ** **                                                                                                                                | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                                                                | ** ** | **2007**                                      | ** ** | **2006** | ** ** |
| Net sales, including  intercompany                                                                                                        | ** ** | **$**                                         | **744.2**  |   | $ | 733.8 |   |
| Cost of goods sold,  including intercompany, exclusive of depreciation and amortization shown  separately below                           | ** ** | **516.8**                                     |       | 549.0 |   |
| Selling, general and  administrative expenses, exclusive of net pension expense and depreciation  and amortization shown separately below | ** ** | **151.3**                                     |       | 172.2 |   |
| Research and  development expenses                                                                                                        | ** ** | **21.1**                                      |       | 19.2 |   |
| Depreciation and amortization                                                                                                             | ** ** | **26.9**                                      |       | 29.3 |   |
| Net pension expense                                                                                                                       | ** ** | **19.2**                                      |       | 23.2 |   |
| Interest expense and  related financing costs                                                                                             | ** ** | **39.0**                                      |       | 35.6 |   |
| Provision for  environmental remediation                                                                                                  | ** ** | **12.0**                                      |       | 30.0 |   |
| Other (income) expense,  net                                                                                                              | ** ** | **(25.2**                                     | **)**      | (28.5 | ) |
| Chapter 11 expenses,  net of interest income                                                                                              | ** ** | **41.5**                                      |       | 20.2 |   |
|                                                                                                                                      | ** ** | **802.6**                                     |       | 850.2 |   |
| Income (loss) before  income taxes and equity in net income of non-filing entities                                                        | ** ** | **(58.4**                                     | **)**      | (116.4 | ) |
| Benefit from (provision  for) income taxes                                                                                                | ** ** | **12.6**                                      |       | 23.2 |   |
| Income (loss) before  equity in net income of non-filing entities                                                                         | ** ** | **(45.8**                                     | **)**      | (93.2 | ) |
| Equity in net income of  non-filing entities                                                                                              | ** ** | **71.1**                                      |       | 88.1 |   |
| **N****et income (loss)**                                                                                                                 | ** ** | **$**                                         | **25.3**   |   | $ | (5.1 | ) |

 

**W. R. Grace & Co. — Chapter 11 Filing EntitiesDebtor-in-PossessionCondensed Statements of Cash Flows***(**In millions)*

 
| ** **                                                                                     | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                     | ** ** | **2007**                                      | ** ** | **2006** | ** ** |
| **Operating  Activities**                                                                      |       |                                          |       |   |   |
| Net income  (loss)                                                                             | ** ** | **$**                                         | **25.3**   |   | $ | (5.1 | ) |
| Reconciliation  to net cash provided by (used for) operating activities:                       | ** ** | ** **                                    |       |   |   |
| Chapter 11 expenses, net of interest income                                                    | ** ** | **41.5**                                      |       | 20.2 |   |
| (Benefit from) provision for income taxes                                                      | ** ** | **(12.6**                                     | **)**      | (23.2 | ) |
| Equity in net income of non-filing entities                                                    | ** ** | **(71.1**                                     | **)**      | (88.1 | ) |
| Depreciation and amortization                                                                  | ** ** | **26.9**                                      |       | 29.3 |   |
| Interest on pre-petition liabilities subject to  compromise                                    | ** ** | **38.8**                                      |       | 34.7 |   |
| Provision for environmental remediation                                                        | ** ** | **12.0**                                      |       | 30.0 |   |
| Other non-cash items, net                                                                      | ** ** | **(6.1**                                      | **)**      | 1.1 |   |
| Contributions to defined benefit pension plans                                                 | ** ** | **(39.4**                                     | **)**      | (32.8 | ) |
| Cash paid to resolve contingencies subject to  Chapter 11                                      | ** ** | **(10.3**                                     | **)**      | — |   |
| Chapter 11 expenses paid                                                                       | ** ** | **(35.5**                                     | **)**      | (20.4 | ) |
| Changes in other assets and liabilities, excluding  the effect of businesses acquired/divested | ** ** | **(57.8**                                     | **)**      | (34.0 | ) |
| **Net  cash provided by (used for) operating activities**                                      | ** ** | **(88.3**                                     | **)**      | (88.3 | ) |
| **Investing  Activities**                                                                      | ** ** | ** **                                    |       |   |   |
| Capital  expenditures                                                                          |       | **(33.9**                                     | **)**      | (40.1 | ) |
| Loan repayments  and other                                                                     |       | **100.5**                                     |       | 46.6 |   |
| **Net  cash provided by (used for) investing activities**                                      | ** ** | **66.6**                                      |       | 6.5 |   |
| **Net  cash provided by (used for) financing activities**                                      | ** ** | **18.1**                                      |       | (1.1 | ) |
| **Net  increase (decrease) in cash and cash equivalents**                                      | ** ** | **(3.6**                                      | **)**      | (82.9 | ) |
| Cash and cash  equivalents, beginning of period                                                | ** ** | **233.8**                                     |       | 269.2 |   |
| Cash and cash  equivalents, end of period                                                      | ** ** | **$**                                         | **230.2**  |   | $ | 186.3 |   |

 

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**W. R. Grace & Co.—Chapter11 Filing Entities Debtor-in-Possession Balance Sheets***(**In millions)*

 
| ** **                                                     | ** ** | **June 30,  2007** | ** **  | **December 31,  2006** | ** ** |
|----------------------------------------------------------------|------------|-------------------------|-------------|-----------------------------|------------|
| **ASSETS**                                                     | ** ** | ** **              | ** **  | ** **                  | ** ** |
| **Current  Assets**                                            | ** ** | ** **              | ** **  | ** **                  | ** ** |
| Cash and cash  equivalents                                     | ** ** | **$**                   | **230.2**   |                        | $          | 233.8 |   |
| Marketable  securities                                         | ** ** | **26.0**                |        | 1.0                         |       |
| Trade accounts  receivable, net                                | ** ** | **121.8**               |        | 117.9                       |       |
| Receivables from  non-filing entities, net                     | ** ** | **76.7**                |        | 53.2                        |       |
| Inventories                                                    | ** ** | **83.6**                |        | 72.9                        |       |
| Other current  assets                                          | ** ** | **44.3**                |        | 59.9                        |       |
| **Total  Current Assets**                                      | ** ** | **582.6**               |        | 538.7                       |       |
| Properties and  equipment, net                                 | ** ** | **396.6**               |        | 394.5                       |       |
| Cash value of  life insurancepolicies, net of policy loans     | ** ** | **91.5**                |        | 89.2                        |       |
| Deferred income  taxes                                         | ** ** | **675.6**               |        | 687.1                       |       |
| Asbestos-related  insurance                                    | ** ** | **500.0**               |        | 500.0                       |       |
| Loans receivable  from non-filing entities, net                | ** ** | **189.0**               |        | 237.7                       |       |
| Investment in  non-filing entities                             | ** ** | **698.8**               |        | 660.3                       |       |
| Other assets                                                   | ** ** | **89.4**                |        | 90.8                        |       |
| **Total  Assets**                                              | ** ** | **$**                   | **3,223.5** |                        | $          | 3,198.3 |   |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY (DEFICIT)**       |       |                    |        |                        |       |
| **Liabilities  Not Subject to Compromise**                     |       |                    |        |                        |       |
| Current  liabilities                                           | ** ** | **$**                   | **208.1**   |                        | $          | 212.0 |   |
| Minority  interest in consolidated entities                    | ** ** | **52.1**                |        | 58.4                        |       |
| Other  liabilities                                             | ** ** | **167.1**               |        | 256.1                       |       |
| **Total  Liabilities Not Subject to Compromise**               | ** ** | **427.3**               |        | 526.5                       |       |
| **Liabilities  Subject to Compromise**                         | ** ** | **3,245.6**             |        | 3,221.6                     |       |
| **Total  Liabilities**                                         | ** ** | **3,672.9**             |        | 3,748.1                     |       |
| **Shareholders’  Equity (Deficit)**                       | ** ** | **(449.4**              | **)**       | (549.8                      | )          |
| **Total Liabilities and  Shareholders’ Equity (Deficit)** | ** ** | **$**                   | **3,223.5** |                        | $          | 3,198.3 |   |

 

In addition toGrace’s financial reporting obligations as prescribed by the U.S. Securitiesand Exchange Commission (“SEC”), the Debtors are also required, under the rulesand regulations of the Bankruptcy Code, to periodically file certain statementsand schedules and a monthly operating report with the Bankruptcy Court. Thisinformation is available to the public through the Bankruptcy Court. Thisinformation is prepared in a format that may not be comparable to informationin Grace’s quarterly and annual financial statements as filed with the SEC. Themonthly operating reports are not audited, do not purport to represent the financialposition or results of operations of Grace on a consolidated basis, and shouldnot be relied on for such purposes.

**3.****              Asbestos-RelatedLitigation**

Grace is adefendant in property damage and personal injury lawsuits relating topreviously sold asbestos-containing products. As of the Filing Date, Grace wasa defendant in 65,656 asbestos-related lawsuits, 17 involving claims forproperty damage (one of which has since been dismissed), and the remainderinvolving 129,191 claims for personal injury. Due to the Filing, holders ofasbestos-related claims are stayed from continuing to prosecute pendinglitigation and from commencing new lawsuits against the Debtors. Separatecreditors’ committees representing the interests of property damage andpersonal injury claimants, and a legal representative of future personal injuryclaimants, have been appointed in the Chapter 11 Cases. Grace’s obligationswith respect to present and future claims will be determined through theChapter 11 process.

***Property Damage Litigation***—******The plaintiffsin asbestos property damage lawsuits generally seek to have the defendants payfor the cost of removing, containing or repairing the asbestos-containingmaterials in the affected buildings. Various factors can affect the merit andvalue of property damage claims, including legal defenses, productidentification, the amount and type of product involved, the age, type, sizeand use of the building, the legal status of the claimant, the jurisdictionalhistory of prior cases, the court in which the case is pending, and thedifficulty of asbestos abatement, if necessary.

Out of 380asbestos property damage cases (which involved thousands of buildings) filedprior to the Filing Date, 140 were dismissed without payment of any damages orsettlement amounts; judgments after trial were entered in favor of Grace innine cases (excluding cases settled following appeals of judgments in favor ofGrace); judgments after trial were entered in favor of the plaintiffs in eightcases (one of which is on appeal) for a total of $86.1 million; 207 propertydamage cases were settled for a total of $696.8 million; and 16 cases remainoutstanding (including the one on appeal). Of the 16 remaining cases, eightrelate to ZAI and eight relate to a number of former asbestos-containingproducts (two of which also are alleged to involve ZAI).

Approximately4,035 additional property damage claims were filed prior to the March 31, 2003claims bar date established by the Bankruptcy Court. (The bar date did notapply to ZAI claims.) Such claims 

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were reviewed indetail by Grace, categorized into claims with sufficient information to beevaluated or claims that require additional information and, where sufficientinformation existed, the estimated cost of resolution was considered as part ofGrace’s recorded asbestos-related liability. (Approximately 200 claims did notcontain sufficient information to permit an evaluation.) Grace has objected tovirtually all property damage claims on a number of different bases, including:no authorization to file a claim; the claim was previously settled oradjudicated; no or insufficient documentation; failure to identify a Graceproduct; the expiration of the applicable statute of limitations and/or statuteof repose, and/or laches; and a defense that the product in place is nothazardous. As of June 30, 2007, following the reclassification, withdrawal orexpungement of claims, approximately 470 property damage claims remainoutstanding.

Eight of the ZAIcases were filed as purported class action lawsuits in 2000 and 2001. Inaddition, ten lawsuits were filed as purported class actions in 2004 and 2005with respect to persons and homes in Canada. These cases seek damages andequitable relief, including the removal, replacement and/or disposal of allsuch insulation. The plaintiffs assert that this product is in millions ofhomes 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’sinvestigation of the claims described in these lawsuits, and testing andanalysis of this product by Grace and others, Grace believes that the productwas and continues to be safe for its intended purpose and poses little or nothreat to human health. The plaintiffs in the ZAI lawsuits (and the U.S.government in the Montana criminal proceeding described in Note 12) disputeGrace’s position on the safety of ZAI. On October 18, 2004, the BankruptcyCourt held a hearing on motions filed by the parties to address a number ofimportant legal and factual issues regarding the ZAI claims.  On December 14, 2006, theBankruptcy Court issued an opinion and order holding that, although ZAI iscontaminated with asbestos and can release asbestos fibers when disturbed,there is no unreasonable risk of harm from ZAI. The ZAI claimants intend to appeal such opinion and order.  The Bankruptcy Court has scheduled a conference inAugust 2007 to consider whether any of the claimant’s theories of liabilitystill need to be addressed and what claims, if any, may still remain.  Grace’s recorded asbestos-related liabilityat June 30, 2007 assumes the risk of loss from ZAI litigation is notprobable.  If Grace’s view as to risk ofloss is not sustained, management believes the cost to resolve the matter wouldbe material.

***Personal Injury Litigation***—****Asbestos personal injury claimants allege adverse healtheffects from exposure to asbestos-containing products formerly manufactured byGrace.  Historically, Grace’s cost toresolve such claims has been influenced by numerous variables, including thenature of the disease alleged, product identification, proof of exposure to aGrace product, negotiation factors, the solvency of other former producers ofasbestos containing products, cross-claims by co-defendants, the rate at whichnew claims are filed, the jurisdiction in which the claims are filed, and thedefense and disposition costs associated with these claims.

Cumulativelythrough the Filing Date, 16,354 asbestos personal injury lawsuits involvingapproximately 35,720 claims were dismissed without payment of any damages orsettlement amounts (primarily on the basis that Grace products were notinvolved) and approximately 55,489 lawsuits involving approximately 163,698claims were disposed of (through settlements and judgments) for a total of$645.6 million.  As of the Filing Date,129,191 claims for personal injury were pending against Grace. Grace believesthat a substantial number of additional personal injury claims would have beenreceived between the Filing Date and June 30, 2007 had such claims not beenstayed by the Bankruptcy Court.

***Asbestos-Related Liability***—****The total recordedasbestos-related liability as of June 30, 2007 and December 31, 2006 was$1,700.0 million and is included in “liabilities subject to compromise” in theaccompanying Consolidated Balance Sheets. Grace adjusted its asbestos-related liability in the fourth quarter of2004 based on its proposed plan of reorganization as discussed in Note 2. Theamount recorded at June 30, 2007 and December 31, 2006 includes the $1,613million maximum amount reflected as a condition precedent to the Plan and $87million related to pre-Chapter 11 contractual settlements and judgmentsincluded in general unsecured claims.

Under the Plan,Grace is requesting that the Bankruptcy Court determine the aggregate dollaramount, on a net present value basis, that must be funded on the effective dateof the Plan into an asbestos trust (established under Section 524(g) of 

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the BankruptcyCode) to pay all asbestos-related personal injury and property damage claims(including ZAI) entitled to payment under the Plan and related trustadministration costs and expenses on the later of the effective date of thePlan or when allowed (the “Funding Amount”). It is a condition to confirmationof the Plan that the Bankruptcy Court shall conclude that the Funding Amount isnot greater than $1,613 million. This amount, which should be sufficient tofund over $2 billion in pending and future claims, was based in part on Grace’s2004 evaluation of (1) existing but unresolved personal injury and propertydamage claims, (2) actuarially-based estimates of future personal injuryclaims, (3) the risk of loss from ZAI litigation, (4) proposed claim paymentsreflected in the Plan, and (5) the cost of the trust administration andlitigation.  Based upon these and otherfactors, Grace was prepared to settle its asbestos-related claims at thisamount as part of a consensual plan of reorganization.  As part of the estimation and litigationprocess, the amounts proposed to or adopted by the Bankruptcy Court may bematerially different than this amount.

The BankruptcyCourt has entered separate case management orders for estimating liability forpending and future personal injury claims and adjudicating pending propertydamage claims, excluding ZAI claims.  Atrial for estimating liability for personal injury claims is currentlyscheduled to begin in the first quarter of 2008.  Hearings for the adjudication of variousissues regarding certain property damage claims are scheduled for the secondand third quarters of 2007.****TheDebtors expect that the estimated liability will provide the basis fordetermining the Funding Amount to be paid into the trust on the effective dateof the Plan.

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

The BankruptcyCourt also established procedures and deadlines forfiling proofs of claims for asbestos personal injury claims pending as of theFiling Date.  Claimants asserting claims subject to enforceable writtensettlement agreements dated prior to the Filing Date, which have not been fullypaid or satisfied, were required to file proofs of claim by October 16,2006.  Claimants asserting claimsthat are not subject to such settlement agreements were required to file proofsof claim by November 15, 2006.

Grace hascatalogued and analyzed the information furnished with the proofs of claim andquestionnaires. The information has been analyzed and reviewed by experts andGrace, the official committee of asbestos personal injury claimants and therepresentative of the future asbestos claimants have submitted expert reportsthat each party will rely upon to support its respective estimate of Grace’sasbestos personal injury liability.  Theestimate of such liability is expected to provide the basis for determining theappropriate funding amount to resolve current and future asbestos personalinjury claims in a plan of reorganization.  Copies of Grace’s and theofficial committee of asbestos personal injury claimants’ expert reports andportions of the representative of the future asbestos claimants’ expert reportare available through the Bankruptcy Court. These expert reports are subject tosupplementation, rebuttal and discovery, and are based on data, methodologiesand assumptions that may or may not be accepted by the Bankruptcy Court. Graceexpects the estimation litigation process to conclude with hearings currentlyscheduled to begin in the first quarter of 2008.  Grace expects to adjust its recordedasbestos-related liability as necessary to reflect rulings made by theBankruptcy Court following these hearings after consideration of all evidencepresented by Grace, the official committees and the representative of futureasbestos claimants; such adjustments may be material.

For propertydamage claims, the case management order provides that estimation will bepreceded by litigation on certain common threshold issues affecting asubstantial majority of claims. Such litigation will consist of determining,among other things, (1) whether asbestos-containing products formerlymanufactured by Grace are hazardous in place, and (2) compliance with theapplicable statute of limitations.  Gracewill also ask****the Bankruptcy Courtto rule on Grace’s specific objections to individual claims and groups ofclaims.

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The Funding Amountwill primarily be a function of the number of property damage and personalinjury claims entitled to be paid under the Plan, and the amount payable perclaim. Through the estimation process, Grace will seek to demonstrate that mostclaims have no value because they fail to establish any material propertydamage, health impairment or significant occupational exposure to asbestos fromGrace’s operations or products. If the Bankruptcy Court agrees with Grace’sposition on the number of, and the amounts to be paid in respect of, allowedpersonal injury and property damage claims, then Grace believes that theFunding Amount could be less than $1,613 million. However, this outcome ishighly uncertain and will depend on a number of Bankruptcy Court rulingsfavorable to Grace’s position.

Conversely, theasbestos claimants committees and the representative of future asbestosclaimants continue to assert that Grace’s asbestos-related liabilities aresubstantially higher than $1,613 million, and in fact are in excess of Grace’sbusiness value.  If the Court accepts theposition of the asbestos claimants committees, then any plan of reorganizationlikely would result in the loss of all or substantially all equity value bycurrent shareholders. Therefore, due to the significant uncertainties of thisprocess and asbestos litigation generally, Grace is not able to estimate aprobable Funding Amount that would be accepted by the Bankruptcy Court.

However, as Graceis willing to proceed with confirmation of the Plan with a Funding Amount of upto $1,613 million (assuming that other conditions precedent to confirmation ofthe Plan are satisfied, including the availability of the payment from Cryovacdirectly to the asbestos trust under the settlement agreement described in Note2), Grace’s recorded asbestos-related liability reflects the maximum amountallowed as a condition precedent under the Plan. This amount, plus $87.0million for pre-Chapter 11 contractual settlements and judgments, brings thetotal recorded asbestos-related liability as of June 30, 2007 and December 31,2006 to $1,700 million. Any differences between the Plan as filed and asapproved for confirmation could fundamentally change the accounting measurementof Grace’s asbestos-related liability and that change could be material.

***Insurance Rights*** —****Grace previously purchased insurancepolicies that provided coverage for years 1962 to 1985 with respect toasbestos-related lawsuits and claims that, in the aggregate, amounts to $917million of available coverage from solvent insurance carriers.  Eligible claims would have to exceed $4billion to access total coverage. For the most part, coverage for years 1962through 1972 has been exhausted, leaving coverage for years 1973 through 1985available for pending and future asbestos claims.  Since 1985, insurance coverage forasbestos-related liabilities has not been commercially available to Grace.

With one exception, coverage disputes regarding Grace’s primaryinsurance policies have been settled, and the settlement amounts paid in full.Grace’s excess coverage is for loss above certain levels.  The levels vary from policy to policy,creating “layers” of excess coverage, some of which are triggered beforeothers.

Grace has entered into settlement agreements with various excessinsurance carriers. These settlements involve amounts paid and to be paid toGrace. The unpaid maximum aggregate amount for settled insurers available underthese settlement agreements is approximately $487 million.  With respect to asbestos-related personalinjury claims, the settlement agreements generally require that the claims bespread over the claimant’s exposure period and that each insurer pay a pro rataportion of each claim based on the amount of coverage provided during each yearof the total exposure period.

Presently, Grace has no agreements in place with insurers withrespect to approximately $430 million of excess coverage, which is at layersof coverage that have not yet been triggered, but certain layers would betriggered if the Plan were approved at the recorded asbestos-related liabilityof $1,700 million. Grace believes that any allowed ZAI claims also would becovered under the settlement agreements and unsettled policies discussed aboveto the extent they relate to installations of ZAI occurring after July 1,1973.

In addition, Grace has approximately $253 million of excesscoverage with insolvent or non-paying insurance carriers. Non-paying carriersare those that, although technically solvent, are not currently meeting theirobligations to pay claims. Grace has filed and continues to file claims in theinsolvency proceedings of insolvent carriers. Grace is currently receiving distributionsfrom some of these insolvent carriers and expects to receive distributions inthe future. Settlement amounts are recorded as income when received.

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In November 2006,Grace entered into a settlement agreement with an underwriter of a portion ofits excess insurance coverage. The insurer paid a settlement amount of $90.0million directly to an escrow account for the benefit of the holders of claimsfor which Grace was provided coverage under the affected policies.  The escrow account balance at June 30, 2007approximated $92.5 million, including interest earned on the account. Fundswill be distributed from this account directly to claimants at the direction ofthe escrow agent pursuant to the terms of a confirmed plan of reorganization oras otherwise ordered by the Bankruptcy Court. Grace will record the amount in the escrow account as an asset andreduce its asbestos insurance receivable balance when all contingencies for therelease of such amount are satisfied.

