** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**WASHINGTON, D.C. 20549

** **

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** **

**FORM 10-K**

** **

**ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934**

 
| **For the fiscal year ended December 31, 2007** |   | **Commission file number 1-13953** |
|------------------------------------------------------|--------|------------------------------------|

 

**W. R. GRACE & CO.**

 
| Incorporated under the Laws of the  **State of Delaware** |   | I.R.S. Employer Identification No.** 65-0773649** |
|----------------------------------------------------------------|--------|--------------------------------------------------------|

 

**7500 Grace Drive, Columbia, Maryland 21044-4098410/531-4000**Securities registeredpursuant to Section 12(b) of the Exchange Act:

 
| **Title of each class**                                       | ** ** | **Name of each exchange on which registered** |
|---------------------------------------------------------------|------------|-----------------------------------------------|
| Common Stock, $.01 par value  Preferred Stock Purchase Rights |       | New York Stock Exchange, Inc.            |

 

Securities registered pursuant to Section 12(g) of theExchange Act:

 

None

 

Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act.

 

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

 

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or15(d) of the Exchange Act.

 

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

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months and (2) has been subject to such filing requirements for the past90 days.

 

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

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulations S-K is notcontained herein and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K.x

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer or a smaller reporting company. See the definitions of“large accelerated filer,” “accelerated filer” and “smaller reporting company”in Rule 12b-2 of the Exchange Act. (Check one):

 
| Large accelerated filer x                                              | Accelerated filer o         |
|------------------------------------------------------------------------|-----------------------------|
| Non-accelerated filer o  (Do not check if a smaller reporting company) | Smaller Reporting Company o |

 

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

 

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

 

The aggregate marketvalue of W. R. Grace & Co. voting and non-voting common equity held bynon-affiliates as of June 29, 2007 (the last business day of theregistrant’s most recently completed second fiscal quarter) based on theclosing sale price of $24.49 as reported on the New York Stock Exchange was$1,479,598,934*

 

At January 31, 2008,71,635,601 shares of W. R. Grace & Co. Common Stock, $.01 par value,were outstanding.

 

**DOCUMENTSINCORPORATED BY REFERENCE**

** **

None.

 

** Excludes 11,219,148 shares ofoutstanding W. R. Grace & Co. (“Grace”) Common Stock held by directorsand executive officers and stockholders, whose beneficial ownership exceeds 10%of the outstanding shares of Grace Common Stock. Exclusion of shares held byany person should not be construed to indicate that such person possesses thepower, direct or indirect, to direct or cause the direction of the managementor policies of Grace, or that such person is controlled by or under commoncontrol with Grace.*

 

** **

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**TABLE OF CONTENTS**

 
|              |                                                                                                               |   |
|-------------------|--------------------------------------------------------------------------------------------------------------------|--------|
| **PART I**   | ** **                                                                                                         | 1      |
|              |                                                                                                               |   |
| Item 1.           | Business                                                                                                           | 1      |
|              |                                                                                                               |   |
| Item 1A.          | Risk Factors                                                                                                       | 22     |
|              |                                                                                                               |   |
| Item 1B.          | Unresolved  Staff Comments                                                                                         | 31     |
|              |                                                                                                               |   |
| Item 2.           | Properties                                                                                                         | 31     |
|              |                                                                                                               |   |
| Item 3.           | Legal Proceedings                                                                                                  | 32     |
|              |                                                                                                               |   |
| Item 4.           | Submission of Matters to a Vote of  Security Holders                                                               | 36     |
|              |                                                                                                               |   |
| **PART II**  |                                                                                                               | 37     |
|              |                                                                                                               |   |
| Item 5.           | Market for Registrant’s Common Equity, Related  Shareholder Matters and Issuer Purchases of Equity Securities | 37     |
|              |                                                                                                               |   |
| Item 6.           | Selected Financial  Data                                                                                           | 38     |
|              |                                                                                                               |   |
| Item 7.           | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                        | 38     |
|              |                                                                                                               |   |
| Item 7A.          | Quantitative  and Qualitative Disclosures About Market Risk                                                        | 38     |
|              |                                                                                                               |   |
| Item 8.           | Financial Statements  and Supplementary Data                                                                       | 38     |
|              |                                                                                                               |   |
| Item 9.           | Changes in and  Disagreements with Accountants on Accounting and Financial Disclosure                              | 39     |
|              |                                                                                                               |   |
| Item 9A.          | Controls and  Procedures                                                                                           | 39     |
|              |                                                                                                               |   |
| Item 9B.          | Other Information                                                                                                  | 39     |
|              |                                                                                                               |   |
| **PART III** |                                                                                                               | 40     |
|              |                                                                                                               |   |
| Item 10.          | Directors,  Executive Officers and Corporate Governance                                                            | 40     |
|              |                                                                                                               |   |
| Item 11.          | Executive  Compensation                                                                                            | 43     |
|              |                                                                                                               |   |
| Item 12.          | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                   | 70     |
|              |                                                                                                               |   |
| Item 13.          | Certain  Relationships, Related Transactions and Director Independence                                             | 72     |
|              |                                                                                                               |   |
| Item 14.          | Principal  Accountant Fees and Services                                                                            | 74     |
| ** **        | ** **                                                                                                         |   |
| **PART IV**  |                                                                                                               | 75     |
|              |                                                                                                               |   |
| Item 15.          | Exhibits and  Financial Statement Schedules                                                                        | 75     |
|              |                                                                                                               |   |
| **SIGNATURES**    | 79                                                                                                                 |

 

*Grace®,the Grace® logo and, except as otherwise indicated, the othertrademarks in this Report are trademarks or registered trademarks of W. R.Grace & Co. — Conn. or its subsidiaries in the United States and/orother countries. OCR® is a registered trademark of ChevronIntellectual Property, LLC.  As usedherein,*®* indicates that a trademark is registered inthe United States and/or other countries. Unless the context otherwise indicates, in this document the terms“Grace,” “we,” “us,” “our” or “the company” mean W. R. Grace & Co.and/or its consolidated subsidiaries and affiliates.  Unless otherwise indicated, the contents ofwebsites mentioned in this Report are not incorporated by reference orotherwise made a part of this Report.*

** **

**i**

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**PART I**

** **

**Item 1.****      BUSINESS**

** **

**BUSINESS OVERVIEW**

 

W.R. Grace and Co. is engaged in the production and sale of specialty chemicalsand specialty materials on a global basis through its two operating segments,Grace Davison and Grace Construction Products. We entered the specialty chemicals industry in 1954, when we acquiredboth the Dewey and Almy Chemical Company and the Davison Chemical Company.  During the 1980s and 1990s, we divested asubstantial number of businesses that were not consistent with our businessstrategy. Grace is the successor to a company that originated in 1854 andoriginally became a public company in 1953.

 

Grace,along with 61 of its United States subsidiaries and affiliates, has filedvoluntary petitions for reorganization under Chapter 11 of the United StatesBankruptcy Code and, since 2001, has been subject to the jurisdiction of theUnited States Bankruptcy Court for the District of Delaware.

 

Inthe fourth quarter of 2007, we realigned our reportable operating segments toreflect the transfer of our packaging technologies product line to the GraceDavison operating segment.  Our previousGrace Performance Chemicals operating segment has been renamed “GraceConstruction Products” as a result of the transfer.  All segment information contained herein hasbeen retrospectively restated to reflect this realignment.

 

***Grace Davison*** markets itsproducts to a wide range of industrial customers, including those in the energyand refining industry, consumer, industrial and packaging industries, petro-/bio-chemical industry and the pharmaceutical and life sciences industry.  Grace Davison includes the following productgroups:

 

·                  Refining Technologies, which includes:

 

·                  fluid catalytic cracking, or FCC, catalysts,that help to “crack” the hydrocarbon chain in distilled crude oil to producetransportation fuels, such as gasoline and diesel fuels, and otherpetroleum-based products; and FCC additives used to reduce sulfur in gasoline,maximize propylene production from refinery FCC units, and reduce emissions ofsulfur oxides, nitrogen oxides and carbon monoxide from refinery FCC units, and

 

·                  hydroprocessing catalysts, marketed throughour Advanced Refining Technologies, LLC joint venture with Chevron ProductsCompany, in which Grace holds a 55% economic interest, that are used in processreactors to upgrade heavy oils into lighter, more useful products by removingimpurities such as nitrogen, sulfur and heavy metals, allowing less expensivefeedstocks to be used in the petroleum refining process;

 

1

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·                  Materials Technologies which includes:

 

·                  silica-based and silica-alumina-basedengineered materials used in:

 

·                  industrial applications, such as rubber andtires, plastics, precision investment casting, refractory, insulating glasswindows, and drying applications, fulfilling various functions such asreinforcement, high temperature binding and moisture scavenging,

 

·                  consumer applications, as a free-flow,carrier or processing aid in food and personal care products; as a toothpasteabrasive; and for the processing and stabilization of edible oils andbeverages, and

 

·                  coatings and print media applicationsconsisting of functional additives that: provide matting effects and corrosion protection for industrialcoatings; enable enhanced media and paper quality in ink jet coatings; and actas a functional filler and retention aid in paper, and

 

·                  sealants and coatings used in rigid food andbeverage packaging, including can and closure sealants used to seal and enhancethe shelf life of can and bottle contents, and coatings for cans and closuresthat prevent metal corrosion, protect package contents from the influence ofmetal and ensure proper adhesion of sealing compounds and technologies designedto reduce off-taste effects and extend the shelf-life of packaged products; and

 

·                  Specialty Technologies, which includes:

 

·                  polyolefin catalysts and catalyst supportsthat are essential components in the manufacture of polyethylene andpolypropylene resins, and other chemical catalysts used in a variety ofindustrial, environmental and consumer applications, and

 

·                  silica-based materials and chromatographycolumns, instruments, consumables and accessories used in analytical chemistryapplications and life sciences.

 

GraceDavison accounted for approximately 64% of our 2007 sales.

 

***Grace Construction Products, or GCP,*** produces andsells specialty construction chemicals and materials, including:

 

·                  concrete admixtures and fibers used toimprove the durability and working properties of concrete;

 

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·                  additives used in cement processing toimprove energy efficiency, enhance the characteristics of finished cement andimprove ease of use;

 

·                  building materials used in commercial andresidential construction and renovation to protect buildings from water, vaporand air penetration; and

 

·                  fireproofing materials used to protectbuildings in the event of fire.

 

GraceConstruction Products accounted for approximately 36% of our 2007 sales.

 

Ourprincipal executive offices are located at 7500 Grace Drive, Columbia, Maryland21044, telephone (410) 531-4000. As of December 31, 2007, we hadapproximately 6,500 full-time employees worldwide.

 

Ourstrategy is to seek increased enterprise value by profitably growing ourspecialty chemicals and materials businesses in the global marketplace andachieving high levels of efficiency. To achieve these objectives, we plan to:

 

·                  invest in research and developmentactivities, with the goals of introducing new high-performance, technicallydifferentiated products and services while continuing to enhance manufacturingprocesses and operations;

 

·                  expand sales and manufacturing intogeographic areas with emerging market economies, including China, India,Eastern Europe, Latin America, South America, Africa and the Middle East;

 

·                  pursue selected acquisitions and alliancesthat complement our current product offerings or provide opportunities forfaster penetration of desirable market or geographic segments; and

 

·                  continue our commitment to process andproductivity improvements and cost-management, such as rigorous controls onworking capital and capital spending, integration of functional supportservices worldwide, and programs for supply chain management, which includeboth procurement and materials management.

 

**CHAPTER 11 FILING**

 

OnApril 2, 2001, Grace, along with 61 of our United States subsidiaries andaffiliates, filed voluntary petitions for reorganization under Chapter 11 ofthe United States Bankruptcy Code in the United States Bankruptcy Court for theDistrict of Delaware. The cases are being jointly administered under casenumber 01-01139. Our non-U.S. subsidiaries and certain of our U.S. subsidiarieswere not included in the bankruptcy filing.

 

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***Background of Chapter 11***

 

A bankruptcy filing under Chapter 11 of the United States BankruptcyCode is generally a voluntary action taken by a debtor to resolve financialproblems such as major liabilities. Chapter 11 gives a debtor the chance torestructure its finances so that it may continue to operate, provide itsemployees with jobs and pay its creditors. Chapter 11 can be used by debtorsthat are faced with large numbers of product liability lawsuits in multiplejurisdictions to provide a practical way to address the potential liabilitiesunder the supervision of one court. A Chapter 11 filing generally stops alllawsuits against a debtor and prevents creditors from taking action to enforceclaims or collect any monies or property that might be owed at the time offiling.

 

Chapter11 permits a debtor to define and resolve its liabilities under acourt-supervised process generally referred to as a reorganization.  Unlike a Chapter 7, or liquidationbankruptcy, which results in the sale or distribution of all of the assets of abusiness, Chapter 11 reorganization permits a debtor to continue its normalbusiness operations. Existing management may continue to manage the debtor’soperations during the reorganization.  Asa debtor-in-possession, a debtor is able to do business with suppliers andcustomers in a routine manner. Certain other activities, including transactionsoutside the ordinary course of business, generally require specific approval ofthe bankruptcy court.

 

Aftera debtor files Chapter 11, one or more official committees that represent theinterests of general unsecured creditors, other creditors and stockholders maybe appointed. Normally these committees and their respective advisors areactively involved in the process to monitor the bankruptcy and protect theinterests of their respective constituencies. The fees and expenses of these committees and advisors are paid by thedebtor.

 

TheChapter 11 process generally ends when the bankruptcy court approves a plan ofreorganization for the debtor. In cases similar to ours with complex asbestosliabilities, debtors have taken several years to complete the Chapter 11 process.

 

***Grace Chapter 11 Filing***

 

Wevoluntarily entered Chapter 11 to resolve comprehensively the nearly 130,000asbestos personal injury and property damage claims against us, as well as anyfuture demands which may be asserted. These claims and demands relate to pastproducts and processes that involved asbestos, a mineral formerly used widelyfor many decades in building and other commercial products. Prior to 2000, wewere able to resolve asbestos-related claims through direct negotiations andlitigation, paying over $2 billion in claims and legal costs over a 20-yearperiod.  In most of the personal injurylawsuits, we are one of many defendants. In 2000 and the first quarter of 2001, the litigation environmentchanged with an unexpected 81% increase in personal injury claims filed againstus, which we believe was caused by a surge in unmeritorious claims. We alsobecame a defendant in class action lawsuits alleging damages from ZonoliteAttic Insulation®, or ZAI, a former attic insulation product. Trendsin claims filing and 

 

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settlementdemands showed no sign of returning to historic levels and these unfavorabletrends were exacerbated by the bankruptcy filings of several of ourco-defendants in asbestos personal injury litigation. These trends greatlyincreased the risk that we would not be able to resolve our pending and futureasbestos-related claims under the state court system.

 

Aftera thorough review of these developments, our Board of Directors concluded thata federal court-supervised bankruptcy process provided the best forum availableto achieve fairness in resolving these claims and demands.  On April 2, 2001, we, along with 61United States subsidiaries and affiliates, filed voluntary petitions forreorganization under Chapter 11 of the United States Bankruptcy Code in theUnited States Bankruptcy Court for the District of Delaware.  Since that time, we have been subject to thejurisdiction of the Bankruptcy Court.

 

Weare currently operating as a debtor-in-possession under court protection fromcreditors and claimants. We believe that our bankruptcy filing will permit acomprehensive resolution of the claims against us while preserving the inherentvalue of our businesses. As a consequence of our bankruptcy filing, pendinglitigation against us is generally stayed (subject to certain exceptions in thecase of governmental authorities), and no party may take any action to realizeits pre-petition claims except pursuant to an order of the Bankruptcy Court.Since our bankruptcy filing, the Bankruptcy Court has approved all motionsnecessary for us to conduct normal business activities.

 

Fourcommittees have been appointed in the bankruptcy cases, two representingasbestos claimants, a third representing other unsecured creditors and a fourthrepresenting shareholders. These committees, and a legal representative offuture asbestos claimants, have the right to be heard on all matters that comebefore the Bankruptcy Court and are playing important roles in the bankruptcycases. We are required to bear certain costs of the committees and of thefuture asbestos claimants’ representative, including those of their counsel andfinancial advisors.

 

Seedisclosure in this Report in Item 3 (Legal Proceedings) and Item 7(Managements’ Discussion and Analysis of Financial Condition and Results ofOperations) for a description of our proposed plan of reorganization, proformafinancial effects of our proposed plan, and the status of our current Chapter11 proceedings.

 

**PRODUCTS AND MARKETS**

 

***Specialty Chemicals and Specialty MaterialsIndustry Overview***

 

Specialtychemicals and specialty materials are high-value-added products used ascatalysts, intermediates, components, protectants or additives in a widevariety of products and applications. They are generally produced in relativelysmall volumes (compared with commodity chemicals) and must satisfy well-definedperformance requirements and specifications. Specialty chemicals and specialtymaterials are often critical components of end products, or catalysts for theproduction of end products and 

 

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componentsused in end products; consequently, they are tailored to meet customer needs,which generally results in a close relationship between the producer and thecustomer.

 

Wefocus our business on the following, which we believe are important competitivefactors in the specialty chemicals and specialty materials industry:

 

·                  value-added products and services, sold atcompetitive prices;

 

·                  customer service, including rapid response tochanging customer needs;

 

·                  technological leadership (resulting frominvestment in research and development and technical customer service); and

 

·                  reliability of product and supply.

 

Webelieve that our focus on these competitive factors enables us to deliverincreased value to customers and competitive operating margins notwithstandingthe increased customer service and research and development costs that thisfocus entails.

 

***Grace Davison Operating Segment***

 

GraceDavison principally applies silica, alumina, zeolite and rubber and latticetechnology in the design and manufacture of products to create significantvalue for our diverse customer base. Our customers include major oil refiners,plastics and chemical manufacturers, users of product packaging, consumerproduct manufacturers and pharmaceutical companies. We believe that ourtechnological expertise provides a competitive advantage, allowing us toquickly design products and materials that help our customers create value intheir markets.

 

Thefollowing table sets forth Grace Davison sales of similar products based onend-use markets as a percentage of Grace total revenue.

 
| ** **               | ** ** | **2007**   | ** **  | **2006**                  | ** ** | **2005**   | ** ** |
|--------------------------|------------|------------|-------------|---------------------------|------------|------------|------------|
| *(In millions)*          | ** ** | **Sales**  | ** **  | **% of   Grace  Revenue** | ** ** | **Sales**  | ** ** | **% of   Grace  Revenue** | ** ** | **Sales** | ** ** | **% of   Grace  Revenue** | ** ** |
| Refining Technologies    |       | $          | 971.1       |                      | 31.2       | %          | $          | 859.1 |   | 30.4 | % | $ | 796.0 |   | 31.0 | % |
| Materials Technologies   |       | 726.7      |        | 23.3                      | %          | 654.4      |       | 23.2 | % | 611.1 |   | 23.8 | % |
| Specialty Technologies   |       | 311.4      |        | 10.0                      | %          | 283.8      |       | 10.0 | % | 256.1 |   | 9.9 | % |
| **Total  Grace Davison** | ** ** | ** ** | ** **  | ** **                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Revenue**              | ** ** | **$**      | **2,009.2** | ** **                | **64.5**   | **%**      | **$**      | **1,797.3** | ** ** | **63.6** | **%** | **$** | **1,663.2** | ** ** | **64.7** | **%** |

 

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Thefollowing table sets forth Grace Davison sales by region as a percentage ofGrace Davison total revenue.

 
| ** **               | ** ** | **2007**   | ** **  | **2006**    | ** ** | **2005**   | ** ** |
|--------------------------|------------|------------|-------------|-------------|------------|------------|------------|
| ** **               | ** ** | ** ** | ** **  | **% of**    | ** ** | ** ** | ** ** | **% of** | ** ** | ** ** | ** ** | **% of** | ** ** |
| ** **               | ** ** | ** ** | ** **  | **Grace**   | ** ** | ** ** | ** ** | **Grace** | ** ** | ** ** | ** ** | **Grace** | ** ** |
| ** **               | ** ** | ** ** | ** **  | **Davison** | ** ** | ** ** | ** ** | **Davison** | ** ** | ** ** | ** ** | **Davison** | ** ** |
| *(In millions)*          | ** ** | **Sales**  | ** **  | **Revenue** | ** ** | **Sales**  | ** ** | **Revenue** | ** ** | **Sales** | ** ** | **Revenue** | ** ** |
| North America            |       | $          | 578.4       |        | 28.8       | %          | $          | 599.9 |   | 33.4 | % | $ | 587.0 |   | 35.3 | % |
| Europe Africa*           |       | 915.6      |        | 45.6        | %          | 761.1      |       | 42.4 | % | 667.4 |   | 40.1 | % |
| Asia Pacific             |       | 362.7      |        | 18.0        | %          | 324.4      |       | 18.0 | % | 297.5 |   | 17.9 | % |
| Latin America            |       | 152.5      |        | 7.6         | %          | 111.9      |       | 6.2 | % | 111.3 |   | 6.7 | % |
| **Total  Grace Davison** | ** ** | ** ** | ** **  | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Revenue**              | ** ** | **$**      | **2,009.2** | ** **  | **100**    | **%**      | **$**      | **1,797.3** | ** ** | **100** | **%** | **$** | **1,663.2** | ** ** | **100** | **%** |

 

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*         Includes the Middle East.

 

***Refining Technologies***

 

            *FCCCatalysts*

 

Weare a global leader in developing and manufacturing FCC catalysts and additivesthat enable petroleum refiners to increase profits by improving product yieldsand quality. Our FCC products also enable refiners to reduce emissions fromtheir FCC units and reduce sulfur content in the gasoline that fuel refinersproduce.

 

Oilrefining is a highly specialized discipline, and FCC catalysts must be tailoredto meet local variations in crude oil and a refinery’s product mix. We workregularly with customers to help them find the most appropriate catalystformulations for their changing needs. We are dependent on the economics of thepetroleum industry, specifically, the impacts of demand for transportationfuels and petrochemical products and crude oil supply, which affect the extentto which our customers utilize the available capacity of their FCC units. Ingeneral, as a refinery utilizes more of its capacity, it needs adisproportionately greater amount of FCC catalyst.

 

Refineryfeedstocks vary in quality from sweet to heavy crude oil. Sweet crudefeedstocks are more expensive than heavy crude and yield a greater proportionof high-value petroleum products.  Theyalso yield a lower proportion of residual oil, or “resid,” which is generallythe lowest-value feedstock contained in crude oil. Although feedstocks withhigh resid content are less expensive than higher quality feedstocks, theprocessing of high resid feedstocks is more difficult because of theirrelatively high metals, nitrogen and sulfur contamination and higher boilingpoints. Due to increased prices for crude oil, refiners have increased theirefforts to maximize the yield from resid feedstocks. We have designed our MIDAS®, IMPACT®, NEKTORTM, and NOMUSTMproduct portfolios to enable our customers to increase the efficiency and yieldof resid refining.

 

ManyU.S. petroleum refiners have entered into consent decrees with the U.S.Environmental Protection Agency under which the refiners have agreed to reduceemissions of nitrogen oxides and sulfur oxides. The European Union has alsoimposed 

 

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requirementson refineries with respect to nitrogen oxides and sulfur oxides emissions. FCCunits are generally the largest emitters of these pollutants in a refinery. Ouradditives are designed to assist refineries in meeting their obligations toreduce these pollutants. Our Super DESOX® additivereduces sulfur oxides emissions from commercial FCC units. Our XNOx® and DENOX® additives aredesigned to achieve reductions in nitrogen oxides emissions comparable to thoseobtained from the capital-intensive alternatives available to a refinery.

 

Economicgrowth in emerging countries has increased the demand for plastics. As aresult, our refinery customers have sought increased profits in thepetrochemical market by increasing the yield of propylene from their FCC units.Our zeolite-based technology, including our Olefins-Max® and OlefinsUltra® products, isdesigned to maximize the propylene output of FCC units.

 

Inrecent years, many countries and regions, including the U.S., European Unionand China have imposed or increased the regulatory limitations on the sulfurcontent of gasoline and diesel fuel. We have developed a portfolio of productsdesigned to assist refiners in meeting their gasoline sulfur reduction targetsincluding our D-PriSM® and GSR®-5 additives and our SuRCA® and NeptuneTM catalystfamilies.

 

Competitionin the FCC catalyst and additives markets is based on technology, productperformance, customer service and price. Our principal FCC catalyst competitorsare BASF and Albemarle, which, with Intercat, are also principal competitors inthe FCC additives market.  We also havemultiple regional competitors in the markets for FCC catalysts and additives.

 

###### *HydroprocessingCatalysts*

###### * *

We market hydroprocessing catalysts through Advanced RefiningTechnologies, LLC, or ART, our joint venture with Chevron Products Company. Weestablished ART to combine our technology with that of Chevron and to develop,market and sell hydroprocessing catalysts to customers in the petroleumrefining industry worldwide.

 

Asdiscussed above, we are dependent on the economics of the petroleum industry.The increase in prices for crude oil has increased the value of refineryfeedstocks that have high resid content. We are a leading supplier ofhydroprocessing catalysts, including fixed-bed, on-stream catalyst replacement(OCR®) andebullating bed products, designed for processing these feedstocks.

 

Wealso offer a full line of catalysts used in processing ultra-low sulfur contentgasoline and diesel fuel, including our SmART Catalyst System® and ApARTTM catalyst system, that arecustomized for individual refiners. These products are designed to helprefiners meet their obligations to reduce sulfur content in their products.

 

Competitionin the hydroprocessing catalyst industry is based on technology, productperformance, customer service and price. Albemarle and Criterion are ourleading global competitors in hydroprocessing catalysts.  We also have multiple regional competitors**.**

 

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## ***MaterialsTechnologies***

## *** ***

Wemarket silica-based and silica alumina-based functional additives and processaids, such as silica gel, colloidal silica, zeolitic adsorbents, precipitatedsilica and silica-aluminas, for a wide variety of uses, and formulations usedin food and beverage packaging, such as closure sealants and can coatings andsealants, as follows:

 
| **Application**                   | ** **                                                                                                                                                                                                                                                                                                      | **Use**                                                                                                                                            | ** **                                                                               | **Key   Brands**                                                                              |
|-----------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------|
| ** **                        | ** **                                                                                                                                                                                                                                                                                                      | ** **                                                                                                                                         | ** **                                                                               | ** **                                                                                    |
| Industrial                        |                                                                                                                                                                                                                                                                                                            | Reinforcing agents for rubber and tires                                                                                                            |                                                                                     | PERKASIL®                                                                                |
|                              | Inorganic binders and surface smoothening aids for  precision investment casting and refractory applications

                                                                                                                                                                                             |                                                                                                                                               | LUDOX®                                                                              |
|                              | Adsorbents  for dual pane windows and industrial applications, desiccant granules, beads,  powders and bags and polyurethane moisture scavengers

                                                                                                                                                         |                                                                                                                                               | PHONOSORB®, PHONOSORB MTX®, SYLOBEAD®, SYLOSIV®

SAFETYSORB®    |
|                              | Chemical  metal polishing aids and formulations for

CMP/electronics  applications

                                                                                                                                                                                                                       |                                                                                                                                               | LUDOX®, Poli Edge®                                                             |
| Consumer                          |                                                                                                                                                                                                                                                                                                            | Toothpaste abrasives and thickening agents,  free-flow agents, anticaking agents, tabletting aids, cosmetic additives and  flavor carriers

  |                                                                                     | SYLODENT®, SYLOID FPTM, SYLOBLANC®, ELFADENT®, SYLOID®, SYLOSIV® |
|                              | Edible oil refining agents, beer stabilizers and  clarification aids for beer, juices and other beverages

                                                                                                                                                                                                |                                                                                                                                               | DARACLAR®, TriSyl®                                                             |
| Coatings &   Print Media |                                                                                                                                                                                                                                                                                                            | Matting  agents, anticorrosion pigments, TiO2 extenders and moisture scavengers for  paints and lacquers

                               |                                                                                     | SYLOID®, SHIELDEX®, SYLOSIV®, SYLOWHITETM                                  |
|                              | Additives and formulations for matte, semi-glossy  and glossy ink receptive coatings on high performance ink jet papers, photo  paper, and commercial wide-format print media

                                                                                                                            |                                                                                                                                               | SYLOJET®, DURAFILL®, LUDOX®                                               |
|                              | Paper retention aids, functional fillers, paper  frictionizers

                                                                                                                                                                                                                                           |                                                                                                                                               | DURAFILL®, LUDOX®                                                              |
| Packaging                         |                                                                                                                                                                                                                                                                                                            | Can sealants for rigid containers, that ensure a  hermetic seal between the lid and the body of beverage, food, aerosol and  other cans

     |                                                                                     | DAREX®, SistiagaTM                                                                   |
|                              | Sealants for metal and plastic bottle closures that  are used on pry-off and twist-off metal crowns, as well as roll-on  pilfer-proof and plastic closures to seal and enhance the shelf life of glass  and plastic bottles and jars used in beverage and food applications

                              |                                                                                                                                               | DAREX®, DARAFORM®, DARASEAL®, DARABLEND®, Sincera®, CeloxTM |
|                              | Coatings for metal packaging that are used in the  manufacture of cans and closures to protect the metal against corrosion,  protect the contents against the influences of metal, ensure proper adhesion  of sealing compounds to metal surfaces, and provide base coats for inks and  for decorative purposes |                                                                                                                                               | DAREX®, Apperta®                                                               |

 

Our products are integratedinto our customers’ manufacturing processes and, when combined with our technicalsupport, can increase the efficiency of such processes. By working closely withour customers, we help them to react quickly to the changing 

 

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needs of their customers.Changing end-customer needs have included higher-resolution ink jet prints,improved scratch resistance of floor and furniture coatings, less abrasive,high cleaning toothpastes and technologies that are friendly to the environmentsuch as water-based coatings, green tires with less friction resistance,bio-fuel processing and non-toxic anticorrosive pigments.

 

Weseek to grow our packaging products by continually developing and introducingnew products to meet packager and brand owner needs and by focusing onhigh-growth markets, such as plastic packaging; growth geographies; and “activepackaging” materials, such as oxygen scavenging sealants.  Our development programs are aligned to theindustry trends of flexible and lighter weight packaging, lower energyconsumption, personal convenience, and highly individualized packaging.  We also attempt to maintain expertise inregulatory awareness and compliance in order to anticipate and respond to newfood grade packaging concerns and regulations.

 

OurMaterials Technologies product group is global, with more than 50% of our salesoutside of the U.S.  Our majorcompetitors include INEOS, Degussa, UOP, Altana, PPG, Akzo Nobel and Valsparwho, in each case, also sell their products on a worldwide basis.  Competition is generally based on productperformance and reliability, as well as additional value added features toaddress the needs of our customers, end-users and brand owners.

 

***Specialty Technologies***

 

###### *SpecialtyCatalysts and Processing Technologies*

###### * *

Weare a leading provider of catalyst systems and catalyst supports to thepolyolefins industry for a variety of polyethylene and polypropylene processtechnologies. These types of catalysts are used for the manufacture ofpolyethylene and polypropylene resins used in products such as plastic film,high-performance plastic pipe and household containers. We use a combination ofproprietary catalyst and support technology, as well as technology licensedfrom third parties, to provide unique catalyst-based solutions to industry, andto provide a broad technology portfolio for enhancing collaborationopportunities with technology leaders.

 

OurMagnapore® polymerization catalyst is used to producehigh performance polyethylene in the slurry loop process for pipe and filmapplications. Polytrak®, our newestfamily of products for the polypropylene market, is designed to achieveimproved polymer performance, particularly for impact-resistant applicationssuch as automobile bumpers.

 

Wealso develop and market catalysts and adsorbents for enhanced biofuel productionand chromatography-based analytical tools for biofuel quality control includingour EnSieve® desiccants for ethanol dehydration, EnPure® adsorbents for biodiesel purification andEnSight® analyzers for process monitoring and qualitycontrol.

 

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OurDavicat® customized products offer a wide range ofchemical and physical properties based on our material science technology forsupported catalysts and biotechnology applications such as nylon and artificialsweeteners. Our Raney® products are used for the synthesis of organiccompounds for the fibers, pharmaceuticals, plastics, perfumes, soaps, colorcouplers and petroleum industries.

 

OurSylobloc®  silica gel antiblock and processing aids forproducers and processors of plastic film prevent layers of polymer film fromsticking together and provide an improved surface structure which results inimproved scratch-resistance.

 

OurSylobead® process adsorbents are used inpetrochemical/natural gas processes for such applications asethylene-cracked-gas-drying, natural gas drying and sulfur removal.

 

Thespecialty catalyst industry is technology-intensive and suppliers must provideproducts formulated to meet customer specifications. There are many manufacturersof polyolefin and other specialty catalysts, and most sell their productsworldwide.

 

###### *DiscoverySciences*

###### * *

We market an array of products for the life science, pharmaceutical,environmental, anesthesiology, biofuels, plastic and polymer, chemical, petrochemical,food and beverage, forensic, educational, neutraceutical and biotechnologyindustries including:

 
| **Products**                                                                                                                                                                                     | ** ** | **Key  Brands**                                                                                    |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                                       | ** ** | ** **                                                                                         |
| Liquid  and gas chromatography columns, detectors and other chromatography  instruments including pumps, gas generators, auto samplers, flow meters, and  gas chromatography instruments

  |       | Vydac®, Alltech®, Jones ChromatographyTM,  FlexitTM, GromTM and MODcol® |
| Chromatography  consumables and accessories including solid phase extraction (SPE)  cartridges, vials, syringes, standards, and thin layer chromatography (TLC)  plates

                   |       |                                                                                               |
| Silica  used by drug companies for pharmaceutical applications

                                                                                                                            |       | Davisil®, Vydac®                                                                         |
| CO2  adsorbents for medial, marine, industrial and rescue applications

                                                                                                                    |       | Sodasorb®                                                                                     |

 

Our chromatography tools are used in a wide range of analyticalchemistry applications, including drug discovery and purification for thepharmaceutical and biotechnology industries, environmental analysis, forensics,petrochemical analysis, food, cosmetics, vitamins and biofuels.  We also market chromatography consumables,analytical and preparative columns packed with our silica, and bulk silica thatcustomers can pack in their own production columns.  We can modify the base silica and surfacechemistry for analytical, preparative and process scale customers, allowing usto enhance our products for unique applications.

 

OurDiscovery Sciences products compete on the basis of product quality, distincttechnology and customer support. The market for these products is highlyfragmented with a large number of companies that sell their products on aglobal and regional basis, although a number of companies, such as WatersCorporation and Agilent 

 

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Technologies,have a substantial global position and a relatively large installed customerbase. We have developed this product group over the past few years, primarilythrough acquisitions of companies with substantial experience in this industry.

 

***Manufacturing***

 

OurGrace Davison products are manufactured by a network of globally-coordinatedplants that are positioned to service our customers regionally. Our integratedplanning organization is responsible for the effective utilization of ourmanufacturing capabilities. Our Discovery Sciences product line has its ownintegrated planning organization.  Ourpackaging products are manufactured in both large facilities to permiteconomies of scale and a network of smaller operations that enablecustomization to local market conditions.

 

***Marketing/Sales***

 

Weuse a global organization of technical professionals with extensive experiencein refining processes, catalyst development, and catalyst applications tomarket our Refining Technologies catalysts and additives. These professionalswork to tailor our technology to the needs of each specific customer. Wegenerally negotiate prices for our refining catalysts because our formulationsare specific to the needs of each customer and each customer receives specialattention and technical service. Due to the current demand for hydroprocessingcatalysts, we generally sell these products through long-term supply agreementswith our geographically diverse customer base.

 

*We use country-based direct sales forces that are dedicatedto each product line and backed by application-specific technical customerservice teams to market our Materials Technologies and Discovery Sciencesproducts.  Our sales force seeks todevelop long-term relationships with our customers and focuses on consultativesales, technical support and key account growth programs.  To ensure full geographic coverage, ourdirect sales organization is further supplemented, especially with respect toour Discovery Sciences products, by a network of agents and distributors.*

* *

Weuse a global direct sales force for our Specialty Catalysts and Processing Technologiesproducts that seeks to maintain close working relationships with our customers.These relationships enable us to cooperate with major polyolefin resinproducers to develop 

 

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catalysttechnologies that complement their process developments. We have geographicallydistributed our sales and technical service professionals to make themresponsive to the needs of our geographically diverse customers. We typicallynegotiate prices on an annual basis; however, we also operate under long-termcontracts with built-in pricing mechanisms for certain customers.

 

Our marketing and research and development functions operate globally.We offer web-based support, including technical service, literature access,customer feedback tools, and process design formulas to assist our customers indetermining their needs for our products.

 

Seasonalitydoes not have a significant overall effect on our Grace Davison operatingsegment. However, sales of FCC catalysts tend to be lower in the first quarterprior to the shift in production by refineries from home heating oil for thewinter season to gasoline production for the summer season. FCC catalysts andebullating-bed hydroprocessing catalysts are consumed at a relatively steadyrate and are replaced regularly.  Fixed-bedhydroprocessing catalysts are consumed over a period of years and are replacedin bulk in an irregular pattern. Since our customers periodically shut downtheir refining processes to replace fixed-bed hydroprocessing catalysts inbulk, our hydroprocessing catalyst sales to any customer can vary substantiallyover the course of a year and between years based on that customer’s catalystreplacement schedule.  Our packagingproducts are affected by seasonal and weather-related factors such as theconsumption of beverages and the size and quality of food crops. These impactsare softened by the global nature of this product line.

 

***Raw Materials***

 

Theprincipal raw materials for Grace Davison products include caustic, alumina,rare earths, nickel, aluminum, cobalt, kaolin, molybdenum, sodium aluminate,sodium silicate, resins, rubber and lattices (including certain food-grade rawmaterials). Multiple suppliers are generally available for each of thesematerials; however some of our raw materials are provided by single sources ofsupply.  We seek to mitigate the risk ofusing single source suppliers by identifying and qualifying alternativesuppliers or, for unique materials, by using alternative formulations fromother suppliers or by passing price increases on to customers.  In some instances, we produce our own rawmaterials and intermediates.

 

Someraw materials are also subject to pricing pressures, particularly metals andpetroleum-based specialty and commodity materials such as resins andsolvents.  As in many chemicalbusinesses, we consume significant quantities of natural gas in the productionof Grace Davison products. World events and other economic factors have causedvolatility in the price of natural gas. Increases in the cost of natural gasand other important raw materials can negatively impact our operating margins**. **Sincewe manufacture a substantial portion of our packaging products in developingcountries using raw materials from suppliers in the U.S., Europe and otherdeveloped economies, currency revaluations versus the U.S. dollar and Euro indeveloping countries may adversely affect our raw material costs and the priceswe may charge for our products.

 

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***Grace Construction Products OperatingSegment***

 

OurGCP products include specialty construction chemicals and materials.  We entered this business in 1954, with ouracquisition of the Dewey and Almy Chemical Company.

 

Thefollowing table sets forth GCP sales of similar products based on end-usemarkets as a percentage of Grace total revenue.

 
| ** **              | ** ** | **2007**  | ** **  | **2006**                      | ** ** | **2005**  | ** ** |
|-------------------------|------------|-----------|-------------|-------------------------------|------------|-----------|------------|
| *(In millions)*         | ** ** | **Sales** | ** **  | **% of Grace********Revenue** | ** ** | **Sales** | ** ** | **% of Grace********Revenue** | ** ** | **Sales** | ** ** | **% of Grace********Revenue** | ** ** |
| Construction Chemicals* |       | $         | 744.3       |                          | 23.9       | %         | $          | 694.0 |   | 24.5 | % | $ | 608.0 |   | 23.7 | % |
| Building Materials**    |       | 361.7     |        | 11.6                          | %          | 335.2     |       | 11.9 | % | 298.3 |   | 11.6 | % |
| **Total GCP Revenue**   | ** ** | **$**     | **1,106.0** | ** **                    | **35.5**   | **%**     | **$**      | **1,029.2** | ** ** | **36.4** | **%** | **$** | **906.3** | ** ** | **35.3** | **%** |

 

----

*         Includes Concrete and Cement products.

**       Includes Fireproofing, Building Envelope and Vermiculiteproducts.

 

The following table sets forth GCP sales by region as a percentage ofGCP total revenue.

 
| ** **            | ** ** | **2007**  | ** **  | **2006**                    | ** ** | **2005**  | ** ** |
|-----------------------|------------|-----------|-------------|-----------------------------|------------|-----------|------------|
| *(In millions)*       | ** ** | **Sales** | ** **  | **% of GCP********Revenue** | ** ** | **Sales** | ** ** | **% of GCP********Revenue** | ** ** | **Sales** | ** ** | **% of GCP********Revenue** | ** ** |
| North America         |       | $         | 536.5       |                        | 48.5       | %         | $          | 558.9 |   | 54.3 | % | $ | 500.1 |   | 55.2 | % |
| Europe Africa*        |       | 380.1     |        | 34.4                        | %          | 309.9     |       | 30.1 | % | 268.7 |   | 29.6 | % |
| Asia Pacific          |       | 139.8     |        | 12.6                        | %          | 118.8     |       | 11.5 | % | 105.7 |   | 11.7 | % |
| Latin America         |       | 49.6      |        | 4.5                         | %          | 41.6      |       | 4.1 | % | 31.8 |   | 3.5 | % |
| **Total GCP Revenue** | ** ** | **$**     | **1,106.0** | ** **                  | **100**    | **%**     | **$**      | **1,029.2** | ** ** | **100** | **%** | **$** | **906.3** | ** ** | **100** | **%** |

 

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*         Includes the Middle East.

 

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Weare a supplier to the nonresidential (commercial and infrastructure)construction industry, and to a lesser extent, the residential construction andrepair and restoration industries. The following table shows our principalspecialty construction chemicals and materials products:

 
| **Products**                                             | ** ** | **Uses**                                                                                                                                                                                                                                                                              | ** ** | **Customers**                                                                                                                                                    | ** ** | **Key   Brands**                                                                   |
|----------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------|
| Concrete  admixtures                                     |       | Concrete admixtures and polymeric fibers are used to  reduce the production and in-place costs of concrete, and improve the life  cycle cost of the structure.                                                                                                                        |       | Ready-mix and precast concrete producers, engineers  and specifiers                                                                                              |       | ADVA®, STRUX®, PolarSet®, Eclipse®                             |
| Additives for  cement processing                         |       | Cement additives added to the grinding stage of the  cement manufacturing process improve the energy efficiency of the plant and  enhance the performance of the finished cement. Chromium reducing additives  to help cement manufacturers in Europe meet environmental regulations. |       | Cement manufacturers                                                                                                                                             |       | CBA®, Synchro®, HEA2®, TDA®                                    |
| Products for  architectural concrete                     |       | Products for architectural concrete include surface  retarders, coatings, pigments and release agents used by concrete producers  and contractors to enhance the surface appearance and aesthetics of concrete.                                                                       |       | Precast concrete producers and architects                                                                                                                        |       | Pieri®                                                                        |
| Admixtures for  masonry concrete                         |       | Products for masonry concrete are used by block and  paver producers for process efficiency and to improve the appearance,  durability and water resistance of finished concrete masonry units.                                                                                       |       | Masonry block manufacturers                                                                                                                                      |       | Dry-Block®, Optec®, Quantec®                                        |
| Specialty  vermiculite products                          |       | Specialty vermiculite products are used in a wide  range of applications making use of vermiculite’s insulating properties and  its ability to absorb nutrients, primarily in the horticultural,  construction, and automotive industries.                                       |       | Manufacturers of a variety of products, including  potting soils, animal feeds, brakes, clutches and fire-rated products                                         |       | MicroLite®, VerxiteTM, FRSVTM                                                 |
| Structural  waterproofing, vapor and air barrier systems |       | Structural waterproofing and air barrier systems  prevent water, vapor and/or air infiltration in commercial structures.  Products include self-adhered sheet and liquid membranes, joint sealing  materials, drainage composites and waterstops.                                     |       | Architects and structural engineers; specialty  waterproofing and general contractors; specialty waterproofing distributors                                      |       | Bituthene®, Procor®, Preprufe®, Perm-A-Barrier®, Adprufe® |
| Residential  building materials                          |       | Specialty roofing membranes and flexible flashings  for windows, doors, decks and detail areas. Products include fully-adhered  roofing underlayments, synthetic underlayments and self-adhered flashing.                                                                             |       | Roofing contractors, home builders and remodelers;  specialty roofing distributors, lumberyards and home centers; homeowners;  architects and specifiers         |       | Ice & Water Shield®, Tri-Flex 30®, Vycor®                  |
| Fire protection  and  firestop products                  |       | Fire protection products are spray-applied to the  structural steel frame, encasing and insulating the steel and protecting the  building in the event of fire. Firestop products and systems compartmentalize  and contain fire and smoke within a building.                         |       | Local contractors and specialty subcontractors and  applicators; building materials distributors; industrial manufacturers;  architects and structural engineers |       | Monokote®, FlameSafe®                                                    |

 

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OurGCP operating segment is organized into geographic regions and most productlines, with certain regional variations, are offered in each region.  GCP manages its business under a geographicorganizational structure that focuses on the following regions:

 

*·*                  **Americas** — including North,Central and South America;

* *

*·*                  **Europe** — including Easternand Western Europe, the Middle East, Africa and India; and

* *

*·*                  **Asia** — including China,Japan, South Korea, South Asia (excluding India), Pacific Rim countries,Australia and New Zealand.

* *

Inview of this diversity of customers and customer concerns, and becauseconstruction chemicals and building materials require intensive sales andcustomer service efforts, we maintain a direct sales and technical support teamwith sales personnel based in more than 35 countries worldwide. This sales andsupport team sells products under global contracts, under U.S. or regionalcontracts, and on a job-by-job basis. We also use distributors in both domesticand overseas markets.  We competeglobally with several large construction materials suppliers, and regionallyand locally with numerous smaller competitors. In recent years, the cement and concrete industry has experienced someconsolidation, thereby increasing the importance of servicing globalcustomers.  For some customer groups,such as producers and contractors, operational efficiency and total appliedcost are key factors in making purchasing decisions, while for others, such asarchitects and engineers, product performance and design versatility are moreimportant.

 

Competitionfor our construction products is based on product performance, technicalsupport and service, and brand name recognition in the constructionindustry.  Our major global competitorsare BASF and Sika.

 

Weseek to improve our products, adapt them for new applications and add newproducts through our innovation growth processes that focus on understandingthe needs of the customer, key performance indicators, and marketing researchand development.  We also seek to extendour product portfolio and geographic reach through acquisitions.

 

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Inaddition to new product introductions, product enhancements and acquisitions,we look for growth opportunities in developing countries where increasingconstruction activity, improvement in building codes, and sophistication ofconstruction practices can accelerate demand for our construction products. Wecontinue to expand our commercial and manufacturing capabilities in thesegeographic areas.

 

Thekey raw materials used in our specialty construction products are obtained froma variety of suppliers, including commodity chemical producers, petroleumcompanies and paper manufacturers. The majority of our raw materials are olefinsand organic chemicals; we also make significant purchases of inorganicmaterials such as gypsum, as well as specialty materials including specialtyfilms, papers, membranes and fibers. In most instances, these materials areavailable from multiple sources.  Globalsupply and demand factors, currency revaluations against the U.S. dollar andpetroleum prices significantly impacted the price and availability of key rawmaterials in recent years.

 

Theconstruction business is cyclical in response to economic conditions andconstruction demand. The construction business is also seasonal and dependenton favorable weather conditions, with a decrease in construction activityduring the winter months. Demand for our specialty construction products isprimarily impacted by global non-residential construction activity and U.S.residential construction activity. We seek to increase profitability andminimize the impact of cyclical downturns in regional economies by introducingtechnically advanced high-performance products and expandinggeographically.  Although in recent yearsthese strategies have been successful in reducing the impact of cyclicality inour markets, a decline in U.S. residential construction activity in late 2006and 2007 has had a negative impact on our North American sales.

 

**FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS AND GEOGRAPHICAREAS**

 

Disclosureof financial information about industry segments and geographic areas for 2007,2006 and 2005 is provided in this Report in Item 8 (Financial Statements andSupplementary Data) in the Financial Supplement under Note 20 (OperatingSegment Information) to the Consolidated Financial Statements which disclosureis incorporated herein by reference. Disclosure of risks attendant to ourforeign operations is provided in this Report in Item 1A (Risk Factors).

 

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### **INTELLECTUALPROPERTY; RESEARCH ACTIVITIES**

### ** **

Competition in our industry is often based on technological superiorityand innovation. Our ability to maintain our margins and effectively competewith other suppliers depends on our ability to introduce new products based oninnovative technology, as well as our ability to obtain patent or otherintellectual property protection. Our research and development programsemphasize development of new products and processes, improvement of existingproducts and processes and application of existing products and processes tonew industries and uses. We conduct research in all regions, with North Americaand Europe accounting for the most activity.

 

Numerouspatents and patent applications protect our products, processes andmanufacturing equipment. We also benefit from trade secrets, including know-howand other proprietary information relating to many of our products andprocessing technologies. There can be no assurance, however, that our patents,patent applications and precautions to protect trade secrets and know-how willprovide sufficient protection for our intellectual property. In addition, othercompanies may independently develop systems or processes that circumvent ourpatents or acquire patent rights applicable to our business.

 

Researchand development expenses relating to continuing operations amounted to $80million in 2007, $66 million in 2006 and $64 million in 2005. These amountsinclude depreciation and amortization expenses related to research anddevelopment and expenses incurred in funding external research projects. Theamount of research and development expenses relating to government- and customer-sponsoredprojects (rather than projects that we sponsor) was not material during theseperiods.

 

**ENVIRONMENTAL, HEALTH AND SAFETY MATTERS**

 

Weare subject, along with other manufacturers of specialty chemicals, tostringent regulations under numerous U.S. federal, state and local and foreignenvironmental, health and safety laws and regulations relating to thegeneration, storage, handling, discharge, disposition and stewardship ofhazardous wastes and other materials. Environmental laws require that certainresponsible parties, as defined in the relevant statute, fund remediationactions regardless of legality of original disposal or ownership of a disposalsite.  We are involved in remediationactions to address hazardous wastes or other materials as required by U.S.federal, state and local and foreign laws. During the Chapter 11 proceeding, wegenerally are not participating in the funding of investigation and remediationat sites that we do not own. Our ultimate liability with respect to many of thesesites will be determined as part of the Chapter 11 proceeding.

 

Wehave expended substantial funds to comply with environmental laws andregulations and expect to continue to do so in the future. The following tablesets forth our expenditures in the past three years, and our estimatedexpenditures in 2008 and 2009, for (i) the operation and maintenance ofmanufacturing facilities and the disposal of wastes; (ii) capitalexpenditures for environmental control facilities; and (iii) siteremediation:

 

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| **Year** | ** ** | **Operation of Facilities********and Waste Disposal******** (in $ millions)** | ** ** | **Capital Expenditures******** (in $ millions)** | ** ** | **Site Remediation******** (in $ millions)** | ** ** |
|----------|------------|-----------------------------------------------------------------------------------------|------------|------------------------------------------------------------|------------|--------------------------------------------------------|------------|
| **2005** |       | $51                                                                                     |       | $9                                                         |       | $28                                                    |       |
| **2006** |       | $59                                                                                     |       | $8                                                         |       | $11                                                    |       |
| **2007** |       | $62                                                                                     |       | $9                                                         |       | $9                                                     |       |
| **2008** |       | $63                                                                                     |       | $8                                                         |       | $8                                                     |       |
| **2009** |       | $69                                                                                     |       | $10                                                        |       | $4                                                     |       |

 

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*          For 2008 and 2009, amounts are current estimates of ongoingsite remediation costs and exclude payments of claims in our Chapter 11proceeding.