As of June 30, 2007, including the settlement discussed above andafter subtracting previous reimbursements by insurers and allowing fordiscounts pursuant to certain settlement agreements, there remainsapproximately $917 million of excess coverage from 55 presently solventinsurers. Grace estimates that, assuming the resolution value ofasbestos-related claims equal to the recorded liability of $1,700 million(which should fund claim payments in excess of $2 billion), it should beentitled to approximately $500 million of insurance recovery.  This amount was determined by estimating theaggregate and per year payout for claims over time and applying the expectedinsurance recovery factor to such claims. However, the ultimate amount ofinsurance recovered on such claims will depend on a number of factors that canonly be determined at the time claims are paid including: the nature of theclaim (PI, PD or ZAI), the relevant exposure years, the timing of payment, thesolvency of insurers and the legal status of policy rights. Accordingly, Grace’srecorded estimate of insurance recovery may differ materially from actualamounts received.

# **4.****              Income Taxes**

As disclosed inNote 1, Grace adopted FIN 48 as of January 1, 2007. Under FIN 48, Grace mayrecognize the tax benefit from an uncertain tax position only if it is morelikely than not that the tax position will be sustained upon examination by thetaxing authorities, based on the technical merits of the position. The taxbenefits recognized in the financial statements from such a position should bemeasured based on the largest benefit that has a greater than fifty percentlikelihood of being realized upon ultimate settlement.

The effect of theimplementation of FIN 48 was to reduce Grace’s accumulated deficit as ofJanuary 1, 2007 by $2.2 million. This amount primarily reflected recognition ofU.S. federal tax benefits relating to certain expenses incurred in defense ofcreditor claims and various alternative minimum tax benefits arising from prioryear audits, offset by certain increases to reserves on foreign income andundistributed foreign earnings.  Theamount of unrecognized tax benefits at January 1, 2007 was $200.2 million. Ifthis amount were recognized it would affect Grace’s effective tax rate.  However, to the extent that such recognitioninvolves an increase in U.S. net operating losses, an additional tax chargecould be required on undistributed foreign earnings.  The $200.2 million of unrecognized taxbenefits includes $45.0 million related to the deduction of certain capitallosses in Grace’s 1999 U.S. tax return, as further described below, the benefitof which has not been recorded by Grace for financial reporting purposes.

During the threemonths ended June 30, 2007, Grace became entitled to and recorded interestreceivable (net of federal tax) of $14.7 million related to certain refundclaims resulting from losses arising in the years 1997-2002 eligible forcarryback. In addition, Grace recorded an increase in its liability foruncertain tax positions of $3.1 million related primarily to an ongoing incometax examination in Germany.

Grace accruespotential interest and any associated penalties related to uncertain taxpositions in “benefit from (provision for) income taxes” in the ConsolidatedStatements of Operations. The total amount of interest and penalties (on agross basis) accrued on uncertain tax positions as of January 1, 2007 was $59.1million. During the three months ended June 30, 2007, Grace accrued additionalinterest expense (net of applicable federal benefit) and penalties of $1.0million ($2.9 million for the six months ended June 30, 2007).

Grace files U.S.federal income tax returns as well as income tax returns in various states andforeign jurisdictions. In many cases, Grace’s uncertain tax positions arerelated to tax years that remain subject to examination by the relevant taxingauthorities. The following table summarizes these open tax years by majorjurisdiction:

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| Tax Jurisdiction | ** ** | ** ** | ** ** | **Examination  in Progress** | ** ** | **Examination Not  Yet Initiated** | ** ** |
|-----------------------|------------|------------|------------|-----------------------------------|------------|----------------------------------------------|------------|
| United States(1)(2)   |       | 1993-2004  |       | 2005-2006                         |       |
| Germany(1)            |       | 1998-2001  |       | 2002-2006                         |       |
| United Kingdom        |       | None       |       | 2005-2006                         |       |
| Singapore             |       | None       |       | 2002-2006                         |       |
| France                |       | None       |       | 2004-2006                         |       |
| Italy                 |       | None       |       | 2000-2006                         |       |

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(1)                Includesfederal as well as state, provincial or local jurisdictions, as applicable.

(2)                Inthe U.S., the IRS is currently examining tax years 2002-2004.  Tax years 1993-1996 and 1997-2001 have beenexamined and partially resolved and there are still pending issues in appealsor pending legal proceedings as described below.

Based upon theoutcome of these examinations, or as a result of the expiration of statute oflimitations for specific jurisdictions, Grace believes there may be a materialchange to Grace’s aggregate recorded liabilities for uncertain tax positions inthe next twelve months with respect to the following matters:

1.               With respect to the1993-1996 federal income tax audit there is one issue outstanding related to$7.0 million of research and experimentation (“R&E”) credits.  Grace is currently engaged in settlementdiscussions with the Internal Revenue Service (“IRS”) regarding this matter.

2.               With respect to theIRS examination of the 1997-2001 tax years, Grace has received revisedexamination reports from the IRS, which include the review of losses carriedback to 1988-1989 (collectively, the “Examination Reports”) asserting, in theaggregate, approximately $32.5 million of net additional tax plus accruedinterest.  The most significant issueaddressed in the Examination Reports concerns the carryback of a specifiedliability loss from the 1998 tax period to the 1989 taxable year.  On March 22, 2007, Grace received a Notice ofDeficiency with respect to the carryback of the specified liability loss and certainother issues.  Grace expects to commencetax court litigation to resolve the issues relating to the Notice ofDeficiency.  Another unresolved issuerelates to the 1999 recognition of a capital loss on the disposal of shares of anaffiliated entity formed to assist Grace with its environmental remediationneeds.  The amount at issue is $45million and Grace is defending its position administratively through the IRSappeals process.

OtherTax Matters

In January 2007, Grace settled with the IRS on thematter related to federal income tax withholding and Federal InsuranceContributions Act taxes for calendar years 1993 through 1998 of a Gracesubsidiary that formerly operated a temporary staffing business for health carepersonnel. Grace paid a $13.0 million settlement and received an indemnificationpayment of approximately $2.7 million from its former partner in the business.

As of June 30, 2007, Grace had $256.2 million in U.S.net operating loss (“NOL”) carryforwards. As reflected in Grace’s accrual related to future foreign earningsrepatriations, Grace anticipates the utilization of these NOLs to reduce thetax cost of future dividends from its non-U.S. affiliates.  Grace anticipates generating additional NOLsupon emergence from bankruptcy as contemplated in the Plan.  Because Grace did not pay a significantamount of U.S. taxes in prior years and/or has already received or applied fortax refunds from available NOL carryback years, it expects to carryforward mostof its NOLs after emergence from bankruptcy. Under federal income tax law, acorporation is generally permitted to carryforward NOLs for a 20-year periodfor deduction against future taxable income. Grace’s ability to deduct NOLcarryforwards could be significantly limited if it were to undergo an ownershipchange during or as a result of the Chapter 11 proceeding.  During the course of the bankruptcyproceeding, the Bankruptcy Court entered an order that places certainlimitations on trading in Grace common stock or options convertible into Gracecommon stock.  Pursuant to theselimitations, Grace intends to object to any purchase of Grace common stock oroptions that would potentially contribute to an ownership change.  However, Grace can provide no assurance thatthese limitations will prevent an ownership change or that its ability toutilize net operating loss carryforwards will not be significantly limited as aresult of Grace’s reorganization.

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# **5.****              Other (Income) Expense**

Components of other(income) expense are as follows:

 
| **Other (Income) Expense**                             | ** ** | **Three Months  Ended  June 30,** | ** ** | **Six Months  Ended  June 30,** | ** ** |
|------------------------------------------------------------------|------------|---------------------------------------------|------------|-------------------------------------------|------------|
| ***(In millions)***                                         | ** ** | **2007**                                    | ** ** | **2006**                                  | ** ** | **2007** | ** ** | **2006** | ** ** |
| Income from insurance  settlements                               | ** ** | **$**                                       | **—** |                                      | $          | (6.9 | ) | **$** | **—** |   | $ | (6.9 | ) |
| COLI income, net                                                 | ** ** | **(0.5**                                    | **)**      | (0.5                                      | )          | **(2.5** | **)** | (1.7 | ) |
| Interest income                                                  | ** ** | **(1.6**                                    | **)**      | (1.6                                      | )          | **(3.7** | **)** | (3.0 | ) |
| Net (gain) loss on  sales of investments and disposals of assets | ** ** | **(3.4**                                    | **)**      | (4.6                                      | )          | **(3.6** | **)** | (2.8 | ) |
| Currency translation — intercompany  loan                   | ** ** | **(1.0**                                    | **)**      | (10.7                                     | )          | **(3.8** | **)** | (13.7 | ) |
| Value of currency  contracts                                     | ** ** | **0.4**                                     |       | 10.7                                      | ** ** | **2.5** |   | 13.5 |   |
| Other currency  transaction effects                              | ** ** | **1.5**                                     |       | 1.7                                       | ** ** | **1.9** |   | 2.7 |   |
| Cash received on  previously written-off receivable              | ** ** | **—**                                  |       | —                                    | ** ** | **(0.9** | **)** | — |   |
| Interest income on  joint venture cash balances                  | ** ** | **(0.6**                                    | **)**      | (0.1                                      | )          | **(1.3** | **)** | (0.2 | ) |
| Other miscellaneous  income                                      | ** ** | **(2.5**                                    | **)**      | (1.9                                      | )          | **(4.3** | **)** | (3.7 | ) |
| Total other (income) expense                                     | ** ** | **$**                                       | **(7.7**   | **)**                                     | $          | (13.9 | ) | **$** | **(15.7** | **)** | $ | (15.8 | ) |

 

# **6.****              Balance SheetAccounts**

*MarketableSecurities*

In April 2007, Graceinvested $25.0 million in a six-month 5.25% note offered by the Federal HomeLoan Bank.  Principal and interest on thenote matures on November 1, 2007.  Graceis accounting for this investment as held-to-maturity, and carrying the note atamortized cost, which approximates fair value. Grace has accrued $0.2 million of interest income on this note in thethree months ended June 30, 2007, which is recorded in “Chapter 11 expenses,net of interest income” in the Consolidated Statement of Operations.

*OtherBalance Sheet Accounts*

The followingtable provides details of Grace’s other significant balance sheet accounts asof June 30, 2007 and December 31, 2006:

 
| ***(In millions)***                                                     | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| **Inventories**                                                              | ** ** | ** **              |       |                        |       |
| Raw materials                                                                | ** ** | **$**                   | **70.6**   |                        | $          | 59.6 |   |
| In process                                                                   | ** ** | **40.1**                |       | 41.4                        |       |
| Finished  products                                                           | ** ** | **201.4**               |       | 189.8                       |       |
| General  merchandise                                                         | ** ** | **36.9**                |       | 35.6                        |       |
| Less: Adjustment  of certain inventories to a last-in/first-out (LIFO) basis | ** ** | **(62.0**               | **)**      | (41.8                       | )          |
|                                                                         | ** ** | **$**                   | **287.0**  |                        | $          | 284.6 |   |
| **Other  Assets**                                                            | ** ** | ** **              |       |                        |       |
| Deferred charges                                                             | ** ** | **$**                   | **39.7**   |                        | $          | 38.1 |   |
| Long-term  receivables, less allowances of $0.8 (2005 - $0.7)                | ** ** | **7.9**                 |       | 7.9                         |       |
| Patents,  licenses and other intangible assets, net                          | ** ** | **81.7**                |       | 84.9                        |       |
| Investments in  unconsolidated affiliates and other                          | ** ** | **10.0**                |       | 0.6                         |       |
|                                                                         | ** ** | **$**                   | **139.3**  |                        | $          | 131.5 |   |
| **Other  Current Liabilities**                                               | ** ** | ** **              |       |                        |       |
| Accrued  compensation                                                        | ** ** | **$**                   | **70.9**   |                        | $          | 90.4 |   |
| Deferred tax  liability                                                      | ** ** | **7.2**                 |       | 6.7                         |       |
| Customer volume  rebates                                                     | ** ** | **29.8**                |       | 41.8                        |       |
| Accrued  commissions                                                         | ** ** | **10.1**                |       | 13.5                        |       |
| Accrued  reorganization fees                                                 | ** ** | **35.3**                |       | 24.9                        |       |
| Income taxes  payable                                                        | ** ** | **33.5**                |       | 13.9                        |       |
| Other accrued  liabilities                                                   | ** ** | **89.6**                |       | 81.4                        |       |
|                                                                         | ** ** | **$**                   | **276.4**  |                        | $          | 272.6 |   |
| **Other  Liabilities**                                                       | ** ** | ** **              |       |                        |       |
| Long-term  self-insurance reserve                                            | ** ** | **$**                   | **8.0**    |                        | $          | 8.0 |   |
| Retained  obligations of divested businesses                                 | ** ** | **5.3**                 |       | 5.3                         |       |
| Long-term  incentive compensation                                            | ** ** | **4.1**                 |       | 12.2                        |       |
| Other accrued  liabilities                                                   | ** ** | **19.2**                |       | 17.8                        |       |
|                                                                         | ** ** | **$**                   | **36.6**   |                        | $          | 43.3 |   |

 

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During2007, a reduction in U.S. LIFO inventory levels resulted in costs pertaining toprior years being reflected in cost of sales for the six months ended June 30,2007.  This had the effect of increasingpre-tax income by $0.7 million compared to current cost.

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

**7.****              Life Insurance**

Graceis the beneficiary of corporate-owned life insurance (“COLI”) policies oncertain current and former employees with a net cash surrender value of $91.5million and $89.2 million at June 30, 2007 and December 31, 2006, respectively.The policies were acquired to fund various employee benefit programs and otherlong-term liabilities and are structured to provide cash flow (primarilytax-free) over an extended number of years.

The following tablessummarize activity in these policies for the six months ended June 30, 2007 and2006, and the components of net cash value at June 30, 2007 and December 31,2006:

 
| **Life Insurance — Activity Summary**  | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------------|------------|-----------------------------------------------|------------|
| ***(In millions)***                              | ** ** | **2007**                                      | ** ** | **2006** | ** ** |
| Earnings on  policy assets                            | ** ** | **$**                                         | **2.8**    |   | $ | 2.4 |   |
| Interest on  policy loans                             | ** ** | **(0.3**                                      | **)**      | (0.7 | ) |
| Policy loan  repayments                               | ** ** | **—**                                    |       | — |   |
| Proceeds from  termination of life insurance policies | ** ** | **—**                                    |       | — |   |
| Net investing  activity                               | ** ** | **(0.2**                                      | **)**      | 0.1 |   |
| Change in net  cash value                             | ** ** | **$**                                         | **2.3**    |   | $ | 1.8 |   |
| Tax-free  proceeds received                           | ** ** | **$**                                         | **—** |   | $ | 0.2 |   |

 
| **Components of Net Cash Value** | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ***(In millions)***                             | ** ** | **2007**          | ** ** | **2006**              | ** ** |
| Gross cash value                                     | ** ** | **$**             | **117.2**  |                  | $          | 114.7 |   |
| Principal — policy  loans                       | ** ** | **(24.5**         | **)**      | (25.0                 | )          |
| Accrued interest  — policy loans                | ** ** | **(1.2**          | **)**      | (0.5                  | )          |
| Net cash value                                       | ** ** | **$**             | **91.5**   |                  | $          | 89.2 |   |
| Insurance benefits in  force                         | ** ** | **$**             | **197.5**  |                  | $          | 197.9 |   |

 

Grace’s financialstatements display income statement activity and balance sheet amounts on a netbasis, reflecting the contractual interdependency of policy assets andliabilities.

**8.****              Debt**

 
| **Components of Debt**                          | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ***(In millions)***                                  | ** ** | **2007**          | ** ** | **2006**              | ** ** |
| **Debt  payable within one year**                         | ** ** | ** **        | ** ** | ** **            | ** ** |
| Other short-term  borrowings                              | ** ** | **$**             | **12.8**   |                  | $          | 3.3 |   |
|                                                      | ** ** | ** **        | ** ** | ** **            | ** ** |
| **Debt  payable after one year**                          | ** ** | ** **        | ** ** | ** **            | ** ** |
| DIP facility                                              | ** ** | **$**             | **—** |                  | $          | — |   |
| Other long-term  borrowings                               | ** ** | **0.3**           |       | 0.2                   |       |
|                                                      | ** ** | **$**             | **0.3**    |                  | $          | 0.2 |   |
| **Debt  Subject to Compromise**                           |       |              |       |                  |       |
| Bank borrowings                                           | ** ** | **$**             | **500.0**  |                  | $          | 500.0 |   |
| Other borrowings                                          | ** ** | **15.5**          |       | 13.8                  |       |
| Accrued interest                                          | ** ** | **255.8**         |       | 225.7                 |       |
|                                                      | ** ** | **$**             | **771.3**  |                  | $          | 739.5 |   |
| Annualized weighted  average interest rates on total debt | ** ** | **8.3**           | **%**      | 7.9                   | %          |

 

In April 2001, theDebtors entered into the DIP facility for a two-year term in the aggregateamount of $250 million. The DIP facility is secured by a priority lien onsubstantially all assets of the Debtors with the exclusion of the capital stockof non-U.S. subsidiaries, and bears interest based on the London InterbankOffered Rate (LIBOR). The Debtors have extended the term of the DIP facilitythrough April 1, 2008. Grace had no outstanding borrowings under the DIPfacility as of June 30, 2007 and December 31, 2006; however, $51.1 million and$55.4 million of standby letters of credit were issued and outstanding underthe facility as of June 30, 2007 and December 31, 2006, respectively. Theletters of credit, which reduce available funds under the facility, were issuedprimarily for trade-related matters such as performance bonds, and certaininsurance and environmental matters.

In January 2007, Grace’s principal German subsidiaryentered into a line of credit arrangement with a German financing company inthe maximum aggregate amount of €50.0 million (equivalent to $67.2 million atJune 30, 2007) secured by the accounts receivable of the German subsidiary.  The financing arrangement will terminate onDecember 31, 2009, and includes financing costs based on the EURIBOR rate ofinterest, plus a minimum annual fee.

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As of June 30, 2007, Grace had access to theequivalent of approximately $63.7 million in available credit under variousnon-U.S. credit facilities.

**9.****              Shareholders’ Equity(Deficit)**

Under itsCertificate of Incorporation, the Company is authorized to issue 300,000,000shares of common stock, $0.01 par value. Of the common stock unissued at June30, 2007, approximately 3,365,846 shares were reserved for issuance pursuant tostock options and other stock incentives. Since the Filing Date, Grace has notgranted any stock options. During the six months ended June 30, 2007, 1,215,996stock options were exercised for aggregate proceeds of $19.4 million.

For additionalinformation, see Notes 15 and 17 to the Consolidated Financial Statements inGrace’s 2006 Form 10-K.

**10.****             Earnings (Loss) PerShare**

The following table showsa reconciliation of the numerators and denominators used in calculating basicand diluted earnings (loss) per share.

 
| **Earnings (Loss) Per Share**                           | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ***(In millions, except per share amounts)*** | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Numerators**                                                         | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income (loss)                                                      | ** ** | **$**                                           | **20.5**   |                                          | $          | (5.2 | ) | **$** | **25.3** |   | $ | (5.1 | ) |
| **Denominators**                                                       |       |                                            |       |                                          |       |   |   |   |   |
| Weighted average common shares — basic calculation                | ** ** | **70.1**                                        |       | 67.9                                          | ** ** | **69.8** |   | 67.5 |   |
| Dilutive effect of employee stock options                              | ** ** | **1.7**                                         |       | —                                        | ** ** | **1.6** |   | — |   |
| Weighted average common shares — diluted calculation              | ** ** | **71.8**                                        |       | 67.9                                          | ** ** | **71.4** |   | 67.5 |   |
| **Basic  earnings (loss) per share**                                   | ** ** | **$**                                           | **0.29**   |                                          | $          | (0.08 | ) | **$** | **0.36** |   | $ | (0.08 | ) |
| **Diluted earnings (loss) per  share**                                 | ** ** | **$**                                           | **0.29**   |                                          | $          | (0.08 | ) | **$** | **0.35** |   | $ | (0.08 | ) |

 

The average market price of Grace’s common stockexceeded the exercise price of all outstanding stock options for the threemonths and six months ended June 30, 2007. Therefore, there were no antidilutive options outstanding during theseperiods.

Stock options that could potentially dilute basicearnings (loss) per share (that were excluded from the computation of dilutedearnings (loss) per share because their exercise prices were greater than theaverage market price of the common shares) averaged approximately 5.3 millionand 6.1 million for the three months and six months ended June 30, 2006,respectively.  As a result of the netlosses recorded for the three months and six months ended June 30, 2006, approximately500,000 and 400,000, respectively, of employee compensation-related sharesissuable under stock options were also excluded from the diluted loss per sharecalculation because their effect would have been antidilutive.