 

SeePart I, Item 3 of this 10-K for additional information about our environmentalremediation activities.

 

Wecontinuously seek to improve our environmental, health and safety performance.To the extent applicable, we extend the basic elements of the AmericanChemistry Council’s Responsible Care® program toall our locations worldwide, embracing specific performance objectives in thekey areas of management systems, product stewardship, employee health andsafety, community awareness and emergency response, distribution, processsafety and pollution prevention. In addition, we have implemented key elementsof the new Responsible Care® Security Code for our operationsand systems. We have completed a review of our existing security (includingcyber-security) vulnerability and have taken actions to enhance our securitysystems and protect our assets.

 

**EMPLOYEE RELATIONS**

 

Asof December 31, 2007, we employed approximately 6,500 persons, of whomapproximately 3,050 were employed in the United States. Of our total employees,approximately 3,850 work in Grace Davison facilities, approximately 1,850 workin Grace Construction Products facilities, and approximately 800 are dedicatedto corporate activities and/or are shared through globally managed professionalgroups such as financial and legal services, human resources, information technology,supply chain and environmental health and safety.

 

Approximately900 of our manufacturing employees in the United States are represented forcollective bargaining purposes by nine different local collective bargaininggroups. We have operated without a labor work stoppage for more than 10years.

 

Wehave works councils representing the majority of our European sites servingapproximately 2,050 employees.

 

 

 

 

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**RISKMANAGEMENT**

** **

We have programs in place toaddress the following significant risks to Grace

 

·                  ***Disasters***—******We have disaster recovery plans in effect atkey sites, and we have built a certain amount of redundancy into our productionplants where feasible. We also have a formalized risk management program, whichincludes several types and layers of insurance. We are advised by risk management professionals and brokers who arefamiliar with recent trends in the insurance markets worldwide. The level of insurancecarried, and other related aspects such as deductibles, self-insurance levels,etc. are monitored by management on a regular basis.

 

·                  ***Environmental***—******We are committed tothe heath and safety of all employees and to protecting the environment fromdamage through the use or production of our products. Our Environmental Healthand Safety (EH&S) organization is global in scope and is charged withassuring that we live up to our commitments in this area. The group performsEH&S audits of our facilities and regularly monitors local laws andregulations. Where appropriate, we use outside consultants and experts toaugment our in-house staff. We continue to implement our EHS management systemin our facilities worldwide.  Our EHSmanagement system is designed to enable us to apply “best practices” and“continual improvement” principles across our business.

 

·                  ***Ethics and Fraud***—******We insist that ouremployees maintain the highest standards of ethical behavior. We havepreventative and investigatory programs in place to maintain these standards,as follows:

 

·                  We have established onlineethics and compliance training programs in several languages.

 

·                  All U.S. employees and keyemployees outside the U.S. must sign an annual ethics statement in which theyrenew their commitment to operate ethically and according to the Grace code ofconduct.  They must also report anyactual or potential conflicts of interest for evaluation by management and, ifnecessary, remediation.

 

·                  We have an anonymoustelephone line to report fraudulent or unethical behavior to our Chief EthicsOfficer.  The direct line is available toall employees worldwide where local law allows such a facility.  Any allegation of fraud is required to bereported to the Audit Committee.

 

·                  Our Internal AuditDepartment is independent of management and reports functionally to theChairman of the Audit Committee of the Board of Directors.  

 

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The department conducts investigations in collaboration with the ChiefEthics Officer when alleged frauds have accounting, financial reporting orfiscal aspects.

 

·                  We provide training tofinancial personnel in key positions covering topics such as the U.S. ForeignCorrupt Practices Act, the Sarbanes Oxley Act of 2002, and other laws andregulations relating to ethical or legal matters.

 

**AVAILABILITY OF REPORTS AND OTHER DOCUMENTS**

 

We maintain an Internet website at www.grace.com. Our annual reports onForm 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K,and amendments to those reports, filed or furnished pursuant to Section 13(a) or15(d) of the Securities Exchange Act of 1934, as amended, are available,free of charge, on our website as soon as reasonably practicable after suchreports are electronically filed with, or furnished to, the Securities andExchange Commission. These reports may be accessed through our website’sinvestor information page.

 

Inaddition, the charters for the Audit, Compensation, Nominating and Governance,and Corporate Responsibility Committees of our Board of Directors, ourcorporate governance guidelines and code of ethics are available, free ofcharge, on our website at www.grace.com/About/Leadership/Governance/.  Printed copies of the charters, governanceguidelines and code of ethics may be obtained free of charge by contactingGrace Shareholder Services at 410-531-4167.

 

Theinformation on our website is not, and shall not be deemed to be, a part ofthis report or incorporated into any other filings we make with the Securitiesand Exchange Commission.

 

OnMarch 29, 2007, our Chief Executive Officer submitted a certification tothe New York Stock Exchange that, as of such date, he was not aware of anyviolation by Grace of the New York Stock Exchange corporate governance listingstandards. Our Chief Executive Officer and Chief Financial Officer havesubmitted certifications to the SEC pursuant to the Sarbanes Oxley Act of 2002as exhibits to this Report.

 

**EXECUTIVE OFFICERS**

 

SeePart III, Item 10 of this Report for information about our ExecutiveOfficers.

 

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** **

**Item 1A.      RISK FACTORS**

** **

ThisReport, including the Financial Supplement, contains, and our other publiccommunications may contain, projections or other “forward-looking” information,that is, information related to future, not past, events.  Such information generally includes the words“believes,” “plans,” “intends,” “targets,” “will,” “expects,” “anticipates,” orsimilar expressions and includes all statements regarding our Chapter 11proceeding (including the pro forma financial statements included in “Management’sDiscussion and Analysis of Financial Condition and Results of Operations”),expected financial position, results of operations, cash flows, financingplans, business strategy, budgets, capital and other expenditures, competitivepositions, growth opportunities for existing products, benefits from newtechnology and cost reduction initiatives, plans and objectives of managementand markets for securities.  For thesestatements, we claim the protection of the safe harbor for forward-looking statementscontained in the Private Securities Litigation Reform Act of 1995. Like otherbusinesses, we are subject to risks and uncertainties that could cause ouractual results to differ materially from our projections or that could causeother forward-looking information to prove incorrect.  Factors that could cause actual events to materiallydiffer from those contained in the forward-looking statements include thosefactors set forth below and elsewhere in this Annual Report on Form 10-K.  Further, our reportedresults should not be considered as an indication of our future performance.Readers are cautioned not to place undue reliance on our projections andforward-looking information, which speak only as of the date thereof. Weundertake no obligation to publicly release any revisions to the projectionsand forward-looking information contained in this document, or to update themto reflect events or circumstances occurring after the date of this document.

 

Inaddition to general economic, business and market conditions, we are subject toother risks and uncertainties, including, without limitation, the following:

 

**COMPANY RISKS**

 

***The outcome of our Chapter 11 cases couldresult in the substantial dilution or cancellation of Grace’s currentlyoutstanding common stock.***

 

Theoutcome of our Chapter 11 cases depends primarily upon the resolution of ourasbestos-related and other contingent liabilities. The Bankruptcy Court hasagreed to a process for estimating our asbestos-related liabilities, whichestimate would form the basis for a plan of reorganization that we expect wouldprovide for the funding of a trust to which all pending and futureasbestos-related claims would be channeled. If the amount of asbestos-relatedliabilities, as determined through estimation or otherwise, and otherliabilities exceeds assets available for funding, then we likely would issueadditional shares of Grace common stock to satisfy such liabilities. The numberof shares to be issued could substantially dilute the interests of currentshareholders or result in a recapitalization of Grace that would cancel theshares of current shareholders and issue new shares to asbestos and othercreditors. Because of this risk of 

 

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substantialdilution or cancellation, the value of Grace common stock is highly speculativeand any investment in Grace common stock poses a high degree of risk.

 

****Ourproposed plan of reorganization provides for substantial dilution of theownership interests of holders of currently outstanding Grace common stock. Analternative plan that has been filed with the bankruptcy court provides forcancellation of these ownership interests with the result that outstandingGrace common stock would likely become worthless.****

 

Ourproposed plan of reorganization provides that the interests of current holdersof Grace common stock would be subject to substantial dilution by additionalGrace securities that may be issued under the plan.  The proformafinancial information included under the caption “Management’s Discussion andAnalysis of Financial Condition and Results of Operations—Proforma FinancialInformation” reflects the accounting effects of our proposed plan as if it werein effect on the dates and for the periods set forth therein.  If our planis not confirmed or, if confirmed, if its provisions are materially differentfrom those proposed, the proforma financial information will change.  Ourplan is subject to the fulfillment of numerous conditions, including adetermination by the bankruptcy court that the maximum amount that we and otherparties would be required to contribute to a trust for the benefit of asbestospersonal injury and property damage claimants does not exceed $1,613 million,and that assets from settlement agreements with Cryovac, Inc. andFresenius Medical Care Holdings, Inc. would be available to fund ourliabilities.

 

OnNovember 5, 2007, the committee representing asbestos personal injuryclaimants and the legal representative of future asbestos claimants filed analternative plan of reorganization with the bankruptcy court that provides forthe cancellation of **theownership interests of holders of currently outstanding Grace common stock**. This plan is subject to the fulfillment of numerous conditions, including adetermination by the bankruptcy court that the value of all pending and futureasbestos-related personal injury claims is at least $4.0 billion, and assumesthat assets from settlement agreements with Cryovac, Inc. and FreseniusMedical Care Holdings, Inc. would be available to fund ourliabilities.  No documents supporting this plan have been filed and theplan was not accompanied by a disclosure statement or other information thatwould permit a comprehensive anlysis of its financial implications. Proformafinancial information is not available with respect to this plan.

 

Neitherplan of reorganization may be ultimately approved by the bankruptcy court andother interested parties.  No party currently has exclusive rights topropose a plan of reorganization and solicit votes thereon, so anyparty-in-interest can propose a competing plan of reorganization at anytime.  Further, the proponents of the filed plans of reorganization arefree to amend their respective plans at any time.  As a result, a plan ofreorganization that is materially different from the two that have been filedmay ultimately be approved and, under the ultimate plan of reorganization, theinterests of the holders of Grace common stock may be substantially diluted orcancelled.  As a result, the value of Grace common stock is highlyspeculative and any investment in Grace common stock poses a high degree ofrisk.

 

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***The bankruptcy process may disrupt ourbusiness.***

 

Wehave attempted to minimize the adverse effect of our Chapter 11 reorganizationon our relationships with our employees, suppliers, customers and otherparties. Nonetheless, as our reorganization becomes more protracted, ourrelationships with our customers, suppliers and employees may be adverselyimpacted and our operations could be materially and adversely affected. Inaddition, the continuation of our reorganization could negatively affect ourability to attract new employees and retain existing high performing employees.

 

***Chapter 11 limits the flexibility of ourmanagement team in running our business.***

 

Whilewe operate our businesses as debtor-in-possession under supervision by thebankruptcy court, we are required to obtain the approval of the bankruptcycourt prior to engaging in activities or transactions outside the ordinarycourse of business. For example, our strategic plan includes the acquisition ofbusinesses in the specialty chemicals industry. Such acquisitions generallyrequire bankruptcy court approval. Bankruptcy court approval of non-ordinarycourse activities entails preparation and filing of appropriate motions withthe bankruptcy court, negotiation with the various creditors’ committees andother parties in interest and one or more hearings. The various creditors’committees and other parties in interest may be heard at any bankruptcy courthearing and may raise objections with respect to these motions. This processdelays major decisions and limits our ability to respond quickly toopportunities and events in the marketplace. Furthermore, in the event thebankruptcy court does not approve a proposed activity or transaction, we wouldbe prevented from engaging in activities and transactions that we believe arebeneficial to Grace.

 

***We may not be able to collect allasbestos-related insurance payments that may be due to us.***

 

We have insurance coverage for a portion of the asbestos-related claimsagainst us. We estimate that, assuming an ultimate payout of asbestos-relatedclaims equal to the $1,700 million of asbestos-related liabilities recorded onour balance sheet, we should be entitled to approximately $500 million ofinsurance recovery. Accordingly, our December 31, 2007 balance sheetincludes a long-term asset for estimated asbestos-related insurance of $500million. Although this amount pertains only to insurance carriers with which wehave asbestos settlement agreements, and/or which are currently solvent, wecannot be sure that all these amounts will be collected. We have entered into a settlementagreement with an underwriter of a portion of our excess insurance coverage.The insurer funded an escrow account for the benefit of the holders of claimsthat currently holds approximately $94.8 million, including interest earned onthe account.  The settlement agreementprovides that unless we confirm a plan of reorganization by December 31,2008, at the option of the insurer, the escrow amount with interest must bereturned to the insurer.  The timing andamount of future payments from our insurers depends on their continued solvencyand the resolution of disputes regarding coverage under the insurance policiesas well as the nature and 

 

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timing of actual claims paid. Because of the significance of our future asbestos-related payments, thereceipt of timely and complete payments from our insurers will be important tothe success of our reorganization.

 

***Grace is currently under criminalindictment in connection with our former vermiculite mining and processingactivities in Libby, Montana.***

 

Alongwith seven former senior level employees (one of whom is now deceased), Gracehas been indicted in connection with our former vermiculite mining andprocessing activities in Libby, Montana. The indictment accuses Grace and theco-defendants of conspiracy to violate environmental laws and obstruct federalagency proceedings, violations of the federal Clean Air Act, and obstruction ofjustice.

 

Thecase is currently stayed pending the resolution of an expected appeal by Graceto the U.S. Supreme Court of certain pre-trial rulings in favor of Grace thatwere reversed by the Ninth Circuit Court of Appeals.  According to the U.S. Department of Justice,Grace could be subject to fines in an amount equal to twice the after-taxprofit earned from our Libby operations or twice the alleged loss suffered byLibby victims, plus additional amounts for restitution to victims. Theindictment alleges that our after-tax profits were $140 million. Grace hascategorically denied any criminal wrongdoing and intends to vigorously defenditself at trial. We are unable to assess whether the indictment or anyconviction will have a material adverse effect on our results of operations orfinancial condition or affect our bankruptcy proceedings. However, we expectthat legal fees for Grace’s defense and that of our current and formeremployees could range from $3 million to $4 million per quarter while theappeal is pending.

 

***We are subject to environmental clean-upfines, penalties and damage claims that have been and continue to be costly.***

 

Graceis subject to lawsuits and regulatory actions, in connection with current andformer operations, for breaches of environmental laws that seek clean-up orother remedies.  For example, a federal courthas ruled that Grace is responsible for reimbursing the government for $54.5million (plus interest) in costs expended through December 2001 and forall appropriate future clean-up costs with respect to our former vermiculitemining and processing activities in Libby, Montana. The State of New Jersey isseeking civil penalties for alleged misrepresentations and false statementsmade in an official filing in connection with the closing of a former plant inNew Jersey. Grace is also subject to other lawsuits and investigations bypublic and private parties under various environmental laws in connection withour current and former operations in various states, including with respect tooff-site disposal at facilities where Grace has been identified as a potentiallyresponsible party under the Comprehensive Environmental Response, Compensationand Liability Act of 1980, as amended, commonly referred to as CERCLA.

 

Wehave established accounting accruals for all environmental matters for whichsufficient information is available. As we receive new information, ourestimated liability may change materially. We do not have sufficientinformation to accrue for all of Grace’s 

 

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environmentalrisks, and we cannot be sure that our actual costs will be equal to or lessthan our current estimates and accruals. Furthermore, it is reasonably possiblethat costs associated with those environmental matters for which we haveestablished accruals may exceed our current accruals by material amounts.  Some or all of our liability in connectionwith alleged violations of environmental laws may not be discharged uponconfirmation of our proposed plan of reorganization.

 

***Our capital resources are limited and wehave limited access to additional financing.***

 

Inaddition to the cash requirements necessary to fund our ongoing operations, wecurrently are incurring, and anticipate that we will continue to incursignificant, professional fees and other restructuring costs in connection withthe Chapter 11 proceedings. We are currently funding our operations with cashflow from operations and a debtor-in-possession (DIP) loan facility, whichexpires on April 1, 2008, in the aggregate amount of $250 million, andwith a borrowing availability as of December 31, 2007 of $178.5 million.We have requested a two-year extension of this DIP facility from the lendersand a hearing before the Bankruptcy Court with respect to the extension isscheduled for March 17, 2008.  Basedon our current and anticipated level of operations, we believe that our cashand short term investments and cash flow from operations are adequate to meetour current and anticipated cash requirements during the Chapter 11proceedings.  If such amounts are notsufficient to fund operations until a plan of reorganization is confirmed bythe Bankruptcy Court, we may be required to reduce planned capital expendituresor seek additional financing.  Further,our proposed plan of reorganization requires, and any plan of reorganizationthat is ultimately confirmed is likely to require, Grace to borrow funds forthe payment of certain claims in cash. We can provide no assurance thatadditional financing for current operations or for payment of claims under aplan of reorganization will be available or, if available, offered onacceptable terms. As a result of the uncertainty surrounding our currentcircumstances, we cannot determine our long-term liquidity requirements or theadequacy of our capital resources until a plan of reorganization is confirmedby the Bankruptcy Court.

 

***We have unfunded and underfundedpension plan liabilities which will likely require us to use current and futureoperating cash flow to fund the shortfall. We have no assurance that we willgenerate sufficient cash flow to satisfy these obligations.***

 

We maintain U.S. and non-U.S. defined benefit pension plans coveringemployees who meet age and service requirements. Our net pension liability andcost is materially 

 

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affected by the discount rate used to measure pension obligations, thelongevity and actuarial profile of our workforce, the level of plan assetsavailable to fund those obligations and the expected long-term rate of returnon plan assets. Significant changes in investment performance or a change inthe portfolio mix of invested assets can result in corresponding increases anddecreases in the valuation of plan assets, particularly equity securities, orin a change in the expected rate of return on plan assets. A change in thediscount rate would result in a significant increase or decrease in thevaluation of pension obligations, affecting the reported funded status of ourpension plans as well as the net periodic pension cost in the following years.Similarly, changes in the expected return on plan assets can result insignificant changes in the net periodic pension cost in the following years.

 

***The international scope of our operationssubjects us to the risks of doing business in foreign countries, which couldadversely affect our business, financial condition and results of operations.***

 

Weconduct a substantial portion of our business outside of the United States,with approximately 67% of our 2007 sales to non-U.S. customers. We currentlyhave many production facilities, research and development facilities andadministrative and sales offices located outside North America, includingfacilities and offices located in Europe, Latin America, Africa and Asia. Weexpect sales from international markets to continue to represent a significantportion of our revenue. Accordingly, our business is subject to risks relatedto the differing legal, political, social and regulatory requirements andeconomic conditions of many jurisdictions. Risks inherent in internationaloperations include the following:

 

·                  agreements may be more difficult to enforceand receivables more difficult to collect;

 

·                  foreign countries may impose additionalwithholding taxes or adopt other restrictions on foreign trade or investment,including currency exchange controls;

 

·                  we may have difficulty transferring ourprofits or capital from foreign operations to the United States or othercountries where such funds could be more profitably deployed;

 

·                  foreign governments may nationalize privateenterprises;

 

·                  we may experience unexpected adverse changesin export duties, quotas and tariffs and difficulties in obtaining exportlicenses;

 

·                  intellectual property rights may be moredifficult to enforce;

 

·                  our business and profitability in aparticular country could be affected by political or economic repercussions ona domestic, country specific or global level from terrorist activities and theresponse to such activities; and

 

·                  we may be affected by unexpected adversechanges in foreign laws or regulatory requirements.

 

Inaddition, certain of our operations are in high-risk regions of the world suchas the Middle East and portions of Asia, Africa and Latin America.Unanticipated events, such as geopolitical changes, could adversely affectthese operations. Our success as a global business will depend, in part, uponour ability to succeed in differing legal, 

 

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regulatory,economic, social and political conditions by developing, implementing andmaintaining policies and strategies that are effective in each location wherewe do business.

 

***We are exposed to currency exchange ratefluctuations that could impact our profitability.***

 

Weare exposed to currency exchange rate risk through our non-U.S. operations. Aswe conduct a significant portion of our operations outside the United States,fluctuations in currencies of other countries, especially the Euro, maymaterially affect our operating results. For example, changes in currencyexchange rates may affect the relative prices at which we and our competitorssell products in the same market and the cost of materials used in ouroperations.  A substantial portion of ournet sales and assets are denominated in currencies other than the U.S. dollar.During times of a strengthening U.S. dollar, at a constant level of business,our reported international sales, earnings, assets and liabilities will bereduced because the foreign currency will translate into fewer U.S. dollars.

 

Inaddition to currency translation risks, we incur a currency transaction riskwhenever one of our operating subsidiaries enters into either a purchase or asales transaction using a currency different from the operating subsidiary’sfunctional currency. Given the volatility of exchange rates, we may not be ableto manage our currency transaction and/or translation risks effectively, orvolatility in currency exchange rates may expose our financial condition orresults of operations to a significant additional risk.

 

****Our ability to use**** ****future net operating loss carryovers to reduce future taxpayments may be limited if there is a change in ownership of Grace or if Gracedoes not generate sufficient U.S. taxable income.****

 

Ourability to utilize future net operating loss carryovers may be limited by Section 382of the Internal Revenue Code of 1986, as amended, if we undergo an ownershipchange as a result of future changes in the ownership of outstanding Gracecommon stock. In addition, our ability to utilize NOLs is dependant on ourability to generate sufficient future taxable income in the U.S.

 

***We may be subject to claims ofinfringement of the intellectual property rights of others, which could hurtour business.***

 

From time to time, we face infringement claims from our competitors orothers alleging that our processes or products infringe on their proprietarytechnologies. Any claims that our products or processes infringe theintellectual property rights of others, regardless of the merit or resolutionof the claims, could cause us to incur significant costs in responding to,defending and resolving the claims, and may divert the efforts and attention ofour management and technical personnel from our business. If we are found to beinfringing on the proprietary technology of others, we may be liable fordamages, and we may be required to change our processes, redesign our products,pay others to use the technology or stop using the technology or producing the 

 

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infringing product. Even if we ultimately prevail, the existence of thelawsuit could prompt our customers to switch to products that are not thesubject of infringement suits.

 

***While Grace is in bankruptcy, we are notpermitted to pay dividends on Grace common stock.***

 

Weare not permitted to pay dividends on Grace common stock while we are inbankruptcy. Following emergence from bankruptcy, we may be subject to covenantsin connection with our financing arrangements that limit or prevent us frompaying dividends for the foreseeable future. Furthermore, it is likely thatfollowing our emergence from bankruptcy, our board of directors will decide toreinvest our operating cash flow in our business rather than paying dividends.Accordingly, for the foreseeable future, investors in Grace common stock, inall likelihood, will obtain an economic benefit from their shares only byselling them.

 

**INDUSTRY RISKS**

 

***Prices for raw materials and energy arevolatile; we may not be able to pass through increases in costs and expensesfor raw materials and energy which may hurt our profitability.***

 

Weuse metals, significant amounts of natural gas and petroleum-based materials,including both specialty and commodity materials such as resins and solvents,in the manufacture of our products.  Wepurchase metals, natural gas and petroleum-based products from third-partiesand prices have increased dramatically in recent years.  To the extent this trend continues and we areunable to pass through these price increases to our customers, our operatingprofit and results of operations may decline.

 

***A substantial portion of our raw materialsare commodities whose prices fluctuate as market supply/demand fundamentalschange.***

 

Weattempt to manage exposure to price volatility of major commodities through:

 

·                  long-term supply contracts;

 

·                  contracts with customers that permitadjustments for changes in prices of commodity-based materials and energy;

 

·                  forward buying programs that layer in ourexpected requirements systematically over time; and

 

·                  limited use of contracts and financialinstruments.

 

Althoughwe regularly assess our exposure to raw material price volatility, we cannotalways predict the prospects of volatility and we cannot always cover the riskin a cost effective manner.

 

Wehave a policy of maintaining, when available, multiple sources of supply forraw materials. However, some of our raw materials are provided by singlesources of 

 

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supply.We may not be able to obtain sufficient raw materials due to unforeseendevelopments that would cause an interruption in supply. Even if we havemultiple sources of supply for raw materials, these sources may not make up forthe loss of a major supplier.

 

***We spend large amounts of money forenvironmental compliance in connection with our current and former operations.***

 

Asa manufacturer of specialty chemicals and materials, we are subject tostringent regulations under numerous U.S. federal, state, local and foreignenvironmental, health and safety laws and regulations relating to thegeneration, storage, handling, discharge, disposition and stewardship ofhazardous wastes and other materials. We have expended substantial funds tocomply with such laws and regulations. Legislative, regulatory and economicuncertainties make it difficult for us to project future spending for thesepurposes, and if there is an acceleration in new regulatory requirements, wemay be required to expend substantial additional funds to remain in compliance.

 

***The length and depth of product andindustry business cycles in our markets, particularly in the construction andpetroleum refining industries, may result in periods of reduced sales,operating margins and operating losses.***

 

OurGCP operating segment and the refining products portion of our Grace Davisonoperating segment are sensitive to the cyclical nature of their respectiveindustries.  Our hydroprocessing catalystproduct line and other hydroprocessing catalyst suppliers have experiencedalternating periods of inadequate capacity and excess capacity for theirproducts.  Periods of inadequatecapacity, including some due to raw material shortages, have usually resultedin increased selling prices and operating margins. This has often been followedby periods of capacity additions, which have resulted in declining capacityutilization rates, selling prices and operating margins.

 

***Some of our employees are unionized,represented by workers’ councils or employed subject to local laws that areless favorable to employers than the laws of the United States.***

 

Asof December 31, 2007, we had approximately 6,500 employees worldwide.Approximately 29% of our 3,150 U.S. employees is unionized. In addition, alarge number of our employees are employed in countries in which employmentlaws provide greater bargaining or other rights to employees than the laws ofthe United States. Such employment rights require us to work collaborativelywith the legal representatives of the employees to effect any changes to laborarrangements. For example, most of our employees in Europe are represented byworkers’ councils that have co-determination rights on any changes inconditions of employment, including salaries and benefits and staff changes,and may impede efforts to restructure our workforce. Although we believe thatwe have a good working relationship with our employees, a strike, work stoppage orslowdown by our employees or significant dispute with our employees couldresult in a significant disruption of our operations or higher ongoing laborcosts.

 

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***We work with dangerous materials that caninjure our employees, damage our facilities and disrupt our operations.***

 

Someof our operations involve the handling of hazardous materials that may pose therisk of fire, explosion, or the release of hazardous substances. Such eventscould result from terrorist attacks, natural disasters, or operationalfailures, and might cause injury or loss of life to our employees and others,environmental contamination, and property damage. These events might cause atemporary shutdown of an affected plant, or portion thereof, and we could besubject to penalties or claims as a result. A disruption of our operationscaused by these or other events could have a material adverse effect on ourresults of operations.

 
| **Item 1B.** | **UNRESOLVED  STAFF COMMENTS** |
|--------------|--------------------------------|

** **

None.

 
| **Item 2.** | **PROPERTIES** |
|-------------|----------------|

 

We operate manufacturingand other types of plants and facilities (including office, warehouse, andother service facilities) throughout the world. Some of these plants andfacilities are shared by both of our operating segments. We own all of ourmajor manufacturing facilities. Substantially all of our U.S. properties aresubject to security interests under our debtor-in-possession borrowingfacility. We consider our major operating properties to be in good operatingcondition and suitable for their current use. We believe that, after takingplanned expansion into account, the productive capacity of our plants and otherfacilities is generally adequate for current operations and foreseeable growth.

 

Our Grace Davisonoperating segment operates out of 40 facilities in the following regions:

 

| **Region**    | ** ** | **Number of********Facilities** |
|---------------|------------|---------------------------------|
| North America |       | 15                              |
| Europe        |       | 12                              |
| Latin America |       | 2                               |
| Asia Pacific  |       | 11                              |

 

Our largest Grace Davisonfacilities are located in Baltimore, Maryland; Lake Charles, Louisiana; andWorms, Germany. Our Grace Davison operating segment also operates sales officesand warehouses in various regions.

 

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Our Grace Construction Products operating segment operatesout of 55 facilities in the following regions:

 

 

| **Region**    | ** ** | **Number of** Facilities |
|---------------|------------|--------------------------|
| North America |       | 23                       |
| Europe        |       | 13                       |
| Latin America |       | 3                        |
| Asia Pacific  |       | 16                       |

 

Ourlargest GCP facilities are located in Cambridge, Massachusetts; Chicago,Illinois; and Slough, England.  Becauseof the nature of our GCP products, GCP requires a greater number of facilitiesto service our customers than Grace Davison. Also, these facilities aregenerally smaller and less capital intensive than our Grace Davison facilities.For information on our net properties and equipment by region and country, seedisclosure set forth in Item 8 (Financial Statements and Supplementary Data) inthe Financial Supplement under Note 20 (Operating Segment Information) to ourConsolidated Financial Statements which disclosure is incorporated herein byreference.

 
| **Item  3.** |   | **LEGAL  PROCEEDINGS** |
|--------------|--------|------------------------|

** **

**CHAPTER 11 PROCEEDINGS**

 

Disclosureprovided in this Report in Item 1 (Business) under the caption “Chapter 11Filing” and in Item 8 (Financial Statements and Supplementary Data) in theFinancial Supplement under Note 1 (Basis of Presentation and Summary ofSignificant Accounting and Financial Reporting Policies), under the caption“Voluntary Bankruptcy Filing,” and Note 2 (Chapter 11–Related Information) tothe Consolidated Financial Statements is incorporated herein by reference.

 

**ASBESTOS LITIGATION**

 

Disclosureprovided in this Report in Item 8 (Financial Statements and Supplementary Data)in the Financial Supplement under Note 2 (Chapter 11–Related Information) andNote 3 (Asbestos-Related Litigation) to the Consolidated Financial Statementsis incorporated herein by reference.

 

**ENVIRONMENTAL INVESTIGATIONS, CLAIMS AND CIVIL PROCEEDINGS**

 

Disclosureprovided in this Report in Item 1 (Business) under the caption “Environmental,Health and Safety Matters” and Item 8 (Financial Statements and SupplementaryData) in the Financial Supplement under Note 15 (Commitments and ContingentLiabilities), under the caption “Environmental Remediation,” to theConsolidated Financial Statements is incorporated herein by reference.

 

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TheEPA also has compiled for investigation a list of 245 facilities that at onetime used, stored, or expanded vermiculite concentrate that originated from theLibby vermiculite mine. Included in this list are 50 vermiculite expansionplants that Grace currently operates or formerly operated. The EPA has listed17 of these 50 sites as requiring additional action. Grace has conductedcorrective actions or investigations at six of these sites. The EPA filedproofs of claims for 9 of these sites (not including Minneapolis, MN and Libby,MT), and for three other sites never owned or operated by Grace.

 

Inaddition, another governmental agency commenced a separate investigation at 28of the 245 facilities, 23 of which Grace currently operates or formerlyoperated. During 2006 and 2007, health screenings for current and former Graceemployees and their household contacts commenced at four of these locations ata cost of approximately $3.4 million (including indirect costs). Grace’s December 31,2007 recorded environmental liability included this amount. Grace does not havesufficient information to determine whether this separate investigation islikely to result in any additional liability.

 

InFebruary 2000, a purported class action lawsuit was filed in the U.S.District Court for Montana, Missoula Division (*Tennison,et al. v. W. R. Grace & Co., et al*.) against Grace onbehalf of all owners of improved private real property situated within 12 milesof Libby, Montana. The action alleges that the class members have suffered harmin the form of environmental contamination and loss of property rightsresulting from Grace’s former vermiculite mining and processing operations. Thecomplaint seeks remediation, property damages, and punitive damages. This casehas been stayed as a result of the Chapter 11 filing.  However, as described in this Report in Item8 (Financial Statements and Supplementary Data) under Note 15 (Commitments andContingent Liabilities) under the caption “Vermiculite Related Matters—EPA CostRecovery Claim”, the EPA has been conducting remediation activities in andaround Libby, which include the remediation of private real property.

 

InOctober 2000, a purported class action lawsuit was filed in the U.S.District Court for the District of Minnesota, 4th Division (*Chase v. W. R. Grace & Co.-Conn*.)alleging loss of property values in the vicinity of the former Grace plant inMinneapolis, Minnesota that processed vermiculite from the Libby mine. Thiscase has been stayed as a result of the Chapter 11 filing.

 

TheEPA has completed a program for removing suspected vermiculite processingby-products from the former Minneapolis vermiculite expansion plant, from theyards and driveways of properties near the former plant, and from a municipalpark.  The Multi-Site SettlementAgreement, discussed below, includes all work completed by EPA in theMinneapolis area involving these properties.

 

TheEPA has designated Grace (together, in most cases, with many other companies)as a potentially responsible party, or PRP, with respect to paying the costs ofinvestigating and remediating pollution at various sites. As of December 31,2007, proceedings were pending with respect to approximately 20 sites as towhich Grace has 

 

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beendesignated a PRP by the EPA. U.S. law provides that all PRPs for a site may beheld jointly and severally liable for the costs of investigating and remediatingthe site. Grace is also conducting investigatory and remediation activities atsites under the jurisdiction of state and/or local authorities. During theChapter 11 proceeding, Grace has not been participating (except in a limitednumber of special cases) in the joint funding of investigation and remediationat non-owned sites where Grace is a PRP.

 

During the last quarterof 2007, Grace filed a motion with the Bankruptcy Court for approval of aMulti-Site Settlement Agreement that Grace has executed with the U.S.Government, on behalf of EPA and other federal agencies, with respect to 38sites.  Under this agreement, Grace wouldpay approximately $44 million to the U.S. Government and other parties in settlementof 35 of these sites.  In return, theU.S. Government would agree not to take action against Grace under theComprehensive Environmental Response, Compensation, and Liability Act withrespect to such sites.  Grace intends to separately fund or carry outremediation at the three remaining sites, including remediation relating toGrace’s former vermiculite mining site in Libby, Montana.

 

**MONTANA CRIMINAL PROCEEDING**

 

Disclosureprovided in this Report in Item 8 (Financial Statements and Supplementary Data)in the Financial Supplement under Note 15 (Commitments and ContingentLiabilities), under the caption “Vermiculite Related Matters—Montana CriminalProceeding,” to the Consolidated Financial Statements is incorporated herein byreference.

 

**LITIGATION RELATED TO FORMER PACKAGING AND MEDICAL CAREBUSINESSES**

 

Disclosureprovided in this Report in Item 8 (Financial Statements and Supplementary Data)in the Financial Supplement under Note 2 (Chapter 11—Related Information),under the caption “Litigation Proceedings in Bankruptcy Court,” to the ConsolidatedFinancial Statements is incorporated herein by reference.

 

**TAX CLAIMS**

 

Disclosureprovided in this Report in Item 8 (Financial Statements and Supplementary Data)in the Financial Supplement under Note 4 (Income Taxes) to the ConsolidatedFinancial Statements is incorporated herein by reference.

 

### **ERISALAWSUITS**

### ** **

InJune 2004, a purported class action complaint (*Evans v. Akers et al.*) was filed in U.S. District Court forthe District of Massachusetts against the Board of Directors, certain current andformer Grace officers and employees, and others, relating to the Grace 401(k) Savingsand Investment Plan, also known as the S&I Plan. The *Evans* complaint alleges that the declinein the price of Grace common stock from July 1999 

 

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throughFebruary 2004 resulted in significant losses to S&I Planparticipants.  The *Evans* 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*Evans* complaint seeks compensatory damages for the S&I Plan fromthe defendants.

 

InOctober 2004, a purported class action complaint (*Bunch et al. v. W. R. Grace & Co. et al.*),also related to the S&I Plan, was filed in the U.S. District Court for theEastern District of Kentucky against Grace, the Grace Investment and BenefitsCommittee, the Board of Directors, certain current and former Grace officersand employees, and others. The complaint alleges that Grace and its investmentadvisors breached fiduciary duties under ERISA by selling Grace common stockfrom the S&I Plan at a distressed price. The complaint further alleges thatGrace breached fiduciary duties under ERISA by hiring State Street Bank andTrust Company, the investment manager for the S&I Plan that Grace retainedin December 2003, to rapidly liquidate all of the employees’ Grace commonstock investment at an artificially low sales price.

 

In2005, the Kentucky District Court transferred the *Bunch* action to the Massachusetts District Court and thatcourt consolidated into one case both the *Bunch*action and the *Evans* action.

 

InDecember 2006, the Massachusetts District Court dismissed the *Evans* claims, on grounds that the *Evans* plaintiffs lacked standing to bringsuit.   The *Evans* plaintiffs’ petitioned the U.S.Court of Appeals for the First Circuit to reverse the District Court’sdismissal of their claims and on February 7, 2008, the First Circuit heardoral argument regarding their appeal.

 

OnJanuary 30, 2008, the court ruled in favor of the defendants on the *Bunch*action, holding that State Streetand Grace did not breach their fiduciary duties under ERISA.  On February 13,2008, the *Bunch* plaintiffsappealed the Massachusetts District Court’s decision to the First Circuit.  That appeal is pending.

 

OnFebruary 6, 2008, a purported class action complaint (*Siamis v Akers et al.*) was filed in theMassachusetts District Court by the plaintiff’s counsel in the *Evans* action but with a differentplaintiff.  The *Siamis* complaint asserts the sameclaims previously asserted in the *Evans*complaint.

 

Graceexpects that it would have an obligation to indemnify the other defendants forany liability resulting from this litigation. Grace has $50 million of employers’ fiduciary liability insurancecoverage that Grace believes would be available to pay liabilities arising outof these lawsuits.  Since all Grace employees who had interests in theS&I Plan during the relevant periods are members of the purported class andMessrs. Corcoran, McGowan, Norris, Poling, Shelnitz and Tarola hadinterests in the S&I Plan during these periods, they have interests in thislitigation that may be adverse to Grace.

 

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** **

**OTHER CLAIMSRECEIVED PRIOR TO THE CHAPTER 11 BAR DATE**

** **

Disclosureprovided in this Report in Item 8 (Financial Statements and Supplementary Data)in the Financial Supplement under Note 2 (Chapter 11–Related Information) underthe caption “Claims Filings” to the Consolidated Financial Statements isincorporated herein by reference.

 
| **Item 4.** | ** ** | **SUBMISSION OF MATTERS TO A VOTE OF SECURITY  HOLDERS** |
|-------------|------------|----------------------------------------------------------|

 

This Item isinapplicable, as no matters were submitted to a vote of our security holdersduring the fourth quarter of 2007.

** **

**36**

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**PART II**

** **
| **Item 5.** |   | **MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED  SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES** |
|-------------|--------|------------------------------------------------------------------------------------------------------------------------|

 

Exceptas provided below, the disclosure required by this Item appears in theFinancial Supplement, under the heading “Selected Financial Data” opposite thecaption “Other Statistics — Common shareholders of record,” and in this Reportin Item 8 (Financial Statements and Supplementary Data) in the FinancialSupplement in Note 16 (Shareholders’ Equtiy (Deficit)) and Note 22 (QuarterlySummary and Statistical Information (Unaudited)), opposite the caption “Marketprice of common stock,” to the Consolidated Financial Statements and isincorporated herein by reference.

 

OnMarch 31, 1998, we paid a dividend of one Preferred Stock Purchase Righton each share of Grace common stock. Subject to our prior redemption for $.01per right, rights will become exercisable on the earlier of:

 

·                  10 days after an acquiring person, comprisedof an individual or group, has acquired beneficial ownership of 20% or more ofthe outstanding Grace common stock or

 

·                  10 business days (or a later date fixed bythe Board of Directors) after an acquiring person commences (or announces theintention to commence) a tender offer or exchange offer for beneficialownership of 20% or more of the outstanding Grace common stock.

 

Untilthese events occur, the rights will automatically trade with the Grace commonstock, and separate certificates for the rights will not be distributed. Therights do not have voting or dividend rights.

 

Generally,each right not owned by an acquiring person:

 

·                  will initially entitle the holder to buy fromGrace one hundredth of a share of the Grace Junior Participating PreferredStock, at an exercise price of $100, subject to adjustment;

 

·                  will entitle such holder to receive uponexercise, in lieu of shares of Grace junior preferred stock, that number ofshares of Grace common stock having a market value of two times the exerciseprice of the right; and

 

·                  may be exchanged by Grace for one share ofGrace common stock or one hundredth of a share of Grace junior preferred stock,subject to adjustment.

 

Generally,if there is an acquiring person and we are acquired, each right not owned by anacquiring person will entitle the holder to buy a number of shares of commonstock of the acquiring company having a market value equal to twice theexercise price of the right.

 

Eachshare of Grace junior preferred stock will be entitled to a minimumpreferential quarterly dividend payment of $1.00 per share but will be entitledto an aggregate 

 

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dividendequal to 100 times the dividend declared per share of Grace common stockwhenever such dividend is declared. In the event of liquidation, holders ofGrace junior preferred stock will be entitled to a minimum preferentialliquidation payment of $100 per share but will be entitled to an aggregatepayment equal to 100 times the payment made per share of Grace common stock.Each share of Grace junior preferred stock will have 100 votes, voting togetherwith the Grace common stock. Finally, in the event of any business combination,each share of Grace junior preferred stock will be entitled to receive anamount equal to 100 times the amount received per share of Grace common stock.These rights are protected by customary antidilution provisions.

 

Theterms of the rights may be amended by the Board of Directors without theconsent of the holders of the rights. The rights, which will remain outstandingunder the proposed plan of reorganization, are currently scheduled to expire onMarch 31, 2008.  Prior to expirationof the rights, Grace intends to amend the terms of the rights to extend theexpiration date of the rights to March 31, 2018.

 

Thissummary of the rights does not purport to be complete and is qualified in itsentirety by reference to the Rights Agreement, which has been filed with theSEC.

 
| **Item 6.** |   | **SELECTED FINANCIAL DATA** |
|-------------|--------|-----------------------------|

 

Thedisclosure required by this Item appears in the Financial Supplement under theheading “Selected Financial Data” which disclosure is incorporated herein byreference.

 
| **Item 7.** |   | **MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL  CONDITION AND RESULTS OF OPERATIONS** |
|-------------|--------|-------------------------------------------------------------------------------------------------|

 

Thedisclosure required by this Item appears in the Financial Supplement under theheading “Management’s Discussion and Analysis of Financial Condition andResults of Operations” which disclosure is incorporated herein by reference.

 
| **Item 7A.** | **QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT  MARKET RISK** |
|--------------|-----------------------------------------------------------------|

 

Thedisclosure required by this Item appears in the Financial Supplement under theheading “Management’s Discussion and Analysis of Financial Condition andResults of Operations—Market Risk” which disclosure is incorporated herein byreference.

 
| **Item 8.** |   | **FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA** |
|-------------|--------|-------------------------------------------------|

 

Thedisclosure required by this Item appears in the Financial Supplement whichdisclosure is incorporated herein by reference.

 

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| **Item 9.** |   | **CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON  ACCOUNTING AND FINANCIAL DISCLOSURE** |
|-------------|--------|-------------------------------------------------------------------------------------------|

 

None.

 
| **Item 9A.** | **CONTROLS AND PROCEDURES** |
|--------------|-----------------------------|

 

Exceptas provided below, the disclosure required by this Item appears in theFinancial Supplement under the heading “Management’s Report on FinancialInformation and Internal Controls” which disclosure is incorporated herein byreference.

 

Therewas no change in Grace’s internal control over financial reporting during thequarter ended December 31, 2007 that has materially affected, or isreasonably likely to materially affect, Grace’s internal control over financialreporting.

 
| **Item 9B.** | **OTHER INFORMATION** |
|--------------|-----------------------|

 

None.

** **

**39**

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** **

**PART III**

** **
| **Item 10.** | **DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE** |
|--------------|------------------------------------------------------------|

 

Ourcurrent directors and executive officers are listed below. Our Certificate ofIncorporation provides for the division of the Board of Directors into threeclasses, each to serve for a three-year term or until their respectivesuccessors are elected.  In view of theChapter 11 filing, the directors are continuing to serve beyond the expirationof their respective terms. Executive officers are elected to serve until thenext annual meeting of the Board of Directors or until their respectivesuccessors are elected.

 
| **Name and Age**            | ** ** | **Office**                                                        | ** ** | **First  Elected** |
|-----------------------------|------------|-------------------------------------------------------------------|------------|--------------------|
| John F. Akers (73)          |       | Class II Director                                            |       | 5/09/97            |
| H. Furlong Baldwin (76)     |       | Class I Director                                             |       | 1/16/02            |
| Ronald C. Cambre (69)       |       | Class III Director                                           |       | 9/01/98            |
| Alfred E. Festa (48)        |       | Class II Director                                            |       | 9/08/04            |
|                        |       | Chairman of the Board                                             |       | 1/1/08             |
|                        |       | President and Chief Executive Officer                             |       | 6/01/05            |
| Marye Anne Fox (60)         |       | Class I Director                                             |       | 5/10/96            |
| John J. Murphy (76)         |       | Class II Director                                            |       | 5/09/97            |
| Paul J. Norris (60)         |       | Class III Director                                           |       | 1/01/99            |
| Christopher J. Steffen (66) |       | Class I Director                                             |       | 11/01/06           |
| Mark E. Tomkins (52)        |       | Class III Director                                           |       | 9/06/06            |
| Thomas A. Vanderslice (76)  |       | Class I Director and Lead Independent Director               |       | 5/10/96            |
| D. Andrew Bonham (47)       |       | Vice President & President, Grace  Construction Products |       | 9/11/07            |
| William M. Corcoran (58)    |       | Vice President, Public and Regulatory Affairs                     |       | 6/01/99            |
| W. Brian McGowan (58)       |       | Senior Vice President, Administration                             |       | 7/09/98            |
| Gregory E. Poling (52)      |       | Vice President & President, Grace Davison                |       | 3/03/05            |
| Mark A. Shelnitz (49)       |       | Vice President, General Counsel & Secretary              |       | 4/27/05            |
| Robert M. Tarola (57)       |       | Senior Vice President & Chief Financial  Officer         |       | 5/11/99            |

 

***Mr. Akers*** served asChairman of the Board and Chief Executive Officer of International BusinessMachines Corporation from 1985 until his retirement in 1993. He is also adirector of Lehman Brothers Holdings, Inc.

 

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***Mr. Baldwin*** served as adirector of Mercantile Bankshares Corporation from 1970 to 2003, as Chairman ofthe Board from 1984 to 2003 and as President and Chief Executive Officer from1976 to 2001.  Mr. Baldwin is Chairmanof NASDAQ Stock Market, Inc., and is a director of Platinum UnderwritersHoldings, Ltd. and Allegheny Energy Inc.

 

***Mr. Cambre*** is retiredChairman of the Board and CEO of Newmont Mining Corporation. He joined Newmontas Vice Chairman and CEO in 1993 and retired as CEO in 2000 and as Chairman in2001. He is also a director of Cleveland-Cliffs Inc. and McDermottInternational, Inc.

 

***Mr. Festa*** joined Gracein 2003 and served as President and Chief Operating Officer until he becameChief Executive Officer in 2005 and Chairman in January 2008.  Prior to joining Grace, Mr. Festa was apartner of Morganthaler Private Equity Partners, a venture capital and buyoutfirm from 2002 to 2003.  From 2000 to2002, he was with ICG Commerce, Inc., a private company providing on-lineprocurement services, where he last served as President and Chief ExecutiveOfficer. For two years prior to that, he served as Vice President and GeneralManager of AlliedSignal’s performance fibers business.

 

***Dr. Fox*** has beenChancellor of the University of California San Diego and DistinguishedProfessor of Chemistry at that institution since 2004. She was Chancellor ofNorth Carolina State University from 1998 to 2004. She is also a director ofBoston Scientific Corporation and Red Hat, Inc.

 

***Mr. Murphy*** served asChairman of the Board of Dresser Industries, Inc., a supplier of productsand technical services to the energy industry, until 1996. From 1997 to 2000,he was a Managing Director of SMG Management L.L.C., a privately ownedinvestment group. Mr. Murphy is also a director of Coastal Energy Company.

 

***Mr. Norris*** was activelyengaged in Grace’s business from 1998 until his retirement as Chief ExecutiveOfficer in 2005.  Since his retirement, Mr. Norrishas provided consulting services to Grace. He is also a director of FMC Corporation and Sealy Corp. He performsadvisory services for Kohlberg Kravis Roberts & Co., currently themajority shareholder of Sealy Corp.

 

***Mr. Steffen*** most recentlyserved as Vice Chairman of Citicorp and its principal subsidiary, CitibankN.A.  Since his retirement in 1996, hehas been a consultant to a number of companies and public accounting firms andserved on committees advising the Financial Accounting Standards Board. Mr. Steffenis also a director of Accelrys, Inc., ViaSystems, Inc. and severalprivate companies in which he has an ownership stake.

 

***Mr. Tomkins***  is currently serving as interim CFO forRenewable Chemicals Corporation, a privately held manufacturer of biointermediates for replacement of petroleum products in certain chemicalcompounds.  He served as SeniorVice President and Chief Financial Officer of Innovene, a petrochemical and oilrefining 

 

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companythat is now part of the INEOS Group, from 2005 until January 2006.  He served as CFO of Vulcan Materials Companyfrom 2001 to 2005.  Mr. Tomkins is amember of the Board of Directors of CVR Energy, Inc., a publicly held oilrefining company.

 

***Mr. Vanderslice*** served asChairman and Chief Executive Officer of M/A-COM, Inc., a designer andmanufacturer of radio frequency and microwave components, devices andsubsystems for commercial and defense applications, from 1989 until 1995. He iscurrently a private investor. As Lead Independent Director, Mr. Vanderslicepresides at all executive sessions of the Board.

 

***Messrs. Corcoran, McGowan, Poling,Shelnitz and Tarola*** have been actively engaged in Grace’sbusiness for the past five years. Mr. Tarola is a director of 14registered mutual funds sponsored by Legg Mason, Inc. Mr. Poling is adirector of Foamex International, Inc.

 

***Mr. Bonham***joined Grace in2005 as vice president and general manager of Grace Construction Products’European operations.  Prior to joiningGrace, he was president and general manager, from 2004 to 2005, and vicepresident and general manager, from 2002 to 2004, of Invensys ControlsAmericas.  Before joining InvensysControls, he held positions of increasing responsibility at General Electricand Honeywell.