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**11.****             Comprehensive Income(Loss)**

The tables below presentthe pre-tax, tax and after-tax components of Grace’s other comprehensive income(loss) for the three months and six months ended June 30, 2007 and 2006:

 
| **Three Months Ended June 30, 2007**                      | ** ** | **Pre-Tax** | ** ** | **Tax  Benefit/** | ** ** | **After-  Tax** | ** ** |
|------------------------------------------------------------------------------------|------------|-------------|------------|-------------------|------------|-----------------|------------|
| ***(In millions)***                                                           | ** ** | **Amount**  | ** ** | **(Expense)**     | ** ** | **Amount**      | ** ** |
| Gain (loss) from  hedging activities                                               |       | $           | (2.0       | )                 | $          | 0.8             | ** ** | **$** | **(1.2** | **)** |
| Defined benefit  pension and other postretirement plans:                           |       |        |       |              | ** ** | ** **      | ** ** |
| Amortization of net prior service credit included in  net periodic benefit cost    |       | (1.8        | )          | 0.6               | ** ** | **(1.2**        | **)**      |
| Amortization of net deferred actuarial loss included  in net periodic benefit cost |       | 7.4         |       | (2.6              | )          | **4.8**         | ** ** |
| Other changes in funded status                                                     |       | 54.5        |       | (18.7             | )          | **35.8**        | ** ** |
| Benefit plans,  net                                                                |       | 60.1        |       | (20.7             | )          | **39.4**        | ** ** |
| Foreign currency  translation adjustments                                          |       | 8.9         |       | —            | ** ** | **8.9**         | ** ** |
| Other  comprehensive income (loss)                                                 |       | $           | 67.0       |              | $          | (19.9           | )          | **$** | **47.1** | ** ** |

 
| **Six Months Ended June 30, 2007**                                                 | ** ** | **Pre-Tax** | ** ** | **Tax  Benefit/** | ** ** | **After-  Tax** | ** ** |
|------------------------------------------------------------------------------------|------------|-------------|------------|-------------------|------------|-----------------|------------|
| ***(In millions)***                                                           | ** ** | **Amount**  | ** ** | **(Expense)**     | ** ** | **Amount**      | ** ** |
| Gain (loss) from  hedging activities                                               |       | $           | (0.1       | )                 | $          | —          | ** ** | **$** | **(0.1** | **)** |
| Defined benefit  pension and other postretirement plans:                           |       |        |       |              | ** ** | ** **      | ** ** |
| Amortization of net prior service credit included in  net periodic benefit cost    |       | (3.5        | )          | 1.2               | ** ** | **(2.3**        | **)**      |
| Amortization of net deferred actuarial loss included  in net periodic benefit cost |       | 14.1        |       | (4.8              | )          | **9.3**         | ** ** |
| Other changes in funded status                                                     |       | 49.0        |       | (17.0             | )          | **32.0**        | ** ** |
| Benefit plans,  net                                                                |       | 59.6        |       | (20.6             | )          | **39.0**        | ** ** |
| Foreign currency  translation adjustments                                          |       | 14.6        |       | —            | ** ** | **14.6**        | ** ** |
| Other  comprehensive income (loss)                                                 |       | $           | 74.1       |              | $          | (20.6           | )          | **$** | **53.5** | ** ** |

 
| **Three Months Ended June 30, 2006**      | ** ** | **Pre-Tax** | ** ** | **Tax  Benefit/** | ** ** | **After-  Tax** | ** ** |
|-------------------------------------------|------------|-------------|------------|-------------------|------------|-----------------|------------|
| ***(In millions)***                  | ** ** | **Amount**  | ** ** | **(Expense)**     | ** ** | **Amount**      | ** ** |
| Gain (loss) from  hedging activities      |       | $           | 0.5        |              | $          | (0.2            | )          | $ | 0.3 |   |
| Foreign currency  translation adjustments |       | 13.6        |       | —            |       | 13.6            |       |
| Other  comprehensive income (loss)        |       | $           | 14.1       |              | $          | (0.2            | )          | $ | 13.9 |   |

 
| **Six Months Ended June 30, 2006**        | ** ** | **Pre-Tax** | ** ** | **Tax  Benefit/** | ** ** | **After-  Tax** | ** ** |
|-------------------------------------------|------------|-------------|------------|-------------------|------------|-----------------|------------|
| ***(In millions)***                  | ** ** | **Amount**  | ** ** | **(Expense)**     | ** ** | **Amount**      | ** ** |
| Gain (loss) from  hedging activities      |       | $           | (0.4       | )                 | $          | 0.1             |       | $ | (0.3 | ) |
| Foreign currency  translation adjustments |       | 14.6        |       | —            |       | 14.6            |       |
| Other comprehensive  income (loss)        |       | $           | 14.2       |              | $          | 0.1             |       | $ | 14.3 |   |

 

The following tablepresents the components of Grace’s accumulated other comprehensive income(loss) at June 30, 2007 and December 31, 2006:

 
| **Components of Accumulated Other Comprehensive Income (Loss)** | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ***(In millions)***                                                                      | ** ** | **2007**          | ** ** | **2006**              | ** ** |
| Hedging  activities (net of tax)                                                              | ** ** | **$**             | **(1.4**   | **)**                 | $          | (1.3 | ) |
| Defined benefit  pension and other postretirement plans:                                      |       |              |       |                  |       |
| Net prior service credit (net of tax)                                                         | ** ** | **6.8**           |       | 9.1                   |       |
| Net deferred actuarial loss (net of tax)                                                      | ** ** | **(362.9**        | **)**      | (404.2                | )          |
| Benefit plans,  net                                                                           | ** ** | **(356.1**        | **)**      | (395.1                | )          |
| Foreign currency  translation                                                                 | ** ** | **20.2**          |       | 5.6                   |       |
| Accumulated other  comprehensive income (loss)                                                | ** ** | **$**             | **(337.3** | **)**                 | $          | (390.8 | ) |

 

Accumulated othercomprehensive income (loss) related to the defined benefit pension and otherpostretirement plans at June 30, 2007 represents the accumulation of netactuarial losses of $362.9 million as well as net prior service credits of $6.8million. These amounts are net of tax and are amortized as a component of netperiodic benefit cost. For the three months and six months ended June 30, 2007,the pre-tax benefit recognized related to prior service credits was $1.8million and $3.5 million, respectively, and the pre-tax expense recognized foramortization of accumulated actuarial losses was $7.4 million and $14.1million, respectively. In addition, $54.5 million and $49.0 million ofadditional pre-tax comprehensive income was recognized for changes in fundedstatus during the three months and six months ended June 30, 2007, respectively(see Note 13 for more information).

From time to time,Grace enters into commodity derivatives such as forward contracts or option 

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contracts directlywith natural gas suppliers, and fixed-rate swaps with financial institutions tomitigate the risk of volatility of natural gas prices in the UnitedStates.  Under fixed-rate swaps, Gracelocks in a fixed rate with a financial institution for future natural gaspurchases, purchases its natural gas from a supplier at the prevailing marketrate, and settles with the bank for any difference in the rates, thereby “swapping”a variable rate for a fixed rate.  Gracepurchases forward contracts, swaps and/or options for a portion of its expectednatural gas requirements. Grace’sforward contracts for natural gas qualify for the normal purchases and normalsales exception from SFAS No. 133, as they do not contain net settlementprovisions, and result in physical delivery of natural gas from suppliers.  Therefore, the fair values of these contractsare not recorded in the Consolidated Balance Sheets.  The outstanding swaps and options aretreated as effective cash flow hedges for accounting purposes and revalued atthe end of each quarter, with corresponding adjustments to other comprehensiveincome (loss).

Grace is a globalenterprise, which operates in over 40 countries with local currency generallydeemed to be the functional currency for accounting purposes. The foreigncurrency translation amount represents the adjustments necessary to translatethe balance sheets valued in local currencies to the U.S. dollar as of the endof each period presented, and to translate revenues and expenses at averageexchange rates for each period presented. As part of its risk management program, Grace enters into foreigncurrency exchange rate forward and/or option contracts to mitigate the effectsof exchange rate fluctuations.  Gracealso utilizes foreign currency forward exchange rate and/or option contractsfrom time to time to hedge the value of its net investment in certain foreignentities.  The outstanding foreigncurrency forward contracts and options were treated as effective cash flowhedges and/or net investments hedges, as appropriate, for accounting purposesand revalued at the end of each quarter, with corresponding adjustments toother comprehensive income (loss).

**12.****             Commitments andContingent Liabilities**

***Asbestos-Related Liability***— See Note3

***Environmental Remediation***—****Grace is subject to loss contingencies resulting fromextensive and evolving federal, state, local and foreign environmental laws andregulations relating to the generation, storage, handling, discharge anddisposition of hazardous wastes and other materials. Grace accrues foranticipated costs associated with investigative and remediation efforts wherean assessment has indicated that a probable liability has been incurred and thecost can be reasonably estimated. These accruals do not take into account anydiscounting for the time value of money.

Grace’senvironmental liabilities are reassessed whenever circumstances become betterdefined or remediation efforts and their costs can be better estimated. Theseliabilities are evaluated based on currently available information, includingthe progress of remedial investigation at each site, the current status ofdiscussions with regulatory authorities regarding the method and extent ofremediation at each site, existing technology, prior experience in contaminatedsite remediation and the apportionment of costs among potentially responsibleparties. Grace expects that the funding of environmental remediation activitieswill be affected by the Chapter 11 proceedings.

At June 30, 2007,Grace’s estimated liability for environmental investigative and remediation coststotaled $368.3 million, as compared with $361.1 million at December 31, 2006.The amount is based on funding and/or remediation agreements in place and Grace’sbest estimate of its cost for sites not subject to a formal remediation plan.Grace’s estimated environmental liabilities are included in “liabilitiessubject to compromise” in the accompanying Consolidated Balance Sheets.

For thethree-month and six-month periods ended June 30, 2007, Grace recorded pre-taxcharges of $12.0 million to adjust its estimate of costs to resolveenvironmental remediation claims based on recent information exchanged with theU.S. Government.  Of the pre-tax charges,$9.4 million was in connection with a cost recovery lawsuit brought by the U.S.Government (see below).  The remainder ofthe pre-tax charges were attributable to the ongoing review of recordedenvironmental liabilities.

Net cashexpenditures charged against previously established reserves for the six monthsended June 30, 2007 and 2006 were $4.8 million and $3.4 million, respectively.

*VermiculiteRelated Matters*

EPA Cost RecoveryClaim - As a result of a 2002 district court ruling, Grace isrequired to reimburse 

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the U.S.Government for $54.5 million (plus interest) in costs expended through December2001, and for all appropriate future costs to complete asbestos-relatedremediation relating to Grace’s former vermiculite mining and processingactivities in the Libby, Montana area. These costs include cleaning and/or demolition of contaminatedbuildings, excavation and removal of contaminated soil, health screening ofLibby residents and former mine workers, and investigation and monitoringcosts.

Grace’s totalestimated liability for asbestos remediation related to its former vermiculiteoperations in Libby, including the cost of remediation at vermiculiteprocessing sites outside of Libby, at June 30, 2007 and December 31, 2006 was$267.3 million and $255.2 million, respectively.  The estimated obligation as of each dateincludes $164.4 million for asserted reimbursable costs through 2005 (whichincludes the $54.5 million charge discussed above).  The estimate as of each date does not includethe cost to remediate the Grace-owned mine site at Libby or other nearby propertiesthat may require remediation, which costs are not currently estimable. Grace’sestimate of costs is based on recent information exchanged with the EPA.However, the EPA’s cost estimates have increased regularly and substantiallyover the course of this remediation. Consequently, as the EPA’s spending onthese matters increases, or the expected time frame increases, Grace’sliability for remediation may increase.

Montana Criminal Proceeding****—****On February 7, 2005, the United States Department ofJustice announced the unsealing of a grand jury indictment against Grace andseven current or former senior level employees *(UnitedStates of America v. W. R. Grace & Co. et al)* relating to Grace’sformer vermiculite mining and processing activities in Libby, Montana.  The indictment accuses the defendants of (1)conspiracy to violate environmental laws and obstruct federal agencyproceedings; (2) violations of the federal Clean Air Act; and (3) obstructionof justice.

Grace purchasedthe Libby mine in 1963 and operated it until 1990; vermiculite processingactivities continued until 1992. The grand jury charges that the conspiracytook place from 1976 to 2002.  Accordingto the U.S. Department of Justice, Grace could be subject to fines in an amountequal to twice the after-tax profit earned from its Libby operations or twicethe alleged loss suffered by victims, plus additional amounts for restitutionto victims. The indictment alleges that such after-tax profits were $140million. Grace has categorically denied any criminal wrongdoing and intends tovigorously defend itself at trial.

In March 2005, theU.S. District Court for the District of Montana entered a scheduling ordersetting a trial date of September 11, 2006. In July 2006, the District Court dismissed a portion of the conspiracycount of a superseding indictment alleging conspiracy to knowingly endangerresidents of the Libby area and others in violation of the Clean Air Act.  In August 2006, the District Court granted amotion by the defendants to exclude as evidence sample results that includedminerals that do not constitute asbestos under the Clean Air Act.  The Government has appealed these and otherrulings to the Ninth Circuit Court of Appeals, which heard oral argument inJune 2007.  As a result of the appeals,the trial has been delayed pending resolution of the appeals.

The U.S.Bankruptcy Court previously granted Grace’s request to advance legal anddefense costs to the employees, subject to a reimbursement obligation if it islater determined that the employees did not meet the standards forindemnification set forth under the appropriate state corporate law. For thesix months ended June 30, 2007 and 2006, respectively, total expense for Graceand the employees was $6.3 million and $27.2 million, which is included inselling, general and administrative expenses in the accompanying ConsolidatedStatements of Operations.

Grace is unable to assess whether the indictment, orany conviction resulting therefrom, will have a material adverse effect on theresults of operations or financial condition of Grace or affect Grace’sbankruptcy proceedings. While the appeal is pending, Grace expects legal feesfor this matter to be $3 million to $5 million per quarter.  Grace intends to expense such costs as theyare incurred.

New Jersey Lawsuit— On June 1, 2005, the New Jersey Department of Environmental Protection (“DEP”)filed a lawsuit against Grace and two former employees in the Superior Court ofNew Jersey Law Division: Mercer County *(N.J.Dept. of Environmental Protection v. W.R. Grace & Co. et al.)*seeking civil penalties for alleged misrepresentations and false statementsmade in a Preliminary Assessment/Site Investigation Report and NegativeDeclarations submitted by Grace to the DEP in 1995 pursuant to the New JerseyIndustrial Site Recovery Act. Grace submitted the 

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report, which wasprepared by an independent environmental consultant, in connection with theclosing of Grace’s former plant in Hamilton Township, New Jersey. Grace is alsoaware that the State of New Jersey and the U.S. Department of Justice each maybe conducting criminal investigations related to Grace’s former operations ofthe Hamilton plant.

Grace purchasedthe Hamilton plant assets in 1963 and ceased operations in 1994. During theoperating period, Grace produced spray-on fire protection products andvermiculite-based products at this plant. The current property owners areconducting remediation activities as directed by the EPA.  The property owners and the EPA have filedproofs of claim against Grace for this site and now seek approximately $3.4million with respect to the Hamilton plant site.

In August 2007, the Bankruptcy Court denied the Stateof New Jersey’s motion for leave to file a late proof of claim in the amount of$31 million.  This ruling, which the Stateof New Jersey is expected to appeal, does not affect the claims against theformer employees, for which Grace would have an indemnification obligation.

*Non-VermiculiteRelated Matters*

At June 30, 2007and December 31, 2006, Grace’s estimated liability for remediation of sites notrelated to its former vermiculite mining and processing activities was $101.0million and $105.9 million, respectively. This liability relates to Grace’scurrent and former operations, including its share of liability for off-sitedisposal at facilities where it has been identified as a potentiallyresponsible party.  Grace’s estimatedliability is based upon an evaluation of claims for which sufficientinformation was available. As Grace receives new information and continues itsclaims evaluation process, its estimated liability may change materially.

***Purchase Commitments***— Grace engagesin purchase commitments to minimize the volatility of major components ofdirect manufacturing costs including natural gas, certain metals, asphalt,amines and other materials.  Suchcommitments are for quantities that Grace fully expects to use in its normaloperations.

***Guarantees and Indemnification Obligations* **—****Graceis a party to many contracts containing guarantees and indemnification obligations.These contracts primarily consist of:

·                  Contractsproviding for the sale of a former business unit or product line in which Gracehas agreed to indemnify the buyer against liabilities arising prior to theclosing of the transaction, including environmental liabilities. Theseliabilities are included in “liabilities subject to compromise” in theaccompanying Consolidated Balance Sheets.

·                  Guaranteesof real property lease obligations of third parties, typically arising out of(a) leases entered into by former subsidiaries of Grace, or (b) the assignmentor sublease of a lease by Grace to a third party. These obligations areincluded in “liabilities subject to compromise” in the accompanyingConsolidated Balance Sheets.

·                  Licensesof intellectual property by Grace to third parties in which Grace has agreed toindemnify the licensee against third party infringement claims.

·                  Contractsentered into with third party consultants, independent contractors, and otherservice providers in which Grace has agreed to indemnify such parties againstcertain liabilities in connection with their performance. Based on historicalexperience and the likelihood that such parties will make a claim againstGrace, Grace believes that such indemnification obligations are immaterial.

·                  Productwarranties with respect to certain products sold to customers in the ordinarycourse of business. These warranties typically provide that product willconform to specifications. Grace generally does not establish a liability forproduct warranty based on a percentage of sales or other formula. Grace accruesa warranty liability on a transaction-specific basis depending on theindividual facts and circumstances related to each sale. Both the liability andannual expense related to product warranties are immaterial to the ConsolidatedFinancial Statements.

***Financial Assurances***— Financialassurances have been established for a variety of purposes, including insuranceand environmental matters, asbestos settlements and appeals, trade-related commitmentsand other matters.  At June 30, 2007,Grace had gross financial assurances issued and outstanding of $280.0 million,comprised of $137.0 million of surety bonds issued by various insurancecompanies, and $143.0 million of standby letters of 

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credit and otherfinancial assurances issued by various banks. As discussed in Note 8, $51.1million of these financial assurances have been issued under the DIP facility.

In connection with a 1994 divestment, Grace obtained aletter of credit in the maximum amount of $25.0 million to secure scheduledpayments on bonds issued to fund the transaction.  Amounts drawn under this letter of creditaggregated $3.9 million through June 30, 2007. The last of the bonds matures in November 2016.  Because the primary source of bond paymentfunds is revenue from contracts under which timing and amounts of sales arevariable, it is not possible to predict future draws.

***Accounting for Contingencies***—****Although the outcome of each of the matters discussed abovecannot be predicted with certainty, Grace has assessed its risk and has madeaccounting estimates as required under U.S. generally accepted accountingprinciples. As a result of the Filing, claims related to certain of the itemsdiscussed above will be addressed as part of Grace’s Chapter 11 proceedings.Accruals recorded for such contingencies have been included in “liabilitiessubject to compromise” in the accompanying Consolidated Balance Sheets. Theamounts of these liabilities as ultimately determined through the Chapter 11proceedings could be materially different from amounts recorded at June 30,2007.

**13.****             Pension Plans andOther Postretirement Benefit Plans**

***Pension Plans***— Grace maintainsdefined benefit pension plans covering employees of certain units who meet ageand service requirements. Benefits are generally based on final average salaryand 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 ofmethods, as required under local laws and customs.

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

At the December31, 2006 measurement date for Grace’s defined benefit pension plans (the “Plans”),the projected benefit obligation (“PBO”) was approximately $1,433 million asmeasured under U.S. generally accepted accounting principles.  Beginning in 2007, on a quarterly basis, Grace analyzes pensionassets and pension liabilities along with the resulting funded status andupdates its estimate of these measures. Funded status is adjusted for contributions, benefit payments, actualreturn on assets, current discount rates and other identifiable and materialactuarial changes.

The assumeddiscount rate for pension plans reflects the market rates for high qualitycorporate bonds currently available and is subject to change based on changesin the overall market interest rates. For the U.S. qualified pension plans, theassumed discount rate of 5.75% as of December 31, 2006 was selected by Grace,in consultation with its independent actuaries, based on a yield curveconstructed from a portfolio of high quality bonds for which the timing andamount of cash outflows approximate the estimated payouts of the plan. Based onreview of an updated yield curve analysis as of June 30, 2007, Grace increasedthe discount rate for the U.S. qualified pension plans to 6.25% based on marketrates at that time. In addition, Grace evaluated the current discount rates forthe United Kingdom pension plan and German pension plans, which combinedrepresented approximately 87% of the benefit obligation of the non-U.S. pensionplans as of December 31, 2006. Based on review of the yield curve analyses forthese plans as of June 30, 2007, Grace increased the discount rates for theUnited Kingdom and Germany by 50 basis points and 25 basis points,respectively, as compared to December 31, 2006. The aggregate adjustment to thefunded status resulting from the change in discount rates as of June 30, 2007was an increase to total assets of approximately $13 million, and a decrease tototal liabilities of approximately $57 million. After tax effects, total assets decreased by approximately $11 million,total liabilities decreased by approximately $57 million and shareholders’equity increased by approximately $46 million.

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At June 30, 2007,Grace’s recorded pension liability for underfunded and unfunded plans was$375.2 million ($270.2 million included in “underfunded and unfunded definedbenefit pension plans”, $11.5 million included in “other current liabilities”,and $93.5 million related to noncurrent supplemental pension benefits, includedin “liabilities subject to compromise”). The recorded liability reflects 1) theshortfall between dedicated assets and the PBO of underfunded plans ($145.1million); and 2) the PBO of unfunded pay-as-you-go plans ($230.1 million).

Funded status forpurposes of the Employee Retirement Income Security Act of 1974 is calculatedon a different basis than under U.S. generally accepted accounting principles.

***Postretirement Benefits Other Than Pensions*** —****Graceprovides postretirement health care and life insurance benefits for retiredemployees of certain U.S. business units and certain divested units.  The postretirement medical plan providesvarious levels of benefits to employees hired before 1991 who retire from Graceafter age 55 with at least 10 years of service. These plans are unfunded and Grace pays a portion of the costs ofbenefits under these plans as they are incurred. Grace applies SFAS No. 106, “Employers’Accounting for Postretirement Benefits Other Than Pensions,” which requiresthat the future costs of postretirement health care and life insurance benefitsbe accrued over the employees’ years of service.

Retirees and beneficiaries covered by thepostretirement medical plan are required to contribute a minimum of 40% of thecalculated premium for that coverage. During 2002, per capita costs under theretiree medical plans exceeded caps on the amount Grace was required tocontribute under a 1993 amendment to the plan. As a result, for 2003 and futureyears, retirees will bear 100% of any increase in premium costs.

For 2007measurement purposes, per capita costs, before retiree contributions, wereassumed to initially increase at a rate of 10.0%.  The rate is assumed to decrease gradually to5.0% through 2012 and remain at that level thereafter.  A one percentage point increase or decreasein assumed health care medical cost trend rates would have a negligible impacton Grace’s postretirement benefit obligations.