 

**Audit Committee**

 

Wehave a standing Audit Committee established in accordance with the provisionsof the Securities Exchange Act of 1934, as amended.  The Committee members are John F. Akers, H.Furlong Baldwin, Ronald C. Cambre, Marye Anne Fox, John J. Murphy, ChristopherJ. Steffen, Mark E. Tomkins and Thomas A. Vanderslice, each of whom meets theindependence standards of the SEC and New York Stock Exchange.  Mr. Murphy serves as Chair of the AuditCommittee. The Board of Directors has determined that all Audit Committeemembers are audit committee financial experts as defined by SECregulations.  A complete description ofthe responsibilities of the Audit Committee is set forth in the Grace AuditCommittee Charter which is available on the Internet atwww.grace.com/About/Leadership/Governance/.

 

**Other Committees**

 

Wehave standing Nominating and Governance, Compensation and CorporateResponsibility Committees. The members of each of these committees are John F.Akers, H. Furlong Baldwin, Ronald C. Cambre, Marye Anne Fox, John J. Murphy,Christopher J. Steffen, Mark E. Tomkins and Thomas A. Vanderslice, each of whommeets the independence standards of the New York Stock Exchange. Mr. Vandersliceserves as Chair of the Nominating and Governance Committee, Mr. Akersserves as Chair of the Compensation Committee and Dr. Fox serves as Chairof the Corporate Responsibility Committee. A complete description of the responsibilities of the Board committeesis set forth in their respective committee charters which are available on theInternet at www.grace.com/About/Leadership/Governance/.

 

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**Section 16(a) Beneficial Ownership ReportingCompliance**

 

UnderSection 16 of the Securities Exchange Act of 1934, as amended, ourdirectors, certain of our officers, and beneficial owners of more than 10% ofthe outstanding Grace common stock are required to file reports with the SECconcerning their ownership of and transactions in Grace common stock or otherGrace securities; these persons are also required to furnish us with copies ofthese reports. Based upon the reports and related information furnished to us,we believe that all such filing requirements were complied with in a timelymanner during and with respect to 2007.

 

**Code of Ethics for Principal Officers**

 

TheBoard of Directors and the Audit Committee have adopted Business Ethics andConflicts of Interest policies, which apply to all of our directors, officers,and employees, including our principal officers. These policies are accessiblethrough our Internet website, www.grace.com/About/Leadership/Governance/, andare available in hard copy, free of charge, by contacting Grace ShareholderServices at 410-531-4167.  We granted nowaivers to these policies during 2007. We intend to promptly post on ourwebsite any amendments or waivers to these policies affecting any principalexecutive officer, principal financial officer, principal accounting officer orcontroller, or persons performing similar functions.

 
| **Item 11.** | **EXECUTIVE COMPENSATION** |
|--------------|----------------------------|

 

**Compensation Discussion and Analysis**

 

***Overview***

 

TheBoard of Directors has designated seven Grace officers (including the executiveofficers named in the Summary Compensation Table) as “executive officers.”  The executive officers include the ChiefExecutive Officer (CEO), Chief Financial Officer and vice presidentswho are in charge of operating segments or principal functions or who havepolicy-making authority for Grace. The Board of Directors has delegated authority for administering thecompensation program for executive officers and other members of seniormanagement to the Compensation Committee. The Board has appointed all of the independent members of the Board toserve as members of the Compensation Committee.

 

Acomplete description of the responsibilities of the Compensation Committee isset forth in the Grace Compensation Committee Charter which is available on theInternet at www.grace.com/About/Leadership/Governance/.  The Compensation Committee and the Board reviewand revise the charter as necessary.  Inthis Compensation Discussion and Analysis, unless the context otherwiserequires, the terms “we”, “our” and “the committee” refer to the CompensationCommittee.

 

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We,the committee, are responsible for reviewing and approving all executiveofficers’ compensation, including:

 

·                  base salary;

 

·                  annual incentive compensation;

 

·                  long-term incentive compensation;

 

·                  employment agreements;

 

·                  severance arrangements;

 

·                  change-in-control agreements; and

 

·                  any special or supplemental benefits.

 

Wealso review and approve all corporate goals and objectives used in determiningthe compensation of each executive officer. We evaluate each executive officer’s performance in light of those goalsand objectives and we approve each executive officer’s compensation based onthis evaluation.  In determiningthe long-term incentive component of an executive officer’s compensation, weconsider the value of similar incentive awards to executive officers withsimilar titles at comparable companies and the awards given to the executiveofficer in previous years.  We also approvethe annual and long-term incentive programs applicable to other salariedpersonnel in which the executive officers participate.

 

Wereceive advice and legal and administrative assistance from the Grace humanresources department and legal services group in meeting ourresponsibilities.  We also have authorityto retain advisors from outside of Grace. During 2007, we used the services of Watson Wyatt Worldwide, a humanresources consulting firm, and we expect to continue working with Watson Wyattduring 2008.  We instructed Watson Wyattto compile competitive compensation data and, based upon such data, to recommendranges of annual and long-term compensation that are consistent with ourcompensation philosophy and objectives as discussed below.  We also asked Watson Wyatt to providesuggestions and alternatives regarding the form of various elements ofexecutive compensation.  We expect WatsonWyatt and Grace executive officers, including the CEO, General Counsel andSenior Vice President of Administration, and their respective subordinates, tomeet, exchange information and otherwise cooperate in the performance of theirrespective duties outside committee meetings. Watson Wyatt also provides consulting services to Grace in connectionwith its employee benefit plans.

 

***Executive Compensation Philosophy andObjectives***

 

###### ***General***

###### * *

Thekey objective of the Grace executive compensation program is to enable Grace tocompete effectively with other firms in attracting, motivating and retainingthe executives that Grace needs to ensure its future growth and businesssuccess.  We intend the incentivecompensation portion of the program to align closely the financial interests ofGrace executives with those of Grace’s stakeholders (including creditors,security holders and others with an interest in the Chapter 11proceedings).  Because senior 

 

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executiveshave a substantial ability to influence business success, we believe that theportion of compensation that is at-risk based on corporate performance shouldincrease as the level of responsibility of the executive increases.  We also expect the executive compensationprograms to be consistent with a culture of ethical conduct, personal integrityand compliance with Grace policies and applicable law.  We require executives to set an example foremployees and other Grace business associates in emphasizing the Grace CoreValues in their daily business conduct. The Grace Core Values consist of a commitment to teamwork, performance,integrity, speed and innovation, and are the foundation of the Grace corporateculture.

 

Theprogram is designed to reward executives for the achievement of corporate goalsand objectives, taking into account both individual performance andcontributions to the success of the overall management team.  The individual performance evaluation isbased on our assessment of an executive officer’s leadership, technical skill,management and operational performance, and potential to contribute to Grace’sfuture success.  In evaluating executiveofficers other than the CEO, we receive substantial input from the CEO.  The CEO proposes compensation levels for theother executive officers and, although not a member of the committee, attendsour meetings and participates in our deliberations regarding compensationlevels for the other executive officers, but is excused from deliberationsregarding his own compensation and executive sessions.  Although we have not received such a request,at the request of the CEO, we would very likely hold a special meeting of thecommittee.

 

Oncewe have completed an evaluation of an executive’s overall performance, we reviewthe executive’s existing compensation and compensation potentially payable tothe executive.  An executive’soutstanding equity-based awards are not considered in setting futurecompensation.  We then consult withWatson Wyatt for an assessment of the competitiveness of Grace executiveofficer compensation relative to certain benchmark companies in the chemicals,materials and specialty chemicals industry, that we deem our peer group andrelative to certain broad industry data. We selected the benchmark companies as our peer group based upon ourjudgment regarding the likelihood that they would compete with us for executivetalent and the availability of public information regarding their compensationpractices.  We periodicallyreview the composition of the peer group to ensure that it remainsrelevant.  For 2007, the peer groupconsisted of:

 
| Albemarle         |   | Hercules                                     |
|-------------------|--------|----------------------------------------------|
| Cabot             |   | International  Flavors & Fragrances |
| Eastman  Chemical |   | PPG  Industries                              |
| EcoLab            |   | Rohm &  Haas                        |
| Fuller  (H.B.)    |   | Sigma-Aldrich                                |

 

Thebroad industry data that we generally review is included in studies produced byMercer, Towers Perrin, Hewitt and Watson Wyatt for any given compensation year.  The chemicals and non-durable goodssections of such surveys were used, in each case, appropriately scoped toreflect Grace’s revenues. This data is used as a secondary reference forexecutive officer compensation, largely as a check on the peer group levels, aswell as to determine if there are any identifiable non-industry trends incompensation.

 

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Weintend that the annual compensation paid to Grace executives (consisting ofsalary plus annual incentive compensation) fall within a range thatapproximates the 50th percentile, and that long-term incentive compensationfall within a range that approximates the 60th percentile, of the practices ofthe peer group companies and broad industry data when performance objectivesare achieved.  We selected thesepercentile targets because they are generally consistent with the historicalpractices of the peer group.  In applyingthese targets, we do not base our decision on a mathematical analysis of theavailable data; rather, we use our judgment after considering all availableinformation.  If performanceobjectives are exceeded, we believe that incentive compensation should be abovethese levels, and when performance objectives are not achieved, incentivecompensation should be below these levels. The bias toward incentive compensation reflected in these percentages isin keeping with our intention to align executive and stakeholder interests.

 

SinceGrace’s Chapter 11 filing, we have not included Grace common stock and stockoptions in the executive compensation program. Accordingly, Grace incentive compensation programs are currently 100%cash-based, although equity incentives awarded prior to 2002 remainoutstanding.  We have requested that theCorporate Secretary inform the committee if an executive officer wishes toenter into any transaction involving Grace equity securities.  Following Grace’s emergence from Chapter 11,we will consider including equity incentives in the executive compensationprogram.

 

Webelieve that income before interest and taxes is generally the best indicatorof the performance of the Grace business for incentive compensationpurposes.  Income before interest andtaxes includes the factors that the executive team generally has the ability toaffect and excludes the cost of capital and tax rates that we believe aregenerally unrelated to business performance or management control.  However, this income measure is significantlyaffected by other factors that Grace executives are generally unable toinfluence such as the substantial costs of the Chapter 11 proceedings, legacyliabilities, income from insurance settlements and pension income andexpense.  As a result, our performancemetric for incentive compensation purposes is pre-tax income from coreoperations (calculated as described in “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations—Summary Financial Information andMetrics” in the financial supplement) adjusted to eliminate the effect of:  certain unusual or one-time events; changesin pension expense (related to core operations) and Long Term IncentiveProgram, or LTIP, expense from year to year; and, for the LTIP, the effect ofmajor acquisitions or divestments.  Wegenerally refer to this performance metric as pre-tax income from coreoperations as adjusted.  Grace coreoperations are comprised of the financial results of Grace Davison, GraceConstruction Products, and the costs of corporate activities that directly orindirectly support their business operations. Excluded from pre-tax income from core operations and pre-tax incomefrom core operations as adjusted are all other events and transactions notdirectly related to the generation of operating revenue or the support of ourcore operations.

 

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*            Chief Executive Officer*

 

Ourprocess for determining the compensation of the CEO is similar to the processwe apply to other executive officers.  Wereview and approve corporate goals and objectives used in determining thecompensation of the CEO.  We evaluate theCEO’s performance in light of those goals and objectives and have soleauthority to determine the CEO’s compensation based on this evaluation subjectto the terms of his employment agreement, that are discussed below in thisCompensation Discussion and Analysis and under the Summary Compensation Tableand Potential Payments Upon Termination or Change-In-Control Table.  The CEO plays no part in our deliberations orapproval of his compensation.

 

Webelieve the CEO’s compensation should be substantially higher than thecompensation of other executive officers because the CEO is uniquely positionedto influence all aspects of Grace’s operations and performance and theresulting return to our stakeholders.  Inaddition, we believe there exists a robust competition for effective CEO talentamong companies the size of Grace and, in this environment, a competitivecompensation package is essential for retention.  Our view is consistent with the practices ofthe peer group companies and the broad industry data that we have reviewed.

 

***Base Salary***

 

To ensure comparability with other companies, as well as consistencyand uniformity within Grace, all management positions have been assigned tosalary ranges based upon broad industry data. Individual salaries and salary increases for executive officers are setwithin the salary ranges based on the median annual base salaries paid toindividuals who hold comparable positions at the peer group companies, salarylevels of peers and subordinates within Grace, individual performance and theamount budgeted for salary increases. Although these factors apply to Mr. Festa his base salary is alsosubject to the terms of his employment agreement.  Grace executives are generally eligible forannual salary reviews.

 

For 2007, Grace establisheda guideline for base salary merit increases applicable to all Grace U.S.salaried employees of 3.7%.  Gracedetermined the amount of the guideline based on a review of projected wageincreases in the U.S. chemical industry and certain additional data applicableto the geographic regions in which Grace has its major operations.  Base salary merit increases for the Graceexecutive officers listed below in the Summary Compensation Table, referred toherein as named executive officers, other than Mr. Festa, were generallyin line with those of other salaried employees, ranging from 3.3% to 8.7%.  We increased Mr. Festa’s base salary by11.1% to reflect our view of his individual contribution to the performance ofGrace during 2006 and 2007.

 

***Annual Incentive Compensation***

 

The Annual IncentiveCompensation Program, or AICP, is a cash-based pay-for-performance incentiveprogram.  Its purpose is to motivate andreward executive officers, and other upper- and middle-level employees, for theircontributions to Grace 

 

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performance and aligntheir financial interests with those of Grace stakeholders by making asignificant portion of their annual compensation variable and dependent uponGrace’s annual financial performance. The amount of an individual incentive award payment under the AICP isbased upon:

 

·                  the individual’s annual incentive targetamount;

 

·                  the change in Grace pre-taxearnings from core operations as adjusted; and

 

·                  the individual’s personal performance.

 

The AICP targets for thenamed executive officers (other than Mr. Festa) for 2007 range from 65% to80% of base salary and actual awards may range from $-0- to an amount equal totwice the target amount, based on business and individual performance.  The AICPtargets for executive officers are generally set within the target range basedon the median annual bonus paid to individuals who hold comparable positions atthe peer group companies.  Although thesefactors also apply to Mr. Festa, his AICP target is also subject to theterms of his employment agreement, which requires a minimum AICP target of 100%of base salary.  For 2007, Mr. Festa’sAICP target is 100% of base salary.

 

For 2007, the targetperformance objective was an 8% increase, and the maximum compensableperformance objective was a 35% increase, in pre-tax earnings from core operationsas adjusted over pre-taxearnings from core operations for 2006.  The targetperformance objective reflects our collective view of good performance by Gracebased upon Grace’s historical performance and the long-term historicalperformance of the peer group. Generally, no awards are earned for any year if pre-taxearnings from core operations as adjusted is less than 80% of the prior year’s pre-taxearnings from core operations; provided however, that we have discretion to establishor increase the size of the incentive pool even if performance measures are notachieved.  We usually make AICP awardsduring the first quarter for the current compensation year.

 

Based on 2007 operating performance, the aggregate AICP incentive poolwas established at 127.0% of the targeted awards.  Mr. Festa’s 2007 AICP award payment (159% ofhis target award) reflects his individual contribution to the performance ofGrace for the year in the judgment of the committee.  Mr. Tarola’s 2007 AICP award payment wasgenerally in line with the incentive pool. Mr. Poling’s 2007 AICP award payment (155% of his target award) reflectsthe increased responsibility he assumed during the year with the transfer ofthe Darex product line to Grace Davison as well as his individual contributionto the performance of Grace for the year in the judgment of the committee.  Mr. Bonham’s 2007 AICP award payment (176% ofhis target award) reflects the increased responsibility he assumed as a resultof his promotion to President, Grace Construction Products as well as hisindividual contribution to the performance of Grace for the year in thejudgment of the committee.  Mr.Shelnitz’s 2007 AICP award payment (153% of his target award) reflects thecommittee's view of his individual performance within the context of Grace’schallenging legal environment.

 

***Long-Term Incentive Compensation***

 

TheLTIPs are cash-basedincentive programs.  Their purpose is tomotivate and reward approximately 225 upper-level Grace employees, includingthe executive officers, for their contributions to Grace performance over amulti-year period and align their financial interests with those of Gracestakeholders by making a significant portion of their total compensationvariable and dependent upon Grace’s sustained financial performance.  TheLTIP target opportunities for these employees are based on the 60thpercentile of long-term compensation opportunities of individuals who holdcomparable positions at the peer group companies (in the case of the executiveofficers) and broad industry data for other participants.  Due to our Chapter 11 

 

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status,we view thecash-based LTIP as a substitute for the equity incentive programs that otherpublic companies generally make available to their senior executives.

 

TheBankruptcy Court has approved the LTIPs for each of the 2005-2007, 2006-2008and 2007-2009 performance periods. Awards under these LTIPs are payable 100% in cash, based on the extentto which Grace achieves certain performance targets.  These LTIP payouts are based on the compoundannual growth in our pre-taxincome from core operations as adjusted over the performance periodusing results for the year prior to the first year of the performance period asthe baseline.  We generally refer to thisgrowth objective as a CAGR.  For theseLTIPs, the CAGR objective is 6% and the maximum compensable CAGR objective is25%.  The CAGR objective reflects our collective view ofgood performance by Grace based upon Grace’s historical performance and thelong-term historical performance of the peer group.  The LTIP target is lowerthan the AICP target because the LTIPs are designed to incentivize sustainedgrowth over a long-term period, which we believe is generally more difficult toachieve than annual performance targets.  The LTIP awardpayouts may rangefrom $-0- to an amount equal to twice the target amount, based onGrace’s operating performance.  No award payouts are earned under theseLTIPs if the CAGR for the performance period is zero or negative.

 

During 2007, we reviewedthe LTIP awards for our named executive officers, other than Mr. Festa,and determined that the outstanding LTIP awards for previous years weresignificantly below the 60th percentile of the practices of the peer groupcompanies and broad industry data.  Inorder to more closely align the long-term compensation of the named executiveofficers with the long-term compensation of similar executives at the peergroup companies and broad industry data, we made additional awards to the namedexecutive officers, other than Mr. Festa, under the 2005 and 2006 LTIPs.

 

Webelieve that the LTIP awards encourage executive retention because the right toany pending payment under an LTIP is generally subject to forfeiture if theexecutive ceases employment with us prior to age 62.  We generally grant LTIP awards during the first yearof the performance period.

 

***Pension Plan/Supplemental ExecutiveRetirement Plan***

 

Asdescribed below under “Pension Benefits,” payments under Grace’s tax-qualifiedpension plan are calculated using annual compensation, including base salaryand AICP awards, and years of credited Grace service.  We believe that retirement compensation thatincreases with increases in years of service and annual compensation is aneffective recruiting and retention tool for our employees, including ourexecutive officers.  For 2007, federalincome tax law limits to $225,000 the annual compensation on which benefitsunder the tax-qualified pension plan may be based.  As a result, we have implemented aSupplemental Executive Retirement Plan, generally referred to as a SERP, thatcurrently applies to approximately 70 upper-level employees, including the executiveofficers, whose annual compensation exceeds that amount, under whicheach such employee will receive the full pension to which that employee wouldbe entitled in the absence of the limitations described above and other limitationsimposed under federal income tax law. The SERP is unfunded and is not qualified for tax purposes.

 

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***Savings and Investment Plan/ReplacementPayment Program***

 

Wegenerally offer a tax-qualified 401(k)-type Savings and Investment Plan, orS&I Plan, to employees under which they may save a portion of their annualcompensation in investment accounts on a pre- or post- tax basis.  Grace currently matches 100% of employeesavings under the plan up to six percent of the employee’s base salary andannual incentive compensation.  Webelieve that a 401(k)-type plan with a substantial company match that increases(in dollar amount, not percentage of compensation) with the level ofparticipation in the plan and increases in the employee’s annual compensationis an effective recruiting and retention tool for our employees, including ourexecutive officers.  For 2007, federalincome tax law limits the total contributions, which include an employee’scontribution plus the employer’s matching contributions, that can be made to anemployee’s 401(k) plan account to $45,000 and qualifying annualcompensation for 401(k) plan purposes to $225,000.  As a result, we have implemented an S&IPlan Replacement Payment Program that currently applies to approximately 75 of our employees, including our executiveofficers, whose annual compensation exceeds $225,000 under whicheach such employee will receive the full Grace matching payments to which thatemployee would be entitled in the absence of the limitations described aboveand other limitations imposed under federal income tax law.

 

***Executive Personal Benefits***

 

We believe thatexecutives generally should not be treated differently than the generalemployee population when it comes to personal benefits and therefore, we havelimited executive personal benefits.  During2007, these personal benefits for the named executive officers were generallylimited to financial counseling and tax preparation services limited to no morethan $10,000 for Mr. Festa and $4,000 for the other named executiveofficers. We eliminated this personal benefit during 2007.  Mr. Festa has access to corporateaircraft at Grace expense for reasonable personal travel.  Due to his overseas assignment in Belgium, Mr. Bonhamreceives certain expatriate benefits that are generally available to Graceexecutives that are U.S. citizens stationed abroad.  We intend that these benefits compensateGrace’s expatriate executives for the additional economic costs they face as aresult of their foreign service including housing costs, higher cost of living,family leave in the U.S., local transportation expenses, children’s tuition,foreign income taxes and increases in U.S. taxes caused by such benefits.

 

***Change-In-Control SeveranceAgreements***

 

As described below under “Change-In-Control Severance Agreements,” Grace has entered into change-in-control severance agreements with each of the named executive officers.  The provisions in these agreements are based on competitive practice and are designed to ensure that the executive officers’ interests remain aligned with the interests of the Grace stakeholders if a potential change in control occurs.  Payments under these agreements are triggered by the involuntary termination of the executive officer’s employment without cause (including constructive termination 

 

50

 

caused by a material reduction in his or her authority orresponsibility or by certain other circumstances) following a “change incontrol.”  A change in control situation often undermines an executiveofficer’s job security, and it is to Grace’s and its stakeholders’ benefit toencourage the Grace executive officers to seek out beneficial transactions andto remain employed through the closing of any transaction, even though theirfuture employment at Grace may be uncertain.  The change-in-control severanceagreements are designed to reinforce and encourage the continued attention anddedication of the executive officers to their assigned duties withoutdistraction in the face of potentially adverse circumstances arising from thepossibility of a change in control of Grace. Certain terms of these agreements are described below under thePotential Payments Upon Termination or Change-In-Control Table.

 

***Severance Arrangements***

 

As described below under “Severance Arrangements,” we have entered into severance agreements with each of the named executive officers, other than Mr. Festa, whose severance arrangements are included in his employment agreement, and Mr. Bonham, whose severance arrangements were established by committee approval.  Payments under these arrangements are triggered by involuntary termination of employment under most circumstances.  The Grace severance arrangements are designed to encourage and reinforce the continued attention and dedication of our executive officers to their assigned duties without undue concern regarding their job security.  Certain terms of these agreements are described below under the Potential Payments Upon Termination or Change-In-Control Table.

 

***Executive Salary Protection Plan***

 

As described below under “Executive Salary Protection Plan,” our Executive Salary Protection Plan provides payments to our named executive officers, or their respective beneficiaries, in the event of their disability or death prior to age 70 while employed by Grace.  The plan is designed to encourage the continued attention and dedication of our executive officers to their assigned duties without undue concern regarding their ability to earn a living and support their families in the event of death or disability.  Certain terms of this plan are described below under the Potential Payments Upon Termination or Change-In-Control Table.

 

***Employment Agreements***

 

Grace has entered into an employment agreement with Mr. Festapursuant to which he serves as CEO of Grace. Certain terms of this employment agreement are described below under theSummary Compensation Table and Potential Payments Upon Termination orChange-In-Control Table.  This agreementwas approved by the Bankruptcy Court and was designed to encourage Mr. Festato accept his appointment as CEO of Grace, remain with Grace and workdiligently in pursuit of corporate objectives. Mr. Festa’s employment agreement includes a minimum salary and AICPtarget that were negotiated with Mr. Festa and are based on his businessexperience, his past performance as Chief Operating Officer of Grace and acompetitive analysis of 

 

51

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the base salary and annual bonus paid to CEOs at the peer groupcompanies.  The agreement also providesfor retention payments that are designed to encourage Mr. Festa to make along-term commitment to Grace through the uncertainty of the Chapter 11 processin lieu of other opportunities that may be available to him, and severance paymentsthat are designed to encourage and reinforce Mr. Festa’s continuedattention and dedication to his assigned duties without undue concern regardinghis job security.

 

Gracehas also entered into an employment agreement with Mr. Tarola.  Certain terms of this employment agreementare described below under the Summary Compensation Table and Pension BenefitsTable.  This agreement includes currentlyeffective provisions regarding severance payments and enhanced pensionpayments.  This agreement was negotiatedon an arms-length basis prior to the time Mr. Tarola joined Grace.  The payments required by this agreement weredesigned to encourage Mr. Tarola to join and remain with Grace in lieu ofother employment opportunities available to him.

 

***Deductibility of Executive Compensation***

 

Underthe Omnibus Budget Reconciliation Act of 1993, provisions were added to theInternal Revenue Code of 1986, as amended, under Section 162(m) thatlimit the tax deduction for compensation expense in excess of $1 million paid toexecutive officers unless such compensation is “performance-based” andsatisfies certain other conditions.  Webelieve that compensation payable to executive officers should generally meetthe conditions required for full deductibility under Section 162(m).  Tax deductibility is one criterion weconsider when establishing compensation programs. The AICP and LTIPs arestructured with the intention that the compensation payable thereunder, withthe exception of any discretionary AICP payments or other non-performance-basedpayments, will qualify as deductible “performance-based” compensation.  While we believe that it is important topreserve the ability to structure compensation programs to meet a variety ofcorporate objectives even if the compensation is not deductible, due to ourfocus on performance-based compensation plans, we expect that the vast majorityof compensation paid to the named executive officers will be tax deductible.

 

**Compensation Committee Report**

 

We,the undersigned members of the Compensation Committee of the Board of Directorsof Grace, have reviewed Grace’s Compensation Discussion and Analysis for 2007and have discussed it with Grace management. Based on our review and this discussion, we recommend to the Board thatthe Compensation Discussion and Analysis be included in Grace’s Annual Reporton Form 10-K.

 

COMPENSATIONCOMMITTEE

 

JohnF. Akers, Chair

H.Furlong Baldwin

RonaldC. Cambre

MaryeAnne Fox

JohnJ. Murphy

ChristopherJ. Steffen

MarkE. Tomkins

ThomasA. Vanderslice

 

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**Summary Compensation Table**

 

Thefollowing table sets forth the compensation we paid for services renderedduring the fiscal year ended December 31, 2007 to our Chief ExecutiveOfficer, our Chief Financial Officer and each of our other three most highly compensatedexecutive officers who were executive officers as of December 31, 2007,determined by reference to total compensation (reduced by the amount set forthin the table below under the caption “Change in Pension Value and NonqualifiedDeferred Compensation Earnings”) earned by such individuals for the 2007 fiscalyear.

 

 

 
| **Name and  Principal Position**                          | ** ** | **Year**   | ** ** | **Salary ($)** | ** ** | **Stock Awards ($)** | ** ** | **Option Awards ($)** | ** ** | **Non-Equity  Incentive Plan  Compensation  ($)** | ** ** | **Change in  Pension  Value and  Nonqualified  Deferred  Compensation  Earnings****(b)****($)** | ** ** | **All Other  Compensation****(c)****($)** | ** ** | **Total($)** | ** ** |
|-----------------------------------------------------------|------------|------------|------------|----------------|------------|----------------------|------------|-----------------------|------------|---------------------------------------------------|------------|-------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|--------------|------------|
| ** **                                                | ** ** | ** ** | ** ** | ** **     | ** ** | ** **           | ** ** | ** **            | ** ** | **AICP**                                          | ** ** | **LTIP****(a)**                                                                                 | ** ** | ** **                                | ** ** | ** **   | ** ** | ** ** | ** ** |
| **A. E. Festa**                                           |       | 2007       |       | 862,500        |       | -0-                  |       | -0-                   |       | 1,375,000                                         |       | 2,399,800                                                                                       |       | 326,000                                   |       | 916,470      |       | 5,879,770 |   |
| President &  Chief Executive Officer             |       | 2006       |       | 789,167        |       | -0-                  |       | -0-                   |       | 1,250,000                                         |       | 1,502,233                                                                                       |       | 56,000                                    |       | 244,525      |       | 3,841,925 |   |
|                                                      |       |       |       |           |       |                 |       |                  |       |                                              |       |                                                                                            |       |                                      |       |         |       |   |   |
| **R. M.  Tarola**                                         |       | 2007       |       | 439,333        |       | -0-                  |       | -0-                   |       | 440,000                                           |       | 611,833                                                                                         |       | 682,000                                   |       | 58,594       |       | 2,231,760 |   |
| Senior  Vice President & Chief Financial Officer |       | 2006       |       | 426,667        |       | -0-                  |       | -0-                   |       | 460,000                                           |       | 769,500                                                                                         |       | 295,000                                   |       | 101,284      |       | 2,052,451 |   |
|                                                      |       |       |       |           |       |                 |       |                  |       |                                              |       |                                                                                            |       |                                      |       |         |       |   |   |
| **G. E.  Poling**                                         |       | 2007       |       | 412,667        |       | -0-                  |       | -0-                   |       | 500,000                                           |       | 743,333                                                                                         |       | 560,000                                   |       | 53,342       |       | 2,269,342 |   |
| Vice  President                                           |       | 2006       |       | 385,000        |       | -0-                  |       | -0-                   |       | 460,000                                           |       | 771,667                                                                                         |       | 158,000                                   |       | 77,407       |       | 1,852,074 |   |
|                                                      |       |       |       |           |       |                 |       |                  |       |                                              |       |                                                                                            |       |                                      |       |         |       |   |   |
| **D. A.  Bonham**                                         |       | 2007       |       | 311,667        |       | -0-                  |       | -0-                   |       | 360,000                                           |       | 301,765                                                                                         |       | 33,000                                    |       | 488,537      |       | 1,494,969 |   |
| Vice  President                                           |       |       |       |           |       |                 |       |                  |       |                                              |       |                                                                                            |       |                                      |       |         |       |   |   |
|                                                      |       |       |       |           |       |                 |       |                  |       |                                              |       |                                                                                            |       |                                      |       |         |       |   |   |
| **M. A. Shelnitz**                                        |       | 2007       |       | 336,000        |       | -0-                  |       | -0-                   |       | 335,000                                           |       | 453,167                                                                                         |       | 237,000                                   |       | 39,957       |       | 1,401,124 |   |
| Vice  President, Secretary and General Counsel            |       |       |       |           |       |                 |       |                  |       |                                              |       |                                                                                            |       |                                      |       |         |       |   |   |

 

 

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| (a) |   | 2007  amount consists of the following payments that we expect to make in  March 2008 pursuant to the 2005-2007 and 2006-2008 Long-Term Incentive  Programs, or LTIPs, as follows: |
|-----|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

| **Name**           | ** ** | **Final Payment  2005-2007 LTIP** | ** ** | **Initial   Payment  2006-2008 LTIP  $** | ** ** | **Total  $** | ** ** |
|--------------------|------------|-----------------------------------|------------|------------------------------------------|------------|--------------|------------|
| **A. E. Festa**    |       | 1,836,467                         |       | 563,333                                  |       | 2,399,800    |       |
| **R. M. Tarola**   |       | 461,833                           |       | 150,000                                  |       | 611,833      |       |
| **G. E. Poling**   |       | 543,333                           |       | 200,000                                  |       | 743,333      |       |
| **D. A. Bonham**   |       | 201,765                           |       | 100,000                                  |       | 301,765      |       |
| **M. A. Shelnitz** |       | 353,167                           |       | 100,000                                  |       | 453,167      |       |

 
| (b)    |   | 2007 amount consists of the aggregate change in the  actuarial present value of the individual’s accumulated benefit under the  Grace Pension Plan, the Grace Supplemental Executive Retirement Plan and, in  the case of Mr. Tarola supplemental benefits pursuant to the terms of his  employment agreement, from December 31, 2006 to December 31, 2007 assuming a  6.25% discount rate and retirement at age 62 with benefits payable on a  straight life annuity basis and other assumptions used for financial  reporting purposes under generally accepted accounting principles as  described in this Report in Item 8 (Financial Statements and Supplementary  Data) in the Financial Supplement under Note 19 (Pension Plans and Other  Postretirement Benefits Plans) to the Consolidated Financial Statements.  The 2007 amount reflects changes from the  method used in prior years to calculate pension values including our revised  data collection procedures. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| (c)    |   | 2007 amount consists of the  following:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   |   | (i)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | retention payment of  $750,000 pursuant to Mr. Festa’s employment agreement; |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |
|   |   | (ii)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | our aggregate incremental  cost of providing personal benefits if the aggregate amount of personal  benefits provided to the individual equals or exceeds $10,000.  Except as specified below, these personal  benefits are limited to financial counseling and tax preparation  services.  The following additional  personal benefits exceed the greater of $25,000 or 10% of the total amount of  personal benefits for that individual and we are required to separately  report them under SEC rules: |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | (A) | for Mr. Festa,  $33,873 for personal use of Grace-provided aircraft, and |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | (B) | for Mr. Bonham,  certain expatriate benefits related to his overseas assignment in Belgium  that are generally available to Grace executives that are U.S. citizens  stationed abroad including, bank fees, U.S. housing maintenance, local  transportation expenses, estimated gross up for U.S. income taxes resulting  from Grace expatriate benefits—$172,400, travel allowance related to family  leave in the U.S.—$27,851, and the following items paid in Euros and  converted at exchange rates prevailing at the time such amounts were  paid:  foreign tax payments—$28,349,  cost of living allowance—$61,976, overseas housing allowance—$95,667, and  children’s tuition reimbursement—$37,106; |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |   |
|   |   | (iii)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | our contributions to the  Savings and Investment Plan, or S&I Plan, as follows:  Mr. Festa—$13,500, Mr. Tarola—$13,500, Mr. Poling—$12,525,  Mr. Bonham—$13,500 and Mr. Shelnitz—$13,500; |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |
|   |   | (iv)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | payments pursuant to the  S&I Plan Replacement Payment Program to persons whose personal and/or  Grace contributions to the S&I Plan would be subject to limitations under  federal income tax law, as follows:  Mr. Festa—$113,250,  Mr. Tarola—$40,460, Mr. Poling—$38,860, Mr. Bonham—$23,500 and  Mr. Shelnitz—$25,260; |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |
|   |   | (v)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | the value of  Grace-provided personal liability insurance, as follows:  Mr. Festa—$1,200,  Mr. Tarola—$900,   Mr. Poling—$600, Mr. Bonham—$200 and Mr. Shelnitz—$600;  and |

 

 

 

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|   |   | (vi) | the value of  Grace-provided life insurance, as follows:   Mr. Festa—$2,097, Mr. Tarola—$3,734,  Mr. Poling—$1,357,  Mr. Bonham—$224 and Mr. Shelnitz—$597. |
|--------|--------|------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

***CEO Employment Agreement***

 

Gracehas entered into an employment agreement with Mr. Festa pursuant to whichhe serves as CEO of Grace.  Under this employment agreement, Mr. Festais entitled to an initial base annual salary of $760,000. His targeted awardunder the AICP for 2005 and each calendar year thereafter is 100% of his basesalary earned during the applicable year (or greater, as determined by theBoard).  Under the Agreement, Mr. Festamay also participate in the LTIPs.  Mr. Festa’sagreement also provides for retention payments, which will generally betriggered by Mr. Festa remaining employed by Grace through a specifiedperiod, and certain payments in the event that Mr. Festa’s employment isinvoluntarily terminated.  Theseretention and severance payments are discussed below under the PotentialPayments Upon Termination or Change-In-Control Table.

 

***CFO Employment Agreement***

 

Gracehas also entered into an employment agreement with Mr. Tarola.  This agreement includes currently effectiveprovisions regarding severance payments and enhanced pension payments.  Other terms of this agreement are discussedbelow under the Pension Benefits Table.

 

 

 

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**Grants of Plan-Based Awardsin 2007**

** **

The following table providesinformation regarding grants under our Annual Incentive Compensation Program,or AICP, and Long Term Incentive Program, or LTIP, to the executive officersnamed in the Summary Compensation Table during 2007.

 

 
| ** **         | ** ** | ** **             | ** ** | **Estimated  Future Payouts Under  Non-Equity Incentive Plan Awards****(1)** | ** ** |
|--------------------|------------|------------------------|------------|------------------------------------------------------------------------------|------------|
| **Name**           | ** ** | **Plan**               | ** ** | **Threshold  ($)**                                                           | ** ** | **Target  ($)****(2)** | ** ** | **Maximum  ($)****(2)** | ** ** |
| ** **         | ** ** | ** **             | ** ** | ** **                                                                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| **A. E. Festa**    |       | **2007 AICP**          |       | 215,625                                                                      |       | 862,500 |   | 1,725,000 |   |
| ** **         | ** ** | **2007-2009 LTIP**     |       | -0-                                                                          |       | 1,690,000 |   | 3,380,000 |   |
| ** **         | ** ** | **2006-2008 LTIP (3)** |       | -0-                                                                          |       | -0- |   | -0- |   |
| ** **         | ** ** | ** **             |       |                                                                         |       |   |   |   |   |
| **R. M. Tarola**   |       | **2007 AICP**          |       | 85,670                                                                       |       | 342,680 |   | 685,359 |   |
| ** **         | ** ** | **2007-2009 LTIP**     |       | -0-                                                                          |       | 500,000 |   | 1,000,000 |   |
| ** **         | ** ** | **2006-2008 LTIP (3)** |       | -0-                                                                          |       | 100,000 |   | 200,000 |   |
| ** **         | ** ** | ** **             |       |                                                                         |       |   |   |   |   |
| **G. E. Poling**   |       | **2007 AICP**          |       | 80,467                                                                       |       | 321,866 |   | 643,732 |   |
| ** **         | ** ** | **2007-2009 LTIP**     |       | -0-                                                                          |       | 650,000 |   | 1,300,000 |   |
| ** **         | ** ** | **2006-2008 LTIP (3)** |       | -0-                                                                          |       | 200,000 |   | 400,000 |   |
| ** **         | ** ** | ** **             |       |                                                                         |       |   |   |   |   |
| **D. A. Bonham**   | ** ** | **2007 AICP**          |       | 51,250                                                                       |       | 205,000 |   | 410,000 |   |
| ** **         | ** ** | **2007-2009 LTIP**     |       | -0-                                                                          |       | 500,000 |   | 1,000,000 |   |
| ** **         | ** ** | **2006-2008 LTIP (3)** |       | -0-                                                                          |       | 185,000 |   | 370,000 |   |
| ** **         | ** ** | ** **             |       |                                                                         |       |   |   |   |   |
| **M. A. Shelnitz** |       | **2007 AICP**          |       | 54,600                                                                       |       | 218,400 |   | 436,800 |   |
| ** **         | ** ** | **2007-2009 LTIP**     |       | -0-                                                                          |       | 325,000 |   | 650,000 |   |
| ** **         | ** ** | **2006-2008 LTIP (3)** |       | -0-                                                                          |       | 50,000 |   | 100,000 |   |

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| (1) |   | Actual payments  pursuant to the 2007 AICP, final payments pursuant to the 2005-2007 LTIP and  initial payments pursuant to the 2006-2008 LTIP that we expect to pay in  March 2008 have been determined and are reflected in the Summary  Compensation Table.                                                                                                                                                                                                                                                                                                                    |
|-----|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) |   | For AICP, amounts are  based upon base salary actually paid during 2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| (3) |   | Including these grants,  the following executive officers hold aggregate outstanding awards under the  2006-2008 Long Term Incentive Program with target payouts and maximun payouts  as follows: Mr. Festa—$1,690,000 and $3,380,000; Mr. Tarola—$450,000 and  $900,000; Mr. Poling—$600,000 and $1,200,000; Mr. Bonham—$300,000 and  $600,000; and Mr. Shelnitz—$300,000 and $600,000. The initial payments  pursuant to these awards, that we expect to pay in March 2008, have been  determined and are reflected above in the Summary Compensation Table |

.

 

***Annual IncentiveCompensation Program (AICP)***

 

Our AnnualIncentive Compensation Program, or AICP, is a cash-based pay-for-performanceincentive program.  Awards underthe AICP are allocated from the corporate incentive pool that is determined bythe extent to which business performance objectives are achieved.  Inorder to generate an incentive pool amount sufficient to pay all participantstheir target award, our pre-tax income from core operations as adjusted must be8% higher than the prior year’s pre-tax income from core operations.  If our pre-tax income from core operations asadjusted is greater than or equal to 35% higher than the prior year’s pre-taxincome from core operations, the incentive pool is funded in an amountsufficient to pay all participants two times their target award.  If our pre-tax income from 

 

 

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core operations asadjusted is 80% of the prior year’s pre-tax income from core operations, theincentive pool is funded in an amount sufficient to pay all participants 25% oftheir target award.  Generally, no awardsare earned if pre-tax income from core operations as adjusted is less then 80%of the prior year’s pre-tax income from core operations.  The Compensation Committee has discretion toestablish or increase the size of the incentive pool even if performancemeasures are not achieved.  Once theincentive pool is established, an executive officer’s award payment isdetermined based on the individual’s target award, performance and otherfactors determined by the Compensation Committee.

 

Inorder to receive an AICP award payment for a specific calendar year, employeesgenerally must be actively employed by Grace through the payout date, which istypically in March of the following year. In the discretion of the Compensation Committee, an employee whoseemployment terminates prior to the payout date may receive an AICP awardpayment if the employee has more than three months’ service under the AICP andemployment terminates for any of the following reasons:  retirement under a Grace retirement plan;death; disability; divestment; or other termination of employment by Grace thatis not for cause.  If an employee whoseemployment terminates prior to the end of the year receives an AICP awardpayment, the amount of the AICP award payment will generally be prorated forthe period of the employee’s service during the year.  See “Potential Payments Upon Termination orChange-In-Control—Contractual Termination Provisions” for a description of thecircumstances under which AICP payments would be made to Mr. Festa in theevent his employment with Grace is terminated.

 

***Long-Term Incentive Program (LTIP)***

 

Ourlong-term incentive programs are multi-year, cash-based, pay-for-performance incentiveprograms.  Awards under the LTIPs arepayable 100% in cash, based on the extent to which we achieve a specifiedcompound annual growth in our pre-tax income from core operations as adjusted over thethree-year performance period using results for the year prior to the firstyear of the performance period as the baseline. We generally refer to this growth objective as a CAGR.  In order to earn the target award, our CAGR must be 6%and, to earn the maximum of two times the target award, our CAGR must be25%.  No awards are earned if the CAGR iszero or negative.

 

*LTIP Compound Annual Growth Rate(CAGR) as of December 31, 2007*

 

| **LTIP**                                | ** ** | **CAGR** | ** ** |
|-----------------------------------------|------------|----------|------------|
| 2005-2007 LTIP (full  3-year period)    |       | 14.04    | %          |
| 2006-2008 LTIP (partial  2-year period) |       | 15.40    | %          |

 

 

 

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Employeeswho become entitled to award payments under an LTIP are paid in twoinstallments:  one in March of thethird year of the performance period (as partial payment based on the first twoyears of the performance period but limited to 50% of the LTIP target for those two years); and the otherin March of the year following the performance period (as final paymentbased on the complete three-year performance period but offset by the priorpartial payment).

 

Basedon 2005-2007 operating performance, final payments under the 2005 LTIP arecalculated based upon 142% of the target for each participant.  Based on 2006-2008 operating performance,partial payments under the 2006 LTIP are calculated based upon 149% of the targetfor each participant but limited to 50% of the target amount for those twoyears.

 

Inorder to receive an LTIP award payment, employees generally must be activelyemployed by Grace through the payout date, which is in March following thesecond and third years of the LTIP performance period.  An employee whose employment terminates priorto the payout date will forfeit any unpaid LTIP award payment if employmentterminates for any of the following reasons:

 

·                  voluntary termination without the consentof the Compensation Committee;

 

·                  retirement under a Grace retirement planprior to age 62 without the consent of the Compensation Committee; or

 

·                  termination for cause.

 

Anemployee whose employment terminates prior to the payout date will receive anLTIP award payment if employment terminates for any of the following reasons:

 

·                  retirement under a Grace retirement planeither at or after age 62;

 

·                  death or disability; or

 

·                  involuntary termination after a change incontrol of Grace (as defined in the LTIP).

 

See“Potential Payments Upon Termination or Change-In-Control—ContractualTermination Provisions” for a description of the circumstances under which LTIPpayments, as described below, would be made to Mr. Festa in the event hisemployment with Grace is terminated.

 

If an employee whose employmentterminates prior to the end of an LTIP performance period receives an LTIPaward payment for that performance period, the amount of the LTIP award paymentwill be prorated for the period of 

 

 

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the employee’s service duringthe performance period.  Assuming theemployment of the executive officers named in the Summary Compensation Tablewas terminated as of December 31, 2007 and the 2006 and 2007 LTIPs pay outat the target amounts, under any of the above-listed circumstances, theexecutive officers would be eligible for payments under their outstanding LTIPsas follows:

 
| **Name**           | ** ** | **2005-2007 LTIP  $** | ** ** | **2006-2008 LTIP  $** | ** ** | **2007-2009 LTIP  $** | ** ** |
|--------------------|------------|-----------------------|------------|-----------------------|------------|-----------------------|------------|
| **A. E. Festa**    |       | 1,836,467             |       | 1,126,666             |       | 563,333               |       |
| **R. M. Tarola**   |       | 461,833               |       | 300,000               |       | 166,667               |       |
| **G. E. Poling**   |       | 543,333               |       | 400,000               |       | 216,667               |       |
| **D. A. Bonham**   |       | 201,765               |       | 200,000               |       | 166,667               |       |
| **M. A. Shelnitz** |       | 353,167               |       | 200,000               |       | 108,332               |       |

 

Inthe discretion of the Compensation Committee, an employee whose employmentterminates for a reason that is not described above (i.e. involuntarytermination not for cause or transfer to the buyer of a Grace business unit)prior to the payout date may receive an LTIP award payment.

 

***Stock Options Granted in 2007***

 

Wegranted no stock options or other equity awards to the executive officers namedin the Summary Compensation Table during 2007.

 

 

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**Outstanding Equity****Awards at Fiscal Year-End**

 

Thefollowing table provides information regarding outstanding stock options heldby the executive officers named in the Summary Compensation Table as of December 31,2007.  Allof these stock options were granted prior to 2002.

** **
| ** **         | ** ** | **Option Awards**                                                              | ** ** |
|--------------------|------------|--------------------------------------------------------------------------------|------------|
| **Name**           | ** ** | **Number  of  Securities  Underlying  Unexercised  Options  (#)  Exercisable** | ** ** | **Number  of  Securities  Underlying  Unexercised  Options  (#)  Unexercisable** | ** ** | **Equity  Incentive  Plan  Awards:  Number of  Securities  Underlying  Unexercised  Unearned  Options  (#)** | ** ** | **Option  Exercise  Price  ($)** | ** ** | **Option  Expiration  Date** | ** ** |
| **A. E. Festa**    |       | -0-                                                                            |       | -0- |   | -0- |   | N/A |   | N/A |   |
| **R. M. Tarola**   |       | 100,000                                                                        |       | -0- |   | -0- |   | 16.1875 |   | 5/10/2009 |   |
| ** **         |       | 75,000                                                                         |       | -0- |   | -0- |   | 13.4688 |   | 5/9/2010 |   |
| ** **         |       | 27,900                                                                         |       | -0- |   | -0- |   | 2.4000 |   | 3/7/2011 |   |
| **G. E. Poling**   |       | 50,000                                                                         |       | -0- |   | -0- |   | 19.4688 |   | 3/31/2008 |   |
| ** **         |       | 35,000                                                                         |       | -0- |   | -0- |   | 13.4688 |   | 5/9/2010 |   |
| ** **         |       | 16,500                                                                         |       | -0- |   | -0- |   | 2.4000 |   | 3/7/2011 |   |
| **D. A. Bonham**   |       | -0-                                                                            |       | -0- |   | -0- |   | N/A |   | N/A |   |
| **M. A. Shelnitz** |       | 13,000                                                                         |       | -0- |   | -0- |   | 19.4688 |   | 3/31/2008 |   |
| ** **         |       | 22,000                                                                         |       | -0- |   | -0- |   | 12.8125 |   | 3/3/2009 |   |
| ** **         |       | 25,000                                                                         |       | -0- |   | -0- |   | 13.4688 |   | 5/9/2010 |   |
| ** **         |       | 8,200                                                                          |       | -0- |   | -0- |   | 2.4000 |   | 3/7/2011 |   |

 

 

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**Option Exercises And Stock Vested**

 

Thefollowing table provides information regarding the exercise of options held bythe executive officers named in the Summary Compensation Table during2007.  Allof these stock options were granted prior to 2002.

 
| ** **         | ** ** | **Option Awards**                                  | ** ** | **Stock Awards**                       | ** ** |
|--------------------|------------|----------------------------------------------------|------------|----------------------------------------|------------|
| **Name**           | ** ** | **Number of  Shares  Acquired  on  Exercise  (#)** | ** ** | **Value  Realized  on  Exercise  ($)** | ** ** | **Number of  Shares  Acquired  on  Vesting  (#)** | ** ** | **Value  Realized  on  Vesting  ($)** | ** ** |
| **A. E. Festa**    |       | -0-                                                |       | -0-                                    |       | -0- |   | -0- |   |
| **R. M. Tarola**   |       | -0-                                                |       | -0-                                    |       | -0- |   | -0- |   |
| **G. E. Poling**   |       | 10,789                                             | *          | 133,335                                |       | -0- |   | -0- |   |
| **D. A. Bonham**   |       | -0-                                                |       | -0-                                    |       | -0- |   | -0- |   |
| **M. A. Shelnitz** |       | 6,743                                              | *          | 83,333                                 |       | -0- |   | -0- |   |

 

*  Exercised options had an expiration date ofMarch 4, 2007.

 

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**Pension Benefits**

 

The following table providesinformation regarding benefits under our Retirement Plan for SalariedEmployees, or Pension Plan, our Supplemental Executive Retirement Plan, orSERP, and any supplemental pension arrangements under employment agreements forthe executive officers named in the Summary Compensation Table.

 
| **Name**           | ** ** | **Plan  Name**          | ** ** | **Number  of Years  Credited  Service  (years)** | ** ** | **Present  Value of  Accumulated  Benefit****(1)****($)** | ** ** | **Payments  During  Last  Fiscal  Year  ($)** | ** ** |
|--------------------|------------|-------------------------|------------|--------------------------------------------------|------------|-----------------------------------------------------------|------------|-----------------------------------------------|------------|
| **A. E. Festa**    | ** ** | **Pension Plan**        |       | 4.08                                             |       | 59,000                                                    |       | -0-                                           |       |
| ** **         | ** ** | **SERP**                |       | 4.08                                             |       | 408,000                                                   |       | -0-                                           |       |
| **R. M. Tarola**   |       | **Pension Plan**        |       | 8.58                                             |       | 218,000                                                   |       | -0-                                           |       |
| ** **         | ** ** | **SERP**                |       | 8.58                                             |       | 682,000                                                   |       | -0-                                           |       |
| ** **         | ** ** | **Supplemental****(2)** |       | 8.58                                             |       | 924,000                                                   |       | -0-                                           |       |
| **G. E. Poling**   | ** ** | **Pension Plan**        |       | 28.42                                            |       | 504,000                                                   |       | -0-                                           |       |
| ** **         | ** ** | **SERP**                |       | 28.42                                            |       | 1,120,000                                                 |       | -0-                                           |       |
| **D. A. Bonham**   |       | **Pension Plan**        |       | 2.25                                             |       | 30,000                                                    |       | -0-                                           |       |
| ** **         | ** ** | **SERP**                |       | 2.25                                             |       | 39,000                                                    |       | -0-                                           |       |
| **M. A. Shelnitz** | ** ** | **Pension Plan**        |       | 24.17                                            |       | 382,000                                                   |       | -0-                                           |       |
| ** **         | ** ** | **SERP**                |       | 24.17                                            |       | 583,000                                                   |       | -0-                                           |       |

----

| (1) |   | The amounts shown  comprise the actuarial present value of the executive’s accumulated benefit  under the Pension Plan, SERP and, in the case of Mr. Tarola,  supplemental pension arrangements, as of December 31, 2007, assuming a  6.25% discount rate and retirement at age 62 with benefits payable on a  straight life annuity basis and other assumptions used for financial  reporting purposes under generally accepted accounting principles as  described in this Report in Item 8 (Financial Statements and Supplementary  Data) in the Financial Supplement under Note 19 (Pension Plans and Other  Postretirement Benefits Plans) to the Consolidated Financial Statements. The  Pension Plan, SERP and supplemental arrangements provide for a reduction in  pension payments to employees that opt for early retirement ranging from a  17% reduction for retirement at age 55 to no reduction for retirement at age  62. Mr. Tarola is eligible for early retirement under the Pension Plan,  SERP and his supplemental arrangements. |
|-----|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) |   | Under his employment  agreement, Mr. Tarola is entitled to a supplemental pension benefit  calculated by applying the benefit formula of the Pension Plan and SERP to  additional years of credited service. Mr. Tarola will be credited with  one additional year of credited service (up to a maximum of 10 additional  years of credited service) for each year of credited service under those  plans that he actually earns during his period of employment with Grace.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |

 

 

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***Retirement Plan for Salaried Employees***

 

Full-timesalaried employees who are 21 or older and who have one or more years ofservice are eligible to participate in our Retirement Plan for SalariedEmployees, or Pension Plan.  Under thisbasic retirement plan, pension benefits are based upon (a) the employee’saverage annual compensation for the 60 consecutive months in which his or hercompensation is highest during the last 180 months of continuous participation,and (b) the number of years of the employee’s credited Grace service.  Thenormal retirement age under the Pension Plan is 62, but participants may electreduced payments upon early retirement beginning at age 55.  For purposes of the PensionPlan, compensation generally includes base salary and AICP awards; however, for2007, federal income tax law limits to $225,000 the annual compensation onwhich benefits under the Pension Plan may be based.

 

***Supplemental Executive Retirement Plan***

 

Wealso have a Supplemental Executive Retirement Plan, or SERP, under which anemployee will receive the full pension to which he or she would be entitled inthe absence of the limitations described above and other limitations imposedunder federal income tax law. In addition, the SERP recognizes deferred basesalary, deferred annual incentive compensation awards and, in some cases,periods of employment during which an employee was ineligible to participate inthe basic retirement plan. Commencing in 2001, we no longer permit deferrals ofbase salary or incentive compensation.

 

***Supplemental Pension Arrangement***

 

Mr. Tarola had anemployment agreement that expired on November 10, 2002.  Mr. Tarola’s supplemental pensionbenefit that is described in the table above is provided pursuant to the termsof this agreement that survived the expiration date.  The supplemental pension benefit will be paidto Mr. Tarola from our general assets. The foregoing description of Mr. Tarola’s supplemental pensionarrangement does not purport to be complete and is qualified in its entirety byreference to the agreement, which has been filed with the SEC.

 

**Potential Payments Upon Terminationor Change-In-Control**

 

The following table sets forth potential payments to executive officersnamed in the Summary Compensation Table in the event of the listed eventscalculated under the assumption that employment terminated on the last businessday of 2007.  The following table doesnot include payments pursuant to contracts, agreements, plans and arrangementsthat do not discriminate in scope, terms or operation, in favor of executiveofficers and that are available generally to all salaried employees.  The value of payments to be made followingtermination of employment of the executive officers named in the Summary CompensationTable pursuant to the Grace SERP and supplemental pension benefits aredescribed above under the caption “Pension 

 

 

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Benefits” and payments that are required to be made followingtermination of employment under designated circumstances pursuant to the GraceLTIPs are described above under the caption “Grants of Plan-Based Awards—LongTerm Incentive Program (LTIP).”

 
| ** **         | ** ** | **Involuntary  Termination  Without Cause****(a)****($)** | ** ** | **Involuntary  Termination  Without Cause  Following  Change-in-  Control****(c) (d)****($)** | ** ** | **Death****(e)****($)** | ** ** | **Disability****(f)****($)** | ** ** |
|--------------------|------------|-----------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------|------------|-------------------------|------------|------------------------------|------------|
| **A. E. Festa**    |       | 3,150,000                                                 | (b)        | 5,400,000                                                                                          | (b)        | 900,000                 | (b)        | 390,000                      | (b)        |
| **R. M. Tarola**   |       | 888,000                                                   |       | 2,370,960                                                                                          |       | 444,000                 |       | 118,400                      |       |
| **G. E. Poling**   |       | 848,000                                                   |       | 2,289,600                                                                                          |       | 424,000                 |       | 84,800                       |       |
| **D. A. Bonham**   |       | 540,000                                                   |       | 1,890,000                                                                                          |       | 360,000                 |       | 132,000                      |       |
| **M. A. Shelnitz** |       | 688,000                                                   |       | 1,702,800                                                                                          |       | 344,000                 |       | 68,800                       |       |

----

| (a) |   | Consists of minimum severance payment pursuant to  his employment agreement, in the case of Mr. Festa, or severance  agreements in the case of the other executive officers.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|-----|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (b) |   | In addition, if Mr. Festa’s termination  (without cause), death or disability occurs after Grace’s emergence from  Chapter 11, but prior to Mr. Festa’s receipt of the retention bonus of  $1 million, then such amount shall be paid to him, or to his survivors, in  the case of his death.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| (c) |   | “Change-in-Control” is described below under  “Change-In-Control Severance Agreements.”                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| (e) |   | Consists of the sum of payments under the Grace  Executive Salary Protection Plan during the first year following death.  During subsequent years after death until the specified termination year  (reflecting the executive officer’s age as of December 31, 2007), the  sum of payments each year would be as follows: Mr. Festa—$450,000, 2017,  Mr. Tarola—$222,000, 2015, Mr. Poling—$212,000, 2017,  Mr. Bonham—$180,000, 2017 and Mr. Shelnitz— $172,000, 2017.                                                                                                                                                                                                                                                                                                                                                 |
| (f) |   | Consists of the sum of payments under the Grace  Executive Salary Protection Plan during the first year following disability,  assuming the executive officer remains disabled for at least 12 consecutive  months. Amounts reflect the offset of expected payments under Grace’s  long-term and short-term disability programs that are based, in part, on the  duration of the executive officer’s employment. During subsequent years after  disability, the sum of payments each year to Mr. Festa would be $180,000  until the earlier of the month he was no longer deemed disabled or until he  attained age 65 in 2024. Due to the offset of expected payments under Grace’s  long-term and short-term disability programs, the other executive officers  would not receive any additional payments under the plan after the first year  of disability. |

 

 

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***Contractual Termination Provisions***

 

In 2005, the CompensationCommittee and the Bankruptcy Court approved the terms of an employmentagreement, dated January 19, 2005, pursuant to which Mr. Festaassumed the position of Chief Executive Officer of Grace on June 1, 2005.The term of this agreement is four years, ending on May 31, 2009.  Under the terms of this agreement, Mr. Festawill not be entitled to any unpaid award under the AICP or any LTIP if hisemployment with Grace terminates prior to the date that the award is paid toactive Grace employees, except that Mr. Festa would be entitled to apro-rated portion of such an unpaid award in the event that we terminate hisemployment without cause, he terminates his employment as a result ofconstructive discharge, or his employment terminates as a result of his deathor disability before the applicable payment date. Assuming Mr. Festa’semployment was terminated as of December 31, 2007 under any of the abovelisted circumstances, Mr. Festa would be eligible to receive an AICP inthe amount of his 2007 AICP payment as described above under “SummaryCompensation Table” and LTIP payments as described above under the caption“Grants of Plan-Based Awards in 2007—Long Term Incentive Programs (LTIPs).”  Also, under the terms of the agreement, if weterminate Mr. Festa’s employment without cause, or he terminates hisemployment as a result of constructive discharge, prior to the expiration ofthe agreement, he would be entitled to a severance payment equal to two times adollar amount equal to 175% of his annual base salary at the time of histermination.  Mr. Festa’s agreementalso provides that he will be entitled to a Chapter 11 retention bonus of$1,750,000, payable in two installments. The first installment, in the amountof $750,000 was paid during 2007 and the second installment in the amount of $1million is due November 13, 2008.  Mr. Festawill not be entitled to the second installment of the retention bonus if hisemployment is terminated prior to November 13, 2008, except in the casewhere his termination occurs after we emerge from Chapter 11 and is the resultof (i) his resignation as a result of constructive discharge, (ii) terminationby us not for cause, or (iii) his death or disability, in which case he wouldreceive the second installment in addition to any severance payments to whichhe is otherwise entitled.  The foregoingdescription of Mr. Festa’s employment agreement does not purport to becomplete and is qualified in its entirety by reference to the agreement, whichhas been filed with the SEC.

 

***Other Termination Or Change-In-ControlProvisions***

 

***Change-In-Control Severance Agreements.**** *We have entered into severance agreements with all ofour executive officers, which renew automatically unless the Board elects notto renew them.  These agreementsgenerally provide that in the event of the involuntary termination of theindividual’s employment without cause (including constructive terminationcaused by a material reduction in his or her authority or responsibility or bycertain other circumstances) following a ‘‘change in control,’’ he or she willgenerally receive a severance payment equal to three times the sum of his orher annual base salary plus target annual incentive compensation, subject to reduction,

 

 

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pro rata in the case ofan executive officer who is within 36 months of normal retirement age (65) or,under certain circumstances, to minimize the effect of certain excise taxes ifapplicable.  For purposes of theseverance agreements, ‘‘change in control’’ means the acquisition of 20% ormore of the outstanding Grace Common Stock (but not if such acquisition is theresult of the sale of Common Stock by Grace that has been approved by the Board),the failure of Board-nominated directors to constitute a majority of any classof the Board of Directors, the occurrence of a transaction in which the Graceshareholders immediately preceding such transaction do not own more than 50% ofthe combined voting power of the entity resulting from such transaction, or theliquidation or dissolution of Grace.  Asa result of Grace’s Chapter 11 filing, the following events will not constitutea ‘‘change in control’’: (i) the acquisition of Grace Common Stock by atrust established for purposes of administering asbestos-related claimspursuant to a plan of reorganization, and (ii) a corporate transactionpursuant to Section 363 of the U.S. Bankruptcy Code or a plan ofreorganization.  This description of theseverance agreements does not purport to be complete and is qualified in itsentirety by reference to the form of such agreement, which has been filed withthe SEC.

 

***Severance Arrangements. ***Wehave entered into severance agreements that establish severance arrangementswith each of the named executive officers, other than Mr. Festa, whoseseverance arrangements are covered by his employment agreement, and Mr. Bonham,whose severance arrangements were established by Compensation Committeeapproval.  Under the terms of theseverance arrangements applicable to the named executive officers, other than Mr. Festa,in the event of the involuntary termination of the executive officer’semployment under circumstances that would qualify the executive officer forseverance pay under the severance plan that generally covers our salariedemployees, the executive officer would be entitled to severance pay equal totwo times his or her annual base salary or, in the case of Mr. Bonham, oneand one-half times his annual base salary. Other than with respect to the amount of severance, Mr. Bonham’sseverance arrangements are the same as for the other named executive officers,other than Mr. Festa.  With respectto any executive officer who has another agreement regarding the payment ofseverance upon termination of employment, if such executive officer becomesentitled to severance under both the terms of the severance agreement and theother agreement, then the executive officer would only receive severance payunder the severance agreement, unless the other agreement provides for agreater amount of severance pay (in which case, the executive officer wouldonly receive severance pay under the other agreement).  This description of the severancearrangements does not purport to be complete and is qualified in its entiretyby reference to the form of executive severance agreement and the GraceSeverance Pay Plan for Salaried Employees, each of which has been filed withthe SEC.

 

***Executive Salary Protection Plan. ***All executive officers participate in the ExecutiveSalary Protection Plan which provides that, in the event of a participant’sdisability or death prior to age 70, we will continue to pay all or a portionof base salary to the participant or a beneficiary for a period based on theparticipant’s age at the time of disability or death.  Payments under the plan may not exceed 100%of base salary for the first year and 60% thereafter in the case of disability(50% in the case of death). Any 

 

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payment under the plan asa result of disability would be reduced by the amount of disability incomereceived under Grace’s long-term and short-term disability plans that aregenerally applicable to U.S. salaried employees.  This description of the plan does not purportto be complete and is qualified in its entirety by reference to the text of theExecutive Salary Protection Plan, as amended, which is filed with the SEC.

 

**Director Compensation**

 

Under the compensation program for nonemployee directors in effectduring 2007, each nonemployee director received an annual retainer of $75,000in cash, 50% of which was paid in January and 50% of which was paid inDecember.  In addition, directorsreceived $6,000 ($7,000 for directors holding a committee chair and $9,000 forthe lead independent director) in cash for each meeting date in respect of theBoard meeting and all committee meetings held on that date.  We reimburse directors for expenses theyincur in attending Board and committee meetings and other activities incidentalto their service as directors.  Ourdirectors, and all Grace employees, are entitled to participate in the GraceFoundation’s Matching Grants Program.  Wealso maintain business travel accident insurance coverage for our directors.  Mr. Festa’s compensation is describedabove in the Summary Compensation Table. Mr. Festa receives no additional compensation for serving as amember of the Board of Directors.

 

Thefollowing table sets forth amounts paid by Grace to our nonemployee directorsin connection with their services to Grace during 2007.

 
| **Name**                   | ** ** | **Fees  Earned  or  Paid in  Cash  ($)****(a)** | ** ** | **Stock  Awards  ($)** | ** ** | **Option  Awards  ($)** | ** ** | **Non-Equity  Incentive Plan  Compensation  ($)** | ** ** | **Change in  Pension  Value and  Nonqualified  Deferred  Compensation  Earnings  ($)** | ** ** | **All Other  Compensation  ($)** | ** ** | **Total  ($)** | ** ** |
|----------------------------|------------|-------------------------------------------------|------------|------------------------|------------|-------------------------|------------|---------------------------------------------------|------------|----------------------------------------------------------------------------------------|------------|----------------------------------|------------|----------------|------------|
| ****John F. Akers****      |       | 117,000                                         |       | -0-                    |       | -0-                     | (c)        | -0-                                               |       | -0-                                                                                    |       | 3,000                            | (b)        | 120,000        |       |
| ****H. Furlong Baldwin**** |       | 111,000                                         |       | -0-                    |       | -0-                     |       | -0-                                               |       | -0-                                                                                    |       | -0-                              |       | 111,000        |       |
| **Ronald C. Cambre**       |       | 111,000                                         |       | -0-                    |       | -0-                     |       | -0-                                               |       | -0-                                                                                    |       | 3,000                            | (b)        | 114,000        |       |
| **Marye Anne Fox**         |       | 117,000                                         |       | -0-                    |       | -0-                     |       | -0-                                               |       | -0-                                                                                    |       | 3,000                            | (b)        | 120,000        |       |
| **John J. Murphy**         |       | 117,000                                         |       | -0-                    |       | -0-                     | (c)        | -0-                                               |       | -0-                                                                                    |       | 3,000                            | (b)        | 120,000        |       |
| **Paul J. Norris**         |       | 111,000                                         |       | -0-                    |       | -0-                     |       | -0-                                               |       | -0-                                                                                    |       | 127,500                          | (d)        | 238,500        |       |
| **Christopher J. Steffen** |       | 111,000                                         |       | -0-                    |       | -0-                     |       | -0-                                               |       | -0-                                                                                    |       | -0-                              |       | 111,000        |       |
| **Mark E. Tomkins**        |       | 111,000                                         |       | -0-                    |       | -0-                     |       | -0-                                               |       | -0-                                                                                    |       | -0-                              |       | 111,000        |       |
| **Thomas A. Vanderslice**  |       | 120,000                                         |       | -0-                    |       | -0-                     | (c)        | -0-                                               |       | -0-                                                                                    |       | -0-                              |       | 120,000        |       |

 

67

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----

| (a) |   | Amount consists of  annual retainer in the amount of $75,000, meeting fees in the amount of  $36,000, other than Mr. Vanderslice who was paid $30,000 and additional  payments to: Mr. Akers for serving as Chair of the Compensation  Committee in the amount of $6,000; Dr. Fox for serving as Chair of the  Corporate Responsibility Committee in the amount of $6,000; Mr. Murphy  for serving as Chair of the Audit Committee in the amount of $6,000; and  Mr. Vanderslice for serving as Chair of the Nominating and Governance  Committee and Lead Independent Director in the amount of $15,000. |
|-----|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (b) |   | Consists of charitable  contributions paid to academic institutions at the request of the director  pursuant to the Grace Foundation’s Matching Grants Program. Grace also paid  an aggregate of $350 in premiums for business travel accident insurance  coverage for all directors during 2007.                                                                                                                                                                                                                                                                                                                             |
| (c) |   | The following directors hold options to purchase shares of  Grace common stock all of which are currently vested and exercisable in the  following amounts: Mr. Akers—74,535, Mr. Murphy—15,528 and Mr. Vanderslice—69,876.                                                                                                                                                                                                                                                                                                                                                                          |
| (d) |   | Consists of payments to Mr. Norris pursuant to his  consulting agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |

 

Thecompensation program for nonemployee directors has been revised for 2008 suchthat each nonemployee director receives an annual retainer of $105,000 in cash,50% of which is paid in January and 50% of which is paid in December.  In addition, directors receive $6,000 ($8,000for directors holding a committee chair, $9,000 for the chair of the AuditCommittee and $11,000 for the lead independent director) in cash for eachmeeting date in respect of the Board meeting and all committee meetings held onthat date.

 

***Norris Consulting Agreement***

 

The CompensationCommittee and the Bankruptcy Court have approved a consulting agreementbetween Grace and Mr. Norris dated January 19, 2005, under which Mr. Norrismonitors our Chapter 11 proceedings and provides consulting services and adviceto our CEO, certain of our employees and the Board of Directors, regardingthose proceedings and other matters. Under this agreement, Mr. Norrisperforms services as an independent contractor, and retains no authority toenter into agreements on our behalf and has no management or supervisoryauthority over our officers or employees. Under his agreement, Mr. Norrisis entitled to a monthly retainer equal to $35,416.67 (i.e., $425,000 peryear), provided that the retainer is subject to adjustment downward if Mr. Norris’services under the agreement are required for less than one-half of a regular40-hour work week.  Based on the amountof time Mr. Norris is currently devoting to his duties under theagreement, his monthly retainer has been adjusted to $10,625 ($127,500 peryear). We anticipate that Mr. Norris will continue to provide servicesunder the agreement until we emerge from Chapter 11.  Mr. Norris’ consulting agreement may beterminated by the Board of Directors or Mr. Norris at any time upon 30days’ written notice, without the obligation to make any post-terminationpayments, and in any event, the agreement will terminate 90 days after weemerge from Chapter 11.  During theperiod of the agreement, Mr. Norris has access to office space andadministrative services at our Columbia, Maryland headquarters. In addition,during this period and so long as he remains a director, Mr. Norris iseligible to receive the 

 

68

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samecompensation payable to our other nonemployee directors.  The foregoing description of Mr. Norris’consulting agreement does not purport to be complete and is qualified in itsentirety by reference to the agreement that has been filed with the SEC.

 

**Compensation Committee Interlocks And InsiderParticipation**

 

During 2007, the Compensation Committee of the Board was comprised of Messrs. Akers(Chair), Baldwin, Cambre, Murphy, Vanderslice, Tomkins and Steffen and Dr. Fox.  None of our executive officers serves or inthe past has served as a member of the board of directors or compensationcommittee of any entity that has one or more of its executive officers servingon our Board of Directors or our Compensation Committee.  None of these persons is our current orformer officer or employee, nor did we have any reportable transactions withany of these persons.

 

69

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| **Item 12.** |   | **SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND  MANAGEMENT AND RELATED STOCKHOLDER MATTERS** |
|--------------|--------|-----------------------------------------------------------------------------------------------------|

 

**SECURITY OWNERSHIP**

 

The following table sets forth the amount of Grace common stockbeneficially owned, directly or indirectly, as of January 31, 2008 by:

 

·                  each person that we know isthe beneficial owner of more than 5% of the outstanding shares of Grace commonstock

 

·                  each current director

 

·                  each of the individualsnamed in the Summary Compensation Table set forth in Item 11 above

 

·                  all directors and allexecutive officers as a group

 

 

70

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| ******Name and Address of Beneficial Owner****(1)**                                                                                                                     | ** ** | **Shares  of Common Stock   Beneficially  Owned** | ** ** | ******Percent** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|-----------------|------------|
| **Peninsula  Partners, L.P.****(2)**

404B East Main Street 

2nd Floor   Charlottesville, VA 22902                                                                     |       | 10,765,600                                        |       | 15.0            | %          |
| ** **                                                                                                                                                              |       |                                              |       |            |       |
| **Citadel  Limited Partnership****(3)******

**Citadel  Investment Group, L.L.C.**

**Kenneth  Griffin**  131 S. Dearborn Street 

32nd Floor   Chicago, Illinois 60603 |       | 4,093,241                                         |       | 5.7             | %          |
| ** **                                                                                                                                                              |       |                                              |       |            |       |
| **J. F.  Akers**                                                                                                                                                        |       | 38,996                                            |       |            |       |
| ** **                                                                                                                                                              |       | 74,535                                            | (O)        |            |       |
| ** **                                                                                                                                                              |       | 15,196                                            | (T)        |            |       |
| ** **                                                                                                                                                              |       |                                              |       |            |       |
| **H. F.  Baldwin**                                                                                                                                                      |       | 21,918                                            |       | *               |       |
| ** **                                                                                                                                                              |       |                                              |       |            |       |
| **R. C.  Cambre**                                                                                                                                                       |       | 28,494                                            |       | *               |       |
| ** **                                                                                                                                                              |       |                                              |       |            |       |
| **A. E.  Festa**                                                                                                                                                        |       | –0–                                     |       | –0–   |       |
| ** **                                                                                                                                                              |       |                                              |       |            |       |
| **M. A.  Fox**                                                                                                                                                          |       | 41,246                                            |       | *               |       |
| ** **                                                                                                                                                              |       | 8,942                                             | (T)        |            |       |
| ** **                                                                                                                                                              |       |                                              |       |            |       |
| **J. J.  Murphy**                                                                                                                                                       |       | 38,930                                            |       | *               |       |
| ** **                                                                                                                                                              |       | 15,528                                            | (O)        |            |       |
| ** **                                                                                                                                                              |       | 18,629                                            | (T)        |            |       |
| ** **                                                                                                                                                              |       |                                              |       |            |       |
| **P. J.  Norris**                                                                                                                                                       |       | 138,822                                           |       | *               |       |
| ** **                                                                                                                                                              |       |                                              |       |            |       |
| **C. J.  Steffen**                                                                                                                                                      |       | –0–                                     |       | –0–   |       |
| ** **                                                                                                                                                              |       |                                              |       |            |       |
| **M. E.  Tomkins**                                                                                                                                                      |       | –0–                                     |       | –0–   |       |
| ** **                                                                                                                                                              |       |                                              |       |            |       |
| **T. A.  Vanderslice**                                                                                                                                                  |       | 39,522                                            |       | *               |       |
| ** **                                                                                                                                                              |       | 69,876                                            | (O)        |            |       |
| ** **                                                                                                                                                              |       | 14,932                                            | (T)        |            |       |
| ** **                                                                                                                                                              |       |                                              |       |            |       |
| **D. A.  Bonham**                                                                                                                                                       |       | –0–                                     |       | –0–   |       |
| ** **                                                                                                                                                              |       |                                              |       |            |       |
| **G. E.  Poling**                                                                                                                                                       |       | 101,500                                           | (O)        | *               |       |
| ** **                                                                                                                                                              |       |                                              |       |            |       |
| **R. M.  Tarola**                                                                                                                                                       |       | 15,000  202,900                                   | (O)        | *               |       |
| ** **                                                                                                                                                              |       |                                              |       |            |       |
| **M. A.  Shelnitz**                                                                                                                                                     |       | 3,500                                             |       | *               |       |
| ** **                                                                                                                                                              |       | 68,200                                            | (O)        |            |       |
| ** **                                                                                                                                                              |       | 9,421                                             | (T)        |            |       |
| ** **                                                                                                                                                              |       |                                              |       |            |       |
| **Directors  and executive officers as a group**                                                                                                                        |       | 366,428                                           |       | 1.3             | %          |
| ** **                                                                                                                                                              |       | 532,539                                           | (O)        |            |       |
| ** **                                                                                                                                                              |       | 67,120                                            | (T)        |            |       |

 

71

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----

| *      |   | Indicates less than 1%                                                                                                                                                                                                                                                                                                                        |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (O)    |   | Shares covered by stock  options exercisable on or within 60 days after January 31, 2008.                                                                                                                                                                                                                                                     |
| (T)    |   | Shares owned by trusts  and other entities as to which the person has the power to direct voting  and/or investment.                                                                                                                                                                                                                          |
| (1)    |   | The address of each of  our directors and executive officers is c/o Secretary, W. R. Grace &  Co., 7500 Grace Drive, Columbia, MD 21044.                                                                                                                                                                                             |
| (2)    |   | The ownership  information set forth is based in its entirety on material contained in a  Form 4 report dated September 10, 2001 filed with the SEC.                                                                                                                                                                                |
| (3)    |   | The ownership  information set forth above is based in its entirety on material contained in  a Schedule 13G/A filed February 13, 2008 with the SEC. The number of  shares beneficially owned includes shares owned by the following investment  funds and managed accounts: Citadel Derivatives Group LLC and Citadel Equity  Fund Ltd. |
|   |   |                                                                                                                                                                                                                                                                                                                                          |

**EQUITY COMPENSATION PLAN INFORMATION**

 

Thefollowing table sets forth information as of December 31, 2007 withrespect to our compensation plans under which shares of Grace common stock areauthorized for issuance upon the exercise of options, warrants or other rights.The only such compensation plans in effect are stock incentive plans providingfor the issuance of stock options and restricted stock.

 
| **Plan category**                                           | ** ** | **Number of securities to  be issued upon exercise  of outstanding options** | ** ** | **Weighted-average  exercise price of  outstanding options  ($)** | ** ** | **Number of securities remaining  available for future issuance under  equity compensation plans   (excluding securities to  be issued upon exercise  of outstanding options)** | ** ** |
|-------------------------------------------------------------|------------|------------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| **Equity compensation plans  approved by security holders** |       | 1,868,963                                                                    |       | $                                                                 | 13.33      |                                                                                                                                                                            | 4,761,457  |   |
|                                                             |            |                                                                              |            |                                                                   |            |                                                                                                                                                                                 |            |  |

 
| **Item 13.** |   | **CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND  DIRECTOR INDEPENDENCE** |
|--------------|--------|----------------------------------------------------------------------------|

 

**BOARD INDEPENDENCE**

 

TheBoard has determined that all directors, other than Mr. Festa (who is alsoChief Executive Officer) and Mr. Norris (who was Chief Executive Officeruntil June 1, 2005 and is currently a consultant to Grace) are independentunder New York Stock Exchange rules because none of such directors has anydirect or indirect material relationship with Grace or our affiliates, otherthan through his or her service as a director and as an owner of less than 1%of Grace common stock. This determination was based on a number of factors,principal among them were the following:

 

·                  none of these directors, nor any member oftheir immediate families is (or at any time during the last three years was) aGrace executive officer or employee and none of these directors is an employee,and no member of their immediate families is an executive officer of any otherentity with whom we do any material amount of business;

 

72

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·                  none of these directors or any member oftheir immediate families has, during the last three years, received anycompensation from Grace (other than Board retainer and meeting fees); and

·                  none of these directors serve, or within thelast three years served, as an executive officer, director, trustee orfiduciary of any charitable organization to which we made any materialdonation.

 

Onlyindependent directors serve on our Audit, Nominating and Governance,Compensation and Corporate Responsibility Committees.  Mr. Vanderslice has been appointed LeadIndependent Director and, in this capacity, presides at executive sessions ofindependent directors. Interested parties may communicate with Mr. Vandersliceby writing him at the following address: Thomas A. Vanderslice—Lead IndependentDirector, c/o W. R. Grace & Co., 7500 Grace Drive, Columbia, Maryland21044.

 

**REVIEW, APPROVAL OR RATIFICATION OF TRANSACTIONS WITH RELATEDPARTIES**

 

TheBoard recognizes that transactions involving related persons in which Grace isa participant can present conflicts of interest, or the appearance thereof, sothe Board has adopted a written policy as part of the Grace CorporateGovernance Principles (which are available on our website atwww.grace.com/About/Leadership/Governance/) with respect to related persontransactions.  The policy applies totransactions involving related persons that are required to be disclosedpursuant to SEC regulations, which are generally transactions in which:

 

·                  Grace is a participant;

 

·                  the amount involved exceeds $120,000; and

 

·                  any related person, such as a Grace executiveofficer, director, director nominee, 5% stockholder or any of their respectivefamily members, has a direct or indirect material interest.

 

Eachsuch related person transaction shall be reviewed, determined to be in, or notinconsistent with, the best interests of Grace and its stockholders andapproved or ratified by:

 

·                  the disinterested members of the AuditCommittee, if the disinterested members of the Audit Committee constitute amajority of the members of the Audit Committee; or

 

·                  the disinterested members ofthe Board.

 

73

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Inthe event a related person transaction is entered into without prior approvaland, after review by the Audit Committee or the Board, as the case may be, thetransaction is not ratified, we will make all reasonable efforts to cancel thetransaction.

 
| **Item 14.** |   | **PRINCIPAL ACCOUNTANT FEES AND SERVICES** |
|--------------|--------|--------------------------------------------|

 

TheAudit Committee of the Board of Directors selected PricewaterhouseCoopers LLP,or PwC, to act as our principal independent accountants for 2007. The followingtable sets forth the fees that we incurred for the services of PwC for thefiscal years ended December 31, 2007 and 2006:

 
| ** **         | ** ** | **2007**      | ** ** | **2006** | ** ** |
|--------------------|------------|---------------|------------|----------|------------|
| Audit Fees         |       | 4,666,400     |       | $        | 4,484,600  |   |
| Audit-Related Fees |       | 244,400       |       | 239,200  |       |
| Tax Fees           |       | 20,000        |       | 7,900    |       |
| All Other Fees     |       | –0– |       | 26,300   |       |
| Total Fees         |       | 4,930,800     |       | $        | 4,758,000  |   |

 

AuditServices consisted of the audit of our Consolidated Financial Statements andour internal controls over financial reporting (as required under Section 404of the Sarbanes-Oxley Act of 2002), the review of our consolidated quarterlyfinancial statements and statutory audits of certain of Grace’s non-U.S.subsidiaries and affiliates.

 

Audit-RelatedServices primarily consisted of (1) an audit of the financial statementsof Advanced Refining Technologies, LLC (a joint venture with Chevron ProductsCompany), (2) an audit of Grace’s 401(k) plan, and (3) audits ofsubsidiary benefit plans as required.

 

TaxServices consisted of tax advice and compliance for non-U.S. subsidiaries,including preparation of tax returns, and advice relating to Grace’s transferpricing policies.

 

TheAudit Committee has adopted a preapproval policy that requires the AuditCommittee to specifically preapprove the annual engagement of the independentaccountants for the audit of our Consolidated Financial Statements and internalcontrols. The policy also provides for general preapproval of certainaudit-related, tax and other services provided by the independent accountants.  Any other services must be specificallypreapproved by the Audit Committee. However, the Chair of the Audit Committeehas the authority to preapprove services requiring immediate engagement betweenscheduled meetings of the Audit Committee. The Chair must report any suchpreapproval decisions to the full Audit Committee at its next scheduledmeeting. During 2007, no audit-related, tax, or other services were performedby PwC without specific or general approval as described above.

 

74

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**PART IV**

 

** **
| **Item  15.** |   | **EXHIBITS  AND FINANCIAL STATEMENT SCHEDULES** |
|---------------|--------|-------------------------------------------------|

** **

Financial Statements andSchedules. The required information is set forth in theFinancial Supplement under the heading “Index to Consolidated FinancialStatements and Financial Statement Schedule and Exhibit” which is incorporatedherein by reference.

 

Exhibits.The exhibits to this Report are listed below. Other than exhibits that arefiled herewith, all exhibits listed below are incorporated by reference.Exhibits indicated by an asterisk (*) are the management contracts andcompensatory plans, contracts or arrangements required to be filed as exhibitsto this Report.

 

For purposes ofdescribing these exhibits, “Old Grace” means W. R. Grace & Co., aDelaware corporation (subsequently renamed Sealed Air Corporation), apredecessor to the Company, and “Grace New York” means W. R. Grace &Co., a New York corporation (subsequently renamed Fresenius Medical CareHoldings, Inc.), a predecessor to Old Grace.

 
| **EXHIBIT  NO.** | ** ** | **EXHIBIT**                                                                                                                                                                                                                                                                                            | ** ** | **WHERE  LOCATED**                                                                                                                                               |
|------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |       |                                                                                                                                                                                                                                                                                                   |       |                                                                                                                                                             |
| 2.1              |       | Form of Distribution Agreement, by and among  Old Grace, W. R. Grace & Co.-Conn. and Grace Specialty  Chemicals, Inc. (now named W. R. Grace & Co.)                                                                                                                        |       | Annex B to the Joint Proxy Statement/Prospectus  dated February 13, 1998 of Old Grace and Sealed Air Corporation included  in Form S-4 (filed 2/13/98) |
|             |       |                                                                                                                                                                                                                                                                                                   |       |                                                                                                                                                             |
| 2.2              |       | Proposed Amended Joint Plan of Reorganization of  W. R. Grace & Co. and its debtor subsidiaries dated January 13,  2005                                                                                                                                                                  |       | Exhibit 2.2 to Form 10-K (filed 3/7/05)                                                                                                                |
|             |       |                                                                                                                                                                                                                                                                                                   |       |                                                                                                                                                             |
| 3.1              |       | Restated Certificate of Incorporation of W. R.  Grace & Co.                                                                                                                                                                                                                                   |       | Exhibit 3.1 to Form 8-K (filed 4/8/98)                                                                                                                 |
|             |       |                                                                                                                                                                                                                                                                                                   |       |                                                                                                                                                             |
| 3.2              |       | Amended and Restated By-laws of W. R.  Grace & Co.                                                                                                                                                                                                                                            |       | Exhibit 3.1 to Form 8-K (filed 9/17/07)                                                                                                                |
|             |       |                                                                                                                                                                                                                                                                                                   |       |                                                                                                                                                             |
| 4.1              |       | Rights Agreement dated as of March 31, 1998  between W. R. Grace & Co. and The Chase Manhattan Bank, as Rights  Agent                                                                                                                                                                    |       | Exhibit 4.1 to Form 8-K (filed 4/8/98)                                                                                                                 |
|             |       |                                                                                                                                                                                                                                                                                                   |       |                                                                                                                                                             |
| 4.2              |       | Credit Agreement dated as of May 14, 1998,  among W. R. Grace & Co.-Conn., W. R. Grace & Co., the  several banks parties thereto; the co-agents signatories thereto; The Chase  Manhattan Bank, as administrative agent for such banks; and Chase Securities  Inc., as arranger |       | Exhibit 4.1 to Form 10-Q (filed 8/14/98)                                                                                                               |

 

 

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| 4.3    |   | 364-Day Credit Agreement, dated as of May 5,  1999, among W. R. Grace & Co.-Conn.; W. R. Grace & Co.; the  several banks parties thereto; the co-agents signatories thereto; Bank of  America National Trust and Savings Association, as documentation agent; The  Chase Manhattan Bank, as administrative agent for such banks; and Chase  Securities Inc., as book manager |   | Exhibit 4.1 to Form 10-Q (filed 8/3/99)                |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                |   |                                                             |
| 4.4    |   | First Amendment to 364-Day Credit Agreement dated  as of May 5, 1999 among W. R. Grace & Co.-Conn.; W. R.  Grace & Co.; the several banks parties thereto; Bank of America  National Trustand  Savings Association, as document agent; The Chase Manhattan Bank, as administrative agent for such banks; and  Chase Securities, Inc., as bank manager                   |   | Exhibit 4 to Form 10-Q (filed 8/15/00)                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                |   |                                                             |
| 4.5    |   | Post-Petition Loan and Security Agreement dated as  of April 1, 2001 among the financial institutions named therein, as  Lenders, Bank of America, N.A. as Agent, and W. R. Grace & Co. and  its subsidiaries named therein as Debtors and Debtors-in-Possession, as  Borrowers                                                                                                       |   | Exhibit 4 to Form 10-Q (filed 8/14/01)                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                |   |                                                             |
| 4.6    |   | Amendment No. 1 and Limited Waiver to  Post-Petition Loan and Security Agreement                                                                                                                                                                                                                                                                                                               |   | Exhibit 4 to Form 10-Q (filed  May 13, 2003)      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                |   |                                                             |
| 4.7    |   | Amendment No. 2 and Limited Waiver to  Post-Petition Loan and Security Agreement                                                                                                                                                                                                                                                                                                               |   | Exhibit 4.1 to Form 10-Q (filed  May 9, 2006)     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                |   |                                                             |
| 4.8    |   | Amendment No. 3 and Limited Waiver to  Post-Petition Loan and Security Agreement                                                                                                                                                                                                                                                                                                               |   | Exhibit 4.2 to Form 10-Q (filed  May 9, 2006)     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                |   |                                                             |
| 4.9    |   | Amendment No. 4 and Limited Waiver to  Post-Petition Loan and Security Agreement                                                                                                                                                                                                                                                                                                               |   | Exhibit 4.3 to Form 10-Q (filed  May 9, 2006)     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                |   |                                                             |
| 4.10   |   | Receivables Purchase agreement dated as of  January 23, 2007 between Grace GmbH &Co. KG and Coface Finanz GmbH                                                                                                                                                                                                                                                                        |   | Exhibit 4.10 to Form 10-K (filed  3/02/07)             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                |   |                                                             |
| 10.1   |   | Form of Employee Benefits Allocation  Agreement, by and among Old Grace, W. R. Grace & Co.-Conn. and Grace  Specialty Chemicals, Inc. (now named W. R. Grace & Co.)                                                                                                                                                                                                     |   | Exhibit 10.1 to Form 10-K (filed  March 13, 2003) |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                |   |                                                             |
| 10.2   |   | Form of Tax Sharing Agreement, by and among  Old Grace, W. R. Grace & Co.-Conn. and Grace Specialty  Chemicals, Inc. (now named W. R.Grace & Co.)                                                                                                                                                                                                                       |   | Exhibit 10.2 to Form 10-K (filed  3/13/03)             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                |   |                                                             |
| 10.3   |   | W. R. Grace & Co. 2000 Stock Incentive  Plan, as amended                                                                                                                                                                                                                                                                                                                                   |   | Exhibit 10 to Form 10-Q (filed 8/15/00)*               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                |   |                                                             |
| 10.4   |   | W. R. Grace & Co. 1998 Stock Incentive  Plan                                                                                                                                                                                                                                                                                                                                               |   | Exhibit 10.4 to Form 10-K (filed  3/13/03)*            |

 

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| 10.5   |   | W. R. Grace & Co. 1998 Stock Plan for  Nonemployee Directors                                        |   | Exhibit 10.5 to Form 10-K (filed  3/13/03)*                                       |
|--------|--------|--------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------|
|   |   |                                                                                                         |   |                                                                                        |
| 10.6   |   | W. R. Grace & Co. 1996 Stock Incentive  Plan, as amended                                            |   | Exhibit 10.6 to Form 10-K (filed  3/5/04)*                                        |
|   |   |                                                                                                         |   |                                                                                        |
| 10.7   |   | W. R. Grace & Co. Supplemental Executive  Retirement Plan, as amended                               |   | Exhibit 10.7 to Form 10-K (filed  3/28/02)*                                       |
|   |   |                                                                                                         |   |                                                                                        |
| 10.8   |   | W. R. Grace & Co. Executive Salary  Protection Plan, as amended                                     |   | Exhibit 10.8 to Form 10-K (filed  3/28/02)*                                       |
|   |   |                                                                                                         |   |                                                                                        |
| 10.9   |   | W. R. Grace & Co. 1994 Stock Incentive  Plan,as amended                                             |   | Exhibit 10.11 to Form 10-K (filed  3/28/02)*                                      |
|   |   |                                                                                                         |   |                                                                                        |
| 10.10  |   | Form of Stock Option Agreements                                                                         |   | Exhibit 10.14 to Registration Statement on  Form S-1 of Old Grace (filed 8/2/96)* |
|   |   |                                                                                                         |   |                                                                                        |
| 10.11  |   | Form of Stock Option Agreements                                                                         |   | Exhibit 10.5 to Form 10-Q (filed  5/15/98)*                                       |
|   |   |                                                                                                         |   |                                                                                        |
| 10.12  |   | Form of 2004-2006 Long-Term Incentive Program  Award                                                    |   | Exhibit 10.29 to Form 10-K (filed  3/7/05)*                                       |
|   |   |                                                                                                         |   |                                                                                        |
| 10.13  |   | Form of 2005-2007 Long-Term Incentive Program  Award                                                    |   | Exhibit 10.1 to Form 8-K (filed  7/21/05)*                                        |
|   |   |                                                                                                         |   |                                                                                        |
| 10.14  |   | Form of 2006-2008 Long-Term Incentive Program  Award                                                    |   | Exhibit 10.1 to Form 8-K (filed  11/06/06)*                                       |
|   |   |                                                                                                         |   |                                                                                        |
| 10.15  |   | Form of 2007-2009 Long-Term Incentive Program  Award                                                    |   | Exhibit 10.1 to Form 10-Q (filed  11/08/07)*                                      |
|   |   |                                                                                                         |   |                                                                                        |
| 10.16  |   | Form of Executive Severance Agreement between  Grace and certain officers                               |   | Exhibit 10.17 to Form 10-K (filed  3/13/03)*                                      |
|   |   |                                                                                                         |   |                                                                                        |
| 10.17  |   | Severance Pay Plan for Salaried Employees                                                                    |   | Exhibit 10.17 to Form 10-K (filed  3/02/07)*                                      |
|   |   |                                                                                                         |   |                                                                                        |
| 10.18  |   | Employment Agreement dated May 11, 1999  between Grace and Robert M. Tarola                             |   | Exhibit 10.1 to Form 10-Q (filed  8/13/99)*                                       |
|   |   |                                                                                                         |   |                                                                                        |
| 10.19  |   | Letter Agreement dated May 7, 1999 between  Paul J. Norris, on behalf of Grace, and William M. Corcoran |   | Exhibit 10.24 to Form 10-K (filed  4/16/01)*                                      |
|   |   |                                                                                                         |   |                                                                                        |
| 10.20  |   | Form of Indemnification Agreement between  Grace and certain officers and directors                     |   | Exhibit 10.27 to Form 10-K (filed  4/16/01)*                                      |
|   |   |                                                                                                         |   |                                                                                        |
| 10.21  |   | Form of Retention Agreement between Grace and  certain officers (includes enhanced severance provision) |   | Exhibit 10.28 to Form 10-K (filed  4/16/01)*                                      |
|   |   |                                                                                                         |   |                                                                                        |
| 10.22  |   | Annual Incentive Compensation Program                                                                        |   | Exhibit 10.26 to Form 10-K (filed  3/13/03)*                                      |

 

77

----

 
| 10.23   |   | Letter Agreement dated January 19, 2005  between Paul J. Norris, on behalf of Grace, and Fred Festa                                                               |   | Exhibit 10.1 to Form 8-K (filed  4/29/05)*                                                                  |
|---------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------|
|    |   |                                                                                                                                                                   |   |                                                                                                                  |
| 10.24   |   | Letter Agreement dated January 19, 2005  between Thomas A. Vanderslice, on behalf of Grace, and Paul J. Norris                                                    |   | Exhibit 10.2 to Form 8-K (filed  4/29/05)*                                                                  |
|    |   |                                                                                                                                                                   |   |                                                                                                                  |
| 12      |   | Computation of Ratio of Earnings to Fixed Charges  and Combined Fixed Charges and Preferred Stock Dividends                                                            |   | Filed herewith in in this Report in Item 8  (Financial Statements and Supplementary Data) in the Financial Supplement |
|    |   |                                                                                                                                                                   |   |                                                                                                                  |
| 21      |   | List of Subsidiaries of W. R. Grace & Co.                                                                                                                     |   | Filed herewith                                                                                                        |
|    |   |                                                                                                                                                                   |   |                                                                                                                  |
| 23      |   | Consent of Independent Accountants                                                                                                                                     |   | Filed herewith in in this Report in Item 8  (Financial Statements and Supplementary Data) in the Financial Supplement |
|    |   |                                                                                                                                                                   |   |                                                                                                                  |
| 24      |   | Powers of Attorney                                                                                                                                                     |   | Filed herewith                                                                                                        |
|    |   |                                                                                                                                                                   |   |                                                                                                                  |
| 31(i).1 |   | Certification of Periodic Report by Chief  Executive Officer under Section 302 of the Sarbanes-OxleyAct of 2002                                                   |   | Filed herewith                                                                                                        |
|    |   |                                                                                                                                                                   |   |                                                                                                                  |
| 31(i).2 |   | Certification of Periodic Report by Chief  Financial Officer under Section 302 of the Sarbanes-OxleyAct of 2002                                                   |   | Filed herewith                                                                                                        |
|    |   |                                                                                                                                                                   |   |                                                                                                                  |
| 32      |   | Certification of Periodic Report by Chief Executive  Officer and Chief Financial Officer under Section 906 of the  Sarbanes-Oxley Act of 2002                     |   | Filed herewith                                                                                                        |
|    |   |                                                                                                                                                                   |   |                                                                                                                  |
| 99.1    |   | Amended Disclosure Statement for proposed Amended  Joint Plan of Reorganization of W. R. Grace & Co. and its debtor  subsidiaries dated January 13, 2005 |   | Exhibit 99.1 to Form 10-K (filed 3/7/05)                                                                    |
|    |   |                                                                                                                                                                   |   |                                                                                                                  |
| 99.2    |   | Glossary of terms used in Plan of Reorganization  documents                                                                                                            |   | Exhibit 99.2 to Form 10-K (filed 3/7/05)                                                                    |

 

78

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** **

**SIGNATURES**

** **

Pursuant to the requirementsof Section 13 or 15(d) of the Securities Exchange Act of 1934, theregistrant has duly caused this Report to be signed on its behalf by theundersigned, thereto duly authorized.

 
|   | W. R. GRACE &  CO.                                 |
|--------|-------------------------------------------------------------|
|   |                                                        |
|   | By:                                                         | /s/ Alfred E. Festa |
|   | Alfred E. Festa  (President and   Chief Executive  Officer) |   |

 

 
|   |   | By:  | /s/ Robert M. Tarola                                                   |
|--------|--------|-----------|------------------------------------------------------------------------|
|   |   |      | Robert M. Tarola  (Senior Vice President and  Chief Financial Officer) |

 

Dated:   February 29,2008

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this Report has beensigned below by the following persons on behalf of the registrant and in thecapacities indicated on March 1, 2007.

 

| **Signature**      | ** ** | ** ** | **Title** |
|--------------------|------------|------------|-----------|
| J. F. Akers*       |       | }          |      |
| H. F. Baldwin*     |       | }          |      |
| R. C. Cambre*      |       | }          |      |
| M. A. Fox*         |       | }          |      |
| J. J. Murphy*      |       | }          | Directors |
| P. J. Norris*      |       | }          |      |
| C. J. Steffen*     |       | }          |      |
| M. E. Tomkins*     |       | }          |      |
| T. A. Vanderslice* |       | }          |      |

 
| /s/ Alfred E. Festa  |   | Chief Executive Officer and Director |
|----------------------|--------|--------------------------------------|
| (Alfred E. Festa)    |   | (Principal Executive Officer)        |
|                 |   |                                 |
| /s/ Robert M. Tarola |   | Senior Vice President and Chief )    |
| (Robert M. Tarola)   |   | Financial Officer                    |
|                 |   | (Principal Financial Officer         |
|                 |   | (Principal Accounting Officer)       |

----

*                            Bysigning his name hereto, Mark A. Shelnitz is signing this document on behalf ofeach of the persons indicated above pursuant to powers of attorney duly executedby such persons and filed with the Securities and Exchange Commission.

 
|   |   | By:  | /s/ Mark A. Shelnitz                 |
|--------|--------|-----------|--------------------------------------|
|   |   |      | Mark A. Shelnitz  (Attorney-in-Fact) |

 

79

----

 

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

** **

**Financial Supplement**

 

**W. R.GRACE & CO.**

**ANNUAL REPORT ON FORM 10-K**

**FOR THE YEAR ENDED DECEMBER 31, 2007**

 

 

 

 

 

F-1

----

 

**FINANCIALSUPPLEMENT**

**to**

**AnnualReport on Form 10-K for the Year Ended December 31, 2007**

 

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

 

Index toConsolidated Financial Statementsand Financial Statement Schedule and Exhibit

 
| Management’s  Report on Financial Information and Internal Controls                                                        |   | F-3         |
|---------------------------------------------------------------------------------------------------------------------------------|--------|-------------|
| Report  of Independent Registered Public Accounting Firm                                                                        |   | F-4         |
| Consent  of Independent Registered Public Accounting Firm                                                                       |   | F-5         |
| Consolidated Statements of Operations for the three  years in the period ended December 31, 2007                           |   | F-6         |
| Consolidated Statements of Cash Flows for the three  years in the period ended December 31, 2007                           |   | F-7         |
| Consolidated  Balance Sheets at December 31, 2007 and 2006                                                                 |   | F-8         |
| Consolidated  Statements of Shareholders’ Equity (Deficit) for the three years in the  period ended December 31, 2007 |   | F-9         |
| Consolidated  Statements of Comprehensive Income (Loss) for the three years in the period  ended December 31, 2007         |   | F-9         |
| Notes to Consolidated Financial Statements                                                                                      |   | F-10 - F-48 |
| Selected  Financial Data                                                                                                        |   | F-49        |
| Management’s Discussion and Analysis of Financial  Condition and Results of Operations                                     |   | F-50 - F-80 |
|                                                                                                                            |   |        |
| Financial  Statement Schedule                                                                                                   |   |        |
| Schedule II -  Valuation and Qualifying Accounts and Reserves                                                                   |   | F-81        |
|                                                                                                                            |   |        |
| Exhibit 12:  Computation of Ratio of Earnings to Fixed Charges and Combined Fixed Charges  and Preferred Stock Dividends   |   | F-82        |
|                                                                                                                            |   |        |

 

The financial data listedabove appearing in this Financial Supplement are incorporated by referenceherein. The Financial Statement Schedule should be read in conjunction with theConsolidated Financial Statements and Notes thereto. Financial statements ofless than majority-owned persons and other persons accounted for by the equitymethod have been omitted as provided in Rule 3-09 of the United StatesSecurities and Exchange Commission’s (SEC) Regulation S-X. Financial StatementSchedules not included have been omitted because they are not applicable or therequired information is shown in the Consolidated Financial Statements or Notesthereto.