The components ofnet periodic benefit cost (income) for Grace’s pension and postretirement plansfor the three months and six months ended June 30, 2007 and 2006 are asfollows:
| ** **                                                                         | ** ** | **Three Months Ended June 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2007**                                            | ** ** | **2006** | ** ** |
| ** **                                                                         | ** ** | ** **                                          | ** ** | ** ** | ** ** | **Post-** | ** ** | ** ** | ** ** | ** ** | ** ** | **Post-** | ** ** |
| **Components of Net Periodic Benefit Cost (Income)** | ** ** | **Pension**                                         | ** ** | **retire-** | ** ** | **Pension** | ** ** | **retire-** | ** ** |
| ***(In millions)***                                                           | ** ** | **U.S.**                                            | ** ** | **Non-U.S.** | ** ** | **ment** | ** ** | **U.S.** | ** ** | **Non-U.S.** | ** ** | **ment** | ** ** |
| Service cost                                                                       | ** ** | **$**                                               | **3.7**    | ** ** | **$** | **1.8** | ** ** | **$** | **0.1** |   | $ | 3.8 |   | $ | 2.1 |   | $ | 0.1 |   |
| Interest cost                                                                      | ** ** | **14.6**                                            | ** ** | **5.1** | ** ** | **1.2** |   | 14.6 |   | 4.3 |   | 0.9 |   |
| Expected return on plan  assets                                                    | ** ** | **(14.4**                                           | **)**      | **(5.3** | **)** | **—** |   | (12.6 | ) | (4.5 | ) | — |   |
| Amortization of prior  service cost (credit)                                       | ** ** | **0.6**                                             | ** ** | **0.2** | ** ** | **(2.6** | **)** | 0.6 |   | 0.2 |   | (2.0 | ) |
| Amortization of net  deferred actuarial loss                                       | ** ** | **5.6**                                             | ** ** | **1.2** | ** ** | **0.6** |   | 6.2 |   | 2.1 |   | (0.2 | ) |
| **Net periodic benefit cost (income)**                                             | ** ** | **$**                                               | **10.1**   | ** ** | **$** | **3.0** | ** ** | **$** | **(0.7** | **)** | $ | 12.6 |   | $ | 4.2 |   | $ | (1.2 | ) |

 
| ** **                                                                         | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2007**                                          | ** ** | **2006** | ** ** |
| ** **                                                                         | ** ** | ** **                                        | ** ** | ** ** | ** ** | **Post-** | ** ** | ** ** | ** ** | ** ** | ** ** | **Post-** | ** ** |
| **Components of Net Periodic Benefit Cost (Income)** | ** ** | **Pension**                                       | ** ** | **retire-** | ** ** | **Pension** | ** ** | **retire-** | ** ** |
| ***(In millions)***                                                           | ** ** | **U.S.**                                          | ** ** | **Non-U.S.** | ** ** | **ment** | ** ** | **U.S.** | ** ** | **Non-U.S.** | ** ** | **ment** | ** ** |
| Service cost                                                                       | ** ** | **$**                                             | **7.9**    | ** ** | **$** | **3.8** | ** ** | **$** | **0.2** |   | $ | 8.1 |   | $ | 4.1 |   | $ | 0.2 |   |
| Interest cost                                                                      | ** ** | **29.0**                                          | ** ** | **10.1** | ** ** | **2.3** |   | 29.1 |   | 8.5 |   | 2.0 |   |
| Expected return  on plan assets                                                    | ** ** | **(29.2**                                         | **)**      | **(10.5** | **)** | **—** |   | (26.5 | ) | (8.8 | ) | — |   |
| Amortization of  prior service cost (credit)                                       | ** ** | **1.2**                                           | ** ** | **0.4** | ** ** | **(5.1** | **)** | 1.2 |   | 0.3 |   | (5.2 | ) |
| Amortization of  net deferred actuarial loss                                       | ** ** | **10.5**                                          | ** ** | **2.6** | ** ** | **1.0** |   | 11.5 |   | 4.1 |   | 0.2 |   |
| **Net periodic benefit cost  (income)**                                            | ** ** | **$**                                             | **19.4**   | ** ** | **$** | **6.4** | ** ** | **$** | **(1.6** | **)** | $ | 23.4 |   | $ | 8.2 |   | $ | (2.8 | ) |

 

***Plan Contributions and Funding*** — Subject to any required approval ofthe Bankruptcy Court, Grace intends to satisfy its obligations under the Plansand to comply with all of the requirements of the Employee Retirement IncomeSecurity Act of 1974 (“ERISA”).  ForERISA purposes, funded status is calculated on a different basis than underU.S. generally accepted accounting principles. On June 20, 2007, Grace obtained Bankruptcy Court approval to fundminimum required payments of approximately $54 million for the period from July2007 through January 2008.  In thatregard, Grace contributed approximately $9 million in July 2007 to the truststhat hold assets of the Plans.  WhileGrace intends to continue to fund all minimum required payments under thePlans, there can be no assurance that the Bankruptcy Court will continue toapprove these payments.

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Contributions tonon-U.S. pension plans are not subject to Bankruptcy Court approval and Graceintends to fund such plans based on applicable legal requirements, andactuarial and trustee recommendations.

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

**14.****             Operating SegmentInformation**

Grace is a globalproducer of specialty chemicals and materials. It generates revenues from twooperating segments: Grace Davison, which includes silica- and alumina-basedcatalysts and materials used in a wide range of industrial applications; andGrace Performance Chemicals, which includes specialty chemicals and materialsused in commercial and residential construction and in rigid food and beveragepackaging. Intersegment sales, eliminated in consolidation, are not material.

In May 2007, Grace’s packaging technologies product group wastransferred to the Grace Davison operating segment. As a result, Grace iscurrently evaluating the configuration of its reportable operating segments inan effort to more clearly convey business drivers and performance, with theevaluation expected to be completed by the fourth quarter of 2007. Until suchreview is complete, Grace will continue to report segment informationconsistent with prior periods.

The following table presents information related to Grace’s operatingsegments for the three months and six months ended June 30, 2007 and 2006,respectively. Only those corporate expenses directly related to the operatingsegments are allocated for reporting purposes. All remaining corporate itemsare reported separately and labeled as such.
| **Operating Segment Data** | ** ** | **Three Months  Ended June 30,** | ** ** | **Six Months  Ended June 30,** | ** ** |
|--------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ***(In millions)***             | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Net  Sales**                       | ** ** |                                            |       |                                          | ** ** | ** ** |   |   |   |
| Grace Davison                        | ** ** | **$**                                           | **438.7**  |                                          | $          | 380.3 |   | **$** | **826.4** |   | $ | 736.7 |   |
| Grace  Performance Chemicals         | ** ** | **374.1**                                       |       | 348.8                                         | ** ** | **702.0** |   | 651.0 |   |
| **Total**                            | ** ** | **$**                                           | **812.8**  |                                          | $          | 729.1 |   | **$** | **1,528.4** |   | $ | 1,387.7 |   |
| **Pre-tax  Operating Income**        | ** ** |                                            |       |                                          | ** ** | ** ** |   |   |   |
| Grace Davison                        | ** ** | **$**                                           | **60.6**   |                                          | $          | 46.3 |   | **$** | **105.6** |   | $ | 82.3 |   |
| Grace  Performance Chemicals         | ** ** | **58.6**                                        |       | 53.1                                          | ** ** | **94.8** |   | 87.3 |   |
| Corporate costs                      | ** ** | **(26.1**                                       | )          | (28.7                                         | )          | **(46.7** | **)** | (51.1 | ) |
| **Total**                            | ** ** | **$**                                           | **93.1**   |                                          | $          | 70.7 |   | **$** | **153.7** |   | $ | 118.5 |   |

 

Corporate costsinclude expenses of corporate headquarters functions incurred in support ofcore operations, such as corporate financial and legal services, humanresources management, communications and regulatory affairs. Corporate costsalso include certain pension and postretirement benefits, including theamortization of deferred costs that are considered a core operating expense butnot allocated to operating segments.

The following table presents information related to the geographicareas in which Grace operated for the three months and six months ended June30, 2007 and 2006, respectively. Sales are attributed to geographic areas basedon customer location.
| **Geographic Area Data** | ** ** | **Three Months  Ended June 30,** | ** ** | **Six Months  Ended June 30,** | ** ** |
|------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ***(In millions)***           | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Net  Sales**                     | ** ** | ** **                                      |       |                                          |       |   |   |   |   |
| United States                      | ** ** | **$**                                           | **252.7**  |                                          | $          | 267.5 | ** ** | **$** | **498.4** |   | $ | 506.8 |   |
| Canada and Puerto Rico             | ** ** | **24.3**                                        |       | 25.5                                          | ** ** | **45.2** |   | 66.1 |   |
| Total North America                | ** ** | **$**                                           | **277.0**  |                                          | $          | 293.0 | ** ** | **$** | **543.6** |   | $ | 572.9 |   |
| Germany                            | ** ** | **39.0**                                        |       | 35.1                                          | ** ** | **74.6** |   | 65.4 |   |
| Europe, other than Germany         | ** ** | **295.3**                                       |       | 233.9                                         | ** ** | **554.8** |   | 450.6 |   |
| Total Europe                       | ** ** | **$**                                           | **334.3**  |                                          | $          | 269.0 | ** ** | **$** | **629.4** |   | $ | 516.0 |   |
| Asia Pacific                       | ** ** | **148.4**                                       |       | 128.4                                         | ** ** | **259.1** |   | 226.7 |   |
| Latin America                      | ** ** | **53.1**                                        |       | 38.7                                          | ** ** | **96.3** |   | 72.1 |   |
| **Total**                          | ** ** | **$**                                           | **812.8**  |                                          | $          | 729.1 | ** ** | **$** | **1,528.4** |   | $ | 1,387.7 |   |

 

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The pre-tax operating income for Grace’s operating segments for thethree months and six months ended June 30, 2007 and 2006, respectively, isreconciled below to income (loss) before income taxes and minority interestpresented 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)***                                                                                | ** ** | **2007**                                    | ** ** | **2006**                                  | ** ** | **2007** | ** ** | **2006** | ** ** |
| Pre-tax  operating income — core operations                                                        | ** ** | **$**                                       | **93.1**   |                                      | $          | 70.7 | ** ** | **$** | **153.7** |   | $ | 118.5 |   |
| Minority  interest in consolidated entities                                                             | ** ** | **4.1**                                     |       | 11.5                                      | ** ** | **6.5** |   | 18.3 |   |
| Chapter 11 expenses,  net of interest income                                                            | ** ** | **(23.6**                                   | **)**      | (11.5                                     | )          | **(41.4** | **)** | (20.2 | ) |
| Net gain (loss)  on sales of investments and disposals of assets                                        | ** ** | **3.4**                                     |       | 4.6                                       | ** ** | **3.6** |   | 2.8 |   |
| Provision for  environmental remediation                                                                | ** ** | **(12.0**                                   | **)**      | (30.0                                     | )          | **(12.0** | **)** | (30.0 | ) |
| Interest expense  and related financing costs                                                           | ** ** | **(20.3**                                   | **)**      | (19.9                                     | )          | **(39.7** | **)** | (35.7 | ) |
| Other, net                                                                                              | ** ** | **(10.8**                                   | **)**      | (15.8                                     | )          | **(14.7** | **)** | (32.7 | ) |
| Income (loss) before  income taxes and minority interest                                                | ** ** | **$**                                       | **33.9**   |                                      | $          | 9.6 | ** ** | **$** | **56.0** |   | $ | 21.0 |   |

 

Minority interestprimarily pertains to Advanced Refining Technologies LLC (“ART”), a jointventure between Grace and Chevron Products Company where Grace has a 55%economic interest.

**15.****             Minority Interest inConsolidated Entities**

Withinboth Grace Davison and Grace Performance Chemicals, Grace conducts certainbusiness activities in various countries through joint ventures withunaffiliated third parties.  Thefollowing tables present summary financial statistics for Grace’s combinedbusinesses subject to profit sharing:
| *** ***                          | ** ** | **Three Months  Ended June 30,** | ** ** | **Six Months  Ended June 30,** | ** ** |
|---------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ***(In millions)***              | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| Sales                                 | ** ** | **$**                                           | **120.6**  |                                          | $          | 106.1 | ** ** | **$** | **215.9** |   | $ | 203.6 |   |
| Income before  taxes                  | ** ** | **9.9**                                         |       | 27.0                                          | ** ** | **15.7** |   | 43.4 |   |
| Net income                            | ** ** | **9.0**                                         |       | 26.3                                          | ** ** | **14.6** |   | 41.7 |   |
| Minority  interests in net income     | ** ** | **4.1**                                         |       | 11.5                                          | ** ** | **6.5** |   | 18.3 |   |
| Dividends paid to minority  interests | ** ** | **—**                                      |       | —                                        | ** ** | **(11.8** | **)** | — |   |
|                                       |            |                                                 |            |                                               |            |  |  |  |  |  |  |  |  |

 
| ***(In millions)***                         | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|--------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Cash                                             | ** ** | **$**                   | **58.7**   |                        | $          | 65.5 |   |
| Other current  assets                            | ** ** | **130.9**               |       | 136.7                       |       |
| Total assets                                     | ** ** | **206.5**               |       | 212.4                       |       |
| Total  liabilities                               | ** ** | **73.5**                |       | 66.9                        |       |
| Shareholders’  equity                       | ** ** | **133.0**               |       | 145.5                       |       |
| Minority interests in  shareholders’ equity | ** ** | **59.7**                |       | 65.0                        |       |
|                                                  |            |                         |            |                             |            |  |  |

 

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**Item 2.**                          MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

**Financial Summary for June 30,2007**

Following is asummary analysis of key financial measures of our performance for the threemonths and six months ended June 30, 2007 compared with the prior year periods.

·                  Salesincreased 11.5% and 10.1% for the three months and six months ended June 30,2007, respectively, primarily as a result of higher selling prices in responseto rising raw material costs and to added sales volume in all geographicregions except North America.

·                  Netresults for each period has been primarily affected by: 1) the results of ourbusinesses — which is categorized as “core operations”; and 2) the impact oflegal contingencies and other nonoperating liabilities — which is categorizedas “noncore activities”.

·                  Netincome was $20.5 million for the three months ended June 30, 2007, comparedwith a net loss of $5.2 million for the three months ended June 30, 2006.  Net income was $25.3 million for the sixmonths ended June 30, 2007, compared with a net loss of $5.1 million for thesix months ended June 30, 2006.  Thecurrent year and prior year periods were negatively affected by revisedestimates of the costs of environmental remediation, Chapter 11 expenses,litigation and other matters not related to core operations.

·                  Pre-taxincome from core operations increased 31.7% and 29.7% for the three months andsix months ended June 30, 2007, respectively, primarily attributable to highersales volume in all geographic regions and higher selling prices to offset costinflation, and from lower overall pension costs.

·                  Pre-taxoperating income of our Grace Performance Chemicals operating segment increased10.4% and 8.6% for the three months and six months ended June 30, 2007,respectively, attributable principally to higher sales volume globally, sellingprice increases and productivity improvements, which more than offset increasesin raw material costs.

·                  Pre-taxoperating income of our Grace Davison operating segment increased 30.9% and28.3% for the three months and six months ended June 30, 2007, respectively,attributable primarily to higher sales in most product groups and in regionsother than North America, partially offset by the negative effects of higherraw material costs.

·                  Operatingcash inflow for the six months ended June 30, 2007 was $5.2 million comparedwith $11.1 million for the prior year period. The decrease in net cash inflow from operating activities wasprincipally attributable to higher contributions to pension plans, dividends tojoint venture partners and cash paid to resolve certain Chapter 11contingencies.

·                  Pre-taxloss from noncore activities was $21.0 million in the second quarter of 2007compared with a pre-tax loss of $42.8 million in the prior year quarter.  The pre-tax loss from noncore activities was$26.8 million year-to-date in 2007 compared with a pre-tax loss of $62.9million in the prior year period.  Thelosses are principally due to: (1) charges of $12.0 million and $30.0 millionin the second quarters of 2007 and 2006, respectively, to adjust Grace’sestimate of costs to resolve environmental remediation claims based oninformation exchanged with the U.S. Government; and (2) defense costs of $6.3million and $27.2 million in the six months ended June 30, 2007 and 2006,respectively, related to legal proceedings arising from Grace’s formervermiculite mining operations in Montana.

We are attemptingto resolve noncore liabilities and contingencies through our Chapter 11proceeding. Our noncore liabilities include asbestos-related litigation,environmental remediation, tax disputes and business litigation. Our operatingstatements include periodic adjustments to account for changes in estimates ofsuch liabilities and developments in our Chapter 11 proceeding. Theseliabilities and contingencies may result in continued volatility in net incomein the future.

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**Description of Core Business**

We are engaged inspecialty chemicals and specialty materials businesses on a worldwide basisthrough our two operating segments:

***Grace Davison***includes:

·                  Catalystsand chemical additives used by petroleum refiners, including fluid catalyticcracking, or FCC, catalysts, that help to “crack” the hydrocarbon chain indistilled crude oil to produce transportation fuels and other petroleum-basedproducts, and FCC additives used to reduce sulfur in gasoline, maximizepropylene production from refinery FCC units, and reduce emissions of sulfuroxides, nitrogen oxides and carbon monoxide from refinery FCC units;

·                  Hydroprocessingcatalysts used by petroleum refiners in process reactors to upgrade heavy oilsinto lighter, more useful products by removing impurities such as nitrogen,sulfur and heavy metals, allowing less expensive feedstocks to be used in thepetroleum refining process;

·                  Specialtycatalysts, including polyolefin catalysts and catalyst supports that areessential components in the manufacture of polyethylene and polypropyleneresins, and other chemical catalysts used in a variety of industrial,environmental and consumer applications;

·                  Silica-basedand silica-alumina-based engineered materials used in:

·                  industrialmarkets, such as coatings, plastics and rubber, precision investment casting,refractory, insulating glass windows, desiccants, and gas and liquidspurification;

·                  consumerapplications, such as food products, toothpaste, pharmaceutical and personalcare products, and the processing of edible oils and beverages;

·                  digitalmedia coatings for ink jet papers; and

·                  Silica-and polymer-based materials and chromatography columns, instruments,consumables and accessories used in life and analytical sciences applications.

We conduct ourhydroprocessing catalyst business through Advanced Refining Technologies, LLC (“ART”),our joint venture with Chevron Products Company (“Chevron”).  We report 100% of the revenues of the ARTjoint venture, but only receive 55% of the income after minority interest isallocated to Chevron.

Key externalfactors for our FCC catalysts and hydroprocessing catalysts are the economicsof the petroleum refining industry, specifically the impacts of demand fortransportation fuels and petrochemical products, and crude oil supply.  FCC catalysts are consumed at a relativelysteady rate and replaced regularly, while most hydroprocessing catalysts areconsumed over a period of years and replaced in an irregular pattern.

Sales of our otherthree Grace Davison product groups are affected by general economic conditionsincluding the underlying growth rate of targeted end-use applications.

***Grace Performance Chemicals***includes:

·                  Specialtychemicals and materials, including concrete admixtures and fibers used toimprove the durability and working properties of concrete, additives used incement processing to improve energy efficiency, enhance the characteristics offinished cement and improve ease of use, building materials used in commercialand residential construction and renovation to protect buildings from water,vapor and air penetration, and fireproofing materials used to protect buildingsin the event of fire; and

·                  Darexpackaging products and technologies, primarily specialty sealants and coatingsused in rigid food and beverage packages, including can and closure sealantsused to seal and enhance the shelf life of can and bottle contents, andcoatings for cans and closures that prevent metal corrosion, protect packagecontents from the influence of metal and ensure proper adhesion of sealingcompounds.

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Constructionproducts sales are primarily impacted by global non-residential constructionactivity and U.S. residential construction activity.

Our packagingtechnologies sales are affected by regional economic conditions as well as anongoing shift in demand away from metal containers to plastic packaging forfoods and beverages. This shift has caused a decline in can sealant usage overrecent years, but provides opportunities for increased sales of closuresealants, coatings and other products for plastic packaging.

***Global scope*** — We operate our businesson a global scale with approximately 65% of our revenue (see table below) andover 50% of our operating properties outside the United States. We conductbusiness in more than 40 countries and in more than 20 currencies. We manage ouroperating segments on a global basis, to serve global markets.  Currency fluctuations in relation to the U.S.dollar affect our reported earnings, net assets and cash flows.

The table belowshows the sales in each of our operating segments, and domestic andinternational sales, as a percentage of our total sales.
| **Percentage of  Total Grace Sales** | ** ** | **Three Months  Ended  June 30,** | ** ** | **Six Months  Ended  June 30,** | ** ** |
|-----------------------------------------------------|------------|---------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                          | ** ** | **2007**                                    | ** ** | **2006**                                  | ** ** | **2007** | ** ** | **2006** | ** ** |
| Grace Davison                                       | ** ** | **54.0**                                    | **%**      | 52.2                                      | %          | **54.1** | **%** | 53.1 | % |
| Grace  Performance Chemicals                        | ** ** | **46.0**                                    | **%**      | 47.8                                      | %          | **45.9** | **%** | 46.9 | % |
| **Total**                                           | ** ** | **100.0**                                   | **%**      | 100.0                                     | %          | **100.0** | **%** | 100.0 | % |
| Grace U.S.                                          | ** ** | **31.1**                                    | **%**      | 36.7                                      | %          | **32.6** | **%** | 36.5 | % |
| Grace non-U.S.                                      | ** ** | **68.9**                                    | **%**      | 63.3                                      | %          | **67.4** | **%** | 63.5 | % |
| **Total**                                           | ** ** | **100.0**                                   | **%**      | 100.0                                     | %          | **100.0** | **%** | 100.0 | % |

 

**Voluntary Bankruptcy Filing**

In response to asharply increasing number of asbestos-related personal injury claims, on April2, 2001, Grace and 61 of our United States subsidiaries and affiliates,including W. R. Grace & Co.—Conn., filed voluntary petitions forreorganization under Chapter 11 of the United States Bankruptcy Code in theUnited States Bankruptcy Court for the District of Delaware. Our non-U.S.subsidiaries and certain of our U.S. subsidiaries were not included in theChapter 11 filing.

Under Chapter 11,we have continued to operate as debtors-in-possession under court protectionfrom creditors and claimants, while using the Chapter 11 process to develop andimplement a plan for addressing the asbestos-related claims. Since the Chapter11 filing, the bankruptcy court has approved all motions necessary to conductnormal business activities.

On January 13,2005, we filed an amended plan of reorganization and related documents with thebankruptcy court. The plan of reorganization is supported by committeesrepresenting general unsecured creditors and equity holders, but is notsupported by committees representing asbestos personal injury claimants andasbestos property damage claimants or the representative of future asbestosclaimants. Under the terms of the plan of reorganization, a trust would beestablished to which all pending and future asbestos-related claims would bechanneled for resolution. The plan of reorganization can become effective onlyafter a vote of eligible creditors and with the approval of the bankruptcycourt and the U.S. District Court for the District of Delaware. See “Plan ofReorganization” below for more information.