### ** **

F-2

----

### ** **

### **Management’sReport on Financial Information and Internal Controls**

### ** **

***Responsibility For Financial Information —*** We are responsible for the preparation,accuracy, integrity and objectivity of the Consolidated Financial Statementsand the other financial information included in this report.  Such information has been prepared inconformity with accounting principles generally accepted in the United Statesof America and accordingly, includes certain amounts that representmanagement’s best estimates and judgments. Actual amounts could differ fromthose estimates.

 

***Responsibility for Internal Controls —*** We are also responsible for establishingand maintaining adequate internal controls over financial reporting. Theseinternal controls consist of policies and procedures that are designed toassess and monitor the effectiveness of the control environment including: riskidentification, governance structure, delegations of authority, informationflow, communications and control activities. A chartered Disclosure Committeeoversees Grace’s public financial reporting process and key managers arerequired to confirm their compliance with Grace’s policies and internalcontrols quarterly. While no system of internal controls can ensure eliminationof all errors and irregularities, Grace’s internal controls, which are reviewedand modified in response to changing conditions, have been designed to providereasonable assurance that assets are safeguarded, policies and procedures arefollowed, transactions are properly executed and reported, and appropriatedisclosures are made. The concept of reasonable assurance is based on therecognition that there are limitations in all systems of internal control andthat the costs of such systems should be balanced with their benefits. TheAudit Committee of the Board of Directors, which is comprised solely ofindependent directors, meets regularly with Grace’s senior financialmanagement, internal auditors and independent registered public accounting firmto review audit plans and results, as well as the actions taken by managementin discharging its responsibilities for accounting, financial reporting andinternal controls. The Audit Committee is responsible for the selection andcompensation of the independent registered public accounting firm. Grace’sfinancial management, internal auditors and independent registered publicaccounting firm have direct and confidential access to the Audit Committee atall times.

 

***Report On Internal Control Over Financial Reporting*** — We and our management have evaluatedGrace’s internal control over financial reporting as of December 31, 2007.This evaluation was based on criteria for effective internal control overfinancial reporting set forth in *InternalControl — Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission. Based on this evaluation, we and ourmanagement have concluded that Grace’s internal control over financialreporting is effective as of December 31, 2007. Grace’s independentregistered public accounting firm that audited our financial statementsincluded in Item 15 has also audited the effectiveness of Grace’s internalcontrol over financial reporting as of December 31, 2007, as stated in theirreport, which appears on the following page.

 

***Report On Disclosure Controls And Procedures —*** As of December 31, 2007, we carriedout an evaluation of the effectiveness of the design and operation of Grace’sdisclosure controls and procedures pursuant to Rule 13a-15 under theSecurities Exchange Act of 1934, as amended (the “Exchange Act”). Based uponthat evaluation, we concluded that Grace’s disclosure controls and proceduresare effective in ensuring that information required to be disclosed in Grace’speriodic filings under the Exchange Act is accumulated and communicated to usto allow timely decisions regarding required disclosures, and such informationis recorded, processed, summarized and reported within the time periodsspecified in the Securities and Exchange Commission’s rules and forms.

 

 
| /s/ A. E. Festa         |   | /s/ Robert M. Tarola      |
|-------------------------|--------|---------------------------|
| A. E. Festa             |   | Robert M. Tarola          |
| President and           |   | Senior Vice President and |
| Chief Executive Officer |   | Chief Financial Officer   |

 

February 29, 2008

 

F-3

----

 

***Report of Independent Registered Public Accounting Firm***

 

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

 

In our opinion, theaccompanying consolidated financialstatements present fairly, in all material respects, the financialposition of W. R. Grace & Co. and its subsidiaries (the"Company") at December 31, 2007 and December 31, 2006, and theresults of their operations and their cash flows for each of the three years inthe period ended December 31, 2007 in conformity with accounting principlesgenerally accepted in the United States of America.  Inaddition, in our opinion, the financial statement schedulepresentsfairly, in all material respects, the information set forth therein when readin conjunction with the related consolidated financial statements.  Also in our opinion, the Companymaintained, in all material respects, effective internal control over financialreporting as of December 31, 2007 based on criteria established in *Internal Control - Integrated Framework* issued by theCommittee of Sponsoring Organizations of the Treadway Commission (COSO). TheCompany's management is responsible for these financial statements andfinancial statement schedule, for maintaining effective internal control overfinancial reporting and for its assessment of the effectiveness of internalcontrol over financial reporting, included in the accompanying Management's Reporton Internal Control over Financial Reporting. Our responsibility is to express opinions on these financial statements,on the financial statement schedule, and on the Company's internal control overfinancial reporting based on our integrated audits.  We conducted our audits in accordance withthe standards of the Public Company Accounting Oversight Board (UnitedStates).  Those standards require that weplan and perform the audits to obtain reasonable assurance about whether thefinancial statements are free of material misstatement and whether effectiveinternal control over financial reporting was maintained in all materialrespects.  Our audits of the financialstatements included examining, on a test basis, evidence supporting the amountsand disclosures in the financial statements, assessing the accountingprinciples used and significant estimates made by management, and evaluatingthe overall financial statement presentation. Our audit of internal control over financial reporting includedobtaining an understanding of internal control over financial reporting,assessing the risk that a material weakness exists, and testing and evaluatingthe design and operating effectiveness of internal control based on theassessed risk.  Our audits also included performingsuch other procedures as we considered necessary in the circumstances. Webelieve that our audits provide a reasonable basis for our opinions.

 

The accompanyingconsolidated financial statements have been prepared assuming that the Companywill continue as a going concern.  Asdiscussed in Note 1 to the consolidated financial statements, on April 2, 2001,the Company and substantially all of its domestic subsidiaries voluntarilyfiled for protection under Chapter 11 of the United States Bankruptcy Code,which raises substantial doubt about the Company's ability to continue as agoing concern in its present form. Management's intentions with respect to thismatter are described in Note 2.  Theaccompanying consolidated financial statements do not include any adjustmentsthat might result from the outcome of this uncertainty.

 

As discussed in Note 4 tothe consolidated financial statements, the Company changed the manner in whichit accounts for income tax uncertainties effective January 1, 2007 to complywith a recently issued financial accounting standard.  As discussed in Note 19 to the consolidatedfinancial statements, the Company changed the manner in which it accounts fordefined benefit pension and other postretirement plans effective December 31,2006 to comply with a recently issued financial accounting standard.

 

 

F-4

----

 

A company’s internalcontrol over financial reporting is a process designed to provide reasonableassurance regarding the reliability of financial reporting and the preparationof financial statements for external purposes in accordance with generallyaccepted accounting principles.  Acompany’s internal control over financial reporting includes those policies andprocedures that (i) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (ii) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (iii) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of theCompany’s assets that could have a material effect on the financial statements.

 

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements.  Also, projectionsof any evaluation of effectiveness to future periods are subject to the riskthat controls may become inadequate because of changes in conditions, or thatthe degree of compliance with the policies or procedures may deteriorate.

 

 
| /s/ PricewaterhouseCoopers LLP |   |
|--------------------------------|--------|
| PricewaterhouseCoopers LLP     |   |
| McLean, Virginia               |   |
| February 29, 2008         |   |

 

***Consent of IndependentRegistered Public Accounting Firm***

 

We hereby consentto the incorporation by reference in the Registration Statements on Form S-8(Nos. 333-37024, 333-49083, 333-49507, 333-49509, 333-49511, 333-49513,333-49515 and 333-49517) of W. R. Grace & Co. of our report dated February 29,2008 relating to the financial statements, financial statement schedule,management’s assessment of the effectiveness of internal control over financialreporting and the effectiveness of internal control over financial reportingwhich appears in this 2007 Annual Report on Form 10-K of W. R. Grace &Co.

 
| /s/  PricewaterhouseCoopers LLP |   |
|---------------------------------|--------|
| PricewaterhouseCoopers  LLP     |   |
| McLean, Virginia                |   |
| February 29,  2008         |   |

 

F-5

----

 

**ConsolidatedFinancial Statements**

 

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

**Consolidated Statements of Operations**

*(Inmillions, except per share amounts)*

 
| ** **                                       | ** ** | **Year Ended December 31,** | ** **  |
|--------------------------------------------------|------------|----------------------------------|-------------|
| ** **                                       | ** ** | **2007**                         | ** **  | **2006** | ** ** | **2005** | ** ** |
|                                             |       |                             |        |   |   |   |   |
| Net sales                                        | ** ** | **$**                            | **3,115.2** |   | $ | 2,826.5 |   | $ | 2,569.5 |   |
|                                             |       |                             |        |   |   |   |   |
| Cost of goods sold                               | ** ** | **2,147.4**                      |        | 1,923.8 |   | 1,774.9 |   |
| Selling, general and administrative expenses     | ** ** | **600.6**                        |        | 593.8 |   | 505.5 |   |
| Research and development expenses                | ** ** | **79.6**                         |        | 65.6 |   | 63.7 |   |
| Defined benefit pension expense                  | ** ** | **52.6**                         |        | 63.7 |   | 71.9 |   |
| Interest expense and related financing costs     | ** ** | **72.1**                         |        | 73.2 |   | 55.3 |   |
| Provision for environmental remediation          | ** ** | **17.0**                         |        | 30.0 |   | 25.0 |   |
| Chapter 11 expenses, net of interest income      | ** ** | **86.4**                         |        | 49.9 |   | 30.9 |   |
| Other (income) expense, net                      | ** ** | **(33.1**                        | **)**       | (34.3 | ) | (67.4 | ) |
|                                             | ** ** | **3,022.6**                      |        | 2,765.7 |   | 2,459.8 |   |
|                                             |       |                             |        |   |   |   |   |
| Income before income taxes and minority interest | ** ** | **92.6**                         |        | 60.8 |   | 109.7 |   |
| Benefit from (provision for) income taxes        | ** ** | **5.8**                          |        | (8.1 | ) | (21.3 | ) |
| Minority interest in consolidated entities       | ** ** | **(18.1**                        | **)**       | (34.4 | ) | (21.1 | ) |
| **Net  income**                                  | ** ** | **$**                            | **80.3**    |   | $ | 18.3 |   | $ | 67.3 |   |
|                                             |       |                             |        |   |   |   |   |
| **Basic earnings per share:**                    | ** ** | ** **                       | ** **  | ** ** | ** ** | ** ** | ** ** |
| Net income                                       | ** ** | **$**                            | **1.15**    |   | $ | 0.27 |   | $ | 1.01 |   |
| Weighted average  number of basic shares         | ** ** | **70.1**                         |        | 67.9 |   | 66.8 |   |
| ** **                                       | ** ** | ** **                       | ** **  | ** ** | ** ** | ** ** | ** ** |
| **Diluted earnings per share:**                  | ** ** | ** **                       | ** **  | ** ** | ** ** | ** ** | ** ** |
| Net income                                       | ** ** | **$**                            | **1.12**    |   | $ | 0.27 |   | $ | 1.00 |   |
| Weighted average  number of diluted shares       | ** ** | **71.6**                         |        | 68.3 |   | 67.3 |   |

 

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

 

F-6

----

 

**W. R. Grace & Co. andSubsidiariesConsolidated Statements of Cash Flows**

*(In millions)*

** **

 
| ** **                                                                                                                  | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                                  | ** ** | **2007**                         | ** ** | **2006** | ** ** | **2005** | ** ** |
| **OPERATING ACTIVITIES**                                                                                                    | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income                                                                                                                  | ** ** | **$**                            | **80.3**   |   | $ | 18.3 |   | $ | 67.3 |   |
| Reconciliation to net cash provided by operating  activities:                                                               |       |                             |       |   |   |   |   |
| Depreciation and  amortization                                                                                              | ** ** | **113.4**                        |       | 113.5 |   | 120.9 |   |
| Chapter 11  expenses, net of interest income                                                                                | ** ** | **86.4**                         |       | 49.9 |   | 30.9 |   |
| (Benefit from)  provision for income taxes                                                                                  | ** ** | **(5.8**                         | **)**      | 8.1 |   | 21.3 |   |
| Income taxes  paid, net of refunds                                                                                          | ** ** | **(51.1**                        | **)**      | (51.6 | ) | (45.7 | ) |
| Minority  interest in consolidated entities                                                                                 | ** ** | **18.1**                         |       | 34.4 |   | 21.1 |   |
| Dividends paid  to minority interests in consolidated entities                                                              | ** ** | **(12.0**                        | **)**      | (6.7 | ) | (0.4 | ) |
| Interest accrued  on pre-petition liabilities subject to compromise                                                         | ** ** | **70.9**                         |       | 71.3 |   | 50.6 |   |
| Net (gain) loss  on sales of investments and disposals of assets                                                            | ** ** | **(1.9**                         | **)**      | (0.6 | ) | 0.7 |   |
| Defined benefit  pension expense                                                                                            | ** ** | **52.6**                         |       | 63.7 |   | 71.9 |   |
| Payments under  defined benefit pension arrangements                                                                        | ** ** | **(105.7**                       | **)**      | (121.5 | ) | (47.7 | ) |
| Payments under  postretirement benefit plans                                                                                | ** ** | **(5.0**                         | **)**      | (13.9 | ) | (11.9 | ) |
| Net income from  life insurance policies                                                                                    | ** ** | **(5.4**                         | **)**      | (4.1 | ) | (3.5 | ) |
| Provision for  (recovery of) uncollectible receivables                                                                      | ** ** | **(0.4**                         | **)**      | 3.5 |   | 2.6 |   |
| Provision for  environmental remediation                                                                                    | ** ** | **17.0**                         |       | 30.0 |   | 25.0 |   |
| Expenditures for  environmental remediation                                                                                 | ** ** | **(9.5**                         | **)**      | (10.9 | ) | (6.7 | ) |
| Expenditures for  retained obligations of divested businesses                                                               | ** ** | **(1.0**                         | **)**      | (3.6 | ) | (1.0 | ) |
| **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)                                        | ** ** | **(47.6**                        | **)**      | 6.1 |   | (46.3 | ) |
| Other accruals  and non-cash items                                                                                          | ** ** | **(2.7**                         | **)**      | 17.1 |   | (31.0 | ) |
| **Net  cash provided by operating activities before Chapter 11 expenses and  settlements**                                  | ** ** | **190.6**                        |       | 203.0 |   | 218.1 |   |
| Cash paid to resolve contingencies subject to  Chapter 11                                                                   | ** ** | **(10.3**                        | **)**      | — |   | (119.7 | ) |
| Chapter 11 expenses paid                                                                                                    | ** ** | **(92.1**                        | **)**      | (50.3 | ) | (31.1 | ) |
| **Net  cash provided by operating activities**                                                                              | ** ** | **88.2**                         |       | 152.7 |   | 67.3 |   |
| ** **                                                                                                                  | ** ** | ** **                       |       |   |   |   |   |
| **INVESTING ACTIVITIES**                                                                                                    | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Capital expenditures                                                                                                        | ** ** | **(136.9**                       | **)**      | (119.2 | ) | (94.0 | ) |
| Investments in short term debt securities                                                                                   | ** ** | **(124.7**                       | **)**      | — |   | — |   |
| Purchase of equity investment                                                                                               | ** ** | **(6.3**                         | **)**      | — |   | — |   |
| Businesses acquired, net of cash acquired                                                                                   | ** ** | **(5.5**                         | **)**      | (19.6 | ) | (5.5 | ) |
| Proceeds from sale of business/product line                                                                                 | ** ** | **21.8**                         |       | — |   | 4.5 |   |
| Proceeds from termination of life insurance policies                                                                        | ** ** | **14.8**                         |       | 0.3 |   | 14.8 |   |
| Net investment in life insurance policies                                                                                   | ** ** | **(1.2**                         | **)**      | (0.5 | ) | 0.5 |   |
| Proceeds from sales of investments and disposals of  assets                                                                 | ** ** | **31.1**                         |       | 9.6 |   | 1.8 |   |
| **Net  cash used for investing activities**                                                                                 | ** ** | **(206.9**                       | **)**      | (129.4 | ) | (77.9 | ) |
| ** **                                                                                                                  | ** ** | ** **                       | ** ** |   |   |   |   |
| **FINANCING ACTIVITIES**                                                                                                    | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net payment of loans secured by cash value of life  insurance policies                                                      | ** ** | **(0.1**                         | **)**      | (0.1 | ) | (0.6 | ) |
| Net (repayments) borrowings under credit  arrangements                                                                      | ** ** | **8.3**                          |       | 0.3 |   | (10.4 | ) |
| Fees paid under debtor-in-possession credit facility                                                                        | ** ** | **(2.6**                         | **)**      | (2.4 | ) | (2.2 | ) |
| Proceeds from exercise of stock options                                                                                     | ** ** | **40.1**                         |       | 24.1 |   | 3.1 |   |
| **Net cash  provided by (used for) financing activities**                                                                   | ** ** | **45.7**                         |       | 21.9 |   | (10.1 | ) |
| Effect of currency exchange rate changes on cash and  cash equivalents                                                      | ** ** | **17.2**                         |       | 16.4 |   | (15.0 | ) |
| **Increase  (decrease) in cash and cash equivalents**                                                                       | ** ** | **(55.8**                        | **)**      | 61.6 |   | (35.7 | ) |
| Cash and cash equivalents, beginning of period                                                                              | ** ** | **536.3**                        |       | 474.7 |   | 510.4 |   |
| Cash and cash equivalents, end of period                                                                                    | ** ** | **$**                            | **480.5**  |   | $ | 536.3 |   | $ | 474.7 |   |

 

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

 

F-7

----

** **

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

 

 
| *** ***                                                                                                                    | ** ** | **December 31,  2007** | ** **  | **December 31,  2006** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|-------------|-----------------------------|------------|
| **ASSETS**                                                                                                                      |       |                        |        |                        |       |
| **Current Assets**                                                                                                              |       |                        |        |                        |       |
| Cash and cash equivalents                                                                                                       | ** ** | **$**                       | **480.5**   |                        | $          | 536.3 |   |
| Investment securities                                                                                                           | ** ** | **100.9**                   |        | 2.4                         |       |
| Cash value of life insurance policies, net of policy  loans                                                                     | ** ** | **77.1**                    |        | —                      |       |
| Trade accounts receivable, less allowance of $5.2  (2006 - $6.6)                                                                | ** ** | **498.1**                   |        | 426.3                       |       |
| Inventories                                                                                                                     | ** ** | **303.5**                   |        | 284.6                       |       |
| Deferred income taxes                                                                                                           | ** ** | **37.7**                    |        | 37.8                        |       |
| Other current assets                                                                                                            | ** ** | **80.7**                    |        | 81.4                        |       |
| **Total  Current Assets**                                                                                                       | ** ** | **1,578.5**                 |        | 1,368.8                     |       |
| ** **                                                                                                                      | ** ** | ** **                  |        |                        |       |
| Properties and  equipment, net of accumulated depreciation and amortization of $1,545.0 (2006—$1,510.5)                    | ** ** | **706.1**                   |        | 664.5                       |       |
| Goodwill                                                                                                                        | ** ** | **122.3**                   |        | 116.5                       |       |
| Cash value of life insurance policies, net of policy  loans                                                                     | ** ** | **3.9**                     |        | 89.2                        |       |
| Deferred income taxes                                                                                                           |       | **767.5**                   |        | 728.5                       |       |
| Asbestos-related insurance                                                                                                      | ** ** | **500.0**                   |        | 500.0                       |       |
| Overfunded defined benefit pension plans                                                                                        | ** ** | **54.1**                    |        | 38.4                        |       |
| Other assets                                                                                                                    | ** ** | **136.6**                   |        | 131.5                       |       |
| **Total  Assets**                                                                                                               | ** ** | **$**                       | **3,869.0** |                        | $          | 3,637.4 |   |
| ** **                                                                                                                      | ** ** | ** **                  | ** **  |                        |       |   |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)**                                                                         |       |                        |        |                        |       |
| **Liabilities Not Subject to Compromise**                                                                                       | ** ** | ** **                  | ** **  | ** **                  | ** ** |
| **Current Liabilities**                                                                                                         |       |                        |        |                        |       |
| Debt payable within one year                                                                                                    | ** ** | **$**                       | **4.7**     |                        | $          | 3.3 |   |
| Accounts payable                                                                                                                | ** ** | **191.3**                   |        | 172.7                       |       |
| Other current liabilities                                                                                                       | ** ** | **325.1**                   |        | 272.6                       |       |
| **Total  Current Liabilities**                                                                                                  | ** ** | **521.1**                   |        | 448.6                       |       |
| ** **                                                                                                                      | ** ** | ** **                  |        |                        |       |
| Debt payable after one year                                                                                                     | ** ** | **0.3**                     |        | 0.2                         |       |
| Deferred income taxes                                                                                                           | ** ** | **32.7**                    |        | 58.9                        |       |
| Minority interest in consolidated entities                                                                                      | ** ** | **70.8**                    |        | 65.0                        |       |
| Underfunded defined benefit pension plans                                                                                       | ** ** | **169.1**                   |        | 222.9                       |       |
| Unfunded pay-as-you-go defined benefit pension plans                                                                            | ** ** | **137.9**                   |        | 126.7                       |       |
| Other liabilities                                                                                                               | ** ** | **46.2**                    |        | 43.3                        |       |
| **Total  Liabilities Not Subject to Compromise**                                                                                | ** ** | **978.1**                   |        | 965.6                       |       |
| ** **                                                                                                                      | ** ** | ** **                  |        |                        |       |
| **Liabilities Subject to Compromise — Note 2**                                                                             | ** ** | ** **                  | ** **  | ** **                  | ** ** |
| Pre-petition bank debt plus accrued interest                                                                                    | ** ** | **783.0**                   |        | 723.1                       |       |
| Drawn letters of credit plus accrued interest                                                                                   | ** ** | **26.9**                    |        | 16.4                        |       |
| Income tax contingencies                                                                                                        | ** ** | **89.3**                    |        | 141.2                       |       |
| Asbestos-related contingencies                                                                                                  | ** ** | **1,700.0**                 |        | 1,700.0                     |       |
| Environmental contingencies                                                                                                     | ** ** | **368.6**                   |        | 361.1                       |       |
| Postretirement benefits                                                                                                         | ** ** | **172.7**                   |        | 158.9                       |       |
| Other liabilities and accrued interest                                                                                          | ** ** | **137.0**                   |        | 120.9                       |       |
| **Total Liabilities  Subject to Compromise**                                                                                    | ** ** | **3,277.5**                 |        | 3,221.6                     |       |
| **Total  Liabilities**                                                                                                          | ** ** | **4,255.6**                 |        | 4,187.2                     |       |
| ** **                                                                                                                      | ** ** | ** **                  |        |                        |       |
| **Commitments and Contingencies**                                                                                               | ** ** | ** **                  | ** **  | ** **                  | ** ** |
| ** **                                                                                                                      | ** ** | ** **                  | ** **  | ** **                  | ** ** |
| **Shareholders’ Equity (Deficit)**                                                                                         | ** ** | ** **                  | ** **  | ** **                  | ** ** |
| Common stock  issued, par value $0.01; 300,000,000 shares authorized; outstanding:  2007—71,627,901 (2006—68,915,022) | ** ** | **0.8**                     |        | 0.8                         |       |
| Paid-in capital                                                                                                                 |       | **431.5**                   |        | 423.8                       |       |
| Accumulated deficit                                                                                                             | ** ** | **(405.1**                  | **)**       | (487.6                      | )          |
| Treasury stock, at cost: shares: 2007—5,351,859;  (2006—8,064,738)                                                    | ** ** | **(63.7**                   | **)**       | (96.0                       | )          |
| Accumulated other comprehensive income (loss)                                                                                   | ** ** | **(350.1**                  | **)**       | (390.8                      | )          |
| **Total  Shareholders’ Equity (Deficit)**                                                                                  | ** ** | **(386.6**                  | **)**       | (549.8                      | )          |
| **Total  Liabilities and Shareholders’ Equity (Deficit)**                                                                  | ** ** | **$**                       | **3,869.0** |                        | $          | 3,637.4 |   |

 

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

 

F-8

----

 

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

**Consolidated Statements ofShareholders’ Equity (Deficit)**

*(In millions)*

 

 
| ** **                                                        | ** ** | ** **           | ** ** | ** **      | ** ** | ** **   | ** ** | **Accumulated**               | ** ** | ** **                   | ** ** |
|-------------------------------------------------------------------|------------|----------------------|------------|-----------------|------------|--------------|------------|-------------------------------|------------|------------------------------|------------|
| ** **                                                        | ** ** | **Common Stock and** | ** ** | **Accumulated** | ** ** | **Treasury** | ** ** | **Other  Comprehensive** | ** ** | **Total Shareholders’** | ** ** |
| ** **                                                        | ** ** | **Paid-in Capital**  | ** ** | **Deficit**     | ** ** | **Stock**    | ** ** | **Income (Loss)**             | ** ** | **Equity (Deficit)**         | ** ** |
|                                                              |       |                 |       |            |       |         |       |                          |       |                         |       |
| **Balance, December 31, 2004**                               |       | $                    | 427.3      |            | $          | (573.2       | )          | $                             | (125.9     | )                            | $          | (350.0 | ) | $ | (621.8 | ) |
| ** **                                                        | ** ** | ** **           | ** ** | ** **      | ** ** | ** **   | ** ** | ** **                    | ** ** | ** **                   | ** ** |
| Net income                                                        |       | —               |       | 67.3            |       | —       |       | —                        |       | 67.3                         |       |
| Stock plan activity                                               |       | (3.1                 | )          | —          |       | 6.2          |       | —                        |       | 3.1                          |       |
| Other  comprehensive income (loss)                                |       | —               |       | —          |       | —       |       | (43.9                         | )          | (43.9                        | )          |
| **Balance, December 31, 2005**                               |       | $                    | 424.2      |            | $          | (505.9       | )          | $                             | (119.7     | )                            | $          | (393.9 | ) | $ | (595.3 | ) |
|                                                              |       |                 |       |            |       |         |       |                          |       |                         |       |
| Net income                                                        |       | —               |       | 18.3            |       | —       |       | —                        |       | 18.3                         |       |
| Stock plan activity                                               |       | 0.4                  |       | —          |       | 23.7         |       | —                        |       | 24.1                         |       |
| Other comprehensive  income (loss)                                |       | —               |       | —          |       | —       |       | 105.4                         |       | 105.4                        |       |
| Adoption of FASB  Statement No. 158 (Note 19)                |       | —               |       | —          |       | —       |       | (102.3                        | )          | (102.3                       | )          |
| **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                                                        |       | —               |       | 80.3            |       | —       |       | —                        |       | 80.3                         |       |
| Stock plan activity                                               |       | 7.7                  |       | —          |       | 32.3         |       | —                        |       | 40.0                         |       |
| Other  comprehensive income (loss)                                |       | —               |       | —          |       | —       |       | 40.7                          |       | 40.7                         |       |
| **Balance, December 31, 2007**                               | ** ** | **$**                | **432.3**  | ** **      | **$**      | **(405.1**   | **)**      | **$**                         | **(63.7**  | **)**                        | **$**      | **(350.1** | **)** | **$** | **(386.6** | **)** |

 

**W. R. Grace & Co. and SubsidiariesConsolidated Statements of Comprehensive Income (Loss)**

*(In millions)*

 
|                                                                         | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------------------------|------------|----------------------------------|------------|
|                                                                         | ** ** | **2007**                         |       | **2006** | ** ** | **2005** |   |
|                                                                         |       |                             |       |   |   |   |   |
| **Net income**                                                               | ** ** | **$**                            | **80.3**   |   | $ | 18.3 |   | $ | 67.3 |   |
|                                                                         |       |                             |       |   |   |   |   |
| **Other comprehensive income (loss):**                                       | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Foreign currency  translation adjustments                                    | ** ** | **44.6**                         |       | 36.8 |   | (28.7 | ) |
| Gain (loss) from  hedging activities, net of income taxes                    | ** ** | **0.8**                          |       | (1.3 | ) | — |   |
| Minimum pension  liability adjustments, net of income taxes                  | ** ** | **—**                       |       | 69.9 |   | (15.2 | ) |
| Defined benefit  pension and other postretirement plans, net of income taxes | ** ** | **(4.7**                         | **)**      | — |   | — |   |
| Total other  comprehensive income (loss)                                     | ** ** | **40.7**                         |       | 105.4 |   | (43.9 | ) |
| **Comprehensive income (loss)**                                              | ** ** | **$**                            | **121.0**  |   | $ | 123.7 |   | $ | 23.4 |   |

 

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

 

F-9

----

 

**Notes toConsolidated Financial Statements**

 

**1.****             ****Basis of Presentation and Summaryof Significant Accounting and Financial Reporting Policies**

 

W. R. Grace &Co., through its subsidiaries, is engaged in specialty chemicals and specialtymaterials businesses on a worldwide basis. W. R. Grace & Co. conducts substantially all of its businessthrough a direct, wholly-owned subsidiary,W. R. Grace & Co.-Conn. (“Grace-Conn.”). Grace-Conn. ownssubstantially all of the assets, properties and rights of W. R. Grace &Co. on a consolidated basis, either directly or through subsidiaries.

 

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

 

***Voluntary Bankruptcy Filing***—During 2000 and the first quarter of2001, Grace experienced several adverse developments in its asbestos-relatedlitigation, including: a significant increase in personal injury claims, higherthan expected costs to resolve personal injury and certain property damageclaims, and class action lawsuits alleging damages from Zonolite AtticInsulation (“ZAI”), a former Grace attic insulation product.

 

After a thorough reviewof these developments, Grace’s 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”), Grace and 61 of its United States subsidiaries and affiliates,including Grace-Conn. (collectively, the “Debtors”), filed voluntary petitionsfor reorganization (the “Filing”) under Chapter 11 of the United StatesBankruptcy Code in the United States Bankruptcy Court for the District ofDelaware (the “Bankruptcy Court”). The cases were consolidated and are beingjointly administered under case number 01-01139 (the “Chapter 11 Cases”).Grace’s non-U.S. subsidiaries and certain of its U.S. subsidiaries were notincluded in the Filing.

 

UnderChapter 11, the Debtors have continued to operate their businesses asdebtors-in-possession under court protection from creditors and claimants,while using the Chapter 11 process to develop and implement a plan foraddressing the asbestos-related claims. Since the Filing, all motions necessaryto conduct normal business activities have been approved by the BankruptcyCourt. (See Note 2 for Chapter 11-Related Information.)

 

***Principles of Consolidation—***The Consolidated Financial Statementsinclude the accounts of Grace and entities as to which Grace exercises controlover operating and financial policies. Grace consolidates the activities of variable interest entities incircumstances where management determines that Grace is the primary beneficiaryof the variable interest entity.  Intercompanytransactions and balances are eliminated in consolidation. Investments inaffiliated companies in which Grace can significantly influence operating andfinancial policies are accounted for under the equity method, unless Grace’sinvestment is deemed to be temporary, in which case the investment is accountedfor under the cost method.

 

***Operating Segments*****—**Grace reports financial results of each of itsoperating segments that engage in business activities that generate revenuesand expenses, and whose operating results are regularly reviewed by Grace’sChief Executive Officer.  Grace reports two operating segments:“Grace Davison,” which includes specialty catalysts and materials used in awide range of energy, refining, consumer, industrial, packaging and lifesciences applications; and “Grace Construction Products,” which includesspecialty chemicals and materials used in commercial, infrastructure andresidential construction.  In the fourthquarter of 2007, Grace completed the transfer of its packaging technologiesproduct group to the Grace Davison segment in an effort to capture operatingsynergies. All segment information herein has been retrospectively restated toreflect this realignment of the packaging technologies product group.  The former Grace Performance Chemicalssegment has been renamed “Grace Construction Products” as a result of thetransfer.

 

***Minority Interestin Consolidated Entities—***Grace conducts certain of its business through jointventures with unaffiliated third parties that require profit sharing.  For joint ventures in which Grace has acontrolling financial interest, Grace consolidates the results of such jointventures in the Consolidated Financial Statements.  Grace recognizes a liability for cumulativeamounts due to 

 

F-10

----

 

the third parties based on the financial results ofthe joint ventures, and deducts the annual amount of profit sharing in themeasurement of its consolidated net income.

 

***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,other than the reclassifications due to the realignment of Grace’s operatingsegments discussed above.

 

***Use of Estimates*****—**The preparation of financial statements in conformitywith U.S. generally accepted accounting principles requires management to makeestimates and assumptions that affect the reported amount of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe Consolidated Financial Statements, and the reported amounts of revenues andexpenses for the periods presented. Actual amounts could differ from thoseestimates, and the differences could be material.  Changes in estimates are recorded in theperiod identified.  Grace’s accountingmeasurements that are most affected by management’s estimates of future eventsare:

 

·                  Contingent liabilities, which depend onan assessment of the probability of loss and an estimate of ultimate resolutioncost, such as asbestos-related matters (see Notes 2 and 3), environmentalremediation (see Note 15), income taxes (see Note 4), and litigation (see Note15);

 

·                  Pension and postretirement liabilitiesthat depend on assumptions regarding participant life spans, future inflation,discount rates and total returns on invested funds (see Note 19); and

 

·                  Realization values of net deferred taxassets and insurance receivables, which depend on projections of future incomeand cash flows and assessments of insurance coverage and insurer solvency.

 

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

 

***Revenue Recognition—***Grace recognizes revenue when all of the followingcriteria are satisfied: risk of loss and title transfer to the customer; theprice is fixed and determinable; and collectibility is reasonably assured.Certain customer arrangements include conditions for volume rebates. Graceaccrues a rebate allowance and reduces recorded sales for anticipated sellingprice adjustments at the time of sale. Grace regularly reviews rebate accrualsbased on actual and anticipated sales patterns.

 

***Cash Equivalents—***Cash equivalents consist of liquid instruments andinvestments with maturities of three months or less when purchased. Therecorded amounts approximate fair value.

 

***Investment Securities—***Investment securities consist of direct and indirectinvestments in debt securities and are classified as available-for-salesecurities.  These investments arereported at fair value as determined by independent pricing sources and/orprofessional market participants, with temporary unrealized gains and lossesincluded in other comprehensive income. Losses that are deemed to be other than temporary are consideredimpairments and are recorded in earnings.

 

***Inventories*****—**Inventoriesare stated at the lower of cost or market. The methods used to determine cost includefirst-in/first-out, or “FIFO” and, for substantially all U.S. inventories,last-in/first-out, or “LIFO.” Market values for raw materials are based oncurrent cost and, for other inventory classifications, net realizable value.Inventories are evaluated regularly for salability, and slow moving and/orobsolete items are adjusted to expected salable value. Inventory values includedirect and certain indirect costs of materials and production. Abnormal costsof production are expensed as incurred.

 

***Properties and Equipment—***Properties and equipment are stated at cost.  Depreciation of properties and equipment isgenerally computed using the straight-line method over the estimated usefullife of the asset.  Estimated usefullives range from 20 to 40 years for buildings, 3 to 7 years for informationtechnology equipment, 3 to 10 years for machinery and equipment and 5 to 10years for furniture and fixtures. Interest is capitalized in connection with major project expenditures.Fully depreciated assets are retained in properties and equipment and relatedaccumulated depreciation accounts until they are removed from service.  In the case of disposals, 

 

F-11

----

 

assets and relatedaccumulated depreciation are removed from the accounts and the net amount, lessany proceeds from disposal, is charged or credited to operations. Obligationsfor costs associated with asset retirements, such as requirements to restore asite to its original condition, are accrued at net present value and amortizedalong with the related asset. Grace reviews long-lived assets for impairmentwhenever events or changes in circumstances indicate that the carrying amountof an asset may not be fully recoverable.

 

***Goodwill*****—**Goodwillarises from certain purchase business combinations. Grace reviews its goodwillfor impairment on an annual basis and whenever events or changes incircumstances indicate that the carrying amount may not be fully recoverable.Recoverability is assessed at the reporting unit level most directly associatedwith the business combination that generated the goodwill.

 

***Income Taxes*****—**Deferred tax assets and liabilities are recognizedwith respect to the expected future tax consequences of events that have beenrecorded in the Consolidated Financial Statements and tax returns.  If it is more likely than not that all or aportion of deferred tax assets will not be realized, a valuation allowance isprovided against such deferred tax assets. The assessment of realization ofdeferred tax assets is performed annually under scenarios of future taxableincome and tax planning alternatives that are considered reasonable in thecircumstances.

 

Tax benefits from an uncertain tax position are recognized only if itis more likely than not that the tax position will be sustained uponexamination by the taxing authorities, based on the technical merits of theposition. Tax benefits recognized in the financial statements from such aposition are measured based on the largest benefit that has a greater thanfifty percent likelihood of being realized upon ultimate settlement.

 

***Foreign Currency Translation—***Assets and liabilities of foreignsubsidiaries (other than those located in countries with highly inflationaryeconomies) are translated into U.S. dollars at current exchange rates, whilerevenues, costs and expenses are translated at average exchange rates duringeach reporting period. The resulting translation adjustments are included inthe “accumulated other comprehensive income (loss)” caption of the ConsolidatedBalance Sheets. The financial statements of subsidiaries located in countrieswith highly inflationary economies, if any, are remeasured as if the functionalcurrency were the U.S. dollar; the remeasurement creates translation adjustmentsthat are reflected in “net income” in the Consolidated Statements ofOperations.

 

***Financial Instruments*****—**Grace periodically enters into commodity forward, swapand/or option contracts, and foreign exchange forward and/or option contractsto manage exposure to fluctuations in commodity prices and foreign currencyexchange rates. Grace does not hold or issue derivative financial instrumentsfor trading purposes.  Derivativeinstruments are recorded in the Consolidated Balance Sheets as either assets orliabilities at their fair value.  Forderivative instruments designated as fair value hedges, changes in the fairvalues of the derivative instruments closely offset changes in the fair valuesof the hedged items in other income (expense) in the Consolidated Statements ofOperations.  For derivative instrumentsdesignated as cash flow hedges, the effective portion of any hedge is reportedas accumulated other comprehensive income (loss) in the Consolidated BalanceSheets until it is cleared to earnings during the same period in which thehedged item affects earnings.  Theineffective portion of all hedges, and changes in the fair values of derivativeinstruments that are not designated as hedges, are recorded in current periodearnings.  Cash flows from derivativeinstruments are reported in the same category as the cash flows from the itemsbeing hedged.

 

***Effect of New Accounting Standards*****—**In February 2007, the Financial AccountingStandards Board (“FASB”) issued SFAS No. 159, “The Fair Value Option forFinancial Assets and Financial Liabilities.” SFAS No. 159 permits entities to measure many financial instrumentsand certain other items at fair value. SFAS No. 159 is effective for the first quarter of 2008.  Grace has determined at this time that itwill not elect to measure eligible 

 

F-12

----

 

financial assets and liabilities at fair value thatare not currently required to be so measured.

 

In November 2006, the FASB Emerging Issues Task Force (“EITF”)promulgated Issue No. 06-10, “Accounting for Deferred Compensation andPostretirement Benefit Aspects of Collateral Assignment Split-Dollar LifeInsurance Arrangement.”  This Issuespecifies that if a company provides a benefit to an employee under acollateral assignment split-dollar life insurance arrangement that extends topostretirement periods or provides an employee with a death benefit, it wouldhave to recognize a liability and related compensation costs.  Grace will adopt EITF 06-10 in the firstquarter of 2008, and expects that it will have no impact to the ConsolidatedFinancial Statements.

 

In September 2006, the FASB issued SFAS No. 157, “Fair ValueMeasurements.”  SFAS No. 157 definesfair value, establishes a framework for measuring fair value, and expands disclosuresabout fair value measurements.  Gracewill adopt SFAS No. 157 effective in the first quarter of 2008.  The adoption of SFAS 157 is not expected tohave a material impact on Grace’s Consolidated Financial Statements.

 

In December 2007, the FASB issued SFAS No. 141(R), “BusinessCombinations.”  SFAS No. 141(R) willrequire the acquirer in a business combination to recognize the assetsacquired, the liabilities assumed, and any noncontrolling interest in theacquiree at the acquisition date, measured at their fair values as of thatdate, with acquisition-related costs recognized separately from theacquisition.  SFAS No. 141(R) appliesprospectively to business combinations occurring on or after the beginning ofthe first annual reporting period beginning on or after December 15, 2008.

 

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

 

**2.****             ****Chapter 11-Related Information**

 

***Official Parties to Grace’s Chapter 11 Proceedings—***Three creditors’ committees, tworepresenting asbestos claimants, the Official Committee of Asbestos PersonalInjury Claimants (the “PI Committee”) and the Official Committee of AsbestosProperty Damage Claimants (the “PD Committee”) and a third representing othergeneral unsecured creditors, and a committee representing shareholders, havebeen appointed in the Chapter 11 Cases. These committees, and a legalrepresentative of future asbestos claimants (the “FCR”), have the right to beheard on all matters that come before the Bankruptcy Court and have importantroles in the Chapter 11 Cases. The Debtors are required to bear certain costsand expenses of the committees and of the FCR, including those of their counseland financial advisors.

 

***Plans of Reorganization*****—**On November 13, 2004, Grace filed aplan of reorganization, as well as several associated documents, including adisclosure statement, trust distribution procedures, exhibits and othersupporting documents, with the Bankruptcy Court.  On January 13, 2005, Grace filed anamended plan of reorganization (the “Debtors Plan”) and related documents toaddress certain objections of creditors and other interested parties.  The Debtors Plan is supported by committeesrepresenting general unsecured creditors and shareholders, but is not supportedby the PI Committee, the PD Committee or the FCR.

 

On July 26, 2007,the Bankruptcy Court terminated Grace’s exclusive rights to propose a plan ofreorganization and solicit votes thereon. As a result of the termination of these rights, any party-in-interestcan propose a competing plan of reorganization.

 

On November 5,2007, the PI Committee and the FCR filed a proposed plan of reorganization (the“PI Plan”, and with the Debtors Plan, the “Plans”) with the BankruptcyCourt.  Copies of the Plans are availablefrom the Bankruptcy Court.  The filingdid not include a disclosure statement, trust distribution procedures, exhibitsor other supporting documents.

 

A plan of reorganization,including either of the Plans and any other plan of reorganization that may befiled in the future by a party-in-interest, will become effective only after avote of eligible creditors and with the approval of the Bankruptcy Court andthe U.S. District Court for the District of Delaware.  Votes on a plan of reorganization may not besolicited until the Bankruptcy Court approves the related disclosurestatement.  The Bankruptcy Court hascurrently deferred 

 

F-13

----

 

consideration of theDebtors Plan disclosure statement and the Debtors Plan until after completionof hearings on the estimation of the amount of Grace’s asbestos-relatedliability.  The PI Committee has notfiled a disclosure statement for the PI Plan.

 

*The Bankruptcy Court has entered separate case management orders forestimating liability for pending and future personal injury claims andadjudicating pending property damage claims, excluding ZAI claims. A t*rialfor estimating liability for personal injury claims began in January 2008.

* *

*Each of the Plans assumes that*Cryovac, Inc., a whollyowned subsidiary of Sealed Air (“Cryovac”), will pay $512.5 million in cash(plus interest at 5.5% compounded annually from December 21, 2002) andwill issue 18 million shares (reflecting a two-for-one stock split) of commonstock of Sealed Air Corporation (“Sealed Air”) to the asbestos trustestablished under such Plan pursuant to the terms of a settlement agreementresolving asbestos-related, successor liability and fraudulent transfer claimsagainst Sealed Air and Cryovac, as further described below (the “Sealed AirSettlement”).  The value of the SealedAir Settlement changes daily with the accrual of interest and the trading valueof Sealed Air common stock. The Sealed Air Settlement has been approved by theBankruptcy Court, but remains subject to the fulfillment of specifiedconditions.

* *

*TheDebtors Plan and the PI Plan are designed to address all pending and futureasbestos-related claims and all other pre-petition claims as outlinedrespectively, therein.  However, it is possiblethat neither of the Plans will be approved by the Bankruptcy Court and otherinterested parties.  Further, theproponents of the Plans are free to amend their respective plans ofreorganization at any time.  As a result,a plan of reorganization that is materially different from the Debtors Plan andthe PI Plan may ultimately be approved. Under the ultimate plan ofreorganization, the interests of the holders of Grace common stock could besubstantially diluted or cancelled and the value of non-asbestos claims couldbe materially different from that reflected in Grace’s balance sheet.  The value of Grace common stock and theextent of any recovery by non-asbestos-related creditors will dependprincipally on the amount of Grace’s asbestos-related liability under aconfirmed plan of reorganization.*

* *

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

 

Asbestos-RelatedClaims and Costs

 

*Under theDebtors Plan, a trust would be established under Section 524(g) ofthe Bankruptcy Code to which all pending and future asbestos-related claimswould be channeled for resolution.  TheDebtors Plan contemplates that the Bankruptcy Court will conduct hearings todetermine, among other things, the amount that would need to be paid into theasbestos trust on the effective date of the Debtors Plan to satisfy Grace’sasbestos-related liabilities and trust administration costs and expenses overtime.  The asbestos trust would utilize specified trustdistribution procedures to satisfy the following allowed asbestos-relatedclaims and costs:*

* *

*·*                  “**PI-SE**”claims—Personal Injury-Symptomatic Eligible claims—in order to qualify for thisclass, claims would have to meet specified exposure and medical criteria andclaimants would have to prove that their health is impaired due to meaningfulexposure to asbestos-containing products formerly manufactured by Grace;

* *

*·*                  “**PI-AO**”claims—Personal Injury-Asymptomatic and Other claims—this class would containall asbestos-related personal injury claims against Grace that did not meet thespecific requirements to be PI-SE Claims, but did meet certain other specifiedexposure and medical criteria;

* *

*·*                  “**PD**”claims—Property Damage, including ZAI, claims—in order to qualify for thisclass, claimants would have to prove Grace liability for loss of property valueor remediation costs related to products formerly manufactured by Grace thatclaimants allege contained asbestos; and

* *

*·*                  Trustadministration costs and legal expenses.

* *

*The claims arising from such proceedings would be subject to thisclassification process as part of the Debtors Plan.*

* *

*Under the Debtors Plan, asbestospersonal injury claimants, including both PI-SE and PI-AO claims, would havethe option either to litigate their claims*

* *

*F-14*

----

* *

*against the trust in federalcourt in Delaware or, if they meet specified eligibility criteria, accept asettlement amount based on the severity of their condition. Under the DebtorsPlan, PD claimants would be required to present allowed claims to the trust orlitigate their claims against the trust in federal court in Delaware.  The Debtors Plan provides that, as acondition precedent to confirmation, the maximum estimated aggregate fundingamount for all asbestos-related liabilities (PI-SE, PI-AO and PD including ZAI)and trust administration costs and expenses as determined by the BankruptcyCourt cannot exceed $1,613 million, which Grace believes would fund over $2billion in claims, costs and expenses over time.*

* *

*PI-SE claims, PD claims and related trust administration costs andexpenses would be funded with (1) a payment by Cryovac of $512.5 millionin cash (plus interest at 5.5% compounded annually from December 21, 2002)and 18 million shares of Sealed Air common stock pursuant to the Sealed AirSettlement and (2) Grace common stock. The number of shares of Grace common stock required to satisfy theseclaims will depend on the price of Grace common stock on the effective date ofthe Debtors Plan, liability measures approved by the Bankruptcy Court, and thevalue of the Sealed Air Settlement.*

* *

*PI-AO claims would be funded with warrants exercisable for that numberof shares of Grace common stock which, when added to the shares issued directlyto the trust on the effective date of the Debtors Plan, would represent 50.1%of Grace’s voting securities. If the common stock issuable upon exercise of thewarrants is insufficient to pay all PI-AO claims (the liability for which isuncapped under the Debtors Plan), then Grace would pay any additionalliabilities in cash.*

* *

*Under the Debtors Plan, theamounts to fund PI-SE claims, PD claims and trust administration costs andexpenses would be capped at the amount determined by the Bankruptcy Court.  Amounts required to fund PI-AO claims wouldnot be capped, so if the amount funded in respect thereof later proved to beinadequate, Grace would be responsible for contributing additional funds intothe asbestos trust to satisfy PI-AO claims. Because of the number and nature of the uncertainties involved, Grace isunable to determine the extent to which, if any, the liability under theDebtors Plan for PI-AO claims may exceed the amount funded into the trust inrespect thereof.*

* *

*Other Claims*

* *

TheDebtors Plan provides that all allowed administrative or priority claims wouldbe paid 100% in cash and all general unsecured claims, other than those coveredby the asbestos trust, would be paid 85% in cash and 15% in Grace common stock.Grace estimates that claims with a recorded value of approximately $1,370million, including interest accrued through December 31, 2007, would besatisfied in this manner at the effective date of the Debtors Plan. Grace wouldfinance these payments with cash on hand, cash from Fresenius Medical CareHoldings, Inc. (“Fresenius”) paid in settlement of asbestos and other Grace-relatedclaims as described below, 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 using cash flow from operations,insurance proceeds from policies and settlements covering asbestos-relatedliabilities, and new credit facilities. Proceedsfrom available product liability insurance applicable to asbestos-relatedclaims would supplement operating cash flow to service new debt and liabilitiesnot paid on the effective date of the Debtors Plan.

 

*Effect on Grace Common Stock*

* *

The Debtors Plan providesthat Grace common stock will remain outstanding at the effective date of theDebtors Plan, but that the interests of existing shareholders would be subjectto dilution by additional shares of common stock issued under the Debtors Plan.In addition, in order to preserve significant tax benefits from net operatingloss carryforwards (“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 Debtors Plan places restrictions onthe purchase of Grace common stock. The restrictions would prohibit (withoutthe consent of Grace), for a period of three years after the effective date ofthe Debtors Plan, a person or entity from acquiring more than 4.75% of theoutstanding Grace common stock or, for those persons already holding more than4.75%, prohibit them from increasing or decreasing their holdings. TheBankruptcy Court has approved the trading restrictions described above,excluding the restriction on sales, until the effective date of the DebtorsPlan.

 

F-15

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Grace intends to addressall pending and future asbestos-related claims and all other pre-petitionclaims as outlined in the Debtors Plan. However, it is possible that theDebtors Plan will not be ultimately approved by the Bankruptcy Court and otherinterested parties. For example, the PI and PD Committees and the FCR havechallenged the confirmability of the Debtors Plan, arguing that the DebtorsPlan 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.

 

***PI Committee and FCR Plan of Reorganization—***Under the terms of the PI Plan, a trustwould be established under Section 524(g) of the Bankruptcy Code (the“PI Trust”) to which all pending and future asbestos-related personal injuryclaims and demands (“PI Claims”) would be channeled for resolution.  The PI Plan contemplates that the BankruptcyCourt would determine, among other things, an estimate of the value of all PIClaims.  The PI Plan assumes that:  cash would be available from insurers; cashwould be available from Fresenius pursuant to the Fresenius settlementdescribed below; and cash and shares of Sealed Air common stock would beavailable from Cryovac pursuant to the Sealed Air Settlement.  As a condition precedent to the PI Plan, theBankruptcy Court must determine that the estimated value of all PI Claims,excluding to the extent applicable, post-petition interest, is not less than $4billion.  If the amount available fordistribution pursuant to the PI Plan is more than the principal amount ofcreditors’ claims, creditors entitled to post-petition interest would be paidsuch interest in the form of Grace equity securities****and any remaining value would be available to current Graceshareholders in the form of new Grace equity securities.

 

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

 

Asbestos-Related PersonalInjury Claims and Costs (PI Claims)

 

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

 

In order to satisfy allowed PI Claims and therelated trust administration costs and expenses, on the effective date ofthe PI Plan, the PI Trust would be funded with:  (1) cash; (2) cash and shares ofSealed Air common stock pursuant to the Sealed Air Settlement; (3) personalinjury liability insurance, unless it is valued at more than $500 million, inwhich case it would remain with Grace; and (4) Grace equitysecurities.  The value of Grace equitysecurities contributed to the PI Trust would depend on the enterprise value ofGrace, the value of Grace’s personal injury liability insurance and the valueof the Sealed Air Settlement.

 

Asbestos-Related PropertyDamage Claims excluding ZAI (PD Claims)

 

Settled PD Claims wouldbe paid in a combination of cash and Grace equity securities on the effective date of the PI Plan.  Onthe effective date of the PI Plan, Grace would establish a reserve consistingof cash and Grace equity securities with a value equal to the estimated amountof unresolved PD Claims.  UnresolvedPD Claims would remain in the mediation and litigation process and would be paid in cash and Graceequity securities from the reserve.  If the reserve did not have sufficientassets to pay all unresolved PD Claims once the amounts were determined, Gracewould be liable to pay any amounts not funded from the reserve.

 

ZAI Claims

 

ZAI claims would remainin the litigation process and would bepaid by Grace, if required.

 

Certain EnvironmentalClaims

 

Certainallowed environmental claims would be paid in cash and Grace equity securitieson the effective date of the PI Plan.  Onthe effective date of the PI Plan, Grace would establish a reserve consistingof cash and Grace equity securities with a value equal to the estimated amountof unresolved environmental claims.  Unresolvedenvironmental claims would be determined by the Bankruptcy Court and would be paid in cash and Graceequity securities from the reserve.  If the reserve did not have sufficientassets to pay all unresolved environmental claims once the amounts were determined, Gracewould be liable to pay any amounts not funded from the reserve.

 

Other Claims

 

Allallowed administrative or priority claims would be paid in cash (either on theeffective date of the PI Plan or as they become due and payable overtime).  General unsecured claims, otherthan those covered by the PI Trust, would be paid in cash (either on theeffective date of the PI Plan or as they become due and payable over time) and 

 

F-16

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Graceequity securities.  Certain environmentaland general unsecured claims would be reinstated and the holders of such claimswould retain all legal and other rights to which they are entitled under suchclaims.  Other non-asbestos-relatedliabilities and claims (primarily certain tax claims and employee-relatedclaims such as pension and retirement medical obligations) would be paid incash as they become due and payable over time.

 

Effect on Grace CommonStock

 

Outstanding Grace commonstock would be cancelled at the effective date of the PI Plan.

 

The Debtors Plan and the PI Plan are designed to address all pendingand future asbestos-related claims and all other pre-petition claims asoutlined respectively, therein.  However,it is possible that neither plan of reorganization will be ultimately approvedby the Bankruptcy Court and other interested parties.  Further, the proponents of the Debtors Planand the PI Plan are free to amend their respective plans of reorganization atany time.  As a result, a plan ofreorganization that is materially different from the Debtors Plan and the PIPlan may ultimately be approved. Under the ultimate plan of reorganization, theinterests of the holders of Grace common stock could be substantially dilutedor cancelled and the value of non-asbestos claims could be materially differentfrom that reflected in Grace’s balance sheet. The value of Grace common stock and the extent of any recovery by non-asbestos-relatedcreditors will depend principally on the amount of Grace’s asbestos-relatedliability under a confirmed plan of reorganization.

 

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

 

Approximately 14,900proofs 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 allege exposureto asbestos through Grace’s products or operations. These claims, if sustained,would require Grace to fund ongoing health monitoring costs for qualifiedclaimants. In addition, approximately 800 proofs of claim were filed after thebar date.

 

Approximately 7,000 ofthe non-asbestos related claims involve claims by employees or former employeesfor future retirement benefits such as pension and retiree medical coverage.Grace views most of these claims as contingent and has proposed a plan of reorganizationthat would retain such benefits. The remaining non-asbestos 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-relatedlitigation, and non-asbestos-related personal injury.  Claims for indemnification or contribution toactual or potential codefendants in asbestos-related and other litigation werealso filed.

 

The Debtors haveanalyzed the claims filed pursuant to the March 31, 2003 bar date and havefound that many are duplicates, represent the same claim filed against morethan one of the Debtors, lack any supporting documentation, or provideinsufficient supporting documentation. As of December 31, 2007, of theapproximately 4,035 asbestos property damage claims filed, 275 claims have beenresolved, approximately 3,570 claims have been expunged or withdrawn byclaimants, leaving approximately 190 claims to be addressed through theproperty damage case management order approved by the Bankruptcy Court. As of December 31, 2007, of the approximately 3,260 non-asbestosclaims filed, approximately 1,845 have been expunged or withdrawn by claimants,approximately 1,140 have been resolved, and approximately 275 claims are to beaddressed through the claim objection process and the dispute resolutionprocedures approved by the Bankruptcy Court.

 

Grace believes that itsrecorded 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 Debtors Plan, as described in “Accounting Impact” below.Grace will adjust its recorded asbestos-related liability, as necessary, toreflect rulings by the Bankruptcy 

 

F-17

----

 

Court.  Any such adjustments couldbe material to its consolidated financial position and results of operations.

 

***Litigation Proceedings in Bankruptcy Court****—*In September 2000, Grace was namedin a purported 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 PI and PD Committees to proceed with claimsagainst Fresenius and Sealed Air and Cryovac on behalf of the Debtors’bankruptcy estate.

 

On November 29,2002, Sealed Air (and Cryovac) and Fresenius each announced that they hadreached agreements in principle with the PI and PD Committees to settleasbestos, successor liability and fraudulent transfer claims related to suchtransactions (the “litigation settlement agreements”). Under the terms of theFresenius settlement, subject to the fulfillment of certain conditions, Freseniuswould pay $115.0 million to the Debtors’ estate as directed by the BankruptcyCourt upon confirmation of the Debtors’ plan of reorganization. In July 2003,the Fresenius settlement was approved by the Bankruptcy Court. Under the termsof the Sealed Air Settlement, subject to the fulfillment of certain conditions,Cryovac would make a payment of $512.5 million (plus interest at 5.5%compounded annually, commencing on December 21, 2002) and nine millionshares (now 18 million shares to reflect a two-for-one stock split) of SealedAir common stock (collectively valued at $1,087.4 million as of December 31,2007), as directed by the Bankruptcy Court upon confirmation of the Debtors’plan of reorganization. In June 2005, the Sealed Air Settlement was approvedby the Bankruptcy Court.

 

***Debt Capital***—All of the Debtors’ pre-petition debt is in defaultdue to the Filing. The accompanying Consolidated Balance Sheets reflect theclassification of the Debtors’ pre-petition debt within “liabilities subject tocompromise.”

 

The Debtors have enteredinto a debtor-in-possession post-petition loan and security agreement with Bankof America, N.A. (the “DIP facility”) in the aggregate amount of $250million.  The term of the DIP facility expireson April 1, 2008. Grace has requested a two-year extension of the DIP facilityfrom the lenders and a hearing before the Bankruptcy Court with respect to theextension is scheduled for March 17, 2008.

 

***Accounting Impact***—The accompanying Consolidated Financial Statementshave been prepared in accordance with Statement of Position 90-7 (“SOP 90-7”),“Financial Reporting by Entities in Reorganization Under the Bankruptcy Code,”promulgated by the American Institute of Certified Public Accountants. SOP 90-7requires that financial statements of debtors-in-possession be prepared on agoing concern basis, which contemplates continuity of operations, realizationof assets and liquidation of liabilities in the ordinary course ofbusiness.  However, as a result of theFiling, the realization of certain of the Debtors’ assets and the liquidationof certain of the Debtors’ liabilities are subject to significant uncertainty.While operating as debtors-in-possession, the Debtors may sell or otherwisedispose of assets and liquidate or settle liabilities for amounts other thanthose reflected in the Consolidated Financial Statements. Further, the ultimateplan of reorganization could materially change the amounts and classificationsreported in the Consolidated Financial Statements.

 

Pursuant to SOP 90-7,Grace’s pre-petition and future liabilities that are subject to compromise arerequired to be reported separately on the balance sheet at an estimate of theamount that will ultimately be allowed by the Bankruptcy Court. As of December 31,2007, such pre-petition liabilities include fixed obligations (such as debt andcontractual commitments), as well as estimates of costs related to contingentliabilities (such as asbestos-related litigation, environmental remediation,and other claims). Obligations of Grace subsidiaries not covered by the Filingcontinue to be classified on the Consolidated Balance Sheets based uponmaturity datesor 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“Chapter 11 expenses, net of interest income,” a separate caption in itsConsolidated Statements of Operations.

 

Grace has not recorded thebenefit of any assets that may be available to fund asbestos-related and otherliabilities under the litigation settlements with Sealed Air and Fresenius, assuch agreements are subject to conditions, which, although expected to be met,have not been satisfied and confirmed by the Bankruptcy Court. The valueavailable under these litigation settlement agreements as measured at December 31,2007, was $1,202.4 

 

F-18

----

 

million comprised of $115.0million in cash from Fresenius and $1,087.4 million in cash and stock fromCryovac. Payments under the Sealed Air Settlement will be made directly to theasbestos 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’s ConsolidatedBalance Sheets separately identify the liabilities that are “subject tocompromise” as a result of the Chapter 11 proceedings. In Grace’s case,“liabilities subject to compromise” represent both pre-petition and futureliabilities as determined under U.S. generally accepted accounting principles.The bases for the asbestos-related liability component of “liabilities subjectto compromise” 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)*                                 | ** ** | **December 31,  2007** | ** **  | **December 31,  2006** | ** ** | **Filing Date  (Unaudited)** | ** ** |
|-------------------------------------------------|------------|-----------------------------|-------------|-----------------------------|------------|------------------------------|------------|
| Pre-petition bank debt plus accrued interest    | ** ** | **$**                       | **783.0**   |                        | $          | 723.1                        |       | $ | 511.5 |   |
| Drawn letters of credit plus accrued interest   | ** ** | **26.9**                    |        | 16.4                        |       | —                       |       |
| Asbestos-related contingencies                  | ** ** | **1,700.0**                 |        | 1,700.0                     |       | 1,002.8                      |       |
| Income taxes (1)                                | ** ** | **89.3**                    |        | 141.2                       |       | 242.1                        |       |
| Environmental contingencies                     | ** ** | **368.6**                   |        | 361.1                       |       | 164.8                        |       |
| Postretirement benefits other than pension      | ** ** | **84.0**                    |        | 72.7                        |       | 185.4                        |       |
| Unfunded special pension arrangements           | ** ** | **100.8**                   |        | 95.6                        |       | 70.8                         |       |
| Retained obligations of divested businesses (2) | ** ** | **30.9**                    |        | 18.0                        |       | 43.5                         |       |
| Accounts payable                                | ** ** | **31.7**                    |        | 31.7                        |       | 43.0                         |       |
| Other accrued liabilities                       | ** ** | **74.4**                    |        | 71.2                        |       | 102.1                        |       |
| Reclassification to current liabilities (3)     | ** ** | **(12.1**                   | **)**       | (9.4                        | )          | **—**                   | ** ** |
| **Total Liabilities Subject to Compromise**     | ** ** | **$**                       | **3,277.5** |                        | $          | 3,221.6                      |       | $ | 2,366.0 |   |

----

| (1) |   | Amounts as of December 31, 2007 and 2006 are net  of expected refunds of $76.4 million and $15.0 million, respectively.                                                                                                                                                                                     |
|-----|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) |   | Increased $12.9 million from December 31, 2006  primarily due to reclass from tax reserves.                                                                                                                                                                                                                 |
| (3) |   | As of December 31, 2007 and 2006, approximately  $12.1 million and $9.4 million, respectively, of certain pension and postretirement  benefit obligations subject to compromise have been presented in other  current liabilities in the Consolidated Balance Sheets in accordance with SFAS  No. 158. |

 

Note that the unfundedspecial pension arrangements reflected above exclude non-U.S. pension plans andqualified U.S. pension plans that became underfunded subsequent to the Filing.Contributions to qualified U.S. pension plans are subject to Bankruptcy Courtapproval.

*** ***

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

 

The following table is areconciliation of the changes in pre-filing date liability balances for theperiod from the Filing Date through December 31, 2007.

 

F-19

----

 
| *(In millions)**(Unaudited)*                                                                         | ** ** | **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 |       | (352.9                       | )           |
| **Expense/(income) items:**                                                                          | ** ** | ** **                   | ** **  |
| Interest on  pre-petition liabilities                                                                |       | 345.8                        |        |
| Employee-related  accruals                                                                           |       | 60.6                         |        |
| Provision for  asbestos-related contingencies                                                        |       | 744.8                        |        |
| Provision for  environmental contingencies                                                           |       | 312.6                        |        |
| Provision for  income tax contingencies                                                              |       | (16.8                        | )           |
| Balance sheet  reclassifications                                                                     |       | (37.8                        | )           |
| **Balance, end of period**                                                                           | ** ** | **$**                        | **3,277.5** | ** ** |

 

Additional liabilitiessubject to compromise may arise due to the rejection of executory contracts orunexpired leases, or as a result of the Bankruptcy Court’s allowance ofcontingent or disputed claims.

 

For the holders of pre-petition bank credit facilities, beginning January 1,2006, Grace agreed to pay interest on pre-petition bank debt at the prime rate,adjusted for periodic changes, and compounded quarterly. The effective ratesfor the twelve months ended December 31, 2007 and 2006 were 8.05% and7.96%, respectively.  From the FilingDate through December 31, 2005, Grace accrued interest on pre-petitionbank debt at a negotiated fixed annual rate of 6.09%, compounded quarterly.

 

For the holders of claims who, but for the Chapter 11 filing, would beentitled under a contract or otherwise to accrue or be paid interest on suchclaim in a non-default (or non-overdue payment) situation under applicablenon-bankruptcy law, Grace accrues interest at the rate provided in the contractbetween the Grace entity and the claimant or such rate as may otherwise applyunder applicable non-bankruptcy law.

 

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

 

***Chapter 11 expenses***

 
| *(In millions)*                    | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Legal and  financial advisory fees | ** ** | **$**    | **95.1**   |     | $          | 57.9     |       | $ | 38.4 |   |
| Interest income                    | ** ** | **(8.7** | **)**      | (8.0     | )          | (7.5     | )          |
| Chapter 11  expenses, net          | ** ** | **$**    | **86.4**   |     | $          | 49.9     |       | $ | 30.9 |   |

 

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

 

***Condensed financial information of the Debtors***

 
| **W. R. Grace & Co.—Chapter  11 Filing Entities**

**Debtor-in-Possession Statements of  Operations**

*(In millions) (Unaudited)******* | ** **                       | ** **  | ** **  |
|--------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------|-------------|-------------|
| ** **                                                                                                                                             | ** **                       | ** **  |
| ** **                                                                                                                                             | **Year Ended December 31,** | ** **  |
| ** **                                                                                                                                             | **2007**                         | ** **  | **2006**    | ** ** | **2005** | ** ** |
| Net sales, including intercompany                                                                                                                      | ** **                       | **$**       | **1,497.9** |   | $ | 1,425.0 |   | $ | 1,267.2 |   |
| Cost of goods  sold, including intercompany, exclusive of depreciation and amortization  shown separately below                                        | ** **                       | **1,063.2** |        | 1,036.6 |   | 896.0 |   |
| Selling, general  and administrative expenses, exclusive of defined benefit pension expense  shown separately below                                    | ** **                       | **314.0**   |        | 340.2 |   | 276.1 |   |
| Research and development expenses                                                                                                                      | ** **                       | **43.9**    |        | 38.3 |   | 38.4 |   |
| Depreciation and amortization                                                                                                                          | ** **                       | **55.5**    |        | 58.6 |   | 65.2 |   |
| Defined benefit pension expense                                                                                                                        | ** **                       | **38.8**    |        | 46.3 |   | 51.9 |   |
| Interest expense and related financing costs                                                                                                           | ** **                       | **71.1**    |        | 72.7 |   | 54.7 |   |
| Other (income) expense, net                                                                                                                            | ** **                       | **(72.9**   | **)**       | (83.4 | ) | (107.3 | ) |
| Provision for environmental remediation                                                                                                                | ** **                       | **17.0**    |        | 30.0 |   | 25.0 |   |
| Chapter 11 expenses, net of interest income                                                                                                            | ** **                       | **86.5**    |        | 49.8 |   | 30.7 |   |
|                                                                                                                                                   | ** **                       | **1,617.1** |        | 1,589.1 |   | 1,330.7 |   |
| Income (loss)  before income taxes and equity in net income of non-filing entities                                                                     | ** **                       | **(119.2**  | **)**       | (164.1 | ) | (63.5 | ) |
| Benefit from (provision for) income taxes                                                                                                              | ** **                       | **61.8**    |        | 33.0 |   | 15.0 |   |
| Income (loss)  before equity in net income of non-filing entities                                                                                      | ** **                       | **(57.4**   | **)**       | (131.1 | ) | (48.5 | ) |
| Equity in net income of non-filing entities                                                                                                            | ** **                       | **137.7**   |        | 149.4 |   | 115.8 |   |
| **Net income**                                                                                                                                         | ** **                       | **$**       | **80.3**    |   | $ | 18.3 |   | $ | 67.3 |   |

 

F-20

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| **W. R. Grace & Co.—Chapter  11 Filing Entities**

**Debtor-in-Possession Condensed  Statements of Cash Flows**

*(In millions) (Unaudited)* | ** **                       | ** ** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------|------------|------------|
| ** **                                                                                                                                                 | ** **                       | ** ** |
| ** **                                                                                                                                                 | ** **                       | ** ** |
| ** **                                                                                                                                                 | **Year Ended December 31,** | ** ** |
| ** **                                                                                                                                                 | **2007**                         | ** ** | **2006**   | ** ** | **2005** | ** ** |
| **Operating Activities**                                                                                                                                   | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income                                                                                                                                                 | ** **                       | **$**      | **80.3**   |   | $ | 18.3 |   | $ | 67.3 |   |
| **Reconciliation to net cash provided by (used  for) operating activities:**                                                                               | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Chapter 11  expenses, net of interest income                                                                                                               | ** **                       | **86.5**   |       | 49.8 |   | 30.7 |   |
| (Benefit from)  provision for income taxes                                                                                                                 | ** **                       | **(61.8**  | **)**      | (33.0 | ) | (15.0 | ) |
| Equity in net  income of non-filing entities                                                                                                               | ** **                       | **(137.7** | **)**      | (149.4 | ) | (115.8 | ) |
| Depreciation and  amortization                                                                                                                             | ** **                       | **55.5**   |       | 58.6 |   | 65.2 |   |
| Interest on  pre-petition liabilities subject to compromise                                                                                                | ** **                       | **70.9**   |       | 71.3 |   | 50.6 |   |
| Provision for  environmental remediation                                                                                                                   | ** **                       | **17.0**   |       | 30.0 |   | 25.0 |   |
| Other non-cash  items, net                                                                                                                                 | ** **                       | **(7.3**   | **)**      | (0.4 | ) | (5.0 | ) |
| Contributions to  defined benefit pension plans                                                                                                            | ** **                       | **(81.1**  | **)**      | (106.6 | ) | (35.0 | ) |
| Cash paid to  resolve contingencies subject to Chapter 11                                                                                                  | ** **                       | **(10.3**  | **)**      | — |   | (119.7 | ) |
| Chapter 11  expenses paid                                                                                                                                  | ** **                       | **(92.1**  | **)**      | (43.0 | ) | (24.3 | ) |
| Changes in other  assets and liabilities, excluding the effect of businesses acquired/divested                                                             | ** **                       | **1.2**    |       | 30.2 |   | (39.3 | ) |
| **Net cash provided by (used for) operating  activities**                                                                                                  | ** **                       | **(78.9**  | **)**      | (74.2 | ) | (115.3 | ) |
| **Investing Activities**                                                                                                                                   | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Capital  expenditures                                                                                                                                      | ** **                       | **(86.3**  | **)**      | (81.4 | ) | (62.2 | ) |
| Loan repayments  and other                                                                                                                                 | ** **                       | **100.8**  |       | 98.5 |   | 106.4 |   |
| **Net cash provided by (used for) investing  activities**                                                                                                  | ** **                       | **14.5**   |       | 17.1 |   | 44.2 |   |
|                                                                                                                                                       |                             |       |       |   |   |   |   |
| **Net cash provided by (used for) financing  activities**                                                                                                  | ** **                       | **37.4**   |       | 21.7 |   | 0.3 |   |
|                                                                                                                                                       |                             |       |       |   |   |   |   |
| **Net  increase (decrease) in cash and cash equivalents**                                                                                                  | ** **                       | **(27.0**  | **)**      | (35.4 | ) | (70.8 | ) |
| Cash and cash  equivalents, beginning of period                                                                                                            | ** **                       | **233.8**  |       | 269.2 |   | 340.0 |   |
| Cash and cash  equivalents, end of period                                                                                                                  | ** **                       | **$**      | **206.8**  |   | $ | 233.8 |   | $ | 269.2 |   |

 

 
| **W. R. Grace & Co.—Chapter  11 Filing Entities**

**Debtor-in-Possession Balance Sheets**

*(In millions) (Unaudited)* | ** **            | ** **  | ** **  |
|---------------------------------------------------------------------------------------------------------------------------------------|-----------------------|-------------|-------------|
| ** **                                                                                                                            | ** **            | ** **  |
| ** **                                                                                                                            | **December 31,** | ** **  |
| ** **                                                                                                                            | **2007**              | ** **  | **2006**    | ** ** |
| **ASSETS**                                                                                                                            | ** **            | ** **  | ** **  | ** ** | ** ** |
| **Current Assets**                                                                                                                    | ** **            | ** **  | ** **  | ** ** | ** ** |
| Cash and cash equivalents                                                                                                             | ** **            | **$**       | **206.8**   |   | $ | 233.8 |   |
| Investment securities                                                                                                                 | ** **            | **98.3**    |        | — |   |
| Cash value of life insurance policies, net of policy  loans                                                                           | ** **            | **77.1**    |        | — |   |
| Trade accounts receivable, net                                                                                                        | ** **            | **108.3**   |        | 117.9 |   |
| Receivables from non-filing entities, net                                                                                             | ** **            | **103.2**   |        | 53.2 |   |
| Inventories                                                                                                                           | ** **            | **82.6**    |        | 72.9 |   |
| Other current assets                                                                                                                  | ** **            | **47.1**    |        | 60.9 |   |
| **Total Current Assets**                                                                                                              | ** **            | **723.4**   |        | 538.7 |   |
|                                                                                                                                  |                  |        |        |   |   |
| Properties and equipment, net                                                                                                         | ** **            | **403.8**   |        | 394.5 |   |
| Cash value of life insurance policies, net of policy  loans                                                                           | ** **            | **3.9**     |        | 89.2 |   |
| Deferred income taxes                                                                                                                 | ** **            | **745.7**   |        | 687.1 |   |
| Asbestos-related insurance                                                                                                            | ** **            | **500.0**   |        | 500.0 |   |
| Loans receivable from non-filing entities, net                                                                                        | ** **            | **524.2**   |        | 237.7 |   |
| Investment in non-filing entities                                                                                                     | ** **            | **395.4**   |        | 660.3 |   |
| Overfunded defined benefit pension plans                                                                                              | ** **            | **1.5**     |        | 2.7 |   |
| Other assets                                                                                                                          | ** **            | **77.7**    |        | 88.1 |   |
| **Total Assets**                                                                                                                      | ** **            | **$**       | **3,375.6** |   | $ | 3,198.3 |   |
|                                                                                                                                  |                  |        |        |   |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)**                                                                               | ** **            | ** **  | ** **  | ** ** | ** ** |
| **Liabilities Not Subject to Compromise**                                                                                             | ** **            | ** **  | ** **  | ** ** | ** ** |
| Current liabilities                                                                                                                   | ** **            | **$**       | **224.0**   |   | $ | 212.0 |   |
| Minority interest in consolidated entities                                                                                            | ** **            | **62.1**    |        | 58.4 |   |
| Underfunded defined benefit pension plans                                                                                             | ** **            | **159.6**   |        | 214.0 |   |
| Other liabilities                                                                                                                     | ** **            | **39.0**    |        | 42.1 |   |
| **Total Liabilities Not Subject to Compromise**                                                                                       | ** **            | **484.7**   |        | 526.5 |   |
| **Liabilities Subject to Compromise**                                                                                                 | ** **            | **3,277.5** |        | 3,221.6 |   |
| **Total Liabilities**                                                                                                                 | ** **            | **3,762.2** |        | 3,748.1 |   |
| **Shareholders’ Equity (Deficit)**                                                                                               | ** **            | **(386.6**  | **)**       | (549.8 | ) |
| **Total Liabilities and Shareholders’ Equity  (Deficit)**                                                                        | ** **            | **$**       | **3,375.6** |   | $ | 3,198.3 |   |

 

F-21

----

 

In addition to Grace’sfinancial reporting obligations as prescribed by the SEC, the Debtors are alsorequired, under the rules and regulations of the Bankruptcy Code, toperiodically file certain statements and schedules and a monthly operatingreport with the Bankruptcy Court. This information is available to the publicthrough the Bankruptcy Court. This information is prepared in a format that maynot be comparable to information in Grace’s quarterly and annual financialstatements as filed with the SEC. The monthly operating reports are notaudited, do not purport to represent the financial position or results ofoperations of Grace on a consolidated basis, and should not be relied on forsuch purposes.

 

**3.****                                     ****Asbestos-Related Litigation**

 

Grace is a defendant inproperty damage and personal injury lawsuits relating to previously soldasbestos-containing products. As of the Filing Date, Grace was a defendant in65,656 asbestos-related lawsuits, 17 involving claims for property damage (oneof which has since been dismissed), and the remainder involving 129,191 claimsfor personal injury. Due to the Filing, holders of asbestos-related claims arestayed from continuing to prosecute pending litigation and from commencing newlawsuits against the Debtors. The PI and PD Committees, representing theinterests of property damage and personal injury claimants, respectively, andthe FCR, representing the interests of future personal injury claimants, havebeen appointed in the Chapter 11 Cases. Grace’s obligations with respect topresent and future claims will be determined through the Chapter 11 process.

 

***Property DamageLitigation***—Theplaintiffs in asbestos property damage lawsuits generally seek to have thedefendants pay for the cost of removing, containing or repairing theasbestos-containing materials in the affected buildings. Various factors canaffect the merit and value of property damage claims, including legal defenses,product identification, the amount and type of product involved, the age, type,size and use of the building, the legal status of the claimant, thejurisdictional history of prior cases, the court in which the case is pending,and the difficulty of asbestos abatement, if necessary.

 

Out of 380 asbestosproperty damage cases (which involved thousands of buildings) filed prior tothe 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).

 

Approximately 4,035additional 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 were reviewed in detail by Grace, categorizedinto claims with sufficient information to be evaluated or claims that requireadditional information and, where sufficient information existed, the estimatedcost of resolution was considered as part of Grace’s recorded asbestos-relatedliability. Approximately 200 claims did not contain sufficient information topermit an evaluation.  Grace 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 December 31, 2007, following the reclassification,withdrawal or expungement of claims, approximately 460 property damage claimsremain outstanding.  The Bankruptcy Courthas approved settlement agreements covering approximately 275 property damageclaims for an aggregate allowed amount of $82 million.

 

Eight of the ZAI caseswere filed as purported class action lawsuits in 2000 and 2001. In addition,ten lawsuits were filed as purported class actions in 2004 and 2005 withrespect to persons and homes in Canada. These cases seek damages and equitablerelief, including the removal, replacement and/or disposal of all suchinsulation. The plaintiffs assert that this product is in millions of homes andthat the cost of removal could be several thousand dollars per home. As aresult 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. governmentin the Montana criminal proceeding described in Note 15) dispute Grace’sposition on the safety of ZAI. On October 18, 2004, the Bankruptcy Courtheld a hearing on motions filed by the parties to address a number of importantlegal and factual issues regarding the ZAI claims.  On December 14, 2006, the BankruptcyCourt issued an opinion and order holding that, although ZAI is contaminatedwith asbestos and can release asbestos fibers when disturbed, there is nounreasonable risk of harm from ZAI.  TheZAI claimants sought an 

 

F-22

----

 

interlocutory appeal ofthe opinion and order with the District Court in Delaware but that request wasdenied. The ZAI claimants have indicated they still intend to appeal such opinionand order when it becomes a final order. The Bankruptcy Court has instructed the parties to consult with oneanother regarding how to proceed with respect to ZAI in light of the Court’sopinion and order. Grace’s recorded asbestos-related liability at December 31, 2007assumes the risk of loss from ZAI litigation is not probable.  If Grace’s view as to risk of loss is notsustained, management believes the cost to resolve the matter would bematerial.

 

***Personal InjuryLitigation***—Asbestospersonal injury claimants allege adverse health effects from exposure toasbestos-containing products formerly manufactured by Grace.  Historically, Grace’s cost to resolve suchclaims has been influenced by numerous variables, including the nature of thedisease alleged, product identification, proof of exposure to a Grace product,negotiation factors, the solvency of other former producers of asbestoscontaining products, cross-claims by co-defendants, the rate at which newclaims are filed, the jurisdiction in which the claims are filed, and thedefense and disposition costs associated with these claims.

 

Cumulatively through theFiling Date, 16,354 asbestos personal injury lawsuits involving approximately35,720 claims were dismissed without payment of any damages or settlementamounts (primarily on the basis that Grace products were not involved) andapproximately 55,489 lawsuits involving approximately 163,698 claims weredisposed of (through settlements and judgments) for a total of $645.6 million.  As of the Filing Date, 129,191 claims forpersonal injury were pending against Grace. Grace believes that a substantialnumber of additional personal injury claims would have been received betweenthe Filing Date and December 31, 2007 had such claims not been stayed bythe Bankruptcy Court.

 

***Asbestos-RelatedLiability***—The total recorded asbestos-related liabilityas of December 31, 2007 and 2006 was $1,700 million and is included in“liabilities subject to compromise” in the accompanying Consolidated BalanceSheets.  Grace adjusted itsasbestos-related liability in the fourth quarter of 2004 based on its proposedplan of reorganization (the Debtors Plan) as discussed in Note 2. The amountrecorded at December 31, 2007 and 2006 includes the $1,613 million maximumamount reflected as a condition precedent to the Debtors Plan and $87 millionrelated to pre-Chapter 11 contractual settlements and judgments included ingeneral unsecured claims.

 

Under the Debtors 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 Debtors Plan into an asbestos trust (established under Section 524(g) ofthe Bankruptcy Code) to pay all asbestos-related personal injury and property damageclaims (including ZAI) entitled to payment under the Debtors Plan and relatedtrust administration costs and expenses on the later of the effective date ofthe Debtors Plan or when allowed (the “Funding Amount”). It is a condition toconfirmation of the Debtors Plan that the Bankruptcy Court shall conclude thatthe Funding Amount is not greater than $1,613 million. This amount, whichshould be sufficient to fund over $2 billion in pending and future claims, wasbased in part on Grace’s 2004 evaluation of (1) existing but unresolvedpersonal injury and property damage claims, (2) actuarially-basedestimates of future personal injury claims, (3) the risk of loss from ZAIlitigation, (4) proposed claim payments reflected in the Debtors Plan, and(5) the cost of trust administration and litigation.  Based upon these and other factors, Grace wasprepared to settle its asbestos-related claims at this amount as part of aconsensual plan of reorganization.  Aspart of the estimation and litigation process, the amounts proposed to oradopted by the Bankruptcy Court may be materially different than this amount.

 

The Bankruptcy Court hasentered separate case management orders for estimating liability for pendingand future personal injury claims and adjudicating pending property damageclaims, excluding ZAI claims.  The trialfor estimating liability for personal injury claims commenced in January 2008.  The Debtors expect that the estimatedliability will provide the basis for determining the Funding Amount to be paidinto the trust on the effective date of the Debtors Plan.

 

For personal injuryclaims, the Bankruptcy Court ordered that all claimants with claims pending asof the Filing Date (other than settled but unpaid claims) must completedetailed questionnaires providing information on, among other things, theirmedical condition, including diagnostic support, exposure to Grace andnon-Grace asbestos-containing products, employment history, and pendinglawsuits against other companies.  The 

 

F-23

----

 

Bankruptcy Court requiredquestionnaires to be completed on or before July 12, 2006 and supplementalquestionnaires to be completed on or before January 12, 2007.

 

The Bankruptcy Court also established proceduresand deadlines for filingproofs of claims for asbestos personal injury claims pending as of the FilingDate.  Claimants asserting claimssubject to enforceable written settlementagreements dated prior to the Filing Date, which have not been fully paid orsatisfied, were required to file proofs of claim byOctober 16, 2006.  Claimants asserting claims that are notsubject to such settlement agreements were required to file proofs of claim by November 15, 2006.

 

Grace has catalogued andanalyzed the information furnished with the proofs of claim and questionnaires.This information and other information, including Grace’s claims and settlementhistory, the experience of other defendants in asbestos-related litigation, andpost-petition developments in asbestos-related litigation generally, have beenanalyzed and reviewed by experts; and Grace, the PI Committee and the FCR havesubmitted expert reports that each party will rely upon to support itsrespective estimate of Grace’s asbestos personal injury liability.  The estimate of such liability is expected toprovide the basis for determining the appropriate funding amount to resolvecurrent and future asbestos personal injury claims in a plan ofreorganization.  Copies of Grace’s and the PI Committee’s expert reportsand portions of the FCR’s expert report are available through the BankruptcyCourt. These expert reports (since supplemented, rebutted and made the subjectof discovery) are based on data, methodologies and assumptions that may or maynot be accepted by the Bankruptcy Court. Grace expects the estimationlitigation process to conclude with hearings that began in January 2008and are scheduled over 20 non-consecutive days ending in May 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 FCR. Such adjustments maybe material.

 

For property damageclaims, the case management order provides that estimation will be preceded bylitigation on certain common threshold issues affecting a substantial majorityof claims. Such litigation will consist of determining, among other things, (1) whetherasbestos-containing products formerly manufactured by Grace are hazardous inplace, and (2) compliance with the applicable statute of limitations.  Grace has asked****the Bankruptcy Court to rule on Grace’s specificobjections to individual claims and groups of claims.

 

The Funding Amount willprimarily be a function of the number of property damage and personal injuryclaims entitled to be paid under the Debtors 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 rulings favorableto Grace’s position.

 

Conversely, the PI and PDCommittees and the FCR continue to assert that Grace’s asbestos-relatedliabilities are substantially higher than $1,613 million, and in fact are inexcess of Grace’s business value.  If theCourt accepts the position of the PI and PD Committees and the FCR, then anyplan of reorganization likely would result in the loss of all or substantiallyall equity value by current shareholders. Therefore, due to the significantuncertainties of this process and asbestos litigation generally, Grace is notable to estimate a probable Funding Amount that would be accepted by theBankruptcy Court.

 

However, as Grace iswilling to proceed with confirmation of the Debtors Plan with a Funding Amountof up to $1,613 million (assuming that other conditions precedent toconfirmation of the Debtors Plan are satisfied, including the availability ofthe payment from Cryovac directly to the asbestos trust under the Sealed Air Settlementdescribed in Note 2), Grace’s recorded asbestos-related liability reflects themaximum amount allowed as a condition precedent under the Debtors Plan. Thisamount, plus $87 million for pre-Chapter 11 contractual settlements andjudgments, brings the total recorded asbestos-related liability as of December 31,2007 and 2006 to $1,700 million. Any differences between the Debtors Plan asfiled and as approved for confirmation could 

 

F-24

----

 

fundamentally change theaccounting measurement of Grace’s asbestos-related liability and that changecould be material.

 

***Insurance Rights***—Grace holds insurance policies that provide coveragefor 1962 to 1984 with respect to asbestos-related lawsuits and claims.  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.

 

For each insurance year, Grace’s coverage consists of both primaryand excess coverage.  Primary coveragefor an insurance year generally reimburses Grace for the portion of paid claimsallocated to that year starting at the first dollar paid (after any deductible)through the coverage limit.  With oneexception, coverage disputes regarding Grace’s primary insurance policies havebeen settled, and the settlement amounts have been paid in full. Excessinsurance generally reimburses Grace for claims paid above a specified policythreshold through the coverage limit. For each insurance year, Grace’s insurance program includes multiplelayers of excess coverage.  A layer ofexcess coverage, which may include multiple insurers, is triggered once claimpayments that can be assigned to that insurance year are paid up to thethreshold of that layer.

 

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 available under these settlementagreements is approximately $487 million. With respect to asbestos-related personal injury claims, the settlementagreements generally require that the claims be spread over the claimant’s exposureperiod and that each insurer pay a pro rata portion of each claim based on theamount of coverage provided during each year of the total exposure period.

 

Presently, Grace has no agreements in place with insurers withrespect to approximately $430 million of excess coverage.  Such policies are at layers of coverage thathave not yet been triggered, but certain layers would be triggered if theDebtors Plan were approved at the recorded asbestos-related liability of $1,700million. In estimating its ultimate insurance recovery, Grace has assumed thatits unsettled excess coverage will be available on terms that are substantiallysimilar to the existing settlement agreements described above.  Grace believes that any allowed ZAI claimsalso would be covered under the policies discussed above to the extent theyrelate to installations of ZAI occurring after July 1, 1973.

 

In addition, Grace hasapproximately $253 million of excess coverage with insolvent or non-payinginsurance carriers.  Non-paying carriersare those that, although technically solvent, are not currently meeting theirobligations to pay claims.  Grace hasfiled and continues to file claims in the insolvency proceedings of thesecarriers.  Grace periodically receivesdistributions from some of these insolvent carriers and expects to receivedistributions in the future.  Settlementamounts are recorded as income when received.

 

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 $90million 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 December 31,2007 and 2006 approximated $94.8 million and $90.3 million, respectively,including interest earned on the account. Funds will be distributed from thisaccount directly to claimants at the direction of the escrow agent pursuant tothe terms of a confirmed plan of reorganization or as otherwise ordered by theBankruptcy Court.  The settlementagreement provides that unless Grace confirms a plan of reorganization by December 31,2008, at the option of the insurer, exercisable at any time prior to April 30,2009, the escrow amount with interest must be returned to the insurer.  Grace will record the amount in the escrowaccount as an asset and reduce its asbestos insurance receivable balance if andwhen all contingencies for the release of such amount are satisfied.

 

As of December 31, 2007, including the settlement discussedabove and after subtracting previous reimbursements by insurers and allowingfor discounts pursuant to certain settlement agreements, there remainsapproximately $917 million of excess coverage from 54 presently solventinsurers.  Grace estimates that eligibleclaims would have to exceed $4 billion to access total coverage.  Grace further estimates that, assuming the resolutionvalue of asbestos-related claims is equal to the recorded liability of $1,700million (which should fund claim payments in 

 

F-25

----

 

excess of $2 billion), itshould be entitled to approximately $500 million of insurance recovery,including the escrow described above. This amount was determined by estimating the aggregate and per yearpayout for claims over time and applying the expected insurance recovery factorto such claims. However, the ultimate amount of insurance recovered on suchclaims will depend on a number of factors that will only be determined at thetime claims are paid including: the nature of the claim (PI, PD or ZAI), therelevant exposure years, the timing of payment, the solvency of insurers andthe legal status of policy rights. Accordingly, Grace’s recorded estimate ofinsurance recovery may differ materially from actual amounts received.

 

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

 

The components of income(loss) from consolidated operations before income taxes and the related benefitfrom (provision for) income taxes for 2007, 2006, and 2005 are as follows:

 
| **Income Taxes—Consolidated Operations*****(In millions)* | ** ** | **2007**   | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|----------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| **Income (loss) before income taxes:**                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Domestic                                                       | ** ** | **$**      | **355.2**  |       | $          | (96.6      | )          | $ | 10.5 |   |
| Foreign                                                        | ** ** | **185.9**  |       | 150.1      |       | 142.3      |       |
| Intercompany  eliminations                                     | ** ** | **(466.6** | **)**      | (27.1      | )          | (64.2      | )          |
|                                                           | ** ** | **$**      | **74.5**   |       | $          | 26.4       |       | $ | 88.6 |   |
| **Benefit from (provision for) income taxes:**                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Federal—current                                           | ** ** | **$**      | **29.0**   |       | $          | (8.5       | )          | $ | 5.1 |   |
| Federal—deferred                                          | ** ** | **34.5**   |       | 41.8       |       | 13.8       |       |
| State and local—current                                   | ** ** | **(1.3**   | **)**      | (1.4       | )          | (1.0       | )          |
| Foreign—current                                           | ** ** | **(66.2**  | **)**      | (43.0      | )          | (47.5      | )          |
| Foreign—deferred                                          | ** ** | **9.8**    |       | 3.0        |       | 8.3        |       |
|                                                           | ** ** | **$**      | **5.8**    |       | $          | (8.1       | )          | $ | (21.3 | ) |

 

The above table reflectsthe elimination in 2007 of approximately $440 million of domestic incomeresulting from repatriated earnings.

 

At December 31, 2007and 2006, the tax attributes giving rise to deferred tax assets and liabilitiesconsisted of the following items:

 
| **Deferred Tax Analysis*********(In millions)* | ** ** | **2007**   | ** **  | **2006**   | ** ** |
|------------------------------------------------|------------|------------|-------------|------------|------------|
| *** ***                                   | ** ** | ** ** | ** **  | ** ** | ** ** |
| **Deferred tax assets:**                       | ** ** | ** ** | ** **  | ** ** | ** ** |
| Liability for asbestos-related litigation      | ** ** | **$**      | **595.0**   |       | $          | 595.0 |   |
| Net operating loss/credit carryforwards        | ** ** | **71.1**   |        | 133.8      |       |
| Deferred state taxes                           | ** ** | **121.0**  |        | 146.9      |       |
| Liability for environmental remediation        | ** ** | **129.0**  |        | 126.4      |       |
| Other postretirement benefits                  | ** ** | **27.8**   |        | 29.7       |       |
| Reserves and allowances                        | ** ** | **40.8**   |        | 38.6       |       |
| Research and development                       | ** ** | **35.2**   |        | 33.3       |       |
| Pension liabilities                            | ** ** | **99.3**   |        | 152.5      |       |
| Foreign loss/credit carryforwards              | ** ** | **36.6**   |        | 24.8       |       |
| Accrued interest on pre-petition debt          | ** ** | **70.7**   |        | 56.8       |       |
| Other                                          | ** ** | **9.2**    |        | 5.4        |       |
| Total deferred tax assets                      | ** ** | **$**      | **1,235.7** |       | $          | 1,343.2 |   |
|                                           | ** ** | ** ** |        |       |       |
| **Deferred tax liabilities:**                  | ** ** | ** ** | ** **  | ** ** | ** ** |
| Asbestos-related insurance receivable          | ** ** | **$**      | **(180.5**  | **)**      | $          | (180.5 | ) |
| Deferred foreign and other income              | ** ** | **(10.0**  | **)**       | (111.6     | )          |
| Pension assets                                 | ** ** | **(11.4**  | **)**       | (41.0      | )          |
| Properties and equipment                       | ** ** | **(47.2**  | **)**       | (60.5      | )          |
| Other                                          | ** ** | **(80.0**  | **)**       | (63.7      | )          |
| Total deferred tax liabilities                 | ** ** | **$**      | **(329.1**  | **)**      | $          | (457.3 | ) |
|                                           | ** ** | ** ** | ** **  |       |       |
| **Valuation allowance:**                       | ** ** | ** ** | ** **  | ** ** | ** ** |
| Deferred state taxes                           | ** ** | **$**      | **(121.0**  | **)**      | $          | (146.9 | ) |
| Net federal tax assets                         | ** ** | **—** |        | (21.7      | )          |
| Foreign loss carryforwards                     | ** ** | **(22.0**  | **)**       | (16.6      | )          |
| Total valuation allowance                      | ** ** | **(143.0** | **)**       | (185.2     | )          |
| Net deferred tax assets                        | ** ** | **$**      | **763.6**   |       | $          | 700.7 |   |

 

The deferred tax assetvaluation allowance of $143.0 million at December 31, 2007 consistsof:  (i) $121.0 million related tonet deferred state tax assets associated with current loss carryforwards andfuture tax deductions that are not likely to provide a cash benefit, and (ii) $22.0million related to foreign loss carryforwards that are not reasonably expectedto be utilized in the future.  The changein the valuation allowance from December 31, 2006 to 2007 primarilyrepresents a $25.9 million reduction in the estimated amount of state taxlosses available to be utilized in the future. Similarly, the increase in valuation allowances related to foreignoperating losses and other business credits corresponds to the increase in theavailable amount of such losses and credits. Based upon anticipated futureresults, Grace has concluded that it is more likely than not that the balance ofthe net deferred tax assets, after consideration of the valuation allowance,will be realized. Because of the nature of the items that make up this balance,the realization period is likely to extend over a number of years and theoutcome of the Chapter 11 Cases could materially impact the amount and therealization period.

 

F-26

----

 

Thetax credit carryforwards at December 31, 2007 of $71.1 million consist of$51.6 million of foreign tax credit carryforwards with expiration dates through2017; $0.6 million of general business credit carryforwards with expirationdates through 2025; and $18.9 million of alternative minimum tax credit (“AMTC”)carryforwards with no expiration dates.  However,the $18.9 million of AMTC carryforwards includes $15.8 million which will notbe available if Grace is successful in resolving certain issues reflected asuncertain tax positions.

 

Gracehas not yet recorded “windfall tax benefits” of $14.0 million associated withstock option compensation that remained unrealized at the end of 2007.

 

Graceutilized approximately $191 million of U.S. Federal net operating losses(“NOLs”) during 2007 as a result of the repatriation of earnings from non-U.S.subsidiaries.   Grace anticipatesgenerating additional NOLs upon emergence from bankruptcy as contemplated inthe Debtors Plan.  Because Grace did notpay a significant amount of U.S. taxes in prior years and/or has alreadyreceived or applied for tax refunds from available NOL carryback years, itexpects to carryforward most of its NOLs after emergence from bankruptcy. Underfederal income tax law, a corporation is generally permitted to carryforwardNOLs for a 20-year period for deduction against future taxable income. Grace’sability to deduct future NOL carryforwards could be significantly limited if itwere to undergo an ownership change during or as a result of the Chapter 11proceeding.  During the course of thebankruptcy proceeding, the Bankruptcy Court entered an order that placescertain limitations on trading in Grace common stock or options convertibleinto Grace common stock.  Pursuant tothese limitations, Grace intends to object to any purchase of Grace commonstock or options 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 future net operating loss carryforwards will not be significantlylimited as a result of Grace’s reorganization.

 

As partof Grace’s evaluation and planning for the funding requirements of its plan ofreorganization, Grace implemented a repatriation plan during 2007 resulting inpayments of cash and promissory notes to the U.S. totaling $442.2 million fromnon-U.S. subsidiaries.  Grace continuesto carry a deferred tax liability of $10.0 million related to the expected taxcost of future repatriations of earnings. Grace has not provided for U.S. federal, state and foreign deferredincome taxes on approximately $675 million of undistributed earnings of foreignsubsidiaries. Based upon Grace’s current outlook and assumptions with respectto the amount of bankruptcy claims and foreign liquidity needs, Grace expectsthat these earnings will be retained indefinitely by such subsidiaries as theyhave been or will be reinvested locally. However, Grace will continue tomonitor this position in light of the assumptions mentioned above.

 

The difference betweenthe benefit from (provision for) income taxes at the federal income tax rate of35% and Grace’s overall income tax provision is summarized as follows:

 
| **Income Tax Benefit (Provision) Analysis*****(In millions)*                               | ** ** | **2007**   | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|--------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| Tax benefit (provision)  at federal corporate rate                                         | ** ** | **$**      | **(26.1**  | **)**      | $          | (9.2       | )          | $ | (31.0 | ) |
| **Change in provision resulting  from:**                                                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Nontaxable  income/non-deductible expenses                                                 | ** ** | **(2.4**   | **)**      | (1.9       | )          | (1.5       | )          |
| State and local  income taxes, net of federal income tax benefit                           | ** ** | **(0.7**   | **)**      | (6.1       | )          | 11.1       |       |
| Federal and  foreign taxes on foreign operations                                           | ** ** | **5.0**    |       | (3.2       | )          | (1.6       | )          |
| Change in APB 23  reserve                                                                  | ** ** | **44.8**   |       | (42.0      | )          | —     |       |
| Change in  valuation allowance on deferred tax assets                                      | ** ** | **—** |       | 60.1       |       | (2.7       | )          |
| Chapter 11  expenses (non-deductible)                                                      | ** ** | **(11.4**  | **)**      | (16.9      | )          | (10.3      | )          |
| Tax and interest  relating to tax deductibility of interest on life insurance policy loans | ** ** | **(20.1**  | **)**      | 1.4        |       | 1.2        |       |
| Impact of rate  changes on deferred tax balances                                           | ** ** | **3.4**    |       | —     |       | —     |       |
| Adjustments to  tax and interest contingencies                                             | ** ** | **13.3**   |       | 9.7        |       | 13.5       |       |
| Income tax benefit from (provision for) continuing  operations                             | ** ** | **$**      | **5.8**    |       | $          | (8.1       | )          | $ | (21.3 | ) |

 

In June 2006, the FASB issued Interpretation No. 48, “Accounting forUncertainty in Income Taxes” (“FIN 48”), which Grace adopted effective January1, 2007. Under FIN 48, Grace may recognize the tax benefit from an uncertaintax position only if it is more likely than not that the tax position will besustained upon examination by the taxing authorities, based on the technicalmerits of the position. The tax benefits recognized in the financial statementsfrom such a position should be measured based on the largest benefit that has agreater than fifty percent likelihood of being realized upon ultimatesettlement.