**Critical Accounting Estimates**

See the “CriticalAccounting Estimates” heading in Item 7 of our Form 10-K for the year endedDecember 31, 2006 and in Item 2 of our Form 10-Q for the quarter ended March31, 2007 for a discussion of our critical accounting estimates.

**Summary Financial Information andMetrics**

Set forth below isa chart that lists our key operating statistics, and dollar and percentagechanges for the three-month and six-month periods ended June 30, 2007 and 2006.Please refer to this Analysis of Continuing Operations chart when readingManagement’s Discussion and Analysis of Financial Condition and Results ofOperations.

In the Analysis ofContinuing Operations chart, as well as in the financial information presentedthroughout Management’s Discussion and Analysis of Financial Condition andResults of Operations, we present our financial results in the same manner asresults are reviewed internally.  Webreak out our results of operations by

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operating segmentand between “core operations” and “noncore activities.” Core operationscomprise the financial results of Grace Davison, Grace Performance Chemicals,and the costs of corporate activities that directly or indirectly support ourbusiness operations. In contrast, noncore activities comprise all other eventsand transactions not directly related to the generation of operating revenue orthe support of our core operations and generally relate to our former operationsand products. See “Pre-tax Income (Loss) from Noncore Activities” for moreinformation about noncore activities. We use pre-tax income from coreoperations as the performance factor in determining certain incentivecompensation and as the profitability factor in all significant businessdecisions.

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

Pre-tax incomefrom core operations has material limitations as an operating performancemeasure because it excludes income and expenses that comprise our noncoreactivities, which include, among other things, provisions for asbestos-relatedlitigation and environmental remediation, income from insurance settlements,and legal defense costs, all of which have been material components of our netincome (loss). Pre-tax income from core operations before depreciation andamortization also has material limitations as an operating performance measuresince it excludes the impact of depreciation and amortization expense.  Our business is substantially dependent onthe successful deployment of our capital assets; therefore, depreciation andamortization expense is a necessary element of our costs and ability togenerate revenue. We compensate for the limitations of these measurements byusing these indicators together with net income (loss) as measured under U.S.generally accepted accounting principles to present a complete analysis of ourresults of operations.  You shouldevaluate pre-tax income from core operations and pre-tax income from core operationsbefore depreciation and amortization in conjunction with net income (loss) fora more complete analysis of our financial results.

 

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** **

**Analysis of Continuing Operations**

*(In millions)*
| ** **                                                                                     | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                     | ** ** | **2007**                                            | ** ** | **2006**                                          | ** ** | **$ Change  Fav (Unfav)** | ** ** | **% Change  Fav (Unfav)** | ** ** | **2007** | ** ** | **2006** | ** ** | **$ Change  Fav (Unfav)** | ** ** | **% Change  Fav (Unfav)** | ** ** |
| **Net sales:**                                                                                 | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Grace Davison                                                                                  | ** ** | **$**                                               | **438.7**  |                                              | $          | 380.3 |   | $ | 58.4 |   | 15.4 | % | **$** | **826.4** |   | $ | 736.7 |   | $ | 89.7 |   | 12.2 | % |
| Grace  Performance Chemicals                                                                   | ** ** | **374.1**                                           |       | 348.8                                             |       | 25.3 |   | 7.3 | % | **702.0** |   | 651.0 |   | 51.0 |   | 7.8 | % |
| **Total Grace net sales**                                                                      | ** ** | **$**                                               | **812.8**  |                                              | $          | 729.1 |   | $ | 83.7 |   | 11.5 | % | **$** | **1,528.4** |   | $ | 1,387.7 |   | $ | 140.7 |   | 10.1 | % |
| **Pre-tax operating income:**                                                                  | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Grace  Davison(1)                                                                              | ** ** | **$**                                               | **60.6**   |                                              | $          | 46.3 |   | $ | 14.3 |   | 30.9 | % | **$** | **105.6** |   | $ | 82.3 |   | $ | 23.3 |   | 28.3 | % |
| Grace Performance Chemicals(2)                                                                 | ** ** | **58.6**                                            |       | 53.1                                              |       | 5.5 |   | 10.4 | % | **94.8** |   | 87.3 |   | 7.5 |   | 8.6 | % |
| Corporate  costs:                                                                              |       |                                                |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Support  functions                                                                             | ** ** | **(12.2**                                           | **)**      | (11.3                                             | )          | (0.9 | ) | (8.0 | %) | **(23.3** | **)** | (22.0 | ) | (1.3 | ) | (5.9 | %) |
| Pension,  performance-related compensation, and other                                          | ** ** | **(13.9**                                           | **)**      | (17.4                                             | )          | 3.5 |   | 20.1 | % | **(23.4** | **)** | (29.1 | ) | 5.7 |   | 19.6 | % |
| Total  Corporate costs                                                                         | ** ** | **(26.1**                                           | **)**      | (28.7                                             | )          | 2.6 |   | 9.1 | % | **(46.7** | **)** | (51.1 | ) | 4.4 |   | 8.6 | % |
| **Pre-tax income from core  operations**                                                       | ** ** | **93.1**                                            |       | 70.7                                              |       | 22.4 |   | 31.7 | % | **153.7** |   | 118.5 |   | 35.2 |   | 29.7 | % |
| **Pre-tax income (loss) from  noncore activities**                                             | ** ** | **(21.0**                                           | **)**      | (42.8                                             | )          | 21.8 |   | 50.9 | % | **(26.8** | **)** | (62.9 | ) | 36.1 |   | 57.4 | % |
| Interest  expense                                                                              | ** ** | **(20.3**                                           | **)**      | (19.9                                             | )          | (0.4 | ) | (2.0 | %) | **(39.7** | **)** | (35.7 | ) | (4.0 | ) | (11.2 | %) |
| Interest  income                                                                               | ** ** | **1.6**                                             |       | 1.6                                               |       | — |   | 0.0 | % | **3.7** |   | 3.0 |   | 0.7 |   | 23.3 | % |
| **Income (loss) before Chapter 11  expenses and income taxes**                                 | ** ** | **53.4**                                            |       | 9.6                                               |       | 43.8 |   | NM | ** ** | **90.9** |   | 22.9 |   | 68.0 |   | NM |   |
| Chapter  11 expenses, net of interest income                                                   | ** ** | **(23.6**                                           | **)**      | (11.5                                             | )          | (12.1 | ) | (105.2 | %) | **(41.4** | **)** | (20.2 | ) | (21.2 | ) | (105.0 | %) |
| Benefit  from (provision for) income taxes                                                     | ** ** | **(9.3**                                            | **)**      | (3.3                                              | )          | (6.0 | ) | (181.8 | %) | **(24.2** | **)** | (7.8 | ) | (16.4 | ) | NM |   |
| **Net income (loss)**                                                                          | ** ** | **$**                                               | **20.5**   |                                              | $          | (5.2 | ) | $ | 25.7 |   | NM | ** ** | **$** | **25.3** |   | $ | (5.1 | ) | $ | 30.4 |   | NM |   |
| **Key Financial Measures:**                                                                    | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Pre-tax income from core  operations as a percentage of sales:**                             | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Grace  Davison                                                                                 | ** ** | **13.8**                                            | **%**      | 12.2                                              | %          | NM |   | 1.6pts | ** ** | **12.8** | **%** | 11.2 | % | NM |   | 1.6pts |   |
| Grace  Performance Chemicals                                                                   | ** ** | **15.7**                                            | **%**      | 15.2                                              | %          | NM |   | 0.5pts | ** ** | **13.5** | **%** | 13.4 | % | NM |   | 0.1pts |   |
| Total  Core Operations                                                                         | ** ** | **11.5**                                            | **%**      | 9.7                                               | %          | NM |   | 1.8pts | ** ** | **10.1** | **%** | 8.5 | % | NM |   | 1.6pts |   |
| Total  Core Operations adjusted for profit sharing of joint ventures(3)                        | ** ** | **12.0**                                            | **%**      | 11.3                                              | %          | NM |   | 0.7pts | ** ** | **10.5** | **%** | 9.9 | % | NM |   | 0.6pts |   |
| **Pre-tax income from core  operations before depreciation and amortization**                  | ** ** | **$**                                               | **120.7**  |                                              | $          | 99.1 |   | $ | 21.6 |   | 21.8 | % | **$** | **208.9** |   | $ | 175.0 |   | $ | 33.9 |   | 19.4 | % |
| **As a percentage of sales**                                                                   | ** ** | **14.8**                                            | **%**      | 13.6                                              | %          | NM |   | 1.2pts | ** ** | **13.7** | **%** | 12.6 | % | NM |   | 1.1pts |   |
| **Depreciation and amortization**                                                              | ** ** | **$**                                               | **27.6**   |                                              | $          | 28.4 |   | $ | 0.8 |   | 2.8 | % | **$** | **55.2** |   | $ | 56.5 |   | $ | 1.3 |   | 2.3 | % |
| **Gross profit percentage (sales  less cost of goods sold as a percent of sales)****(4)****:** | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Grace  Davison                                                                                 | ** ** | **29.2**                                            | **%**      | 30.7                                              | %          | NM |   | (1.5)pts | ** ** | **28.8** | **%** | 29.5 | % | NM |   | (0.7)pts |   |
| Grace  Performance Chemicals                                                                   | ** ** | **35.6**                                            | **%**      | 35.4                                              | %          | NM |   | 0.2pts | ** ** | **34.4** | **%** | 34.6 | % | NM |   | (0.2)pts |   |
| Total  Grace                                                                                   | ** ** | **32.0**                                            | **%**      | 32.8                                              | %          | NM |   | (0.8)pts | ** ** | **31.3** | **%** | 31.7 | % | NM |   | (0.4)pts |   |
| **Net Consolidated Sales by  Region:**                                                         | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| North  America                                                                                 | ** ** | **$**                                               | **277.0**  |                                              | $          | 293.0 |   | $ | (16.0 | ) | (5.5 | %) | **$** | **543.6** |   | $ | 572.9 |   | $ | (29.3 | ) | (5.1 | %) |
| Europe                                                                                         | ** ** | **334.3**                                           |       | 269.0                                             |       | 65.3 |   | 24.3 | % | **629.4** |   | 516.0 |   | 113.4 |   | 22.0 | % |
| Asia  Pacific                                                                                  | ** ** | **148.4**                                           |       | 128.4                                             |       | 20.0 |   | 15.6 | % | **259.1** |   | 226.7 |   | 32.4 |   | 14.3 | % |
| Latin  America                                                                                 | ** ** | **53.1**                                            |       | 38.7                                              |       | 14.4 |   | 37.2 | % | **96.3** |   | 72.1 |   | 24.2 |   | 33.6 | % |
| **Total**                                                                                      | ** ** | **$**                                               | **812.8**  |                                              | $          | 729.1 |   | $ | 83.7 |   | 11.5 | % | **$** | **1,528.4** |   | $ | 1,387.7 |   | $ | 140.7 |   | 10.1 | % |

----

NM = Not meaningful

*(1)**                **Grace Davison pre-tax operatingincome includes minority interest related to the Advanced Refining Technologiesjoint venture.*

*(2)        **Grace Performance Chemicals pre-tax operating income includes minorityinterests related to consolidated joint ventures.*

*(3)        **Reflects the add-back of minority interests in consolidated entities.*

*(4)        **Includes depreciation and amortization related to manufacturing ofproducts.*

 

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**Grace Overview**

The following is an overview of our financial performance for the threemonths and six months ended June 30, 2007 compared with the prior year periods.

***Net Sales***—****Thefollowing tables identify the period-over-period increase or decrease in salesattributable to changes in product volume, product price and/or mix, and theimpact of foreign currency translation.
| **Net Sales Variance Analysis** | ** ** | **Three Months Ended June 30, 2007 as a Percentage Increase  (Decrease) from Three Months Ended June 30, 2006** | ** ** |
|------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                     | ** ** | **Volume**                                                                                                                                                                                 | ** ** | **Price/Mix** | ** ** | **Currency  Translation** | ** ** | **Total** | ** ** |
| Grace Davison                                  |       | 6.5                                                                                                                                                                                        | %          | 5.9 | % | 3.0 | % | 15.4 | % |
| Grace Performance  Chemicals                   |       | 0.5                                                                                                                                                                                        | %          | 3.2 | % | 3.6 | % | 7.3 | % |
| Net sales                                      |       | 3.6                                                                                                                                                                                        | %          | 4.6 | % | 3.3 | % | 11.5 | % |
| **By Region:**                                 | ** ** | ** **                                                                                                                                                                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| North America                                  |       | (4.9                                                                                                                                                                                       | %)         | (0.7 | %) | 0.1 | % | (5.5 | %) |
| Europe                                         |       | 10.2                                                                                                                                                                                       | %          | 6.6 | % | 7.5 | % | 24.3 | % |
| Asia Pacific                                   |       | 1.2                                                                                                                                                                                        | %          | 12.2 | % | 2.2 | % | 15.6 | % |
| Latin America                                  |       | 18.1                                                                                                                                                                                       | %          | 16.3 | % | 2.8 | % | 37.2 | % |

 

Salesfor the three months ended June 30, 2007 were favorably impacted by highervolume (including acquisitions), and selling price increases that partiallyoffset cost inflation. Acquisitions contributed $3.2 million or 0.8 percentagepoints of the sales growth.
| **Net Sales Variance Analysis** | ** ** | **Six Months Ended June 30, 2007 as a Percentage Increase  (Decrease) from Six Months Ended June 30, 2006** | ** ** |
|------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                     | ** ** | **Volume**                                                                                                                                                                                  | ** ** | **Price/Mix** | ** ** | **Currency  Translation** | ** ** | **Total** | ** ** |
| Grace Davison                                  |       | 5.1                                                                                                                                                                                         | %          | 3.9 | % | 3.2 | % | 12.2 | % |
| Grace  Performance Chemicals                   |       | 1.5                                                                                                                                                                                         | %          | 3.0 | % | 3.3 | % | 7.8 | % |
| Net sales                                      |       | 3.3                                                                                                                                                                                         | %          | 3.5 | % | 3.3 | % | 10.1 | % |
| **By  Region:**                                | ** ** | ** **                                                                                                                                                                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| North America                                  |       | (4.8                                                                                                                                                                                        | %)         | (0.3 | %) | 0.0 | % | (5.1 | %) |
| Europe                                         |       | 10.4                                                                                                                                                                                        | %          | 4.0 | % | 7.6 | % | 22.0 | % |
| Asia Pacific                                   |       | (1.9                                                                                                                                                                                        | %)         | 14.0 | % | 2.2 | % | 14.3 | % |
| Latin America                                  |       | 23.9                                                                                                                                                                                        | %          | 8.2 | % | 1.5 | % | 33.6 | % |

 

Sales for the six monthsended June 30, 2007 were favorably impacted by higher volume (includingacquisitions), and selling price increases that partially offset costinflation. Acquisitions contributed $7.2 million or 1.0 percentage point of thesales growth.

***Pre-tax Income from Core Operations***— Operating profit for the three monthsand six months ended June 30, 2007 improved due to sales volume growth andselling price increases, partially offset by raw material cost inflation.

Corporate costsinclude corporate functional costs (such as financial and legal services, humanresources, communications and information technology), the cost of corporategovernance (including directors and officers liability insurance) and pensioncosts related to both corporate employees and to the effects of changes inassets and liabilities for all of our pension plans.  Corporate costs for the three months and sixmonths ended June 30, 2007 decreased compared with the prior year periodsprimarily due to lower pension costs from the effect of contributions made todefined benefit pension plans in recent years and higher investment returns.

We value our U.S.inventories under the last-in/first- out method, or LIFO, and our non-U.S.inventories under the first-in/first-out, or FIFO, method. LIFO was selected in1974 for U.S. financial reporting and tax purposes because it generally resultsin a better matching of current revenue with current costs during periods ofinflation. We have not elected LIFO for our non-U.S. inventories due tostatutory restrictions. However, if we valued our U.S. inventories using theFIFO method, consistent with our non-U.S. subsidiaries, our pre-tax income fromcore operations would have been approximately 7.3% higher and 14.6% lower forthe six months ended June 30, 2007 and 2006, respectively. The significantchange in inventory valuations between FIFO and LIFO relates primarily to theprice volatility, over the past several quarters, of commodity metals andnatural gas used in Grace Davison products and production processes.  We attempt to mitigate price volatilitythrough hedging techniques such as layering our required supply under fixeddelivery contracts, entering into commodity option and swap contracts withsuppliers and financial institutions, and by negotiating sales contracts thatpermit the partial pass-through of market price increases for these volatilecommodity items.

We normallyattempt to lock in raw material costs through long-term supply contracts andtargeted hedging programs. Arrangements and programs can span a few months toseveral years. Major raw materials include natural gas, certain metals,petroleum-based materials and certain industrial chemicals. The actual cost ofthese raw materials can differ significantly from spot prices at any point intime.  Our reported gross profit for theperiods presented has been favorably impacted by certain raw material supply arrangementsand unfavorably

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affected byothers, relative to the then-current market price. We expect that new supplyagreements and hedging arrangements will result in raw material costs that canbe significantly favorable or unfavorable compared with prior periods. Weattempt to mitigate period-over-period commodity-driven cost changes throughutilization and customer pricing strategies; however, gross profit marginsstill are likely to be affected when compared over time.

Within both GraceDavison and Grace Performance Chemicals, we conduct certain business activitiesin various countries through joint ventures with unaffiliated thirdparties.  Minority interest inconsolidated entities decreased due to lower earnings of our joint ventures.

***Pre-tax Income (Loss) fromNoncore Activities***—****Pre-tax income (loss) from noncore activitiesreflects financial matters unrelated to our core operations.  This category of costs and income is expectedto be volatile as potentially material items are addressed through our Chapter11 proceedings and/or as the financial implications of our legal contingenciesbecome apparent. Some noncore activities are shown as separate items on theConsolidated Statement of Operations. Those not separately listed are primarily included in selling, generaland administrative expenses and in other (income) expense. The table belowshows the components of noncore activities, and the captions in which eachcomponent is presented in the Consolidated Statements of Operations:

 
| ** **                                                       | ** ** | **Three Months  Ended  June 30,** | ** ** | **Six Months  Ended  June 30,** | ** ** |
|------------------------------------------------------------------|------------|---------------------------------------------|------------|-------------------------------------------|------------|
| ***(In millions)***                                         | ** ** | **2007**                                    | ** ** | **2006**                                  | ** ** | **2007** | ** ** | **2006** | ** ** |
| Provision for  environmental remediation — vermiculite      | ** ** | **$**                                       | **(9.4**   | **)**                                     | $          | (29.4 | ) | **$** | **(9.4** | **)** | $ | (29.4 | ) |
| Provision for  environmental remediation — other sites      | ** ** | **(2.6**                                    | **)**      | (0.6                                      | )          | **(2.6** | **)** | (0.6 | ) |
| **Total  provision for environmental remediation**               | ** ** | **$**                                       | **(12.0**  | **)**                                     | $          | (30.0 | ) | **$** | **(12.0** | **)** | $ | (30.0 | ) |
| Insurance  settlements — environmental and asbestos-related | ** ** | **$**                                       | **—** |                                      | $          | 6.9 | ** ** | **$** | **—** |   | $ | 6.9 |   |
| COLI income, net                                                 | ** ** | **0.5**                                     |       | 0.5                                       | ** ** | **2.5** |   | 1.7 |   |
| Translation  effects — intercompany loan                    | ** ** | **1.0**                                     |       | 10.7                                      | ** ** | **3.8** |   | 13.7 |   |
| Value of  currency contracts                                     | ** ** | **(0.4**                                    | **)**      | (10.7                                     | )          | **(2.5** | **)** | (13.5 | ) |
| Gain on sale of  real estate                                     | ** ** | **0.6**                                     |       | 5.0                                       | ** ** | **1.1** |   | 5.0 |   |
| Other                                                            | ** ** | **(1.4**                                    | **)**      | (1.7                                      | )          | **(1.7** | **)** | (2.9 | ) |
| **Total  other income (expense), net**                           | ** ** | **$**                                       | **0.3**    |                                      | $          | 10.7 | ** ** | **$** | **3.2** |   | $ | 10.9 |   |
| D&O  insurance cost — portion related to Chapter 11     | ** ** | **$**                                       | **(1.5**   | **)**                                     | $          | (1.5 | ) | **$** | **(3.0** | **)** | $ | (3.0 | ) |
| Asbestos  administration                                         | ** ** | **(1.4**                                    | **)**      | (2.5                                      | )          | **(4.1** | **)** | (5.4 | ) |
| Postretirement  benefit costs — divested businesses         | ** ** | **0.3**                                     |       | 0.9                                       | ** ** | **1.0** |   | 1.8 |   |
| Stock  appreciation rights                                       | ** ** | **—**                                  |       | 0.6                                       | ** ** | **—** |   | (2.0 | ) |
| Legal defense  costs                                             | ** ** | **(3.8**                                    | **)**      | (17.6                                     | )          | **(6.4** | **)** | (27.9 | ) |
| Other                                                            | ** ** | **(1.2**                                    | **)**      | (0.3                                      | )          | **(1.7** | **)** | (1.4 | ) |
| **Total  selling, general and administrative expenses**          | ** ** | **$**                                       | **(7.6**   | **)**                                     | $          | (20.4 | ) | **$** | **(14.2** | **)** | $ | (37.9 | ) |
| Net pension  costs — divested businesses                    | ** ** | **(1.7**                                    | **)**      | (3.1                                      | )          | **(3.8** | **)** | (5.9 | ) |
| **Total  net pension expense**                                   | ** ** | **$**                                       | **(1.7**   | **)**                                     | $          | (3.1 | ) | **$** | **(3.8** | **)** | $ | (5.9 | ) |
| **Total pre-tax income (loss)  from noncore activities**         | ** ** | **$**                                       | **(21.0**  | **)**                                     | $          | (42.8 | ) | **$** | **(26.8** | **)** | $ | (62.9 | ) |

 

Pre-tax income(loss) from noncore activities in the six months ended June 30, 2007 wasattributable primarily to: (1) a charge of $12.0 million in the second quarterto adjust Grace’s estimate of costs to resolve environmental remediation claimsbased on recent information exchanged with the U.S. Government; and (2) legaldefense costs of $6.4 million related to the Montana and New Jersey legalproceedings (see Note 12 to the Consolidated Financial Statements for moreinformation).  Pre-tax income (loss) fromnoncore activities in the six months ended June 30, 2006 was attributableprimarily to: (1) a charge of $30.0 million in estimated costs forenvironmental remediation, primarily in Montana, (2) legal defense costs of$27.9 million related to the Montana and New Jersey legal proceedings and (3)an accrual for stock appreciation rights of $2.0 million.

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In March 2004, webegan accounting for currency fluctuations on a €293 million intercompany loanbetween our subsidiaries in the United States and Germany as a component ofoperating results instead of as a component of other comprehensive income. Thischange was prompted by an analysis of new tax laws in Germany and our cash flowplanning in connection with our Chapter 11 reorganization, which togetherindicated that we should no longer consider this loan as part of our permanentcapital structure in Germany. In May 2004, we entered into a series of foreigncurrency forward contracts with a U.S. bank to mitigate future currencyfluctuations on the remaining loan balance. Contract amounts of €200.7 millionwere extended in June 2005 at varying rates and have terms that coincide withloan repayments due periodically through December 2008.  As part of the contract extension, we wererequired to pay a settlement premium of $9.3 million to the bank. We expect torecover this settlement premium over time as the contracts are settled at ratesgreater than the initial rates in the May 2004 foreign currency forwardcontracts.  For the six months ended June30, 2007 and 2006, respectively, €36.6 million and €29.3 million of loanprincipal was repaid. For the six months ended June 30, 2007 and 2006, werecognized a $2.5 million and a $13.5 million contract loss, respectively,offset by a $3.8 million and a $13.7 million foreign currency gain,respectively.

***Chapter 11 Expenses***—****Although we are unable to measure precisely the impact ofthe Chapter 11 proceedings on our overall financial performance, we incursignificant added costs that are directly attributable to operating in Chapter11. Net Chapter 11 expenses consist primarily of legal, financial andconsulting fees that we, the three creditors’ committees, the equity committeeand the representative of future asbestos claimants, incur, reduced by interestincome earned on cash and cash equivalents held by our entities subject toChapter 11. We pay for the costs of all committees, and the committees’advisors.  These costs fluctuate with theactivity in our Chapter 11 proceedings.

Chapter 11expenses increased due to a higher level of activity in our bankruptcyproceeding related to claims adjudication and estimation.  Our pre-tax income from core operationsincluded expenses for Chapter 11-related compensation charges of $3.0 millionand $6.2 million for the three months ended June 30, 2007 and 2006,respectively, and $5.3 million and $9.7 million for the six months ended June30, 2007 and 2006, respectively.  Becauseof the uncertain outcome of the Chapter 11 proceeding and the volatility andspeculative nature of Grace common stock, we changed our long-term incentivecompensation from an equity-based to a cash-based program.

We incur numerousother indirect costs to manage the Chapter 11 proceedings such as: managementtime devoted to Chapter 11 matters; added cost of debt capital; added costs ofgeneral business insurance, including D&O liability insurance premiums; andlost business and acquisition opportunities due to the complexities andrestrictions of operating under Chapter 11.

***Interest******Expense*** — Net interest expense is higherfor the three months and six months ended June 30, 2007 compared with the respectiveprior year periods due to the increase in the prime interest rate used toaccrue interest on pre-petition bank debt. The plan of reorganization statesthat each holder of an allowed general unsecured claim shall be paid in full, plus post-petition interest. Post-petition interest shall accruethrough the date of payment as follows:

·                  Forthe holders of pre-petition bank credit facilities, beginning January 1, 2006,we agreed to pay interest on pre-petition bank debt at the prime rate, adjustedfor periodic changes, and compounded quarterly. The effective rates onpre-petition bank debt for the six months ended June 30, 2007 and 2006 were8.25% and 7.90%, respectively.

·                  Forthe holders of claims who, but for the Chapter 11 filing, would be entitledunder a contract or otherwise to accrue or be paid interest on such claim in anon-default (or non-overdue payment) situation under applicable non-bankruptcylaw, the rate provided in the contract between the Grace entity and theclaimant or such rate as may otherwise apply under applicable non-bankruptcylaw.

·                  Forall other holders of allowed general unsecured claims, at a rate of 4.19% perannum, compounded annually.

The effectiveinterest rates for the six months ended June 30, 2007 and 2006 were 7.02% and6.47%, respectively.  Such interest,which under the plan of reorganization is payable 85% in cash and 15% in Gracecommon stock, will not be paid until the plan of reorganization is confirmedand funded.

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***Income Taxes***—****Income tax provision at the federalcorporate rate of 35% for the six months ended June 30, 2007 and 2006 was $17.3million and $0.9 million, respectively.  In the second quarter of 2007, we recorded a net reduction of $10.7million in tax expense primarily related to our entitlement to receive intereston tax refunds resulting from the carry-back of tax losses to prior years.  Excluding this discrete item in the 2007second quarter, the primary differences between the income tax provision at thefederal corporate rate and the overall provision for income taxes are due tointerest on tax contingencies and the non-deductibility of certain Chapter 11expenses.  The increase in our income taxprovision is primarily driven by our increased pre-tax income from coreoperations.

**Operating Segment Overview**

The following is an overview of financial measures of the performance ofour operating segments for the three months and six months ended June 30, 2007,as compared with the prior year periods.

***Grace Davison***

***Three Months Ended June 30, 2007***
| ** **                                                 | ** ** | **Three Months Ended June 30,** | ** ** |
|------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **Net Sales by Region***(In millions)* | ** ** | **2007**                                            | ** ** | **2006** | ** ** | **$ Change  Fav  (Unfav)** | ** ** | **% Change  Fav  (Unfav)** | ** ** |
|                                                       |       |                                                |       |   |   |   |   |   |   |
| North America                                              | ** ** | **$**                                               | **120.6**  |   | $ | 129.8 |   | $ | (9.2 | ) | (7.1 | %) |
| Europe                                                     | ** ** | **198.7**                                           |       | 153.4 |   | 45.3 |   | 29.5 | % |
| Asia Pacific                                               | ** ** | **95.0**                                            |       | 81.8 |   | 13.2 |   | 16.1 | % |
| Latin America                                              | ** ** | **24.4**                                            |       | 15.3 |   | 9.1 |   | 59.5 | % |
| **Total Grace Davison**                                    | ** ** | **$**                                               | **438.7**  |   | $ | 380.3 |   | $ | 58.4 |   | 15.4 | % |

 

*Sales*

The key factors contributing to the Grace Davison sales increase were:

·                  Sellingprice increases that partially offset higher raw material costs;

·                  Highervolume of FCC catalysts in most geographic regions from stronger economicactivity and from the success of strategic growth initiatives; and

·                  Favorabletranslation effects from sales denominated in foreign currencies.

European salesincreased from the prior year period due to growth in volume and higher sellingprices.  North American sales decreasedfrom the prior year period, primarily from lower sales in Canada ofhydroprocessing catalysts following the loss of a significant customer in theprior year.  Asia Pacific and LatinAmerica sales increased with strong volume growth from new business.

###### *Operating Income and Margin*

Grace Davisonoperating income increased compared with 2006 primarily due to higher sellingprices and higher volumes, a better product mix, and successful productivityinitiatives.

We report 100% of salesfor the Advanced Refining Technologies LLC joint venture, but only account for55% of the income in our measure of operating performance.  Income of this joint venture decreased fromthe prior year due to order patterns in the U.S., lower sales in Canada andhigher material costs.

***Six Months EndedJune 30, 2007***
| ** **                                                 | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------------------------------------|------------|---------------------------------------------------|------------|
| **Net Sales by Region***(In millions)* | ** ** | **2007**                                          | ** ** | **2006** | ** ** | **$ Change  Fav  (Unfav)** | ** ** | **% Change  Fav  (Unfav)** | ** ** |
|                                                       |       |                                              |       |   |   |   |   |   |   |
| North America                                              | ** ** | **$**                                             | **246.5**  |   | $ | 262.5 |   | $ | (16.0 | ) | (6.1 | %) |
| Europe                                                     | ** ** | **378.8**                                         |       | 307.8 |   | 71.0 |   | 23.1 | % |
| Asia Pacific                                               | ** ** | **158.8**                                         |       | 139.9 |   | 18.9 |   | 13.5 | % |
| Latin America                                              | ** ** | **42.3**                                          |       | 26.5 |   | 15.8 |   | 59.6 | % |
| **Total Grace Davison**                                    | ** ** | **$**                                             | **826.4**  |   | $ | 736.7 |   | $ | 89.7 |   | 12.2 | % |

 

*Sales*

Sales increasesfor the six months ended June 30, 2007 reflected similar economic conditionsand cost factors as those experienced in the three months ended June 30,2007.  Favorable currency translationincreased sales by 3.2 percentage points.

*Operating Income and Margin*

The increase inoperating income for the six months ended June 30, 2007 was a result of highersales in most product groups and in regions other than North America, partiallyoffset by the negative effects of higher raw material costs.

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***GracePerformance Chemicals***

***Three Months Ended June 30, 2007***
| ** **                                                 | ** ** | **Three Months Ended June 30,** | ** ** |
|------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **Net Sales by Region***(In millions)* | ** ** | **2007**                                            | ** ** | **2006** | ** ** | **$ Change  Fav  (Unfav)** | ** ** | **% Change  Fav  (Unfav)** | ** ** |
|                                                       |       |                                                |       |   |   |   |   |   |   |
| North America                                              | ** ** | **$**                                               | **156.4**  |   | $ | 163.2 |   | $ | (6.8 | ) | (4.2 | %) |
| Europe                                                     | ** ** | **135.6**                                           |       | 115.6 |   | 20.0 |   | 17.3 | % |
| Asia Pacific                                               | ** ** | **53.4**                                            |       | 46.6 |   | 6.8 |   | 14.6 | % |
| Latin America                                              | ** ** | **28.7**                                            |       | 23.4 |   | 5.3 |   | 22.6 | % |
| **Total Grace Performance  Chemicals**                     | ** ** | **$**                                               | **374.1**  |   | $ | 348.8 |   | $ | 25.3 |   | 7.3 | % |

 

*Sales*

The key factorscontributing to the Grace Performance Chemicals sales increase were:

·                  Highervolume of commercial construction products in Europe, Asia Pacific and LatinAmerica, where economic activity was favorable and commercial initiatives weresuccessful;

·                  Highervolume and selling prices for Darex packaging technologies worldwide thatpartially offset raw material cost inflation; and

·                  Favorabletranslation effects from sales denominated in foreign currencies.

Sales ofconstruction products in North America were lower in the second quarter of 2007compared with 2006 primarily due to a nearly 22% decline in housing starts inthe United States.

*OperatingIncome and Margin*

Grace PerformanceChemicals operating income increased primarily due to sales volume growth ingeographic regions other than North America and selling price increases thatpartially offset raw material cost inflation and productivity gains.

***Six Months Ended June 30, 2007***
| ** **                                                 | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------------------------------------|------------|---------------------------------------------------|------------|
| **Net Sales by Region***(In millions)* | ** ** | **2007**                                          | ** ** | **2006** | ** ** | **$ Change  Fav  (Unfav)** | ** ** | **% Change  Fav  (Unfav)** | ** ** |
|                                                       |       |                                              |       |   |   |   |   |   |   |
| North America                                              | ** ** | **$**                                             | **297.1**  |   | $ | 310.4 |   | $ | (13.3 | ) | (4.3 | %) |
| Europe                                                     | ** ** | **250.6**                                         |       | 208.2 |   | 42.4 |   | 20.4 | % |
| Asia Pacific                                               | ** ** | **100.3**                                         |       | 86.8 |   | 13.5 |   | 15.6 | % |
| Latin America                                              | ** ** | **54.0**                                          |       | 45.6 |   | 8.4 |   | 18.4 | % |
| **Total Grace Performance  Chemicals**                     | ** ** | **$**                                             | **702.0**  |   | $ | 651.0 |   | $ | 51.0 |   | 7.8 | % |

 

*Sales*

Sales increasesfor the six months ended June 30, 2007 reflected similar economic conditionsand cost factors as those experienced in the three months ended June 30, 2007.Favorable currency translation increased sales by 3.3 percentage points.

*Operating Income and Margin*

The increase inoperating income for the six months ended June 30, 2007 was a result of sellingprice increases, which offset increases in raw material costs and positiveresults from productivity initiatives.

***Operating Returns on Assets Employed***—****The following tables setforth the Grace Davison and Grace Performance Chemicals total asset positionand pre-tax return on average total assets as of June 30, 2007 and December 31,2006.  We use the measure pre-tax returnon average total assets as an indicator of our efficiency in using our assetsand allocating our resources to generate earnings.  We devote significantly higher capital to themanufacture of Grace Davison products than to the manufacture of GracePerformance Chemicals products. Conversely, non-manufacturing costs,particularly selling expenses, are significantly higher for Grace PerformanceChemicals than for Grace Davison.
| **Grace Davison***(In millions)*                   | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|--------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
|                                                         |       |                    |       |                        |       |
| Trade  receivables                                           | ** ** | **$**                   | **213.7**  |                        | $          | 180.4 |   |
| Inventory                                                    | ** ** | **177.9**               |       | 192.3                       |       |
| Other current  assets                                        | ** ** | **20.6**                |       | 15.8                        |       |
| Total current  assets                                        | ** ** | **412.2**               |       | 388.5                       |       |
| Properties and  equipment, net                               | ** ** | **402.8**               |       | 402.3                       |       |
| Goodwill and  other intangible assets                        | ** ** | **107.3**               |       | 108.4                       |       |
| Other assets                                                 | ** ** | **14.8**                |       | —                      |       |
| Total assets                                                 | ** ** | **$**                   | **937.1**  |                        | $          | 899.2 |   |
| Pre-tax return on  average total assets (trailing 12 months) | ** ** | **21.1**                | **%**      | 18.7                        | %          |

 

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GraceDavison’s total assets increased by $37.9 million primarily due to higher tradereceivables, partially offset by a decrease in inventory levels, both caused byincreased sales.
| **Grace Performance Chemicals***(In millions)* | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|---------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
|                                                          |       |                    |       |                        |       |
| Trade receivables                                             | ** ** | **$**                   | **279.3**  |                        | $          | 245.1 |   |
| Inventory                                                     | ** ** | **109.1**               |       | 92.2                        |       |
| Other current assets                                          | ** ** | **19.6**                |       | 16.9                        |       |
| Total current assets                                          | ** ** | **408.0**               |       | 354.2                       |       |
| Properties and  equipment, net                                | ** ** | **246.1**               |       | 242.0                       |       |
| Goodwill and other  intangible assets                         | ** ** | **92.4**                |       | 92.6                        |       |
| Other assets                                                  | ** ** | **6.1**                 |       | 6.0                         |       |
| Total assets                                                  | ** ** | **$**                   | **752.6**  |                        | $          | 694.8 |   |
| Pre-tax return on average total assets (trailing 12 months)   | ** ** | **25.5**                | **%**      | 25.2                        | %          |

 

Grace PerformanceChemicals’ total assets increased by $57.8 million, mainly due to higher tradereceivables as a result of increased sales and higher inventory to supportsales growth.

**Noncore Liabilities**

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

Thefollowing table summarizes our net noncore liabilities at June 30, 2007 andDecember 31, 2006:
| **Net Noncore Liabilities***(In millions)* | ** ** | **June 30,  2007** | ** **   | **December 31,  2006** | ** ** |
|-----------------------------------------------------------|------------|-------------------------|--------------|-----------------------------|------------|
| ** **                                                | ** ** | ** **              | ** **   | ** **                  | ** ** |
| Asbestos-related  liabilities                             | ** ** | **$**                   | **(1,700.0** | **)**                       | $          | (1,700.0 | ) |
| Asbestos-related  insurance receivable                    | ** ** | **500.0**               |         | 500.0                       |       |
| Asbestos-related  liability, net                          | ** ** | **(1,200.0**            | **)**        | (1,200.0                    | )          |
| Environmental  remediation                                | ** ** | **(368.3**              | **)**        | (361.1                      | )          |
| Postretirement  benefits                                  | ** ** | **(78.5**               | **)**        | (72.7                       | )          |
| Income taxes                                              | ** ** | **(96.5**               | **)**        | (141.2                      | )          |
| Retained  obligations and other                           | ** ** | **(36.8**               | **)**        | (23.3                       | )          |
| **Net noncore liability**                                 | ** ** | **$**                   | **(1,780.1** | **)**                       | $          | (1,798.3 | ) |

 

The resolution ofmost of these noncore recorded and contingent liabilities will be determinedthrough the Chapter 11 proceedings. We cannot predict with any certainty how,and for what amounts, any of these contingencies will be resolved. The amountsof these liabilities as ultimately determined through the Chapter 11proceedings could be materially different from amounts recorded at June 30,2007.

**Plan of Reorganization**

As described under“Voluntary Bankruptcy Filing” in Notes 1 and 2 to the Consolidated FinancialStatements, Grace and our principal U.S. operating subsidiary aredebtors-in-possession under Chapter 11 of the bankruptcy code. Our non-U.S.subsidiaries, although not part of the Chapter 11 filing, are owned directly orindirectly by our principal operating subsidiary or other filing entities.Consequently, we expect that any Chapter 11 plan of reorganization, includingour proposed plan of reorganization, will involve the combined value of ourglobal businesses and other assets to fund (with cash and/or securities) ourobligations as adjudicated through the bankruptcy process. We have analyzed ourcash flow and capital needs to continue to fund our businesses and believethat, while in Chapter 11, sufficient cash flow and credit facilities areavailable to support our business strategy.

On January 13,2005, we filed a plan of reorganization and related documents that amended ouroriginal plan of reorganization and disclosure statement filed on November 13,2004 to address certain objections of creditors and other interested parties.The plan of reorganization is supported by committees representing generalunsecured creditors and shareholders, but is not supported by committeesrepresenting asbestos personal injury claimants and asbestos property damageclaimants or the representative of future asbestos claimants.  See Note 2 to the Consolidated FinancialStatements for more information on the plan of reorganization.

***Risks of the Plan of Reorganization*** —We intend to address all pending and future asbestos-related claims and allother pre-petition claims as outlined in the plan of reorganization. However,we may not be successful in obtaining approval of the plan of reorganization bythe bankruptcy court.  Instead, amaterially different plan of reorganization may ultimately be approved and,under the ultimate plan of reorganization, the interests of our shareholderscould be substantially diluted or cancelled. The value of Grace common stockfollowing a plan of reorganization, and the extent of any recovery bynon-asbestos-related creditors, will depend principally on the amount of ourasbestos-related liability under a confirmed plan of reorganization.

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Our proposed planof reorganization assumes several fundamental conditions including that:

·                  Ourasbestos-related liabilities can be resolved at a net present value cost of nomore than $1,700 million (including $87 million for pre-petitionasbestos-related contractual settlements and judgments), including all propertydamage claims (including claims related to our former Zonolite AtticInsulation, or ZAI, product) and all pending and future personal injury claims;and

·                  Thebenefit of assets from litigation settlement agreements with Sealed AirCorporation and its subsidiary, Cryovac, Inc., and Fresenius Medical CareHoldings, Inc. will be available to satisfy liabilities under the plan ofreorganization.

There can be noguarantee that these two fundamental conditions can be met. The measure of ourasbestos-related liabilities could be settled by the bankruptcy court (inconformity with the plan of reorganization or otherwise), by a negotiation withinterested parties, and/or under an alternative plan.

Any resolution,other than that reflected in the plan of reorganization, could have a materialadverse effect on the percentage of Grace common stock to be retained by ourcurrent shareholders beyond that reflected in the proforma financialinformation presented below. We will adjust our financial statements and theproforma effects of the plan of reorganization as facts and circumstanceswarrant.

***Proforma Financial Information*** — Theunaudited proforma financial information presented below reflects theaccounting effects of our proposed plan of reorganization (1) as if it were putin effect on the date of our most recent consolidated balance sheet — June 30,2007, and (2) as if it were in effect for (a) the full year ended December 31,2006, and (b) the six months ended June 30, 2007. Proforma adjustments for taxeffects have been applied at a 35% tax rate. The proforma financial information included herein, may not beconsistent with the plan of reorganization documents filed on January 13, 2005due to subsequent changes in operations and accounting estimates. Such proformafinancial statements reflect how our assets, liabilities, equity and incomewould be affected by the plan of reorganization as follows:

A.                                   BorrowingsUnder New Debt Agreements and Contingencies

The plan of reorganizationreflects the assumption that $1,000 million in debt financing will be availableto fund settled claims payable at the effective date of the plan ofreorganization (approximately $800 million) and to provide working capital(approximately $200 million) for continuing operations.  No such financing currently exists but, weexpect, based on discussions with prospective lenders, our sustained level ofcore operations while we have operated under Chapter 11, and publicly availableinformation regarding funding available to comparable companies, that we couldobtain financing at this level before the plan of reorganization iseffective.  In addition, the proformafinancial information reflects $150 million in contingencies to payprofessional and bank fees, other non-operating liabilities and their relatedtax effects that will not become liabilities until the effective date of theplan of reorganization. The $26.3 million adjustment to increase deferred taxesreflects the tax impact on $150 million in contingencies as described above, ofwhich we estimate 50% would be deductible for tax purposes. Proformaadjustments related to the borrowings under new debt financing andcontingencies have been denoted by the capital letter **“A”** in the proforma balance sheet presentedbelow.

B.                                     Fresenius and Sealed Air Settlements

The plan ofreorganization reflects the value, in the form of cash and securities, expectedto be realized under litigation settlement agreements as follows: $115.0million of cash from Fresenius; and, $1,211.4 million of estimated value fromCryovac, Inc., a subsidiary of Sealed Air (calculated as of June 30, 2007) inthe form of $512.5 million of cash plus accrued interest at 5.5% from December21, 2002 compounded annually (approximately $140.5 million), and 18 millionshares of Sealed Air common stock valued at $31.02 per share (approximately$558.4 million). Tax accounts have been adjusted to reflect the satisfaction ofour recorded liabilities by way of these third-party agreements. The Freseniussettlement amount will be payable directly to Grace and will be accounted foras income; however, we have presented the amount of the settlement as aproforma balance sheet adjustment only in order to avoid distorting thepredictive value of the proforma statement of operations with this one-timegain. Payments under the Sealed Air settlement will be paid directly to theasbestos trust by Cryovac and will be accounted for as satisfaction of aportion of our recorded asbestos-related liability and a credit to

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shareholders’ equity.Both the Sealed Air and Fresenius settlements are subject to the fulfillment ofspecified conditions. The $(40.3) million adjustment to deferred income taxesin the proforma balance sheet below represents the tax impact of the $115.0million Fresenius settlement.  The$(424.0) million adjustment to deferred income taxes represents the tax impactof the $1,211.4 million Sealed Air settlement. Proforma adjustments related tothe Fresenius and Sealed Air settlements have been denoted by the capitalletter **“B”** in the proforma balancesheet presented below.