 

The effect of theimplementation of FIN 48 was to reduce Grace’s accumulated deficit as of January 1,2007 by $2.2 million. This amount primarily reflected recognition of U.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 

 

F-27

----

 

$200.2 million ($154.9million, excluding interest and penalties). The $200.2 million of unrecognized tax benefits included $45 millionrelated to the deduction of certain capital losses in Grace’s 1999 U.S. taxreturn.

 

The amount ofunrecognized tax benefits at the end of 2007 was $177.8 million ($123.0million, excluding interest and penalties). A reconciliation of the unrecognizedtax benefits for the year ended December 31, 2007 follows:

 
| **Rollforward of Uncertain Tax Positions***(In millions)* | ** ** | **Unrecognized Tax Benefits** | ** ** |
|-----------------------------------------------------------|------------|-------------------------------|------------|
|                                                      |       |                          |       |
| Balance as of January 1, 2007                        |       | $                             | 154.9      |   |
| Additions for  current year tax positions                 |       | 4.3                           |       |
| Additions for  prior year tax positions                   |       | 10.5                          |       |
| Reductions for  prior year tax positions                  |       | (11.2                         | )          |
| Settlements                                               |       | (35.5                         | )          |
| Reductions for  expirations of statute of limitations     |       | —                        |       |
| Balance as of December 31, 2007                      |       | $                             | 123.0      |   |

 

Of the total amount ofunrecognized benefits of $123.0 million, the amount that if recognized wouldaffect the effective tax rate is equal to $107.2 million.  This is due to the fact that $15.8 million ofAMTC carryforwards recorded as deferred tax assets will not be available ifGrace is successful in resolving certain issues.  

 

Grace accrues potentialinterest and any associated penalties related to uncertain tax positions in“benefit from (provision for) income taxes” in the Consolidated Statements ofOperations. The balances of Unrecognized Tax Benefits reflected above do notinclude accrued interest and penalties. The total amount of interest andpenalties accrued on uncertain tax positions as of January 1, 2007 was$59.1 million ($45.3 million, net of applicable tax benefit). During 2007, Graceaccrued additional interest expense and penalties of $12.0 million ($9.6million, net of applicable tax benefit) resulting in a balance at December 31,2007 of $54.9 million (net of applicable tax benefit).

 

Grace files U.S. federalincome tax returns as well as income tax returns in various states and foreignjurisdictions. In many cases, Grace’s uncertain tax positions are related totax years that remain subject to examination by the relevant taxingauthorities. The following table summarizes these open tax years by majorjurisdiction:

 

| **Tax Jurisdiction**       | ** ** | **Examination in  Progress** | ** ** | **Examination Not   Yet Initiated** |
|----------------------------|------------|-----------------------------------|------------|-------------------------------------|
| United States (1) (2) |       | 1993-2004                         |       | 2005-2007                           |
| Germany (1)                |       | 1998-2005                         |       | 2006-2007                           |
| United Kingdom             |       | None                              |       | 2001-2007                           |
| Singapore                  |       | None                              |       | 2001-2007                           |
| France                     |       | 2004-2006                         |       | 2007                                |
| Italy                      |       | None                              |       | 2003-2007                           |

----

| (1) | Includes federal as well as state, provincial or  local jurisdictions, as applicable.                                                                                                                                                                |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | In the U.S., the IRS is currently examining tax years  2002-2004.  Tax years 1993-1996 and  1997-2001 have been examined and partially resolved and there are still  pending issues in appeals or pending legal proceedings as described below. |

 

Based upon the outcome ofthese examinations, or as a result of the expiration of statute of limitationsfor specific jurisdictions, Grace believes there may be a material change toGrace’s aggregate recorded liabilities for uncertain tax positions in the nexttwelve months with respect to the following matters:

 

1.                     With respect to the 1993-1996 federal income tax audit,there is one issue outstanding related to $7 million of research andexperimentation (“R&E”) credits. Grace has reached a settlement with the Internal Revenue Service (“IRS”)regarding this matter and is awaiting joint committee approval of ananticipated refund of approximately $4.5 million.

 

2.                     With respect to the IRS examination of the 1997-2001tax years, Grace has received revised examination reports from the IRS, whichinclude the review of losses carried back to 1988-1989 (collectively, the“Examination Reports”) asserting, in the aggregate, approximately $32.5 millionof net additional tax plus accrued interest. The most significant issue addressed in the Examination Reports concernsthe carryback of a specified liability loss from the 1998 tax period to the1989 taxable year.  On December 10,2007, the Tax Court granted the parties’ Joint Motion for Continuance andforwarded the case to the IRS Appeals Office for the purpose of conductingsettlement negotiations.

 

3.                     In the fourth quarter of 2007, Grace reached aresolution of a question regarding the 1999 recognition of a capital loss onthe disposal of shares of an affiliated entity formed to assist Grace with itsenvironmental remediation needs.  Theamount at issue was $45 million.  Gracereached a settlement agreement with the 

 

F-28

----

 

IRS Appeals Office (pending Bankruptcy Court approval)under which Grace will be allowed a capital loss of $32.2 million in lieu ofthe $128.6 million originally claimed on its 1999 tax return.  The settlement resulted in the recognition of$11.3 million in tax benefits in December 2007. On February 25, 2008,the U.S. Bankruptcy Court issued an order authorizing Grace to proceed with thesettlement agreement.

 

4.                     The IRS examination of the 2002-2004 years was stillongoing at the end of 2007. Issues raised were considered in connection withthe increase in the amount accrued for uncertain tax positions during 2007 (seethe Rollforward of Uncertain Tax Positions table above).  Grace expects that the examination will beconcluded in the first quarter of 2008, but further impact on the balance ofuncertain tax positions is not yet determinable.

 

OtherTax Matters

 

In January 2007,Grace settled with the IRS on the matter related to federal income taxwithholding and Federal Insurance Contributions Act taxes for calendar years1993 through 1998 of a Grace subsidiary that formerly operated a temporarystaffing business for health care personnel. Grace paid a $13.0 millionsettlement and received an indemnification payment of approximately $2.7million from its former partner in the business.

 

**5.****             ****Acquisitions and Divestments**

 

In August 2007,Grace sold its washcoat product line, which accounted for approximately $25.8million of Grace Davison operating segment net sales in 2006.

 

In July 2007,Grace acquired certain assets of Grupo Sistiaga S.L., a supplier of coatingsfor aluminum containers located in Hernani, Spain.  Theacquired assets and liabilities and the results of operations of the acquiredbusiness are reflected in financial results of the Grace Davison operatingsegment.

 

In June 2007,Grace, through its Advanced Refining Technologies, LLC (“ART”) joint venturewith Chevron Products Company, completed the purchase of twelve million sharesof the Kuwaiti Catalyst Company (“KCC”), which resulted in an approximate 18%ownership of the outstanding common stock of KCC.  ART acquired the interest in KCC for theequivalent of $6.3 million, paid in cash, and has accounted for the investmentunder the equity method.

 

In June 2006, Graceacquired the custom catalyst manufacturing assets of Basell, USA, as well asBasell’s components business for cash consideration of $19.6 million.  The manufacturing assets and the results ofoperations of the acquired business have been included as part of the GraceDavison operating segment since the date of acquisition.

 

**6.****             ****Other (Income) Expense, net**

 

Components of other (income) expense, net are asfollows:

 
| **Other (Income) Expense, net***(In millions)*                        | ** ** | **2007**  | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------------------------------------------|------------|-----------|------------|----------|------------|----------|------------|
| Income from insurance settlements with insolvent  insurance companies | ** ** | **$**     | **(1.0**   | **)**    | $          | (12.5    | )          | $ | (44.5 | ) |
| COLI income, net                                                      | ** ** | **(5.4**  | **)**      | (4.1     | )          | (3.5     | )          |
| Interest income                                                       | ** ** | **(7.7**  | **)**      | (7.0     | )          | (3.6     | )          |
| Net (gain) loss on sales of investments and  disposals of assets      | ** ** | **(1.9**  | **)**      | (0.6     | )          | 0.7      |       |
| Currency translation—intercompany loans                          | ** ** | **(10.5** | **)**      | (23.1    | )          | 35.9     |       |
| Value of currency contracts                                           | ** ** | **8.2**   |       | 21.5     |       | (35.7    | )          |
| Other currency transaction effects                                    | ** ** | **2.8**   |       | 3.3      |       | (0.1     | )          |
| Other miscellaneous income                                            | ** ** | **(17.6** | **)**      | (11.8    | )          | (16.6    | )          |
| Total other (income) expense, net                                     | ** ** | **$**     | **(33.1**  | **)**    | $          | (34.3    | )          | $ | (67.4 | ) |

 

**7.****             ****Goodwill and Other IntangibleAssets**

 

For the purpose of measuring impairment under the provisions of SFAS No. 142,Grace has identified its reporting units as the product groups at one level belowits operating segments. Grace has evaluated its goodwill annually as of November 30with no impairment charge required in any of the periods presented.

 

F-29

----

 

The carrying amount of goodwill attributable to each operating segmentand the changes in those balances during the year ended December 31, 2007are as follows:

 
| *******(In millions)*                            | ** ** | **Grace   Davison** | ** ** | **Grace  Construction Products** | ** ** | **Total  Grace** |
|--------------------------------------------------|------------|---------------------|------------|----------------------------------|------------|------------------|
| Balance as of December 31, 2006             |       | $                   | 54.0       |                             | $          | 62.5             |   | $ | 116.5 |
| Goodwill acquired during the year                |       | —              |       | —                           |       | —           |
| Foreign currency translation / other adjustments |       | 1.6                 |       | 4.1                              |       | 5.8              |
| **Balance as of December 31,  2007**        | ** ** | **$**               | **55.6**   | ** **                       | **$**      | **66.6**         | ** ** | **$** | **122.3** |

 

Grace’s net book value of other intangible assets at December 31,2007 and December 31, 2006 was $82.2 million and $84.9 million,respectively, detailed as follows:

 
| *(In millions)* | ** **                   | **As of December 31, 2007** |
|-----------------|------------------------------|----------------------------------|
| ** **      | **Gross  Carrying   Amount** | ** **                       | **Accumulated  Amortization** |
| Technology      | ** **                   | **$**                            | **45.3** | ** ** | **$** | **19.3** |
| Patents         | ** **                   | **1.2**                          | ** ** | **0.2** |
| Customer lists  | ** **                   | **56.1**                         | ** ** | **21.6** |
| Other           | ** **                   | **31.1**                         | ** ** | **10.4** |
| Total           | ** **                   | **$**                            | **133.7** | ** ** | **$** | **51.5** |

 
| *(In millions)* |                             | **As of  December 31, 2006** |
|-----------------|----------------------------------|-----------------------------------|
|            | **Gross  Carrying  Amount** | ** **                        | **Accumulated  Amortization** |
| Technology      |                             | $                                 | 43.6 |   | $ | 15.7 |
| Patents         |                             | 1.6                               |   | 0.6 |
| Customer lists  |                             | 52.3                              |   | 16.3 |
| Other           |                             | 28.0                              |   | 8.0 |
| Total           |                             | $                                 | 125.5 |   | $ | 40.6 |

 

At December 31, 2007,estimated future annual amortization expenses for intangible assets are:

 
| **Estimated Amortization Expense*********(In  millions)* | *** *** | *** *** |
|----------------------------------------------------------|--------------|--------------|
| 2008                                                     |         | $            | 10.1 |
| 2009                                                     |         | 10.3         |
| 2010                                                     |         | 9.8          |
| 2011                                                     |         | 9.7          |
| 2012                                                     |         | 8.9          |

 

F-30

----

** **

**8.     ComprehensiveIncome (Loss)**

 

Thetables below present the pre-tax, tax and after-tax components of Grace’s othercomprehensive income (loss) for the years ended December 31, 2007, 2006,and 2005:

** **
| **Year  Ended December 31, 2007**

*(In millions)*****                        | ** **          | ** ** | ** **                    | ** ** | ** **             | ** ** | ** ** |
|------------------------------------------------------------------------------------|---------------------|------------|-------------------------------|------------|------------------------|------------|------------|
| ** **                                                                         | **Pre-Tax  Amount** | ** ** | **Tax  Benefit /  (Expense)** | ** ** | **After  Tax  Amount** | ** ** |
| Defined benefit pension and other postretirement  plans:                           |                |       |                          |       |                   |       |       |
| Net deferred  actuarial loss arising during period                                 |                | $          | (29.1                         | )          | $                      | 9.9        |       | $ | (19.2 | ) |
| Amortization of  net prior service credit included in net periodic benefit cost    |                | (6.5       | )                             | 2.3        |                   | (4.2       | )          |
| Amortization of  net deferred actuarial loss included in net periodic benefit cost |                | 28.4       |                          | (9.7       | )                      | 18.7       |       |
| Benefit plans, net                                                                 |                | (7.2       | )                             | 2.5        |                   | (4.7       | )          |
| Gain (loss) from hedging activities                                                |                | 0.9        |                          | (0.1       | )                      | 0.8        |       |
| Foreign currency translation adjustments                                           |                | 43.7       |                          | 0.9        |                   | 44.6       |       |
| Other comprehensive income (loss)                                                  |                | $          | 37.4                          |       | $                      | 3.3        |       | $ | 40.7 |   |

 
| **Year  Ended December 31, 2006**

*(In millions)* | ** **          | ** ** | ** **                    | ** ** | ** **             | ** ** | ** ** |
|---------------------------------------------------------|---------------------|------------|-------------------------------|------------|------------------------|------------|------------|
| ** **                                              | **Pre-Tax  Amount** | ** ** | **Tax  Benefit /  (Expense)** | ** ** | **After  Tax  Amount** | ** ** |
| Minimum pension liability adjustments                   |                | $          | 107.5                         |       | $                      | (37.6      | )          | $ | 69.9 |   |
| Gain (loss) from hedging activities                     |                | (1.9       | )                             | 0.6        |                   | (1.3       | )          |
| Foreign currency translation adjustments                |                | 36.8       |                          | —     |                   | 36.8       |       |
| Other comprehensive income (loss)                       |                | $          | 142.4                         |       | $                      | (37.0      | )          | $ | 105.4 |   |

 
| **Year  Ended December 31, 2005**

*(In millions)* | ** **          | ** ** | ** **       | ** ** | ** **             | ** ** | ** ** |
|---------------------------------------------------------|---------------------|------------|------------------|------------|------------------------|------------|------------|
| ** **                                              | **Pre-Tax  Amount** | ** ** | **Tax  Benefit** | ** ** | **After  Tax  Amount** | ** ** |
| Minimum pension liability adjustments                   |                | $          | (23.5            | )          | $                      | 8.3        |       | $ | (15.2 | ) |
| Foreign currency translation adjustments                |                | (28.7      | )                | —     |                   | (28.7      | )          |
| Other comprehensive income (loss)                       |                | $          | (52.2            | )          | $                      | 8.3        |       | $ | (43.9 | ) |

 
| **Components of  Accumulated Other**

**Comprehensive  Income (Loss), Net of Tax**

*(In millions)* | ** **                                   | ** ** | ** **                              | ** ** | ** **             | ** ** | ** **                                     | ** ** | ** ** |
|-----------------------------------------------------------------------------------------------------|----------------------------------------------|------------|-----------------------------------------|------------|------------------------|------------|------------------------------------------------|------------|------------|
| ** **                                                                                          | **Foreign currency translation adjustments** | ** ** | **Gain (loss) from hedging activities** | ** ** | **Pension accounting** | ** ** | **Total accumulated other comprehensive loss** | ** ** |
| Balance as of December 31, 2005                                                                |                                         | $          | (31.2                                   | )          | $                      | —     |                                           | $          | (362.7     | ) | $ | (393.9 | ) |
| Current-period change                                                                               |                                         | 36.8       |                                    | (1.3       | )                      | 69.9       |                                           | 105.4      |       |
| Adoption of SFAS 158 (See Note 19)                                                                  |                                         | —     |                                    | —     |                   | (102.3     | )                                              | (102.3     | )          |
| Balance as of December 31, 2006                                                                |                                         | $          | 5.6                                     |       | $                      | (1.3       | )                                              | $          | (395.1     | ) | $ | (390.8 | ) |
| Current-period change                                                                               |                                         | 44.6       |                                    | 0.8        |                   | (4.7       | )                                              | 40.7       |       |
| **Balance as of December 31, 2007**                                                            | ** **                                   | **$**      | **50.2**                                | ** ** | **$**                  | **(0.5**   | **)**                                          | **$**      | **(399.8** | **)** | **$** | **(350.1** | **)** |

 

Accumulated othercomprehensive income (loss) related to the defined benefit pension and otherpostretirement plans at December 31, 2007 represents the accumulation ofnet actuarial losses of $404.7 million as well as net prior service credits of$4.9 million. These amounts are net of tax and are amortized as a component ofnet periodic benefit cost. For the year ended December 31, 2007, thepre-tax benefit recognized related to prior service credits was $6.5 million,and the pre-tax expense recognized for amortization of accumulated actuariallosses was $28.4 million. In addition, $29.1 million of additional pre-taxcomprehensive loss was recognized for net deferred actuarial losses arisingduring the year ended December 31, 2007 (see Note 19 for moreinformation).

 

From time to time, Graceenters into commodity derivatives such as forward contracts or option contractsdirectly with natural gas suppliers, and fixed-rate swaps with financialinstitutions to mitigate the risk of volatility of natural gas prices.  Under fixed-rate swaps, Grace locks in afixed rate with a financial institution for future natural gas purchases,purchases its natural gas from a supplier at the prevailing market rate, andsettles with the bank for any difference in the rates, thereby “swapping” avariable rate for a fixed rate.  In 2007,Grace utilized fixed-rate swaps to mitigate the risk of natural gas pricevolatility.  In 2006, Grace purchased acombination of forward contracts, fixed-rate swaps and options for a portion ofits expected natural gas requirements. Grace’s forward contractsfor natural gas qualify for the normal purchases and normal sales exception 

 

F-31

----

 

fromSFAS No. 133, as they do not contain net settlement provisions, and resultin physical delivery of natural gas from suppliers.  Therefore, the fair values of these contractsare not recorded in the Consolidated Balance Sheets.  The outstanding swaps are treated as effective cashflow hedges for accounting purposes and revalued at the end of each quarter,with corresponding adjustments to other comprehensive income (loss).

 

Grace is a globalenterprise operating in over 40 countries with local currency generally deemedto be the functional currency for accounting purposes. The foreign currencytranslation amount represents the adjustments necessary to translate thebalance sheets valued in local currencies to the U.S. dollar as of the end ofeach 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 foreign currencyexchange rate forward and/or option contracts to mitigate the effects ofexchange rate fluctuations.  Grace alsoutilizes foreign currency forward exchange rate and/or option contracts fromtime 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).

 

**9.****             ****Investment Securities**

 

Investment securities of$100.9 million and $2.4 million at December 31, 2007 and 2006,respectively, consist of direct or indirect investments in debt securities.Prior to the fourth quarter of 2007, Grace’s investment in the ColumbiaStrategic Cash Fund was classified in cash and cash equivalents as redemptionswere available in cash.  InDecember 2007, the fund began an orderly liquidation that is expected tocontinue through 2008 and restricted redemptions to an in-kind distribution ofsecurities held by the fund. Grace has elected to remain in the fund and tovalue the fund based on the underlying securities as determined by the fundprincipals.  The strategic cash investmentfund was valued at $98.3 million at December 31, 2007, which includes animpairment loss of $1.4 million recorded in the fourth quarter of 2007 due tounfavorable conditions of the credit markets. The impairment loss is recorded as an offset to interest income earnedon the Columbia Strategic Cash Fund by the Debtors, which is net againstChapter 11 expenses in the Consolidated Statements of Operations.  This impairment was deemed to be other thantemporary, and as such, was recorded in earnings.

 

**10.****            ****Other Balance Sheet Accounts**

** **
| *(In millions)*                                               | ** ** | **December 31,  2007** | ** ** | **December 31,  2006** | ** ** |
|---------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| **Inventories****(1)**                                        | ** ** | ** **                  | ** ** | ** **                  | ** ** |
| Raw materials                                                 | ** ** | **$**                       | **76.3**   |                        | $          | 59.6 |   |
| In process                                                    | ** ** | **44.7**                    |       | 41.4                        |       |
| Finished products                                             | ** ** | **207.1**                   |       | 189.8                       |       |
| General merchandise                                           | ** ** | **38.2**                    |       | 35.6                        |       |
| Less: Adjustment of certain inventories to a LIFO  basis(2)   | ** ** | **(62.8**                   | **)**      | (41.8                       | )          |
|                                                          | ** ** | **$**                       | **303.5**  |                        | $          | 284.6 |   |
| **Other Assets**                                              | ** ** | ** **                  | ** ** | ** **                  | ** ** |
| Deferred charges                                              | ** ** | **$**                       | **40.9**   |                        | $          | 38.1 |   |
| Long-term  receivables, less allowances of $0.0 (2006 - $0.5) | ** ** | **1.3**                     |       | 7.9                         |       |
| Patents, licenses and other intangible assets, net            | ** ** | **82.2**                    |       | 84.9                        |       |
| Investments in unconsolidated affiliates and other            | ** ** | **12.2**                    |       | 0.6                         |       |
|                                                          | ** ** | **$**                       | **136.6**  |                        | $          | 131.5 |   |
| **Other Current Liabilities**                                 | ** ** | ** **                  | ** ** | ** **                  | ** ** |
| Accrued compensation                                          | ** ** | **$**                       | **97.2**   |                        | $          | 90.4 |   |
| Customer volume rebates                                       | ** ** | **44.1**                    |       | 41.8                        |       |
| Accrued commissions                                           | ** ** | **11.6**                    |       | 13.5                        |       |
| Accrued reorganization fees                                   | ** ** | **27.5**                    |       | 24.9                        |       |
| Income tax payable                                            | ** ** | **30.4**                    |       | 13.9                        |       |
| Deferred tax liability                                        | ** ** | **8.8**                     |       | 6.7                         |       |
| Other accrued liabilities                                     | ** ** | **105.5**                   |       | 81.4                        |       |
|                                                          | ** ** | **$**                       | **325.1**  |                        | $          | 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                              | ** ** | **13.8**                    |       | 12.2                        |       |
| Other accrued liabilities                                     | ** ** | **19.1**                    |       | 17.8                        |       |
|                                                          | ** ** | **$**                       | **46.2**   |                        | $          | 43.3 |   |

----

| (1) |   | Inventories valued at LIFO cost comprised 47.0% of  total inventories at December 31, 2007 and 48.2% at December 31,  2006.                                                                                                                                                    |
|-----|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) |   | During 2007 and 2006, a  reduction in U.S. LIFO inventory levels resulted in costs pertaining to prior  years being reflected in cost of sales for the 2007 and 2006 year. This had  the effect of increasing pre-tax income by $0.9 million in each year compared  with current cost*.* |

 

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

 

F-32

----

 

**11.****      ****Properties and Equipment**

 
| *(In millions)*                           | ** ** | **2007**     | ** ** | **2006** | ** ** |
|-------------------------------------------|------------|--------------|------------|----------|------------|
| Land                                      | ** ** | **$**        | **23.0**   |     | $          | 22.4 |   |
| Buildings                                 | ** ** | **460.7**    |       | 440.4    |       |
| Information technology and equipment      | ** ** | **144.9**    |       | 125.8    |       |
| Machinery, equipment and other            | ** ** | **1,571.0**  |       | 1,513.8  |       |
| Projects under construction               | ** ** | **51.5**     |       | 72.6     |       |
| Properties and equipment, gross           | ** ** | **2,251.1**  |       | 2,175.0  |       |
| Accumulated depreciation and amortization | ** ** | **(1,545.0** | **)**      | (1,510.5 | )          |
| Properties and equipment, net             | ** ** | **$**        | **706.1**  |     | $          | 664.5 |   |

 

Capitalizedinterest costs amounted to $2.0 million in 2007 and $1.2 million in 2006.  Depreciation and lease amortization expenserelating to properties and equipment amounted to $104.4 million in 2007, $104.2million in 2006, and $111.9 million in 2005. Grace’s rental expense foroperating leases amounted to $20.8 million in 2007, $18.6 million in 2006, and$18.7 million in 2005.

 

At December 31,2007, minimum future non-cancelable payments for operating leases were:

 

**MinimumFuture Payments Under Operating Leases**

 
| *(In millions)*              |   |   |   |
|------------------------------|--------|--------|--------|
| 2008                         |   | $      | 23.1   |   |
| 2009                         |   | 18.6   |   |
| 2010                         |   | 12.0   |   |
| 2011                         |   | 8.2    |   |
| 2012                         |   | 5.6    |   |
| Thereafter                   |   | 8.9    |   |
| Total minimum lease payments |   | $      | 76.4   |   |

 

Theabove minimum non-cancelable lease payments are net of anticipated subleaseincome of $2.4 million in 2008, $2.2 million in 2009, $1.5 million in 2010,$1.1 million in 2011, and $1.1 million in 2012.

 

**12.****      ****Life Insurance**

 

Graceis the beneficiary of corporate-owned life insurance (“COLI”) policies oncertain current and former employees with net cash surrender values of $81.0million and $89.2 million at December 31, 2007 and 2006, respectively. Thefollowing tables summarize activity in these policies for 2007, 2006 and 2005,and the components of net cash value at December 31, 2007 and 2006:

 

**LifeInsurance - Activity Summary**

 
| *(In millions)*                                      | ** ** | **2007**  | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------------------------|------------|-----------|------------|----------|------------|----------|------------|
| Earnings on policy assets                            | ** ** | **$**     | **6.2**    |     | $          | 5.6      |       | $ | 6.3 |   |
| Interest on policy loans                             | ** ** | **(0.9**  | **)**      | (1.5     | )          | (2.8     | )          |
| Premiums                                             | ** ** | **1.7**   |       | 2.3      |       | 1.7      |       |
| Policy loan repayments                               | ** ** | **0.1**   |       | 0.1      |       | 0.6      |       |
| Proceeds from termination of life insurance policies | ** ** | **(14.8** | **)**      | (0.3     | )          | (14.8    | )          |
| Net investing activity                               | ** ** | **(0.5**  | **)**      | (1.8     | )          | (2.2     | )          |
| Change in net cash value                             | ** ** | **$**     | **(8.2**   | **)**    | $          | 4.4      |       | $ | (11.2 | ) |
| Tax-free proceeds received                           | ** ** | **$**     | **0.3**    |     | $          | 2.3      |       | $ | 2.2 |   |

 

**Components of Net Cash Value**

 
| *(In millions)*                    | ** ** | **December 31,** |      |
|------------------------------------|------------|-----------------------|-----------|
| ** **                         | **2007**   | ** **            | **2006**  |   |
| Gross cash value                   | ** ** | **$**                 | **85.8**  |   | $ | 114.7 |   |
| Principal—policy loans        | ** ** | **(4.7**              | **)**     | (25.0 | ) |
| Accrued interest—policy loans | ** ** | **(0.1**              | **)**     | (0.5 | ) |
| Total net cash value               | ** ** | **$**                 | **81.0**  |   | $ | 89.2 |   |
| Less: current portion              | ** ** | **(77.1**             | **)**     | — |   |
| Net cash value—long term      | ** ** | **$**                 | **3.9**   |   | $ | 89.2 |   |
| Insurance benefits in force        | ** ** | **$**                 | **141.1** |   | $ | 197.9 |   |

 

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

 

In November and December 2007,Grace surrendered and terminated life insurance policies and receivedapproximately $14.8 million of net cash value from the terminations.  As a result of the terminations, gross cashvalue of the policies was reduced by approximately $36.3 million and policyloans of approximately $20.9 million were satisfied. Grace’s insurance benefitsin force was reduced by approximately $60.1 million.

 

**13.****      ****Debt**

 
| **Components of Debt**

*(In millions)*****              | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------------------------------------------|------------|------------|------------|------------|------------|
| ** **                                               | ** ** | ** ** | ** ** | ** ** |
| ** **                                               | **2007**   | ** ** | **2006**   | ** ** |
| **Debt payable within one year****(1)**                  | ** ** | **$**      | **4.7**    |       | $          | 3.3 |   |
| **Debt payable after one year**                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| DIP facility (2)                                         | ** ** | **$**      | **—** |       | $          | — |   |
| Other long-term borrowings                               | ** ** | **0.3**    |       | 0.2        |       |
| ** **                                               | ** ** | **$**      | **0.3**    |       | $          | 0.2 |   |
| **Debt Subject to Compromise**                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Bank borrowings (3)                                      | ** ** | **$**      | **500.0**  |       | $          | 500.0 |   |
| Accrued interest on bank borrowings (4)                  | ** ** | **283.0**  |       | 223.1      |       |
| Drawn letters of credit (5)                              | ** ** | **23.6**   |       | 13.8       |       |
| Accrued interest on drawn letters of credit              | ** ** | **3.3**    |       | 2.6        |       |
|                                                     | ** ** | **$**      | **809.9**  |       | $          | 739.5 |   |
| Full-year weighted average interest rates on total  debt | ** ** | **8.1**    | **%**      | 7.9        | %          |

----

| (1) |   | Represents borrowings under various lines of credit  and other miscellaneous borrowings, primarily by non-U.S. subsidiaries. |
|-----|--------|------------------------------------------------------------------------------------------------------------------------------|

 

F-33

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| (2) |   | In April 2001, the Debtors entered into a  debtor-in-possession post-petition loan and security agreement with Bank of  America, N.A. (the “DIP facility”) in the aggregate amount of $250 million.  The DIP facility is secured by priority liens on substantially all assets of  the Debtors, and bears interest based on LIBOR plus 2 to 2.25 percentage  points. The term of the DIP facility expires April 1, 2008. As of  December 31, 2007 and 2006, the Debtors had no outstanding borrowings  under the DIP facility. However, $56.3 million and $55.4 million of standby  letters of credit were issued and outstanding under the facility as of  December 31, 2007 and 2006, respectively, which were issued mainly for  trade-related matters such as performance bonds, as well as certain insurance  and environmental matters. The outstanding amount of standby letters of  credit, as well as other holdback provisions issued under the DIP facility  reduces the borrowing availability to $178.5 million at December 31,  2007. Under the DIP facility, the Debtors are required to maintain $50  million of liquidity, in a combination of cash, cash equivalents and the net  cash value of life insurance policies. |
|-----|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (3) |   | Under bank revolving credit agreements in effect  prior to the Filing, Grace could borrow up to $500 million at interest rates  based upon the prevailing prime, federal funds and/or Eurodollar rates. Of  that amount, $250 million was available under short-term facilities expiring  in May 2001, and $250 million was available under a long-term facility  expiring in May 2003. As a result of the Filing, Grace was in default  under the bank revolving credit agreements, and accordingly, the balance as  of the Filing Date was reclassified to debt subject to compromise in the  Consolidated Balance Sheet.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| (4) |   | In the fourth quarter of 2004, Grace accrued $69.5  million to increase its estimate of interest to which holders of the Debtor’s  pre-petition bank credit facilities and letters of credit would be entitled  under the Debtors Plan to 6.09%. Grace continued to accrue interest at this  rate throughout 2005. Beginning January 1, 2006, Grace agreed to pay  interest on pre-petition bank debt at the prime rate, adjusted for periodic  changes and compounded quarterly; such rate averaged 8.1% over 2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| (5) |   | Amounts drawn on letters of credit pursuant to  settled but unpaid claims.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |

** **

**14.****      ****Financial Instruments and Risk**

 

***Debt and Interest Rate Swap Agreements***—Grace was not a party to any debt orinterest rate swaps at December 31, 2007 and December 31, 2006.

 

***Commodity Risk***—Certain raw materials and energy sources are subjectto price fluctuation.  Grace hedgesagainst volatility in certain raw material and energy purchases, usingfinancial instruments as appropriate.  Gracealso enters into long term supply agreements and/or forward commitments tosecure materials at stable prices and in quantities fully expected to be usedin production.  During 2007 and 2006,Grace entered into fixed-price swaps with financial institutions, forwardcontracts with natural gas suppliers, and options agreements with natural gassuppliers to manage the cost of a portion of quantities required for use atcertain production plants.

 

***Currency Risk***—Because Grace does business in over 40 countries,results are exposed to fluctuations in foreign exchange rates. Grace seeks tominimize exposure to these fluctuations by matching revenue streams in volatilecurrencies with expenditures in the same currencies, but it is not alwayspossible to do so.  From time to timeGrace will use financial instruments such as foreign currency forwardcontracts, options, or combinations of the two to reduce the risk of certainspecific transactions. However, Grace does not have a policy of hedging allexposures, because management does not believe that such a level of hedgingwould be cost-effective, particularly translation exposures that are notexpected to affect cash flows in the near term.

 

In 2004, Grace purchasedforward contracts to minimize currency risk related to euro denominatedintercompany loans due to a U.S. subsidiary of Grace. In 2005, Grace extendedthe remaining portion of these forward foreign currency contracts.  The intercompany loans and the forwardforeign currency contracts mature in 2008. In November 2007, Grace purchased additional forward foreigncurrency contracts to mitigate the effect of foreign currency translation withrespect to new intercompany loans between its principal U.S. subsidiary and aGerman subsidiary.

 

In February 2006,Grace adopted a currency risk management program.  Pursuant to this program, Grace has enteredinto derivative instruments such as foreign currency forward contracts andoptions to hedge its exposure to foreign currency fluctuations in variouscurrencies.

 

***Fair Value of Debt and Other Financial Instruments*****—**At December 31, 2007, the fair value of Grace’sdebt payable within one year not subject to compromise approximated therecorded value of $4.7 million.  Fairvalue is determined based on expected future cash flows (discounted at marketinterest rates), quotes from financial institutions and other appropriatevaluation methodologies. At December 31, 2007, the recorded values ofother financial instruments such as cash equivalents, short-term investments,trade receivables and payables and short-term debt approximated their fairvalues, based on the short-term maturities and floating rate characteristics ofthese instruments.  At December 31,2007, the carrying value of Grace’s bank debt subject to compromise plusinterest was $783.0 million.  Theestimated fair value of the bank debt is higher than the carrying value;however, because such debt is subject to compromise in Grace’s Chapter 11 

 

F-34

----

 

proceeding, neithercarrying values nor market values may reflect ultimate liquidation value.

 

***Credit Risk*****—**Trade receivables potentially subject Grace to creditrisk. Concentrations of credit to customers in the petroleum and constructionindustries represent the greatest exposure. Grace’s credit evaluation policies,relatively short collection terms and history of minimal credit losses mitigatecredit risk exposures.  Grace does notgenerally require collateral for its trade accounts receivable, but may requirea bank letter of credit in certain instances, particularly when selling tocustomers in cash restricted countries.

 

**15.****      ****Commitments and ContingentLiabilities**

 

***Asbestos-Related Liability*****—See Note 3**

 

***EnvironmentalRemediation*****—**Grace issubject to loss contingencies resulting from extensive and evolving federal,state, local and foreign environmental laws and regulations relating to thegeneration, storage, handling, discharge and disposition of hazardous wastesand other materials. Grace accrues for anticipated costs associated withinvestigative and remediation efforts where an assessment has indicated that aprobable liability has been incurred and the cost can be reasonably estimated.These accruals do not take into account any discounting for the time value ofmoney.

 

Grace’s environmentalliabilities are reassessed whenever circumstances become better defined orremediation efforts and their costs can be better estimated. These liabilitiesare evaluated based on currently available information, including the progressof remedial investigation at each site, the current status of discussions withregulatory authorities regarding the method and extent of remediation at eachsite, existing technology, prior experience in contaminated site remediationand the apportionment of costs among potentially responsible parties. Graceexpects that the funding of environmental remediation activities will beaffected by the Chapter 11 proceedings.

 

At December 31,2007, Grace’s estimated liability for environmental investigative andremediation costs totaled $368.6 million, as compared with $361.1 million at December 31,2006. The amount is based on funding and/or remediation agreements in place andGrace’s best estimate of its cost for sites not subject to a formal remediationplan. During the first quarter of 2008, Grace filed a motion with theBankruptcy Court for approval of one of the largest of these remediationagreements, a multi-site settlement agreement that Grace has executed with theU.S. Government, on behalf of the Environmental Protection Agency (“EPA”) andother federal agencies.  This agreement addresses38 sites for which the EPA has filed a claim against Grace.  Under this agreement, Grace would payapproximately $44 million to the U.S. Government and other parties insettlement of 35 of these outstanding claims. In return, the U.S. Government would agree not to take action againstGrace under the Comprehensive Environmental Response, Compensation, andLiability Act with respect to such sites. Grace intends to separately fund or carry out remediation at the threeremaining sites, including remediation relating to Grace’s former vermiculitemining processing site in Libby, Montana discussed below.  Grace’s estimated environmental liabilitiesare included in “liabilities subject to compromise” in the accompanyingConsolidated Balance Sheets.

 

Grace recorded pre-taxcharges of $17.0 million and $30.0 million for environmental matters in 2007and 2006, respectively.  Of the pre-taxcharges, $14.4 million and $28.0 million, respectively, was in connection with costrecovery obligations arising out of a lawsuit brought by the U.S. Government(see below).  The remainder of thepre-tax charges were attributable to the ongoing review of recordedenvironmental liabilities.

 

Net cash expenditurescharged against previously established reserves for the years ended December 31,2007, 2006, and 2005 were $9.5 million, $10.9 million, and $28.0 million,respectively. Cash expenditures in 2005 included a settlement payment of $21.3million related to a formerly owned site.

 

*Vermiculite Related Matters*

 

EPA Cost Recovery Claim—As a result of a 2002 U.S. DistrictCourt ruling, Grace is required to reimburse the U.S. Government for $54.5million (plus interest) in costs expended through December 2001, and forall appropriate future costs to complete asbestos-related remediation relatingto Grace’s former vermiculite mining and processing activities in the Libby,Montana area.  These costs includecleaning and/or demolition of contaminated buildings, excavation and removal ofcontaminated soil, health screening of Libby 

 

F-35

----

 

residents and former mineworkers, and investigation and monitoring costs.

 

Grace’s total estimatedliability for asbestos remediation related to its former vermiculite operationsin Libby, including the cost of remediation at vermiculite processing sitesoutside of Libby, at December 31, 2007 and 2006 was $270.8 million and$255.2 million, respectively, excluding interest.  The estimated obligation as of each dateincludes $162.5 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 information exchanged with the EPA in the firstquarter of 2008.

 

MontanaCriminal Proceeding**—**On February 7,2005, the United States Department of Justice announced the unsealing of agrand jury indictment against Grace and seven former senior level employees *(United States of America v. W. R. Grace &Co. et al)* relating to Grace’s former vermiculite mining andprocessing activities in Libby, Montana. The indictment accuses the defendants of (1) conspiracy to violateenvironmental laws and obstruct federal agency proceedings; (2) violationsof the federal Clean Air Act; and (3) obstruction of justice.

 

Grace purchased the Libbymine in 1963 and operated it until 1990; vermiculite processing activitiescontinued until 1992. The grand jury charges that the conspiracy took placefrom 1976 to 2002.  According to the U.S.Department of Justice, Grace could be subject to fines in an amount equal to twicethe after-tax profit earned from its Libby operations or twice the alleged losssuffered by victims, plus additional amounts for restitution to victims. Theindictment alleges that such after-tax profits were $140 million. Grace hascategorically denied any criminal wrongdoing and intends to vigorously defenditself at trial.

 

In July 2006, the U.S. District Court for the District of Montanadismissed a portion of the conspiracy count of a superseding indictmentalleging conspiracy to knowingly endanger residents of the Libby area andothers in violation of the Clean Air Act. In August 2006, the District Court granted a motion by thedefendants to exclude as evidence sample results that included minerals that donot constitute asbestos under the Clean Air Act.  The Government appealed these and otherrulings to the Ninth Circuit Court of Appeals. In September 2007, the Ninth Circuit overturned the July 2006and August 2006 District Court rulings. In December 2007, Grace’spetition for rehearing concerning these rulings was denied.  Grace intends to appeal the Ninth Circuit’sruling to the Supreme Court.  A trialdate has not yet been scheduled.

 

The U.S. Bankruptcy Courtpreviously granted Grace’s request to advance legal and defense costs to theemployees involved in this case, 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 theyears ended December 31, 2007, 2006, and 2005, total expense for Grace andthe employees was $19.0 million, $52.7 million, and $20.0 million,respectively, which amounts are included in selling, general and administrativeexpenses in the accompanying Consolidated Statements of Operations. Cumulativeexpenses to address this matter were $91.7 million through December 31,2007.

 

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’s bankruptcyproceedings. While the appeal is pending, Grace expects legal fees for thismatter to be $3 million to $4 million per quarter.  Grace intends to expense such costs as theyare incurred.

 

New Jersey Lawsuit—On June 1, 2005, the New JerseyDepartment of Environmental Protection (“DEP”) filed a lawsuit against Graceand two former employees in the Superior Court of New Jersey Law Division:Mercer County *(N.J. Dept. of EnvironmentalProtection v. W.R. Grace & Co. et al.)* seeking civilpenalties for alleged misrepresentations and false statements made in aPreliminary Assessment/Site Investigation Report and Negative Declarationssubmitted by Grace to the DEP in 1995 pursuant to the New Jersey IndustrialSite Recovery Act. Grace submitted the report, which was prepared by anindependent environmental consultant, in connection with the closing of Grace’sformer plant in Hamilton Township, New Jersey. The State of New Jersey and theU.S. Department of Justice also have conducted criminal investigations related toGrace’s former operations of the Hamilton plant, 

 

F-36

----

 

but Grace is not aware ofany recent activity related to such investigations.

 

Grace purchased theHamilton plant assets in 1963 and ceased operations in 1994. During theoperating period, Grace produced spray-on fire protection products and othervermiculite-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 seeking approximately $4.2 million with respectto the Hamilton plant site, which is contemplated as part of the multi-sitesettlement agreement described above.

 

In August 2007, theBankruptcy Court denied the State of New Jersey’s motion for leave to file alate proof of claim in the amount of $31 million.  This ruling, which the State of New Jerseyhas appealed, does not affect the claims against the former employees, forwhich Grace would have an indemnification obligation.

 

*Non-VermiculiteRelated Matters*

 

At December 31, 2007and 2006, Grace’s estimated liability for remediation of sites not related toits former vermiculite mining and processing activities was $97.8 million and$105.9 million, respectively. This liability relates to Grace’s current andformer operations, including its share of liability for off-site disposal atfacilities where it has been identified as a potentially responsibleparty.  Grace’s estimated liability isbased upon an evaluation of claims for which sufficient information wasavailable and the liabilities settled pursuant to the multi-site settlementagreement described above. As Grace receives new information and continues itsclaims evaluation process, its estimated liability may change materially.

 

***Purchase Commitments*****—**Grace engages in purchase commitments to minimize thevolatility of major components of direct manufacturing costs including naturalgas, certain metals, asphalt, amines and other materials.  Such commitments are for quantities thatGrace fully expects to use in its normal operations.

 

***Guarantees and Indemnification Obligations*****—**Grace is a party to many contractscontaining guarantees and indemnification obligations. These contractsprimarily consist of:

 

·                  Contracts providing for the sale of aformer business unit or product line in which Grace has agreed to indemnify thebuyer against liabilities arising prior to the closing of the transaction,including environmental liabilities. These liabilities are included in“liabilities subject to compromise” in the accompanying Consolidated BalanceSheets.

 

·                  Guarantees of real property leaseobligations of third parties, typically arising out of (a) leases enteredinto by former subsidiaries of Grace, or (b) the assignment or sublease ofa lease by Grace to a third party. These obligations are included in “liabilitiessubject to compromise” in the accompanying Consolidated Balance Sheets.

 

·                  Licenses of intellectual property byGrace to third parties in which Grace has agreed to indemnify the licenseeagainst third party infringement claims.

 

·                  Contracts entered into with third partyconsultants, independent contractors, and other service providers in whichGrace has agreed to indemnify such parties against certain liabilities inconnection with their performance. Based on historical experience and the likelihoodthat such parties will make a claim against Grace, Grace believes that suchindemnification obligations are immaterial.

 

·                  Product warranties with respect tocertain products sold to customers in the ordinary course of business. Thesewarranties typically provide that product will conform to specifications. Gracegenerally does not establish a liability for product warranty based on apercentage of sales or other formula. Grace accrues a warranty liability on atransaction-specific basis depending on the individual facts and circumstancesrelated to each sale. Both the liability and annual expense related to productwarranties are immaterial to the Consolidated Financial Statements.

 

***FinancialAssurances*****—**Financialassurances have been established for a variety of purposes, including insuranceand environmental matters, asbestos settlements and appeals, trade-relatedcommitments and other matters.  At December 31,2007, Grace had gross financial assurances issued and outstanding of $277.6million, comprised of $140.6 million of surety bonds issued by variousinsurance companies, and $137.0 million of 

 

F-37

----

 

standby letters of creditand other financial assurances issued by various banks. As discussed in Note13, $56.3 million of these financial assurances have been issued under the DIPfacility.

 

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 $4.2 million through December 31, 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 forContingencies*****—**Althoughthe outcome of each of the matters discussed above cannot be predicted withcertainty, Grace has assessed its risk and has made accounting estimates asrequired under U.S. generally accepted accounting principles. As a result ofthe Filing, claims related to certain of the items discussed above will beaddressed as part of Grace’s Chapter 11 proceedings. Accruals recorded for suchcontingencies have been included in “liabilities subject to compromise” in theaccompanying Consolidated Balance Sheets. The amounts of these liabilities asultimately determined through the Chapter 11 proceedings could be materiallydifferent from amounts recorded at December 31, 2007.

 

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

 

Under its Certificate ofIncorporation, the Company is authorized to issue 300,000,000 shares of commonstock, $0.01 par value. Of the common stock unissued at December 31, 2007,1,868,963 shares were reserved for issuance pursuant to stock options and otherstock incentives. The Company has not paid a dividend on its common stock since1998. The Company is not permitted to pay dividends on its common stock whileit is in Chapter 11. The Certificate of Incorporation also authorizes53,000,000 shares of preferred stock, $0.01 par value, none of which has beenissued. Of the total, 3,000,000 shares have been designated as Series AJunior Participating Preferred Stock and are reserved for issuance inconnection with the Company’s Preferred Stock Purchase Rights (“Rights”). ARight trades together with each outstanding share of common stock and entitlesthe holder to purchase one one-hundredth of a share of Series A JuniorParticipating Preferred Stock under certain circumstances and subject tocertain conditions.  The Rights are notand will not become exercisable unless and until certain events occur, and atno time will the Rights have any voting power. The Rights agreement expires March 31, 2008.

 

**17.****      ****Earnings Per Share**

 

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

 
| **Earnings Per Share**
*(In millions, except per share amounts)* | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                       | **2007**   | ** ** | **2006**   | ** ** | **2005**   | ** ** |
| **Numerators**                                                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income                                                       | ** ** | **$**      | **80.3**   |       | $          | 18.3       |       | $ | 67.3 |   |
| **Denominators**                                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Weighted average  common shares—basic calculation           | ** ** | **70.1**   |       | 67.9       |       | 66.8       |       |
| Dilutive effect  of employee stock options                       | ** ** | **1.5**    |       | 0.4        |       | 0.5        |       |
| Weighted average  common shares—diluted calculation         | ** ** | **71.6**   |       | 68.3       |       | 67.3       |       |
| **Basic earnings per share**                                     | ** ** | **$**      | **1.15**   |       | $          | 0.27       |       | $ | 1.01 |   |
| **Diluted earnings per share**                                   | ** ** | **$**      | **1.12**   |       | $          | 0.27       |       | $ | 1.00 |   |

 

The average market priceof Grace’s common stock exceeded the exercise price of all outstanding stockoptions as of December 31, 2007. Therefore, there were no antidilutive options outstanding for 2007.

 

Stock options that couldpotentially dilute basic earnings per share (that were excluded from thecomputation of diluted earnings per share because their exercise prices weregreater than the average market price of the common shares) averagedapproximately 5.3 million in 2006, and 6.8 million in 2005.

 

**18.****      ****Stock Incentive Plans**

 

Each stock option grantedunder the Company’s stock incentive plans has an exercise price equal to thefair market value of the Company’s common stock on the date of grant. Optionsbecome exercisable at the time or times determined by the 

 

F-38

----

Compensation Committee ofthe Company’s Board of Directors and may have terms of up to ten years and onemonth.

 

The following table setsforth information relating to such options during 2007, 2006, and 2005:

 
| **Stock Option Activity**             | ** ** | **Number  Of Shares** | ** ** | **Average  Exercise  Price** |
|---------------------------------------|------------|----------------------------|------------|------------------------------|
| Balance at January 1, 2005       |       | 7,691,580                  |       | $                            | 12.92 |
| Options exercised                     |       | (526,475                   | )          | 5.92                         |
| Options terminated or cancelled       |       | (71,459                    | )          | 14.19                        |
| Balance at  December 31, 2005    |       | 7,093,646                  |       | $                            | 13.42 |
| Options exercised                     |       | (1,992,826                 | )          | 12.10                        |
| Options terminated or cancelled       |       | (503,939                   | )          | 11.73                        |
| Balance at  December 31, 2006    |       | 4,596,881                  |       | $                            | 14.18 |
| Options exercised                     |       | (2,712,879                 | )          | 14.79                        |
| Options terminated or cancelled       |       | (15,039                    | )          | 10.70                        |
| **Balance at December 31, 2007** | ** ** | **1,868,963**              | ** ** | **$**                        | **13.33** |

 

At December 31,2007, 2006 and 2005, all outstanding stock options were also exercisable.  Currently outstanding options expire onvarious dates through September 2011. At December 31, 2007, 4,761,457shares were available for additional stock option or restricted stockgrants.  The following is a summary ofstock options outstanding at December 31, 2007:

 

**Stock Options Outstanding**

** **
| **Exercise Price Range** | ** ** | ** ** | **Number   Outstanding  and   Exercisable** | ** ** | **Weighted-  Average   Remaining   Contractual   Life (Years)** | ** **  | **Weighted-  Average  Exercise Price** | ** ** |
|--------------------------|------------|------------|---------------------------------------------|------------|-----------------------------------------------------------------|-------------|----------------------------------------|------------|
| $ 1 - $8            |       | 341,206    |                                        | 4.00       |                                                            | $ 2.78 |                                   |
| $ 8 - $13           |       | 259,590    |                                        | 2.00       |                                                            | 12.81       |                                   |
| $ 13 - $18          |       | 744,550    |                                        | 2.82       |                                                            | 14.02       |                                   |
| $ 18 - $21          |       | 523,617    |                                        | 1.02       |                                                            | 19.50       |                                   |
|                     |       | 1,868,963  |                                        | 2.42       |                                                            | 13.33       |                                   |

 

**19.****      ****Pension Plans and OtherPostretirement Benefits Plans**

*** ***

In September 2006, theFASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pensionand Other Postretirement Plans.”  SFASNo. 158 requires an employer to recognize the funded status of defined benefitpension plans and other postretirement benefit plans as an asset or liabilityin its statement of financial position, and requires recognition in othercomprehensive income of gains or losses and prior service costs or creditsarising during the period but which are not included as components of netperiodic benefit cost.  Grace adopted theprovisions of SFAS No. 158 as of December 31, 2006. 