C.                                     Paymentof Pre-Petition Liabilities

The plan ofreorganization reflects the transfer of funds and securities to settleestimated obligations payable under the plan of reorganization at the effectivedate. We would be required to issue approximately 18.5 million shares of Gracecommon stock, based on the closing price per share of $24.49 on June 30, 2007,for total proceeds of $453.9 million, and utilize cash of $1,110.5 million tosettle these estimated obligations (see the adjustments denoted by the capitalletter **“C”** in the proforma balancesheet below).  The following tableprovides a calculation of the proforma share issuance:
| **Proforma Issuance of Shares***($ and shares in millions)*     | ** ** | **June 30, 2007** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|
|                                                                                               |       |                        |       |
| Payment of  asbestos claims                                                                        |       | $                           | 358.6      |   |
| Less: portion  related to general unsecured claims                                                 |       | (87.0                       | )          |
|                                                                                               |       | $                           | 271.6      |   |
| Value of  unsecured claims paid with equity (15%)                                                  |       | 182.3                       |       |
| Equity value  distributable at emergence (18.5 million shares)                                     |       | $                           | 453.9      |   |
| Equity value  distributable post-emergence for PI-AO claims (5.3 million shares)                   |       | 130.0                       |       |
| Total value of  equity to satisfy claims                                                           |       | $                           | 583.9      |   |
| Closing price of  shares at 6/30/07                                                                |       | $                           | 24.49      |   |
| Proforma shares  to satisfy asbestos and general unsecured claims and post-emergence PI-AO  claims |       | 23.8                        |       |
| Add: Shares  issuable upon exercise of in-the-money stock options                                  |       | 3.4                         |       |
| **Proforma issuance of shares**                                                                    |       | 27.2                        |       |

 

In our proformapresentation, we have assumed that our emergence from bankruptcy will give riseto 1) the payment of pre-petition liabilities, 2) the Fresenius/Sealed Airpayments, and 3) the securing of emergence financing by non-U.S. subsidiariesand payment of dividends as further described below.

The payments result inchanging the source of our tax assets from reserves for tax-deductibleobligations such as asbestos claims and environmental claims to time-limitedtax net operating losses (see the adjustments denoted by the capital letter **“D”** in the proforma balance sheetbelow).  We have assumed non-asbestos andpass-through liabilities will be paid in cash when due.  A portion of the funding required to meet ouremergence obligations will involve repatriating monies through a dividend fromcertain non-U.S. subsidiaries.  Webelieve that the reserve related to repatriation of funds presently recordedwill be adequate to absorb the U.S. tax effects of this dividend, assuming thatwe employ (as intended) certain tax planning strategies to preserve our netoperating losses.

The followingtable presents a detailed description of the proforma tax effects of thesepayments on the balance of both (i) net operating loss carryforwards and (ii)temporary differences, net of valuation allowance.
| **Summary of Change in Deferred Tax Asset Balances***(In millions)* | ** ** | **Tax Effects of  Net Operating  Loss Carry-  Forwards** | ** ** | **Temporary  Differences, Net  of Valuation  Allowance** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| **June  30, 2007 Balance As Reported**                                                                      |       | $                                                                            | 89.7       |                                                               | $          | 623.1 |   |
| **Proforma  Adjustments:**                                                                                  |       |                                                                         |       |                                                               |       |
| Contingent  liabilities                                                                                     |       | —                                                                       |       | 26.3                                                               |       |
| Fresenius  payment                                                                                          |       | (40.3                                                                        | )          | —                                                             |       |
| Sealed Air  payment                                                                                         |       | —                                                                       |       | (424.0                                                             | )          |
| **Emergence  Payments & Other:**                                                                        |       |                                                                         |       |                                                               |       |
| Accrued interest                                                                                            |       | 60.7                                                                         |       | (60.7                                                              | )          |
| Asbestos claims                                                                                             |       | 125.5                                                                        |       | (125.5                                                             | )          |
| Environmental  claims                                                                                       |       | 89.7                                                                         |       | (89.7                                                              | )          |
| Special pensions                                                                                            |       | 5.1                                                                          |       | (5.1                                                               | )          |
| Insurance  recovery                                                                                         |       | (175.0                                                                       | )          | 175.0                                                              |       |
| Repatriation of  foreign earnings                                                                           |       | (123.0                                                                       | )          | 123.0                                                              |       |
| Other                                                                                                       |       | 13.0                                                                         |       | (13.0                                                              | )          |
| Subtotal                                                                                                    |       | (4.0                                                                         | )          | 4.0                                                                |       |
| **June 30, 2007 Proforma Balance**                                                                          |       | $                                                                            | 45.4       |                                                               | $          | 229.4 |   |

 

D.                                    Proforma Consolidated Statement ofOperations and Capital Structure

The proforma incomeadjustments to our June 30, 2007 and December 31, 2006 Consolidated Statementsof Operations consist of:

·                  The elimination of all recorded chargesand expenses directly related to Chapter 11, as these costs would not continueafter effectiveness of the Plan, and the elimination of provisions recorded forenvironmental remediation obligations as we expect this risk would be resolvedunder the Plan (these eliminations are denoted by

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                        the capital letter **“E”** in the proforma statements ofoperations below);

·                  Adjustments to reduce Selling, Generaland Administrative Expenses and Other Income to eliminate noncore legalexpenses, and noncore insurance income related to asbestos litigation, as theliabilities to which these noncore activities relate would be resolved as partof the Plan (these adjustments are denoted by the letter **“F”** in the proforma statements ofoperations below);

·                  The elimination of interest expenseassociated with pre-petition bank debt, and the addition of interest expenseassociated with the new $1,000.0 million in financing as discussed above, whichresults in the net increase in interest expense denoted by the adjustmentsmarked by the letter **“G”** in theproforma statements of operations below;

·                  The tax effects of the proformastatements of operations adjustments at our effective tax rate (see theadjustments denoted by the capital letter **“H”**in the proforma statements of operations below); and

·                  The addition of new shares of Gracecommon stock related to the assumed financing of the plan of reorganization(see the adjustments denoted by the capital letter **“I”** in the proforma statements of operations below).

Proforma expenses forboth periods presented reflect an assumed 7.4% average interest rate onoutstanding borrowings, based on market conditions as of June 30, 2007 andDecember 31, 2006.  A hypothetical 1/8percent variance in interest rates would increase or decrease our proforma netincome (loss) by approximately $0.3 million for the six months ended June 30,2007 and by approximately $0.7 million for the year ended December 31, 2006.

For purposes of proformaearnings per share and proforma share capital, we used the trading price of$24.49 per share as of June 30, 2007 and $19.80 per share as of December 31,2006 for calculating issued and outstanding shares. At the per share valuationof $24.49 as of June 30, 2007, we assume that 18.5 million shares will beissued at the effective date of the plan of reorganization to fund asbestos andgeneral unsecured claims, 5.3 million shares would be issuable upon exercise ofwarrants to satisfy our estimate of PI-AO claims, and 3.4 million shares wouldbe issued upon exercise of in-the-money stock options. We present the tradingvalue solely to show proforma Consolidated Statements of Operations. Thistrading value may not be indicative of the actual trading value of Grace commonstock following the effective date of the plan of reorganization.  If our distributable value per share at theeffective date of the plan of reorganization is below approximately $6.10 pershare, we would be required to revalue our balance sheet for a change incontrol. (The trading value of Grace common stock over the twelve-month periodended June 30, 2007 was between $8.12 and $29.92 per share.) These proformafinancial statements reflect no change in assets or income related to thispotential accounting outcome.

E.                                      Non-asbestos Contingencies

The accompanying proformafinancial information assumes all non-asbestos related contingencies (includingenvironmental, tax and civil and criminal litigation) are settled for recordedamounts as of June 30, 2007.  Certainliabilities are assumed to be paid at the effective date of the plan ofreorganization based on our estimate of amounts that will be determinable andpayable. The remainder, which would also be subject to the plan ofreorganization, if approved, is assumed to be paid subsequent to the effectivedate of the plan of reorganization as amounts are either not due until a laterdate or will be determined through post-effective-date litigation. The ultimatevalue of such claims may change materially as Chapter 11 and other legalproceedings further define our non-asbestos related obligations.

 

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**W. R. Grace & Co and SubsidiariesProforma Condensed Consolidated Balance Sheet***(In millions)*
| ** **                                                                      | ** ** | ** **                                    | ** ** | **Proforma Adjustments**                                        | ** **  | ** **                             | ** **  |
|---------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|----------------------------------------------------------------------|-------------|----------------------------------------|-------------|
| ** **                                                                      | ** ** | **June 30, 2007  As Reported** | ** ** | **Borrowings  Under  New Debt  Agreements  and  Contingencies** | ** **  | **Sealed  Air/Fresenius  Settlements** | ** **  | **Payment of  Pre-Petition  Liabilities** | ** ** | **June 30, 2007  Proforma** | ** ** |
| **ASSETS**                                                                      |       |                                          |       |                                                                 |        |                                   |        |   |   |   |   |
| **Current Assets**                                                              | ** ** | ** **                                    | ** ** | ** **                                                           | ** **  | ** **                             | ** **  | ** ** | ** ** | ** ** | ** ** |
| Cash and cash equivalents                                                       |       | $                                             | 494.3      | ** **                                                           | $           | 800.0                                  | ** A** | $ | 115.0 | ** B** | $ | (1,110.5 | )**C** | $ | 298.8 |   |
| Other current assets                                                            |       | 917.1                                         |       | —                                                               |        | —                                 |        | — |   | 917.1 |   |
| **Total  Current Assets**                                                       |       | 1,411.4                                       |       | 800.0                                                                |        | 115.0                                  |        | (1,110.5 | ) | 1,215.9 |   |
| Non-current  operating assets                                                   |       | 990.7                                         |       | —                                                               |        | —                                 |        | — |   | 990.7 |   |
| Cash value of life insurance                                                    |       | 91.5                                          |       | —                                                               |        | —                                 |        | — |   | 91.5 |   |
| Deferred income taxes:                                                          |       |                                          |       |                                                                 |        |                                   |        |   |   |   |   |
| Net operating loss carryforwards                                                |       | 89.7                                          |       | —                                                               | ** **  | (40.3                                  | )**B**      | (4.0 | )**D** | 45.4 |   |
| Temporary differences, net of valuation allowance                               |       | 623.1                                         | ** ** | 26.3                                                                 | ** A** | (424.0                                 | )**B**      | 4.0 | ** D** | 229.4 |   |
| Asbestos-related  insurance                                                     |       | 500.0                                         |       | —                                                               |        | —                                 |        | — |   | 500.0 |   |
| **Total Assets**                                                                |       | $                                             | 3,706.4    |                                                                 | $           | 826.3                                  |        | $ | (349.3 | ) | $ | (1,110.5 | ) | $ | 3,072.9 |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY  (DEFICIT)**                        | ** ** | ** **                                    | ** ** | ** **                                                           | ** **  | ** **                             | ** **  | ** ** | ** ** | ** ** | ** ** |
| Total  current liabilities                                                      |       | $                                             | 489.4      |                                                                 | $           | —                                 |        | $ | — | ** ** | $ | (0.9 | )**C** | $ | 488.5 |   |
| Long-term  debt                                                                 |       | 0.3                                           | ** ** | 800.0                                                                | ** A** | —                                 |        | — |   | 800.3 |   |
| Other  noncurrent liabilities                                                   |       | 420.5                                         |       | —                                                               |        | —                                 |        | — |   | 420.5 |   |
| **Total  Liabilities Not Subject to Compromise**                                |       | 910.2                                         |       | 800.0                                                                |        | —                                 | ** **  | (0.9 | )**C** | 1,709.3 |   |
| Bank  debt/letters of credit/capital leases                                     |       | 771.3                                         |       | —                                                               |        | —                                 | ** **  | (771.3 | )**C** | — |   |
| Liability  for asbestos-related litigation and claims                           |       | 1,700.0                                       |       | —                                                               | ** **  | (1,211.4                               | )**B**      | (358.6 | )**C** | 130.0 |   |
| Liability  for environmental remediation                                        |       | 368.3                                         |       | —                                                               |        | —                                 | ** **  | (256.3 | )**C** | 112.0 |   |
| Liability  for postretirement health and special pensions                       |       | 166.3                                         |       | —                                                               |        | —                                 | ** **  | (13.7 | )**C** | 152.6 |   |
| Liability  for accounts payable and litigation                                  |       | 143.2                                         |       | —                                                               |        | —                                 | ** **  | (106.7 | )**C** | 36.5 |   |
| Liability  for tax claims and contingencies                                     |       | 96.5                                          |       | —                                                               |        | —                                 | ** **  | (6.9 | )**C** | 89.6 |   |
| Other nonoperating liabilities, including plan of  reorganization contingencies |       | —                                        | ** ** | 150.0                                                                | ** A** | —                                 | ** **  | (50.0 | )**C** | 100.0 |   |
| **Total  Liabilities Subject to Compromise**                                    |       | 3,245.6                                       |       | 150.0                                                                |        | (1,211.4                               | )           | (1,563.5 | ) | 620.7 |   |
| **Total  Liabilities**                                                          |       | 4,155.8                                       |       | 950.0                                                                |        | (1,211.4                               | )           | (1,564.4 | ) | 2,330.0 |   |
| **Shareholders’  Equity (Deficit)**                                        | ** ** | ** **                                    | ** ** | ** **                                                           | ** **  | ** **                             | ** **  | ** ** | ** ** | ** ** | ** ** |
| Share  capital                                                                  |       | 429.5                                         |       | —                                                               |        | —                                 | ** **  | 453.9 | ** C** | 883.4 |   |
| Retained  earnings and other equity items                                       |       | (878.9                                        | )          | (123.7                                                               | )**A**      | 862.1                                  | ** B** | — |   | (140.5 | ) |
| **Total  Shareholders’ Equity (Deficit)**                                  |       | (449.4                                        | )          | (123.7                                                               | )           | 862.1                                  |        | 453.9 |   | 742.9 |   |
| **Total Liabilities and Shareholders’Equity  (Deficit)**                   |       | $                                             | 3,706.4    |                                                                 | $           | 826.3                                  |        | $ | (349.3) |   | $ | (1,110.5 | ) | $ | 3,072.9 |   |

----

Note:                   Proforma amounts in liabilitiessubject to compromise will be reclassed to liabilities not subject tocompromise after the proposed plan is in effect.

**W. R. Grace & Co. andSubsidiariesProforma Consolidated Statements of**Operations*(In millions, except per share amounts)*
| ** **                                                                                              | ** ** | **Year Ended December 31, 2006** | ** ** | **Six Month Period Ended June 30, 2007** | ** **  |
|---------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|------------------------------------------------------------------------|-------------|
| ** **                                                                                              | ** ** | **As Reported**                                 | ** ** | **Proforma  Adjustments**                                              | ** **  | **Proforma** | ** ** | **As Reported** | ** ** | **Proforma  Adjustments** | ** ** | **Proforma** | ** ** |
| **Net Sales**                                                                                           |       | $                                                    | 2,826.5    |                                                                   | $           | — |   | $ | 2,826.5 |   | $ | 1,528.4 |   | $ | — |   | $ | 1,528.4 |   |
| Cost of goods  sold, exclusive of depreciation and amortization shown separately below                  |       | 1,845.0                                              |       | —                                                                 |        | 1,845.0 |   | 1,012.6 |   | — |   | 1,012.6 |   |
| Selling, general  and administrative expenses, exclusive of net pension expense shown  separately below |       | 560.9                                                | ** ** | (74.4                                                                  | )**F**      | 486.5 |   | 265.9 | ** ** | (13.6 | )**F** | 252.3 |   |
| Depreciation and  amortization                                                                          |       | 113.5                                                |       | —                                                                 |        | 113.5 |   | 55.2 |   | — |   | 55.2 |   |
| Research and development  expenses                                                                      |       | 63.8                                                 |       | —                                                                 |        | 63.8 |   | 35.5 |   | — |   | 35.5 |   |
| Net pension expense                                                                                     |       | 63.7                                                 |       | —                                                                 |        | 63.7 |   | 25.8 |   | — |   | 25.8 |   |
| Interest expense and  related financing costs                                                           |       | 73.2                                                 | ** ** | (12.9                                                                  | )**G**      | 60.3 |   | 39.7 | ** ** | (9.0 | )**G** | 30.7 |   |
| Provision for  environmental remediation                                                                |       | 30.0                                                 | ** ** | (30.0                                                                  | )**E**      | — |   | 12.0 | ** ** | (12.0 | )**E** | — |   |
| Chapter 11 expenses, net  of interest income                                                            |       | 49.9                                                 | ** ** | (49.9                                                                  | )**E**      | — |   | 41.4 | ** ** | (41.4 | )**E** | — |   |
| Other (income) expense,  net                                                                            |       | (34.3                                                | )          | 12.5                                                                   | ** F** | (21.8 | ) | (15.7 | ) | **—** | ** F** | (15.7 | ) |
| **Total costs and expenses**                                                                            |       | 2,765.7                                              |       | (154.7                                                                 | )           | 2,611.0 |   | 1,472.4 |   | (76.0 | ) | 1,396.4 |   |
| **Income  (loss) before income taxes and minority interest**                                            |       | 60.8                                                 |       | 154.7                                                                  |        | 215.5 |   | 56.0 |   | 76.0 |   | 132.0 |   |
| Benefit from (provision  for) income taxes                                                              |       | (8.1                                                 | )          | (37.3                                                                  | )**H**      | (45.4 | ) | (24.2 | ) | (14.0 | )**H** | (38.2 | ) |
| Minority interest in  consolidated entities                                                             |       | (34.4                                                | )          | —                                                                 |        | (34.4 | ) | (6.5 | ) | — |   | (6.5 | ) |
| **Net income (loss)**                                                                                   |       | $                                                    | 18.3       |                                                                   | $           | 117.4 |   | $ | 135.7 |   | $ | 25.3 |   | $ | 62.0 |   | $ | 87.3 |   |
| **Basic earnings (loss) per  common share**                                                             |       | $                                                    | 0.27       |                                                                   | $           | — |   | $ | 1.53 |   | $ | 0.36 |   | $ | — |   | $ | 0.95 |   |
| Weighted average number  of basic shares                                                                |       | 67.9                                                 | ** ** | 20.6                                                                   | ** I** | 88.5 |   | 69.8 | ** ** | 21.9 | ** I** | 91.7 |   |
| **Diluted earnings (loss) per  common share**                                                           |       | $                                                    | 0.27       |                                                                   | $           | — |   | $ | 1.45 |   | $ | 0.35 |   | $ | — |   | $ | 0.89 |   |
| Weighted average number of diluted shares                                                               |       | 68.3                                                 | ** ** | 25.5                                                                   | ** I** | 93.8 |   | 71.4 | ** ** | 27.2 | ** I** | 98.6 |   |

 

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**FinancialCondition**

***Chapter 11-Related Information***— See Note 2 to the Consolidated FinancialStatements.

***Asbestos-Related Litigation***—See Note 3 to the ConsolidatedFinancial Statements.

***Environmental Matters***—See Note 12 to the ConsolidatedFinancial Statements.

***Defined Contribution Retirement Plans***—We sponsor a defined contribution retirement plan for our employees in theUnited States. This plan qualifies under section 401(k) of the U.S. tax code.At the present time, we contribute an amount equal to 100% of employeecontributions, up to 6% of an individual employee’s salary or wages. Our costsrelated to this benefit plan were $3.3 million and $3.1 million for thethree-month periods ended June 30, 2007 and 2006, respectively, and $6.3million and $7.9 million for the six-month periods ended June 30, 2007 and2006, respectively.

***Defined BenefitPension Plans***— We sponsor defined benefit pension plansfor our employees in the United States, Canada, the United Kingdom, Australia,Germany, Italy, France, Spain, Netherlands, Japan, Philippines, South Korea,Taiwan, South Africa, Brazil and Mexico and fund government sponsored programsin other countries where we operate. Certain of our sponsored plans are advance-funded and others arepay-as-you-go. The advance-funded plans are administered by trustees who directthe management of plan assets and arrange to have obligations paid when due outof a trust. The most significant advance-funded plans cover our salariedemployees in the U.S. and U.K. and employees covered by collective bargainingagreements at certain of our U.S. facilities.

The following tables present the components of netpension expense and cash contributions for the advance-funded and pay-as-you-goplans:
| **Components of Net Pension Expense***(In millions)* | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                    | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| Annual pension benefits  earned                                               | ** ** | **$**                                           | **5.5**    |                                          | $          | 5.9 | ** ** | **$** | **11.7** |   | $ | 12.2 |   |
| Interest on opening  liability — advance-funded plans                    | ** ** | **16.5**                                        |       | 16.1                                          | ** ** | **33.0** |   | 32.3 |   |
| Expected return on  funded assets                                             | ** ** | **(19.7**                                       | **)**      | (17.1                                         | )          | **(39.7** | **)** | (35.3 | ) |
| Net financing cost  (benefit) of advance-funded plans                         | ** ** | **(3.2**                                        | **)**      | (1.0                                          | )          | **(6.7** | **)** | (3.0 | ) |
| Interest on opening  liability — pay-as-you-go plans                     | ** ** | **3.2**                                         |       | 2.8                                           | ** ** | **6.1** |   | 5.3 |   |
| Net pension financing  cost (benefit)                                         | ** ** | **—**                                      |       | 1.8                                           | ** ** | **(0.6** | **)** | 2.3 |   |
| Amortization of:                                                              | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Plan changes  related to prior service                                        | ** ** | **0.8**                                         |       | 0.8                                           | ** ** | **1.6** |   | 1.5 |   |
| Accumulated  differences between actual and assumed performance (1)      | ** ** | **6.8**                                         |       | 8.3                                           | ** ** | **13.1** |   | 15.6 |   |
| Net pension catch-up  expense                                                 | ** ** | **7.6**                                         |       | 9.1                                           | ** ** | **14.7** |   | 17.1 |   |
| **Total Net Pension Expense**                                                 | ** ** | **$**                                           | **13.1**   |                                          | $          | 16.8 | ** ** | **$** | **25.8** |   | $ | 31.6 |   |

 
| **Cash Contributions to  Defined Benefit Pension Plans** | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ***(In millions)***                                 | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| U.S.  advance-funded plans                               | ** ** | **$**                                           | **20.7**   |                                          | $          | 21.5 | ** ** | **$** | **36.9** |   | $ | 30.2 |   |
| U.S.  pay-as-you-go plans                                | ** ** | **1.2**                                         |       | 1.3                                           | ** ** | **2.5** |   | 2.6 |   |
| Foreign  advance-funded plans                            | ** ** | **1.2**                                         |       | 2.1                                           | ** ** | **14.5** |   | 4.2 |   |
| Foreign  pay-as-you-go plans                             | ** ** | **1.5**                                         |       | 1.4                                           | ** ** | **3.1** |   | 2.6 |   |
| **Total Cash Contributions**                             | ** ** | **$**                                           | **24.6**   |                                          | $          | 26.3 | ** ** | **$** | **57.0** |   | $ | 39.6 |   |

----

*(1)**            Primarily related to return on assets, terminationand mortality*

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The followingtable presents the funded status of fully-funded, underfunded and unfundedpension plans as determined under U.S. generally accepted accountingprinciples:
| ** **                                                                          | ** ** | **Fully-Funded**(1)  Pension Plans | ** ** | **Underfunded**(1)  Pension Plans | ** ** | **Unfunded**(2)  Pension Plans | ** ** |
|-------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|---------------------------------------------|------------|------------------------------------------|------------|
| **Funded Status of Pension Plans **(3)*(In millions)* | ** ** | **June 30,  2007**                      | ** ** | **December 31,  2006**                 | ** ** | **June 30,  2007**                  | ** ** | **December 31,  2006** | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
| Projected  benefit obligation                                                       | ** ** | **$**                                        | **239.0**  |                                        | $          | 243.8                                    | ** ** | **$** | **924.5** |   | $ | 961.4 | ** ** | **$** | **230.1** |   | $ | 227.8 |   |
| Fair value of  plan assets                                                          | ** ** | **301.5**                                    |       | 282.2                                       | ** ** | **779.4**                                |       | 738.5 | ** ** | **—** |   | — |   |
| Funded status (PBO  basis)                                                          | ** ** | **$**                                        | **62.5**   |                                        | $          | 38.4                                     | ** ** | **$** | **(145.1** | **)** | $ | (222.9 | ) | **$** | **(230.1** | **)** | $ | (227.8 | ) |

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*(1)**            Plans intended to beadvance-funded.*

*(2)**            Plans intended to be pay-as-you-go.*

*(3)**            For ERISA purposes, funded status iscalculated on a different basis than under U.S. generally accepted accountingprinciples.*

Fully-funded plansinclude several defined benefit pension plans where the fair value of the planassets exceeds the projected benefit obligation, or PBO.  This group of plans was overfunded by $62.5million as of June 30, 2007, and the overfunded status is reflected as “overfundeddefined benefit pension plans” in the Consolidated Balance Sheet. Underfundedplans include a group of defined benefit pension plans that are underfunded ona PBO basis by a total of $145.1 million as of June 30, 2007.Additionally, we have several plans that are funded on a pay-as-you-go basis,and therefore, the entire PBO of $230.1 million at June 30, 2007 isunfunded.  The combined balance of theunderfunded and unfunded plans was $375.2 million as of June 30, 2007 and ispresented as a liability on the Consolidated Balance Sheet as follows - $11.5million in “other current liabilities,” $270.2 million in “underfunded andunfunded defined benefit pension plans” and $93.5 million in “liabilitiessubject to compromise.”

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

The assumeddiscount rate for pension plans reflects the market rates for high qualitycorporate bonds currently available and is subject to change based on changesin the overall market interest rates. For the U.S. qualified pension plans, theassumed discount rate of 5.75% as of December 31, 2006 was selected inconsultation with our independent actuaries, based on a yield curve constructedfrom a portfolio of high quality bonds for which the timing and amount of cashoutflows approximate the estimated payouts of the plan. Based on review of anupdated yield curve analysis as of June 30, 2007, we increased the discountrate for the U.S. qualified pension plans to 6.25% based on market rates atthat time. In addition, we evaluated the current discount rates for the UnitedKingdom pension plan and German pension plans, which combined representedapproximately 87% of the benefit obligation of the non-U.S. pension plans as ofDecember 31, 2006. Based on review of the yield curve analyses for these plansas of June 30, 2007, we increased the discount rates for the United Kingdom andGermany by 50 basis points and 25 basis points, respectively, as compared toDecember 31, 2006. The aggregate adjustment to the funded status resulting fromthe change in discount rates as of June 30, 2007 was an increase to totalassets of approximately $13 million, and a decrease to total liabilities ofapproximately $57 million.  After taxeffects, total assets decreased by approximately $11 million, total liabilitiesdecreased by approximately $57 million and shareholders’ equity increased byapproximately $46 million.

At the December31, 2006 measurement date for the U.S. advance-funded defined benefit pensionplans, the PBO was approximately $949 million as measured under U.S. generallyaccepted accounting principles. The PBO is measured as the present value (usinga 5.75% discount rate as of December 31, 2006) of vested and non-vestedbenefits earned from employee service to date, based upon current services andestimated future pay increases for active employees.  Of the participants in the pension plans,approximately 82% are current retirees or employees of our former businesses,which skews the payout pattern to the nearer term. Assets available to fund thePBO at December 31, 2006 were approximately $737 million, or approximately $212million less than the measured obligation.

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Assets availableat June 30, 2007 to fund the PBO of the U.S. advance-funded defined benefitpension plans totaled approximately $778 million, up $41 million from December31, 2006, primarily as a result of current year contributions. It is ourintention to satisfy obligations under the pension plans and to comply with therequirements of the Employee Retirement Income Security Act of 1974. On June20, 2007, we obtained bankruptcy court approval to fund minimum requiredpayments of approximately $54 million for the period from July 2007 throughJanuary 2008.  In that regard, wecontributed approximately $9 million in July 2007 to the trusts that holdassets of the Plans.  While we intend tocontinue to fund all minimum required payments under the Plans, there can be noassurance that the bankruptcy court will continue to approve the funding needsof the Plans.  Contributions to non-U.S.plans are not subject to bankruptcy court approval and we intend to fund suchplans based on applicable legal requirements, and actuarial and trustee recommendations;$17.6 million was funded during the six months ended June 30, 2007.

We expect totalpension expense for 2007 to be approximately $52 million, and benefit paymentsto retirees to aggregate approximately $122 million for all pension programs in2007.

***Postretirement Benefits Other Than Pensions***—We provide certain health careand life insurance benefits for retired employees, a large majority of whom areretirees of divested businesses. These plans are unfunded, and we pay the costsof benefits under these plans as they are incurred. Our share of benefits underthis program was $2.9 million and $5.8 million during the three months and sixmonths ended June 30, 2007, respectively, compared with $4.3 million and $6.5million during the three months and six months ended June 30, 2006,respectively. In addition, we received Medicare subsidy payments of $2.7million during the six months ended June 30, 2007.  Our recorded liability for postretirementbenefits is $78.5 million at June 30, 2007. Our proposed plan of reorganizationprovides for the continuation of these benefits.

***Cash Resources and AvailableCredit Facilities***— AtJune 30, 2007, we had $494.3 million in cash and cash equivalents, $28.1million in marketable securities and $91.5 million in net cash value of lifeinsurance. In addition, we had access to committed credit facilities in theU.S., Germany and France.  In the U.S.,under the $250.0 million DIP facility, $189.4 million was available at June 30,2007, net of letters of credit and holdback provisions. The term of theDIP facility expires April 1, 2008. In Germany, under a €10.0 million line ofcredit, we had access to €0.9 million at June30, 2007, net of bankers guarantees and other holdbacks. In France,under a €4.0 million line of credit, we had access to €3.7 million at June 30, 2007, net of bankersguarantees.  New terms for the German andFrench credit facilities are currently being negotiated.

In January 2007, our German subsidiary entered into aline of credit arrangement with a German financing company in the maximumaggregate amount of €50.0 million (equivalent to $67.2 million as of June 30,2007) secured by the accounts receivable of the German subsidiary.  The financing arrangement will terminate onDecember 31, 2009, and includes financing costs based on the EURIBOR rate ofinterest, plus a minimum annual fee. The line was secured to provide liquidityfor either our plan of reorganization or to fund growth in that region.  In May 2007, our German subsidiary accessed€10.0 million (approximately $13.4 million) of the line of credit forpayment of intercompany loans between certain of our European subsidiaries.€2.0 million (approximately $2.7 million) of the borrowing was repaid in June2007, resulting in an outstanding short-term borrowing of €8.0 million(approximately $10.8 million) at June 30, 2007, which was repaid in full inJuly 2007.

As of June 30, 2007, Grace had access to theequivalent of approximately $63.7 million in available credit under variousnon-U.S. credit facilities.

We believe thatthese funds and credit facilities will be sufficient to finance our businessstrategy while in Chapter 11.

***Debt and Other Contractual Obligations***—Total debt outstanding at June 30, 2007 was $784.4 million, including $255.8million of accrued interest on pre-petition debt.  As a result of the Chapter 11 filing, we arenow in default on $515.5 million of pre-petition debt, which, together withaccrued interest thereon, has been included in “liabilities subject tocompromise” as of June 30, 2007. The automatic stay provided under thebankruptcy code prevents our lenders from taking any action to collect theprincipal amounts as well as related accrued interest. However, we willcontinue to accrue and report interest on such debt during the Chapter 11proceedings unless further developments lead management to conclude that it isprobable that such interest will be compromised.

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See Note 12 to theConsolidated Financial Statements for a discussion of financial assurances.

**Analysis of Cash Flows**

Our net cashinflow from operating activities for the six months ended June 30, 2007 was$5.2 million, compared with $11.1 million for the prior year period. Weattribute the lower net cash flow in 2007 to higher contributions to pensionplans and dividends paid to joint venture partners. Cash used for investingactivities was $80.4 million, compared with $64.8 million for the prior yearperiod.  The increased investingactivities are primarily due to an investment of $25.0 million in a six-month5.25% note offered by the Federal Home Loan Bank, partially offset by theacquisition of a custom catalyst business in June 2006.  Net cash inflow from financing activities was$27.7 million, compared with $15.3 million for the prior year period.  We attribute the increased inflow primarilyto cash received from stock options exercised and a borrowing by our principalGerman subsidiary, as discussed above.

***Cash Flow From Core Operations***—The following table presents the components of net cash flow from core operations for the six months ended June 30, 2007and 2006.
| ** **                                               | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------------------------------|------------|-----------------------------------------------|------------|
| **Core Operations***(In millions)*             | ** ** | **2007**                                      | ** ** | **2006** | ** ** |
| **Cash  flows:**                                         | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| Pre-tax  operating income                                | ** ** | **$**                                         | **153.7**  |   | $ | 118.5 |   |
| Depreciation and  amortization                           | ** ** | **55.2**                                      |       | 56.5 |   |
| **Pre-tax  income before depreciation and amortization** | ** ** | **208.9**                                     |       | 175.0 |   |
| Working capital  and other changes                       | ** ** | **(129.9**                                    | **)**      | (98.7 | ) |
| **Cash  flow before investing**                          | ** ** | **79.0**                                      |       | 76.3 |   |
| Short-term  investments                                  | ** ** | **(25.0**                                     | **)**      | — |   |
| Capital  expenditures                                    | ** ** | **(52.3**                                     | **)**      | (51.9 | ) |
| Purchase of  equity investment                           | ** ** | **(6.3**                                      | **)**      | — |   |
| Businesses  acquired                                     | ** ** | **—**                                    |       | (20.0 | ) |
| **Net cash flow from core  operations**                  | ** ** | **$**                                         | **(4.6**   | **)** | $ | 4.4 |   |

 

We expect tocontinue to invest excess cash flow and/or other available capital resources inour core business base. These investments are likely to be in the form ofadditional plant capacity, product line extensions and geographic marketexpansions, and/or acquisitions in existing product lines.  Investments that are outside the ordinarycourse of business may be subject to bankruptcy court approval and review bythe Chapter 11 creditor committees.

***Cash Flow From Noncore Activities***— The cash flow from our noncoreactivities can be volatile.******Expenditures are generally governed by bankruptcy court rulingsand receipts are generally nonrecurring. Historically, much of our noncorespending has been under Chapter 11 first-day motions that allow us to fundpostretirement benefits and required environmental remediation on Grace-ownedsites. Cash inflows have been from asbestos-related insurance recovery onpre-Chapter 11 liability payments, and unusual events.  The following table presents the componentsof net cash flow from noncoreactivities for the six months ended June 30, 2007 and 2006.
| ** **                                      | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------|------------|-----------------------------------------------|------------|
| **Noncore Activities***(In millions)* | ** ** | **2007**                                      | ** ** | **2006** | ** ** |
| **Cash  flows:**                                | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| Pre-tax income  (loss) from noncore activities  | ** ** | **$**                                         | **(26.8**  | **)** | $ | (62.9 | ) |
| Other non-cash  charges                         | ** ** | **17.1**                                      |       | 41.4 |   |
| Cash spending  for:                             |       |                                          |       |   |   |
| Tax settlement                                  | ** ** | **(10.3**                                     | **)**      | — |   |
| Environmental remediation                       | ** ** | **(4.8**                                      | **)**      | (3.4 | ) |
| Postretirement benefits                         | ** ** | **(3.1**                                      | **)**      | (6.5 | ) |
| Retained obligations and other                  | ** ** | **(0.8**                                      | **)**      | (1.3 | ) |
| **Net cash flow from noncore activities**       | ** ** | **$**                                         | **(28.7**  | **)** | $ | (32.7 | ) |

 

Net cash flow from coreoperations and net cash flow from noncore activities do not represent income orcash flow as defined under generally accepted accounting principles, and youshould not consider them to be an alternative to such measures as an indicatorof our performance. We provide these measures to permit you to distinguishoperating results of our current business base from results and related assetsand liabilities of past businesses, discontinued products, and corporatelegacies and the effect of our Chapter 11 proceedings.

See the “ConsolidatedStatements of Cash Flows” included in the Consolidated Financial Statements formore information.

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**Forward-LookingStatements**

This documentcontains, and our other public communications may contain, forward-lookinginformation, that is, information related to future, not past, events. Suchinformation generally includes the words ‘‘believes,’’ ‘‘plans,’’ ‘‘intends,’’ ‘‘targets,’’‘‘will,’’ ‘‘expects,’’ ‘‘anticipates,’’ or similar expressions.  Forward-looking information includes allstatements regarding our Chapter 11 proceeding (including the proformafinancial statements included in ‘‘Management’s Discussion and Analysis ofFinancial Condition and Results of Operations’’); expected financial position;results of operations; cash flows; financing plans; business strategy; budgets;capital and other expenditures; competitive positions; growth opportunities forexisting products; benefits from new technology and cost reduction initiatives,plans and objectives;  and markets forsecurities. For these statements, we claim the protection of the safe harborfor forward-looking statements contained in the Private Securities LitigationReform Act of 1995. Factors that could cause actual results to materiallydiffer from those contained in the forward-looking statements include:  our bankruptcy and proposed plan of reorganization,our legal proceedings, especially the Montana criminal proceeding and theenvironmental proceedings, the cost and availability of raw materials andenergy, our unfunded pension obligations, risks related to foreign operations,especially, security, regulation and currency risks, costs of compliance withenvironmental regulation and those factors set forth in our most recent AnnualReport on Form 10-K, this quarterly report on Form 10-Q and current reports onForm 8-K, which have been filed with the Securities and Exchange Commission.  Like other businesses, we are subject torisks and uncertainties that could cause our actual results to differmaterially from our projections or that could cause other forward-lookinginformation to prove incorrect. Further, our reported results should not beconsidered as an indication of our future performance. Readers are cautionednot to place undue reliance on our projections and forward-looking information,which speak only as of the date thereof. We undertake no obligation to publiclyrelease any revisions to the projections and forward-looking informationcontained in this document, or to update them to reflect events orcircumstances occurring after the date of this document.

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**Item 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

See the “MarketRisk” heading in Item 7 of our Form 10-K for the year ended December 31, 2006and Item 3 of our Form 10-Q for the quarter ended March 31, 2007 fordisclosures required by this item.

**Item 4.****   CONTROLS AND PROCEDURES**

*EVALUATIONOF DISCLOSURE CONTROLS AND PROCEDURES*

As of June 30,2007, Grace carried out an evaluation of the effectiveness of the design andoperation of its disclosure controls and procedures pursuant to Rule 13a-15under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).Based upon that evaluation, Grace’s Chief Executive Officer and Chief FinancialOfficer concluded that Grace’s disclosure controls and procedures are effectiveto ensure that information required to be disclosed in Grace’s Exchange Actreports is recorded, processed, summarized and reported within the time periodsspecified in the SEC’s rules and forms, and that material information relatingto Grace is made known to management, including Grace’s Chief Executive Officerand Chief Financial Officer, as appropriate to allow timely decisions regardingrequired disclosure.

*CHANGESIN INTERNAL CONTROL OVER FINANCIAL REPORTING*

There were nochanges in Grace’s internal control over financial reporting during the quarterended June 30, 2007 that have materially affected, or are reasonably likely tomaterially affect, Grace’s internal control over financial reporting.

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**PART II. OTHER INFORMATION**

**Item 1.  LEGAL PROCEEDINGS**

Notes 2, 3 and 12to the interim consolidated financial statements in Part 1 of this Report areincorporated herein by reference.

**ERISALAWSUITS**

In June 2004, apurported class action complaint (*Evans v.Akers et al.*) was filed in U.S. District Court for the District ofMassachusetts against the Board of Directors, certain current and former Graceofficers and employees, and others, relating to the Grace 401(k) Savings andInvestment Plan. The complaint alleges that the decline in the price of Gracecommon stock from July 1999 through February 2004 resulted in significantlosses to S&I Plan participants. The complaint further alleges that thedefendants breached their fiduciary duties under the Employee Retirement IncomeSecurity Act of 1974, as amended, or ERISA, by failing to sell or take otherappropriate action with regard to Grace common stock held by the S&I Planduring that period, and by failing to disclose to S&I Plan participants therisk of investing in Grace common stock. The complaint seeks compensatorydamages for the S&I Plan from the defendants.

On October 26,2004, a purported class action complaint (*Bunchet al. v. W. R. Grace & Co. et al.*) also related to the S&IPlan was filed in the U.S. District Court for the Eastern District of Kentuckyagainst Grace, the Investment and Benefits Committee, the Board of Directors,certain current and former Grace officers and employees, and others. Thecomplaint alleges that Grace and its investment advisors breached fiduciaryduties under ERISA by selling Grace common stock from the S&I Plan at adistressed price. The complaint further alleges that Grace breached fiduciaryduties under ERISA by hiring State Street Bank and Trust Company, the investmentmanager for the S&I Plan that Grace retained in December 2003, to rapidlyliquidate all of the employees’ Grace common stock investment at anartificially low sales price.

On July 21, 2005,the U.S. District Court for the Eastern District of Kentucky granted thedefendants’ motion to transfer the *Bunch*action to the U.S. District Court for the District of Massachusetts.  On August 23, 2005, the MassachusettsDistrict Court consolidated into one case both the *Bunch* action and the *Evans*action. Grace expects that it would have an obligation to indemnify the otherdefendants for any liability arising out of the consolidated lawsuit.

On December 6,2006, the Massachusetts District Court, in considering the *Evans* plaintiffs’ motion for classcertification, denied that motion and dismissed the *Evans* plaintiffs’ claims, on grounds that those plaintiffslacked standing to bring suit.  The *Evans* plaintiffs’ have petitioned the U.S.Court of Appeals for the First Circuit to reverse the District Court’s decisionto dismiss the Evans plaintiffs’ claims and remand the case to the DistrictCourt.  This appeal is pending.

On January 16,2007, the *Bunch* plaintiffs filedan amended complaint in the Massachusetts District Court alleging self-dealingby State Street and various theories purportedly supporting allegations ofbreaches of fiduciary duty by Grace and other defendants.  On February 2, 2007, Grace and State Streeteach filed motions with the District Court to dismiss the amended complaintagainst Grace and State Street, respectively. On March 1, 2007, the District Court denied each of these motions todismiss, and certified a class of plaintiffs comprising certain S&I Planparticipants.  On March 30, 2007, theDistrict Court granted Grace’s and State Street’s motion to strike the *Bunch* plaintiffs’ jury demand.

Grace has $50million of employers’ fiduciary liability insurance coverage that Gracebelieves would be available to pay liabilities arising out of this consolidatedlawsuit.  Since all Grace employees whohad interests in the S&I Plan during the relevant periods are members ofthe purported class and Messrs. Corcoran, McGowan, Norris, Poling, Shelnitz andTarola had interests in the S&I Plan during these periods, they haveinterests in this litigation that may be adverse to Grace.

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** **

**Item 1A.  RISK FACTORS**

With respect to certain risk factors disclosed in the “RiskFactors” section of our Annual Report on Form 10-K for the year ended December31, 2006, more recent numerical measures and other information are available inthe “Financial Statements,” and “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” sections of this Report.  These more recent measures and informationare incorporated herein by reference.

**Item 6.  EXHIBITS**

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

| 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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**SIGNATURES**

In accordance with therequirements of the Securities Exchange Act of 1934, the Registrant caused thisReport to be signed on its behalf by the undersigned, thereunto duly authorized.
|                      |   | W. R. GRACE  & CO. |
|----------------------|--------|------------------------|
|                 |   | (Registrant)           |
|                 |   |                   |
|                 |   |                   |
| Date: August 8, 2007 |   | By                     | /s/ A. E. Festa |
|                 |   |                   | A. E. Festa |
|                 |   |                   | President and Chief Executive Officer |
|                 |   |                   |   |
|                 |   |                   |   |
| Date: August 8, 2007 |   | By                     | /s/ Robert M. Tarola |
|                 |   |                   | Robert M. Tarola |
|                 |   |                   | Senior Vice President and Chief Financial Officer |
|                 |   |                   | (Principal Accounting Officer) |

 

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**EXHIBITINDEX**
| Exhibit No. | ** ** | **Description  of Exhibit**                                                                                                                   |
|-------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------|
|        |       |                                                                                                                                          |
| 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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