*** ***

***Pension Plans—***Grace maintains defined benefit pension plans coveringemployees of certain units who meet age and service requirements. Benefits aregenerally based on final average salary and years of service. Grace funds itsU.S. qualified pension plans (“U.S. qualified pension plans”) in accordancewith U.S. federal laws and regulations. Non-U.S. pension plans (“non-U.S.pension plans”) are funded under a variety of methods, as required under locallaws and customs.

 

Grace also provides,through nonqualified plans, supplemental pension benefits in excess of U.S.qualified pension plan limits imposed by federal tax law. These plans coverofficers and higher-level employees and serve to increase the combined pensionamount to the level that they otherwise would have received under the U.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 December 31,2007 measurement date for Grace’s defined benefit pension plans (the “Plans”),the projected benefit obligation (“PBO”) was approximately $1,449 million asmeasured under U.S. generally accepted accounting principles compared with$1,433 million as of December 31, 2006. The PBO basis reflects the present value (using a 6.25% discount ratefor U.S. plans and a 5.81% weighted average discount rate for non-U.S. plans asof December 31, 2007) of vested and non-vested benefits earned from employeeservice to date, based upon current services and estimated future pay increasesfor active employees.

 

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

 

At December 31,2007, Grace’s recorded pension liability for underfunded and unfunded plans was$415.0 million ($169.1 million included in “underfunded defined benefit pensionplans”, $137.9 million included in “unfunded pay-as-you-go defined benefitpension plans”, $12.5 million included in “other current liabilities”, and$95.5 million related to noncurrent supplemental pension benefits, included in“liabilities subject to compromise”). The recorded liability reflects 1) theshortfall between dedicated assets and the PBO of underfunded plans ($169.1million); and 2) the PBO of unfunded pay-as-you-go plans ($245.9 million).

 

***PostretirementBenefits Other Than Pensions***—Grace provides postretirement health care and lifeinsurance benefits for retired employees of certain U.S. business units andcertain divested units.  Thepostretirement medical plan provides various levels of benefits to employeeshired before 1991 who retire from Grace after age 55 with at least 10 years ofservice.  These plans are unfunded andGrace pays a portion of the costs of benefits under these plans as they areincurred. Grace applies SFAS No. 106, “Employers’ Accounting forPostretirement Benefits Other Than Pensions,” 

 

F-39

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which requires that the future costs of postretirement health care andlife insurance benefits be accrued over the employees’ years of service.

 

Retirees and beneficiaries covered by the postretirement medical planare required to contribute a minimum of 40% of the calculated premium for thatcoverage. During 2002, per capita costs under the retiree medical plansexceeded caps on the amount Grace was required to contribute under a 1993amendment to the plan. As a result, for 2003 and future years, retirees willbear 100% of any increase in premium costs.

 

For 2007 measurement purposes, per capita costs, before retireecontributions, were assumed to initially increase at a rate of 10%.  The rate is assumed to decrease gradually to5% through 2012 and remain at that level thereafter.  A one percentage point increase or decreasein assumed health care medical cost trend rates would not materially changeGrace’s postretirement benefit obligations (impact of less than $1 million) andwould have a negligible impact on the aggregate of the service and interestcost components of net periodic benefit cost.

 

***Analysis of PlanAccounting and Funded Status—***The following table summarizes the changes in benefitobligations and fair values of retirement plan assets during 2007 and 2006:

 

F-40

----

 
| ** **                                                                                                               | ** ** | **Defined Benefit Pension Plans** | ** **  | ** **   | ** ** | ** ** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------|-------------|--------------|------------|------------|------------|
| ** **                                                                                                               | ** ** | **U.S.**                          | ** **  | **Non-U.S.** |       | **Total**  | ** ** | **Other Post-  Retirement Plans** | ** ** |
| **Change in Financial Status of Retirement Plans*********(In millions)*                                                  | ** ** | **2007**                          | ** **  | **2006**     | ** ** | **2007**   | ** ** | **2006** |   | **2007** | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Change  in Projected Benefit Obligation (PBO)**                                                                        | ** ** | ** **                        | ** **  |         |       | ** ** | ** ** |   |   |   |   |   |   |   |   |   |   |
| Benefit  obligation at beginning of year                                                                                 |       | **$**                             | **1,044.1** | ** **   | $          | 1,094.2    |       | **$** | **388.9** | ** ** | $ | 364.3 |   | **$** | **1,433.0** | ** ** | $ | 1,458.5 |   | **$** | **72.7** | ** ** | $ | 88.6 |   |
| Service cost                                                                                                             |       | **15.7**                          | ** **  | 16.3         |       | **8.1**    | ** ** | 8.4 |   | **23.8** | ** ** | 24.7 |   | **0.3** | ** ** | 0.4 |   |
| Interest cost                                                                                                            |       | **58.0**                          | ** **  | 58.2         |       | **20.9**   | ** ** | 17.8 |   | **78.9** | ** ** | 76.0 |   | **4.6** | ** ** | 4.0 |   |
| Plan  participants’ contributions                                                                                   |       | **—**                        | ** **  | —       |       | **0.8**    | ** ** | 0.7 |   | **0.8** | ** ** | 0.7 |   | **—** | ** ** | — |   |
| Amendments                                                                                                               |       | **—**                        | ** **  | 0.6          |       | **—** | ** ** | — |   | **—** | ** ** | 0.6 |   | **—** | ** ** | — |   |
| Curtailments/settlements  recognized                                                                                     |       | **—**                        | ** **  | —       |       | **(0.1**   | **)**      | — |   | **(0.1** | **)** | — |   | **—** | ** ** | — |   |
| Change in  discount rates and other assumptions                                                                          |       | **2.7**                           | ** **  | (32.6        | )          | **(5.3**   | **)**      | (24.9 | ) | **(2.6** | **)** | (57.5 | ) | **11.4** | ** ** | (6.4 | ) |
| Medicare subsidy  receipts                                                                                               |       | **—**                        | ** **  | —       |       | **—** | ** ** | — |   | **—** | ** ** | — |   | **4.8** | ** ** | — |   |
| Benefits paid                                                                                                            |       | **(87.9**                         | **)**       | (92.6        | )          | **(20.4**  | **)**      | (16.2 | ) | **(108.3** | **)** | (108.8 | ) | **(9.8** | **)** | (13.9 | ) |
| Currency  exchange translation adjustments                                                                               |       | **—**                        | ** **  | —       |       | **23.5**   | ** ** | 38.8 |   | **23.5** | ** ** | 38.8 |   | **—** | ** ** | — |   |
| Benefit obligation  at end of year                                                                                       |       | **$**                             | **1,032.6** | ** **   | $          | 1,044.1    |       | **$** | **416.4** | ** ** | $ | 388.9 |   | **$** | **1,449.0** | ** ** | $ | 1,433.0 |   | **$** | **84.0** | ** ** | $ | 72.7 |   |
| **Change  in Plan Assets**                                                                                               |       | ** **                        | ** **  |         |       | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   |
| Fair value of  plan assets at beginning of year                                                                          |       | **$**                             | **737.2**   | ** **   | $          | 645.5      |       | **$** | **283.5** | ** ** | $ | 237.1 |   | **$** | **1,020.7** | ** ** | $ | 882.6 |   | **$** | **—** | ** ** | $ | — |   |
| Actual return on  plan assets                                                                                            |       | **43.3**                          | ** **  | 77.7         |       | **15.4**   | ** ** | 20.4 |   | **58.7** | ** ** | 98.1 |   | **—** | ** ** | — |   |
| Employer  contributions                                                                                                  |       | **81.1**                          | ** **  | 106.6        |       | **24.6**   | ** ** | 14.9 |   | **105.7** | ** ** | 121.5 |   | **5.0** | ** ** | 13.9 |   |
| Plan  participants’ contributions                                                                                   |       | **—**                        | ** **  | —       |       | **0.8**    | ** ** | 0.7 |   | **0.8** | ** ** | 0.7 |   | **—** | ** ** | — |   |
| Medicare subsidy  receipts                                                                                               |       | **—**                        | ** **  | —       |       | **—** | ** ** | — |   | **—** | ** ** | — |   | **4.8** | ** ** | — |   |
| Benefits paid                                                                                                            |       | **(87.9**                         | **)**       | (92.6        | )          | **(20.4**  | **)**      | (16.2 | ) | **(108.3** | **)** | (108.8 | ) | **(9.8** | **)** | (13.9 | ) |
| Currency  exchange translation adjustments                                                                               |       | **—**                        | ** **  | —       |       | **10.5**   | ** ** | 26.6 |   | **10.5** | ** ** | 26.6 |   | **—** | ** ** | — |   |
| Fair value of  plan assets at end of year                                                                                |       | **$**                             | **773.7**   | ** **   | $          | 737.2      |       | **$** | **314.4** | ** ** | $ | 283.5 |   | **$** | **1,088.1** | ** ** | $ | 1,020.7 |   | **$** | **—** | ** ** | $ | — |   |
|                                                                                                                     |       | ** **                        | ** **  |         |       | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   |
| Funded status at  end of year (PBO basis)                                                                                |       | **$**                             | **(258.9**  | **)**        | $          | (306.9     | )          | **$** | **(102.0** | **)** | $ | (105.4 | ) | **$** | **(360.9** | **)** | $ | (412.3 | ) | **$** | **(84.0** | **)** | $ | (72.7 | ) |
| **Amounts  recognized in the Consolidated Balance Sheet consist of:**                                                    |       | ** **                        | ** **  |         |       | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   |
| Noncurrent  assets                                                                                                       |       | **$**                             | **1.5**     | ** **   | $          | 2.7        |       | **$** | **52.6** | ** ** | $ | 35.7 |   | **$** | **54.1** | ** ** | $ | 38.4 |   | **$** | **—** | ** ** | $ | — |   |
| Current  liabilities                                                                                                     |       | **(5.3**                          | **)**       | (4.7         | )          | **(7.2**   | **)**      | (5.5 | ) | **(12.5** | **)** | (10.2 | ) | **(6.8** | **)** | (4.7 | ) |
| Noncurrent  liabilities                                                                                                  |       | **(255.1**                        | **)**       | (304.9       | )          | **(147.4** | **)**      | (135.6 | ) | **(402.5** | **)** | (440.5 | ) | **(77.2** | **)** | (68.0 | ) |
| Net amount  recognized                                                                                                   |       | **$**                             | **(258.9**  | **)**        | $          | (306.9     | )          | **$** | **(102.0** | **)** | $ | (105.4 | ) | **$** | **(360.9** | **)** | $ | (412.3 | ) | **$** | **(84.0** | **)** | $ | (72.7 | ) |
| **Amounts  recognized in Accumulated Other Comprehensive (Income) Loss consist of:**                                     | ** ** | ** **                        | ** **  |         |       | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   |
| Accumulated  actuarial loss                                                                                              |       | **$**                             | **497.6**   | ** **   | $          | 500.9      |       | **$** | **97.0** | ** ** | $ | 102.4 |   | **$** | **594.6** | ** ** | $ | 603.3 |   | **$** | **27.0** | ** ** | $ | 17.6 |   |
| Prior service  cost (credit)                                                                                             |       | **8.0**                           | ** **  | 10.8         |       | **1.0**    | ** ** | 1.7 |   | **9.0** | ** ** | 12.5 |   | **(16.7** | **)** | (26.7 | ) |
| Net amount  recognized                                                                                                   |       | **$**                             | **505.6**   | ** **   | $          | 511.7      |       | **$** | **98.0** | ** ** | $ | 104.1 |   | **$** | **603.6** | ** ** | $ | 615.8 |   | **$** | **10.3** | ** ** | $ | (9.1 | ) |
| **Weighted  Average Assumptions Used to Determine Benefit Obligations as of December 31**                           | ** ** | ** **                        | ** **  |         |       | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   |
| Discount rate                                                                                                            | ** ** | **6.25**                          | **%**       | 5.75         | %          | **5.81**   | **%**      | 5.31 | % | **NM** | ** ** | NM |   | **6.25** | **%** | 5.75 | % |
| Rate of  compensation increase                                                                                           |       | **4.50**                          | **%**       | 4.25         | %          | **3.55**   | **%**      | 3.42 | % | **NM** | ** ** | NM |   | **NM** | ** ** | NM |   |
| **Weighted  Average Assumptions Used to Determine Net Periodic Benefit Cost (Income) for  Years Ended December 31** | ** ** | **U.S.**                          | ** **  | ** **   | ** ** |       |       | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   |
| ** **                                                                                                               | ** ** | **2008**                          | ** **  | ** **   | ** ** |       |       | ** ** | ** ** |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   |
| Discount rate                                                                                                            |       | **6.25**                          | **%**       | **5.75**     | **%**      | 5.50       | %          | **5.31** | **%** | 4.66 | % | **NM** | ** ** | NM |   | **5.75** | **%** | 5.50 | % |
| Expected return  on plan assets                                                                                          | ** ** | **8.00**                          | **%**       | **8.00**     | **%**      | 8.00       | %          | **7.19** | **%** | 7.21 | % | **NM** | ** ** | NM |   | **NM** | ** ** | NM |   |
| Rate of  compensation increase                                                                                           | ** ** | **4.50**                          | **%**       | **4.25**     | **%**      | 4.25       | %          | **3.42** | **%** | 3.42 | % | **NM** | ** ** | NM |   | **NM** | ** ** | NM |   |

----

NM—Not meaningful

N/A—Not applicable

 

F-41

----

 
| **Components  of Net Periodic Benefit Cost (Income) and Other Amounts Recognized in Other  Comprehensive (Income) Loss**

*(In millions)* | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|---------------|------------|------------|------------|------------|
| ** **                                                                                                                                | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** |
| ** **                                                                                                                                | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** |
| ** **                                                                                                                                | **2007**   | ** ** | **2006**      | ** ** | **2005**   | ** ** |
| ** **                                                                                                                                | **U.S.**   | ** ** | **Non- U.S.** | ** ** | **Other**  |       | **U.S.**   | ** ** | **Non-****U.S.** | ** ** | **Other** | ** ** | **U.S.** | ** ** | **Non-****U.S.** | ** ** | **Other** | ** ** |
| ** **                                                                                                                                |
| **Net Periodic Benefit Cost (Income)**                                                                                                    | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service cost                                                                                                                              | ** ** | **$**      | **15.7**      | ** ** | **$**      | **8.1**    | ** ** | **$** | **0.3** |   | $ | 16.3 |   | $ | 8.4 |   | $ | 0.4 |   | $ | 16.4 |   | $ | 6.9 |   | $ | 0.5 |   |
| Interest cost                                                                                                                             | ** ** | **58.0**   | ** **    | **20.9**   | ** ** | **4.5**    |       | 58.2 |   | 17.8 |   | 4.0 |   | 57.9 |   | 17.1 |   | 4.9 |   |
| Expected return on plan assets                                                                                                            | ** ** | **(58.4**  | **)**         | **(21.6**  | **)**      | **—** |       | (53.2 | ) | (18.1 | ) | — |   | (51.1 | ) | (15.5 | ) | — |   |
| Amortization of prior service cost (credit)                                                                                               | ** ** | **2.4**    | ** **    | **0.7**    | ** ** | **(10.0**  | **)**      | 2.5 |   | 0.7 |   | (10.5 | ) | 5.1 |   | 0.7 |   | (12.7 | ) |
| Amortization of net deferred actuarial loss                                                                                               | ** ** | **21.1**   | ** **    | **5.3**    | ** ** | **1.9**    |       | 23.0 |   | 8.1 |   | 0.4 |   | 22.9 |   | 8.1 |   | 1.6 |   |
| Net curtailment and settlement loss                                                                                                       | ** ** | **0.4**    | ** **    | **—** | ** ** | **—** |       | — |   | — |   | — |   | 1.1 |   | 2.3 |   | — |   |
| Net periodic benefit cost (income)                                                                                                        | ** ** | **$**      | **39.2**      | ** ** | **$**      | **13.4**   | ** ** | **$** | **(3.3** | **)** | $ | 46.8 |   | $ | 16.9 |   | $ | (5.7 | ) | $ | 52.3 |   | $ | 19.6 |   | $ | (5.7 | ) |
| **Other  Changes in Plan Assets and Benefit Obligations Recognized in Other  Comprehensive (Income) Loss**                                | ** ** | ** ** | ** **    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net deferred actuarial loss                                                                                                               | ** ** | **$**      | **17.8**      | ** ** | **$**      | **—** | ** ** | **$** | **11.3** |   | N/A |   | N/A |   | N/A |   | N/A |   | N/A |   | N/A |   |
| Amortization of prior service cost (credit)                                                                                               | ** ** | **(2.8**   | **)**         | **(0.7**   | **)**      | **10.0**   |       | N/A |   | N/A |   | N/A |   | N/A |   | N/A |   | N/A |   |
| Amortization of net deferred actuarial loss                                                                                               | ** ** | **(21.1**  | **)**         | **(5.4**   | **)**      | **(1.9**   | **)**      | N/A |   | N/A |   | N/A |   | N/A |   | N/A |   | N/A |   |
| Total recognized  in other comprehensive (income) loss                                                                                    | ** ** | **(6.1**   | **)**         | **(6.1**   | **)**      | **19.4**   |       | N/A |   | N/A |   | N/A |   | N/A |   | N/A |   | N/A |   |
| Total recognized  in net periodic benefit cost (income) and other comprehensive (income) loss                                             | ** ** | **$**      | **33.1**      | ** ** | **$**      | **7.3**    | ** ** | **$** | **16.1** |   | N/A |   | N/A |   | N/A |   | N/A |   | N/A |   | N/A |   |

 

The estimated netdeferred actuarial loss and prior service cost for the defined benefit pensionplans that will be amortized from accumulated other comprehensive income intonet periodic benefit cost (income) over the next fiscal year are $25.0 millionand $2.5 million, respectively. The estimated net deferred actuarial loss andprior service credit for the other postretirement plans that will be amortizedfrom accumulated other comprehensive income into net periodic benefit cost(income) over the next fiscal year are $2.1 million and $(8.5) million,respectively.

 

 
| **Funded  Status of U.S. Pension Plans**

*(In millions)* | *** ***                                             | ** ** | ** **                                                   | ** ** | ** **                                                    | ** ** | ** ** |
|-----------------------------------------------------------|----------------------------------------------------------|------------|--------------------------------------------------------------|------------|---------------------------------------------------------------|------------|------------|
| *** ***                                              | **Fully-Funded  U.S.****(1)****Qualified Pension Plans** | ** ** | **Underfunded  U.S.****(1)********Qualified  Pension Plans** | ** ** | **Unfunded  Pay-As-You-Go****(2)****U.S. Nonqualified Plans** | ** ** |
| ** **                                                | **2007**                                                 | ** ** | **2006**                                                     | ** ** | **2005**                                                      | ** ** | **2007**   | ** ** | **2006** | ** ** | **2005** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** |   |
| Projected benefit obligation                              | ** **                                               | **$**      | **6.8**                                                      |       | $                                                             | 7.4        |       | $ | 3.2 | ** ** | **$** | **925.0** |   | $ | 941.1 |   | $ | 999.4 | ** ** | **$** | **100.8** |   | $ | 95.6 |   | $ | 91.6 |   |
| Fair value of plan assets                                 | ** **                                               | **8.3**    |                                                         | 10.1       |                                                          | 5.3        | ** ** | **765.4** |   | 727.1 |   | 640.2 | ** ** | **—** |   | — |   | — |   |
| Funded status (PBO basis)                                 | ** **                                               | **$**      | **1.5**                                                      |       | $                                                             | 2.7        |       | $ | 2.1 | ** ** | **$** | **(159.6** | **)** | $ | (214.0 | ) | $ | (359.2 | ) | **$** | **(100.8** | **)** | $ | (95.6 | ) | $ | (91.6 | ) |
| Benefits paid                                             | ** **                                               | **$**      | **(0.3**                                                     | **)**      | $                                                             | (0.3       | )          | $ | (0.1 | ) | **$** | **(82.5** | **)** | $ | (87.2 | ) | $ | (80.4 | ) | **$** | **(5.1** | **)** | $ | (5.1 | ) | $ | (10.9 | ) |
| Discount rate                                             | ** **                                               | **6.25**   | **%**                                                        | 5.75       | %                                                             | 5.50       | %          | **6.25** | **%** | 5.75 | % | 5.50 | % | **6.25** | **%** | 5.75 | % | 5.50 | % |

 
| **Funded  Status of Non-U.S. Pension Plans**

*(In millions)* | ** **                                            | ** ** | ** **                                           | ** ** | ** **                                                      | ** ** | ** ** |
|---------------------------------------------------------------|-------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------------------|------------|------------|
| ** **                                                    | **Fully-Funded Non-U.S.****(1)********Pension Plans** | ** ** | **Underfunded Non-U.S.****(1)********Pension Plans** | ** ** | **Unfunded Pay-As-You-Go****(2)********Non-U.S. Pension Plans** | ** ** |
| ** **                                                    | **2007**                                              | ** ** | **2006**                                             | ** ** | **2005**                                                        | ** ** | **2007**   | ** ** | **2006** | ** ** | **2005** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Projected benefit obligation                                  | ** **                                            | **$**      | **248.0**                                            |       | $                                                               | 236.4      |       | $ | 215.5 | ** ** | **$** | **23.3** |   | $ | 20.3 |   | $ | 18.3 | ** ** | **$** | **145.1** |   | $ | 132.2 |   | $ | 130.5 |   |
| Fair value of plan assets                                     | ** **                                            | **300.6**  |                                                 | 272.1      |                                                            | 227.5      | ** ** | **13.8** |   | 11.4 |   | 9.6 | ** ** | **—** |   | — |   | — |   |
| Funded status (PBO basis)                                     | ** **                                            | **$**      | **52.6**                                             |       | $                                                               | 35.7       |       | $ | 12.0 | ** ** | **$** | **(9.5** | **)** | $ | (8.9 | ) | $ | (8.7 | ) | **$** | **(145.1** | **)** | $ | (132.2 | ) | $ | (130.5 | ) |
| Benefits paid                                                 | ** **                                            | **$**      | **(11.2**                                            | **)**      | $                                                               | (10.1      | )          | $ | (8.9 | ) | **$** | **(2.8** | **)** | $ | (0.8 | ) | $ | (0.8 | ) | **$** | **(6.4** | **)** | $ | (5.3 | ) | $ | (5.0 | ) |
| Weighted average  discount rate                               | ** **                                            | **5.77**   | **%**                                                | 5.30       | %                                                               | 4.85       | %          | **8.16** | **%** | 7.46 | % | 7.01 | % | **5.49** | **%** | 4.99 | % | 4.00 | % |

----

| (1) | Plans intended to be advance-funded. |
|-----|--------------------------------------|
| (2) | Plans intended to be pay-as-you-go.  |

 

The accumulated benefitobligation for all defined benefit pension plans was approximately $1,379million and $1,341 million as of December 31, 2007 and 2006, respectively.

 
| **Pension  Plans with Underfunded or Unfunded Accumulated Benefit Obligation**

*(In millions)* | ** ** | **U.S.**  | ** **  | **Non-U.S.** | ** ** | **Total** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|-----------|-------------|--------------|------------|-----------|------------|
| ** **                                                                                      | ** ** | **2007**  |        | 2006         | ** ** | **2007**  |       | 2006 | ** ** | **2007** |   | 2006 |   |
| Projected benefit obligation                                                                    | ** ** | **$**     | **1,025.8** |         | $          | 1,036.6   | ** ** | **$** | **163.8** |   | $ | 149.0 | ** ** | **$** | **1,189.6** |   | $ | 1,185.6 |   |
| Accumulated benefit obligation                                                                  | ** ** | **992.6** |        | 983.2        | ** ** | **147.6** |       | 131.0 | ** ** | **1,140.2** |   | 1,114.2 |   |
| Fair value of plan assets                                                                       | ** ** | **$**     | **765.4**   |         | $          | 727.1     | ** ** | **$** | **9.4** |   | $ | 8.4 | ** ** | **$** | **774.8** |   | $ | 735.5 |   |

 

F-42

----

| **Estimated  Expected Future Benefit Payments Reflecting Future Service and Medicare  Subsidy Receipts for the Fiscal Year(s) Ending**

*(In millions)* | ** **            | ** ** | ** **                     | ** ** | ** **            | ** ** | ** **                      |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------|------------|--------------------------------|------------|-----------------------|------------|---------------------------------|
| ** **                                                                                                                                                   | ** **            | ** ** | ** **                     | ** ** | ** **            | ** ** |
| ** **                                                                                                                                                   | **Pension Plans**     | ** ** | **Other Postretirement Plans** | ** ** | ** **            | ** ** |
| * *                                                                                                                                                     | **U.S.****(3)**       | ** ** | **Non-U.S.****(4)**            | ** ** | **Benefit  Payments** | ** ** | **Medicare  Subsidy  Receipts** | ** ** | **Total Payments Net of Subsidy** | ** ** |
|                                                                                                                                                         | **Benefit  Payments** | ** ** | **Benefit  Payments**          |       |                  |       |                            |
| 2006 (actual)                                                                                                                                                |                  | $          | 92.6                           |       | $                     | 16.2       |                            | $ | 13.9 |   | $ | — |   | $ | 122.7 |   |
| 2007 (actual)                                                                                                                                                |                  | 87.9       |                           | 20.4       |                  | 9.8        |                            | (4.8 | ) | 113.3 |   |
| 2008                                                                                                                                                         | * *              | 65.9       | (5)                            | 19.8       |                  | 9.7        |                            | (2.9 | ) | 92.5 |   |
| 2009                                                                                                                                                         |                  | 68.7       |                           | 21.6       |                  | 8.5        |                            | (0.8 | ) | 98.0 |   |
| 2010                                                                                                                                                         |                  | 69.8       |                           | 22.2       |                  | 8.4        |                            | (0.1 | ) | 100.3 |   |
| 2011                                                                                                                                                         |                  | 70.8       |                           | 22.9       |                  | 8.2        |                            | (0.1 | ) | 101.8 |   |
| 2012                                                                                                                                                         |                  | 72.2       |                           | 24.4       |                  | 8.0        |                            | (0.1 | ) | 104.5 |   |
| 2013—2017                                                                                                                                               |                  | $          | 419.2                          |       | $                     | 136.2      |                            | $ | 36.6 |   | $ | (0.3 | ) | $ | 591.7 |   |

----

| (3) | Effective January 1, 2008 lump sum distributions  from certain U.S. qualified pension plans will be restricted based on the  provisions of the Pension Protection Act of 2006 (the “Act”).  During the period the plan is less than  100% funded after that date, the Act prohibits the distribution of lump sums  to retiring participants, while the Company remains under Chapter 11 of the  U.S. Bankruptcy Code.  The plan would  be permitted to resume distributing lump sums to retiring participants under  the Act at the date (1) the plan becomes 100% funded or (2) the  Company is no longer in Chapter 11 and the plan is at least 80% funded,  whichever is earlier.  Estimated  payments from the U.S. pension plans are expected to be lower starting in  2008 as a result of this restriction. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (4) | Non-U.S. estimated benefit payments for 2008 and  future periods have been translated at the applicable December 31, 2007  exchange rates.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (5) | Excludes $17 million of estimated future benefit  payments from nonqualified plans that are restricted by the Bankruptcy Court.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |

 

***Discount RateAssumption*****—**Theassumed discount rate for pension plans reflects the market rates forhigh-quality corporate bonds currently available and is subject to change basedon changes in the overall market interest rates. For the U.S. qualified pensionplans, the assumed discount rate of 6.25% as of December 31, 2007 wasselected by Grace, in consultation with its independent actuaries, based on ayield curve constructed from a portfolio of high quality bonds for which thetiming and amount of cash outflows approximate the estimated payouts of theplan.

 

As of December 31,2007 and 2006, the United Kingdom pension plan and German pension planscombined represented approximately 86% and 87%, respectively, of the benefitobligation of the non-U.S. pension plans. The assumed discount rates as of December 31,2007 for the United Kingdom (5.75%) and Germany (5.50%) were selected by Grace,in consultation with its independent actuaries, based on yield curvesconstructed from a portfolio of Sterling and Euro denominated high quality bondsfor which the timing and amount of cash outflows approximate the estimatedpayouts of the plans. The assumed discount rates for the remaining non-U.S.pension plans were determined based on the nature of the liabilities, localeconomic environments and available bond indices.

 

***Investment Guidelines for Advance-Funded Pension Plans***—The target allocation of investmentassets for 2008, the actual allocation at December 31, 2007 and 2006, andthe expected long-term rate of return by asset category for Grace’s U.S.qualified pension plans are as follows:

 
| **U.S.  Qualified Pension Plans Asset Category** | ** ** | **Target  Allocation** | ** ** | **Percentage of Plan Assets  December 31,** | ** ** | **Weighted-Average  Expected Long-Term  Rate of Return** | ** ** |
|-------------------------------------------------------|------------|------------------------|------------|--------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                            | **2008**   | ** **             | **2007**   | ** **                                       | **2006**   | ** **                                               | **2008**   | ** ** | **2007** | ** ** |
| U.S. equity  securities                               |       | 45                     | %          | **45**                                           | **%**      | 46                                                       | %          | 4.46 |   | 4.46 |   |
| Non-U.S. equity  securities                           |       | 15                     | %          | **16**                                           | **%**      | 16                                                       | %          | 0.76 |   | 0.76 |   |
| Short-term debt  securities                           |       | 10                     | %          | **11**                                           | **%**      | 11                                                       | %          | 0.60 |   | 0.60 |   |
| Intermediate-term  debt securities                    |       | 30                     | %          | **28**                                           | **%**      | 27                                                       | %          | 2.18 |   | 2.18 |   |
| Total                                                 |       | 100                    | %          | **100**                                          | **%**      | 100                                                      | %          | 8.00 |   | 8.00 |   |

 

The investment goal forthe U.S. qualified pension plans, subject to advance funding, is to earn along-term rate of return consistent with the related cash flow profile of theunderlying benefit obligation.

 

The U.S. qualified pension plans have assets managedby five investment managers under investment guidelines summarized as follows:

 

·                  For debt securities: single issuers are limited to 5%of the portfolio’s market value (with the exception of U.S. government andagency securities); the average credit quality of the portfolio shall be atleast A rated; no more than 20% of the market value of the portfolio shall beinvested in non-dollar denominated bonds; and privately placed securities arelimited to no more than 50% of the portfolio’s market value.

 

F-43

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·                  For U.S. equity securities: the portfolio is entirelypassively managed through investment in the Dow Jones Wilshire 5000 index fund,which is invested primarily in equity securities with the objective ofapproximating as closely as possible the capitalization weighted total rate ofreturn of the entire U.S. market for publicly traded securities.

 

·                  For non-U.S. equity securities: no individual securityshall represent more than 5% of the portfolio’s market value at any time;investment in U.S. common stock securities is prohibited (with the exception ofAmerican Depository Receipts) and emerging market securities may represent upto 30% of the total portfolio’s market value. Currency futures and forwardcontracts may be held for the sole purpose of hedging existing currency risk inthe portfolio.

 

For 2008, the expectedlong-term rate of return on assets for the U.S. qualified pension plans is 8%(also 8% in 2007). Average annual returns over one, two, three, five, ten andfifteen-year periods were 6.27%, 9.23%, 8.27%, 11.30%, 6.54%, and 8.16%,respectively. Negative returns across broad categories of U.S. equitysecurities in 2000, 2001 and 2002 caused lower returns in periods greater thanthree years.

 

The expected return on plan assets for the U.S. qualifiedpension plans is a conservative rate based on a comparison to historical actualreturns and benchmark data.  Grace looksat the trailing 20-year and 25-year returns on the plan portfolio under thecurrent target equity to fixed income allocation of 60%/40% to determine aweighted-average rate of return based on historical data.  These results are then compared withhistorical returns of balanced fund indices, as provided by our independentactuaries.

 

The balanced fund indices are composites of theS&P 500 and the Lehman Brothers Gov’t/Credit indices.  Grace then evaluates the estimated rates andselects a rate that it believes to be reasonable and conservative, and submitsthat rate for review by our independent actuaries for reasonableness.

 

Non-U.S. pension plansaccounted for approximately 29% and 28% of total global pension assets at December 31,2007 and 2006, respectively. Each of these plans, where applicable, followslocal requirements and regulations.  Someof the local requirements include the establishment of a local pensioncommittee, a formal statement of investment policy and procedures, and routinevaluations by plan actuaries.

 

The target allocation of investment assets fornon-U.S. pension plans varies depending on the investment goals of theindividual plans. The plan assets of the United Kingdom pension plan representapproximately 82% and 83% of the total non-U.S. pension plan assets at December 31,2007 and 2006, respectively. In determining the expected rate of return for theUK plan, the trustees’ strategic investment policy has been considered togetherwith long-term historical returns and investment community forecasts for eachasset class.  The expected return bysector has been combined with the actual asset allocation to determine the 2007expected long-term return assumption of 7%. As of December 31, 2007, the Trustees of this plan changed thetarget equity to fixed income allocation from 50%/50% to 18%/82%, which willreduce the long-term return assumption to 6% as of 2008.

 

The target allocation ofinvestment assets for 2008, the actual allocation at December 31, 2007 and2006, and the expected long-term rate of return by asset category for Grace’sUnited Kingdom pension plan are as follows:

 
| **United Kingdom Pension Plans Asset Category** | ** ** | **Target  Allocation** | ** ** | **Percentage  of  Plan Assets   December 31,** | ** ** | **Weighted-Average    Expected Long-Term**

**Rate of Return** | ** ** |
|------------------------------------------------------|------------|------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                           | **2008**   | ** **             | **2007**   | ** **                                               | **2006**   | ** **                                                     | **2008**   | ** ** | **2007** | ** ** |
| U.K. equity  securities                              |       | 11                     | %          | **10**                                                   | **%**      | 30                                                             | %          | 0.89 |   | 2.55 |   |
| Non-U.K. equity  securities                          |       | 7                      | %          | **7**                                                    | **%**      | 20                                                             | %          | 0.60 |   | 2.00 |   |
| U.K. gilts                                           |       | 19                     | %          | **20**                                                   | **%**      | 20                                                             | %          | 0.86 |   | 0.90 |   |
| U.K. corporate  bonds                                |       | 63                     | %          | **63**                                                   | **%**      | 30                                                             | %          | 3.65 |   | 1.55 |   |
| Total                                                |       | 100                    | %          | **100**                                                  | **%**      | 100                                                            | %          | 6.00 |   | 7.00 |   |

 

The plan assets of theCanadian pension plans represent approximately 7% and 6% of the total non-U.S.pension plan assets at December 31, 2007 and 2006, respectively. Thetarget allocation of investment assets for 2008, the actual allocation at December 31,2007 and 2006, and the expected long-term rate of return by asset category forGrace’s Canadian pension plans are as follows:

 

F-44

----

 
| **Canadian Pension Plans Asset Category** | ** ** | **Target  Allocation** | ** ** | **Percentage of Plan Assets   December 31,** | ** ** | **Weighted-Average   Expected Long-Term**

**Rate of Return** | ** ** |
|------------------------------------------------|------------|------------------------|------------|---------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                     | **2008**   | ** **             | **2007**   | ** **                                        | **2006**   | ** **                                                    | **2008**   | ** ** | **2007** | ** ** |
| Equity securities                              |       | 55                     | %          | **53**                                            | **%**      | 55                                                            | %          | 4.70 |   | 5.50 |   |
| Bonds                                          |       | 45                     | %          | **47**                                            | **%**      | 45                                                            | %          | 2.30 |   | 2.50 |   |
| Total                                          |       | 100                    | %          | **100**                                           | **%**      | 100                                                           | %          | 7.00 |   | 8.00 |   |

 

The plan assets of theother country plans represent approximately 11% in the aggregate (with nocountry representing more than 3% individually) of total non-U.S. pension planassets at December 31, 2007 and 2006.

 

***Plan Contributionsand Funding***—Subjectto any required approval of the Bankruptcy Court, Grace intends to satisfy itsfunding obligations under the Plans and to comply with all of the requirementsof the Employee Retirement Income Security Act of 1974 (“ERISA”).  For ERISA purposes, funded status iscalculated on a different basis than under U.S. generally accepted accountingprinciples.  On June 20, 2007, Graceobtained Bankruptcy Court approval to fund minimum required payments ofapproximately $54 million for the period from July 2007 through January 2008.  In that regard, Grace contributedapproximately $9 million in July 2007 and approximately $15 million ineach of September 2007, October 2007, and January 2008 to thetrusts that hold assets of the Plans. While Grace intends to continue to fund all minimum required paymentsunder the Plans, there can be no assurance that the Bankruptcy Court willcontinue to approve these payments. Based on the Plans’ status as of December 31, 2007, Grace’s ERISAfunding obligations for 2008, 2009, and 2010 would be approximately $54million, $50 million, and $38 million, respectively.

 

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 expects to contributeapproximately $14 million to its non-U.S. pension plans and approximately $10 million(excluding any Medicare subsidy receipts) to its other postretirement plans in2008.

 

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

 

**20.****      ****Operating Segment Information**

 

Grace is a globalproducer of specialty chemicals and materials. It generates revenues from twooperating segments: Grace Davison, which includes specialty catalysts andmaterials used in a wide range of energy, refining, consumer industrial,packaging and life sciences applications; and Grace Construction Products,which includes specialty chemicals and building materials used in commercial,infrastructure, and residential construction. Intersegment sales, eliminated in consolidation, are not material.

 

Grace’s reportable operatingsegments reflect the transfer of the packaging technologies product group tothe Grace Davison operating segment, which was completed in the fourth quarterof 2007. The previous Grace Performance Chemicals operating segment has beenrenamed “Grace Construction Products” as a result of the transfer. All segmentinformation contained herein has been retrospectively restated to reflect thisrealignment.

 

The table below presentsinformation related to Grace’s operating segments for the years ended December 31,2007, 2006, and 2005. Only those corporate expenses directly related to theoperating segments are allocated for reporting purposes. All remainingcorporate items are reported separately and labeled as such.

 

F-45

----

 
| **Operating Segment Data*******(**In  millions)* | ** ** | **2007**    | ** **  | **2006**   | ** ** | **2005**   | ** ** |
|--------------------------------------------------|------------|-------------|-------------|------------|------------|------------|------------|
| **Net Sales**                                    | ** ** | ** **  | ** **  | ** ** | ** ** | ** ** | ** ** |
| Grace Davison                                    |       | **$**       | **2,009.2** | ** ** | $          | 1,797.3    |       | $ | 1,663.2 |   |
| Grace  Construction Products                     |       | **1,106.0** | ** **  | 1,029.2    |       | 906.3      |       |
| Total                                            |       | **$**       | **3,115.2** | ** ** | $          | 2,826.5    |       | $ | 2,569.5 |   |
| **Pre-tax Operating Income**                     |       | ** **  | ** **  |       |       |       |       |
| Grace Davison                                    |       | **$**       | **240.4**   | ** ** | $          | 209.1      |       | $ | 192.8 |   |
| Grace  Construction Products                     |       | **146.8**   | ** **  | 138.5      |       | 115.4      |       |
| Corporate                                        |       | **(102.6**  | **)**       | (107.4     | )          | (106.7     | )          |
| Total                                            |       | **$**       | **284.6**   | ** ** | $          | 240.2      |       | $ | 201.5 |   |
| **Depreciation  and Amortization**               |       | ** **  | ** **  |       |       |       |       |
| Grace Davison                                    |       | **$**       | **79.6**    | ** ** | $          | 81.7       |       | $ | 85.6 |   |
| Grace  Construction Products                     |       | **31.6**    | ** **  | 30.6       |       | 31.0       |       |
| Corporate                                        |       | **2.2**     | ** **  | 1.2        |       | 4.3        |       |
| Total                                            |       | **$**       | **113.4**   | ** ** | $          | 113.5      |       | $ | 120.9 |   |
| **Capital Expenditures**                         |       | ** **  | ** **  |       |       |       |       |
| Grace Davison                                    |       | **$**       | **87.0**    | ** ** | $          | 69.6       |       | $ | 57.1 |   |
| Grace  Construction Products                     |       | **38.2**    | ** **  | 40.0       |       | 30.0       |       |
| Corporate                                        |       | **11.7**    | ** **  | 9.6        |       | 6.9        |       |
| Total                                            |       | **$**       | **136.9**   | ** ** | $          | 119.2      |       | $ | 94.0 |   |
| **Total Assets**                                 |       | ** **  | ** **  |       |       |       |       |
| Grace Davison                                    |       | **$**       | **1,185.6** | ** ** | $          | 1,072.6    |       | $ | 1,031.7 |   |
| Grace  Construction Products                     |       | **561.6**   | ** **  | 521.2      |       | 502.9      |       |
| Corporate                                        |       | **2,121.8** | ** **  | 2,043.6    |       | 2,004.0    |       |
| Total                                            |       | **$**       | **3,869.0** | ** ** | $          | 3,637.4    |       | $ | 3,538.6 |   |

 

Corporate costs includeexpenses of corporate headquarters functions incurred in support of coreoperations, such as corporate financial and legal services, human resourcesmanagement, communications and regulatory affairs. Corporate costs also includecertain pension and postretirement benefits, including the amortization ofdeferred costs that are considered a core operating expense but not allocatedto operating segments.  Corporate assetsinclude cash and cash equivalents, investment securities, cash value of lifeinsurance policies, net of policy loans, deferred income taxes and asbestosinsurance receivable.

 

The following tablepresents information related to the geographic areas in which Grace operated in2007, 2006 and 2005.  Sales areattributed to geographic areas based on customer location.

 
| **Geographic Area Data***(In millions)* | ** ** | **2007**    | ** **  | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------------|------------|-------------|-------------|----------|------------|----------|------------|
| **Net Sales**                           |       |        |        |     |       |     |       |
| United States                           |       | **$**       | **1,020.7** |     | $          | 1,032.3  |       | $ | 945.4 |   |
| Canada and Puerto Rico                  |       | **94.2**    |        | 126.5    |       | 141.7    |       |
| Total North America                     |       | **1,114.9** |        | 1,158.8  |       | 1,087.1  |       |
| Europe Africa                           |       | **1,295.7** |        | 1,071.0  |       | 936.1    |       |
| Asia Pacific                            |       | **502.5**   |        | 443.2    |       | 403.2    |       |
| Latin America                           |       | **202.1**   |        | 153.5    |       | 143.1    |       |
| Total                                   |       | **$**       | **3,115.2** |     | $          | 2,826.5  |       | $ | 2,569.5 |   |
| **Properties  and Equipment, net**      |       | ** **  |        |     |       |     |       |
| United States                           |       | **$**       | **408.8**   |     | $          | 400.2    |       | $ | 384.1 |   |
| Canada and Puerto Rico                  |       | **20.8**    |        | 18.7     |       | 19.8     |       |
| Total North America                     |       | **429.6**   |        | 418.9    |       | 403.9    |       |
| Europe Africa                           |       | **212.8**   |        | 186.7    |       | 171.6    |       |
| Asia Pacific                            |       | **47.0**    |        | 44.1     |       | 43.8     |       |
| Latin America                           |       | **16.7**    |        | 14.8     |       | 13.6     |       |
| Total                                   |       | **$**       | **706.1**   |     | $          | 664.5    |       | $ | 632.9 |   |
| **Goodwill  and Other Assets**          |       | ** **  |        |     |       |     |       |
| United States                           |       | **$**       | **126.1**   |     | $          | 133.2    |       | $ | 153.5 |   |
| Canada and Puerto Rico                  |       | **8.7**     |        | 10.3     |       | 17.9     |       |
| Total North America                     |       | **134.8**   |        | 143.5    |       | 171.4    |       |
| Europe Africa                           |       | **141.8**   |        | 117.3    |       | 177.5    |       |
| Asia Pacific                            |       | **17.5**    |        | 10.2     |       | 10.8     |       |
| Latin America                           |       | **18.9**    |        | 15.4     |       | 15.8     |       |
| Total                                   |       | **$**       | **313.0**   |     | $          | 286.4    |       | $ | 375.5 |   |

 

F-46

----

 

Cash value of lifeinsurance policies, net of policy loans and asbestos-related insurance are heldentirely in the U.S.

 

The pre-tax operating incomefor Grace’s operating segments for the years ended December 31, 2007, 2006and 2005 is reconciled below to income before income taxes and minorityinterest presented in the accompanying Consolidated Statements of Operations.

 
| **Reconciliation of Operating    Segment Data to     Financial Statements***(In millions)* | ** ** | **2007**  | ** ** | **2006**   | ** ** | **2005** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|-----------|------------|------------|------------|----------|------------|
| Pre-tax  operating income—core operations                                                                 | ** ** | **$**     | **284.6**  | ** ** | $          | 240.2    |       | $ | 201.5 |   |
| Minority  interest in consolidated entities                                                                    | ** ** | **18.1**  | ** ** | 34.4       |       | 21.1     |       |
| Chapter 11  expenses, net of interest income                                                                   | ** ** | **(86.4** | **)**      | (49.9      | )          | (30.9    | )          |
| Net gain (loss)  on sales of investments and disposals of assets                                               | ** ** | **1.9**   | ** ** | 0.6        |       | (0.7     | )          |
| Provision for  environmental remediation                                                                       | ** ** | **(17.0** | **)**      | (30.0      | )          | (25.0    | )          |
| Interest expense  and related financing costs                                                                  | ** ** | **(72.1** | **)**      | (73.2      | )          | (55.3    | )          |
| Other, net                                                                                                     | ** ** | **(36.5** | **)**      | (61.3      | )          | (1.0     | )          |
| Income before  income taxes and minority interest                                                              | ** ** | **$**     | **92.6**   | ** ** | $          | 60.8     |       | $ | 109.7 |   |

 

**21.****      ****Minority Interest in ConsolidatedEntities**

 

Within both Grace Davisonand Grace Construction Products, Grace conducts certain business activities invarious countries through joint ventures with unaffiliated third parties, thefinancial results of which are included in Grace’s consolidated financialstatements.  Minority interest primarilypertains to Grace’s joint venture with Chevron Products Company for thedevelopment and sale of hydroprocessing catalysts to the petroleum refiningindustry.  Grace has a 55% economicinterest in this joint venture.  Thefollowing table presents summary financial statistics for Grace’s combinedbusinesses subject to profit sharing:

 
| ** **                                           | ** ** | **Year Ended December 31,** |
|------------------------------------------------------|------------|----------------------------------|
| ***(In millions)***                                  | ** ** | **2007**                         | ** ** | **2006** |   | **2005** |
| **Sales**                                            | ** ** | **$**                            | **434.7** |   | $ | 397.9 |   | $ | 341.7 |
| **Income before taxes**                              | ** ** | **41.8**                         |   | 79.1 |   | 49.3 |
| **Net income**                                       | ** ** | **39.5**                         |   | 77.9 |   | 47.5 |
| **Minority interests in net income**                 | ** ** | **18.1**                         |   | 34.4 |   | 21.1 |
| **Cash**                                             | ** ** | **57.0**                         |   | 65.5 |   | 15.0 |
| **Other current assets**                             | ** ** | **157.0**                        |   | 136.7 |   | 119.9 |
| **Total assets**                                     | ** ** | **233.1**                        |   | 212.4 |   | 146.3 |
| **Total liabilities**                                | ** ** | **74.5**                         |   | 66.9 |   | 61.5 |
| **Shareholders’ equity**                        | ** ** | **158.6**                        |   | 145.5 |   | 84.8 |
| **Minority interests in  shareholders’ equity** | ** ** | **70.8**                         |   | 65.0 |   | 36.4 |
|                                                      |            |                                  |  |  |  |  |  |  |  |

 

F-47

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**22.****      ****Quarterly Summary and StatisticalInformation (Unaudited)**

 

**QuarterlySummary and Statistical Information***(Unaudited)*

*(In millions, except per share)*

 
| ** **                           | ** ** | **March 31** | *** *** | **June 30(1)** | ** ** | **September 30** | *** *** | **December 31(1)** | *** *** |
|--------------------------------------|------------|-------------------|--------------|---------------------|------------|-----------------------|--------------|-------------------------|--------------|
| **2007**                             | ** ** | ** **        | ** **   | ** **          | ** ** | ** **            | ** **   | ** **              | ** **   |
| Net sales                            |       | $                 | 715.6        |                | $          | 812.8                 |         | $                       | 783.1        |   | $ | 803.7 |   |
| Cost of goods sold                   |       | 497.7             |         | 552.9               |       | 537.6                 |         | 559.2                   |         |
| Net income                           |       | 4.8               |         | 20.5                |       | 16.7                  |         | 38.3                    |         |
|                                 |       |              |         |                |       |                  |         |                    |         |
| **Net income per share*:***(2***)*** | ** ** | ** **        | ** **   | ** **          | ** ** | ** **            | ** **   | ** **              | ** **   |
| **Basic  earnings per share:**       | ** ** | ** **        | ** **   | ** **          | ** ** | ** **            | ** **   | ** **              | ** **   |
| Net income                           |       | $                 | 0.07         |                | $          | 0.29                  |         | $                       | 0.24         |   | $ | 0.54 |   |
| **Diluted  earnings per share:**     | ** ** | ** **        | ** **   | ** **          | ** ** | ** **            | ** **   | ** **              | ** **   |
| Net income                           |       | 0.07              |         | 0.29                |       | 0.23                  |         | 0.53                    |         |
|                                 |       |              |         |                |       |                  |         |                    |         |
| **Market price of common stock:**(3) | ** ** | ** **        | ** **   | ** **          | ** ** | ** **            | ** **   | ** **              | ** **   |
| High                                 |       | $                 | 26.83        |                | $          | 29.92                 |         | $                       | 27.08        |   | $ | 30.65 |   |
| Low                                  |       | 19.82             |         | 24.46               |       | 18.86                 |         | 22.99                   |         |
| Close                                |       | 26.42             |         | 24.49               |       | 26.86                 |         | 26.18                   |         |

 
|                                    | ** ** | **March 31** | *** *** | **June 30(1)** | ** ** | **September 30** | ** ** | **December 31** | ** ** |
|-----------------------------------------|------------|-------------------|--------------|---------------------|------------|-----------------------|------------|----------------------|------------|
| **2006**                                |       |              |         |                |       |                  |       |                 |       |
| Net sales                               |       | $                 | 658.6        |                | $          | 729.1                 |       | $                    | 741.4      |   | $ | 697.4 |   |
| Cost of goods sold                      |       | 457.8             |         | 490.1               |       | 503.7                 |       | 472.2                |       |
| Net income (loss)                       |       | 0.1               |         | (5.2                | )          | 18.4                  |       | 5.0                  |       |
|                                    |       |              |         |                |       |                  |       |                 |       |
| **Net income (loss) per share:**(2)     | ** ** | ** **        | ** **   | ** **          | ** ** | ** **            | ** ** | ** **           | ** ** |
| **Basic  earnings (loss) per share:**   | ** ** | ** **        | ** **   | ** **          | ** ** | ** **            | ** ** | ** **           | ** ** |
| Net income  (loss)                      |       | $                 | 0.00         |                | $          | (0.08                 | )          | $                    | 0.27       |   | $ | 0.07 |   |
| **Diluted  earnings (loss) per share:** | ** ** | ** **        | ** **   | ** **          | ** ** | ** **            | ** ** | ** **           | ** ** |
| Net income  (loss)                      |       | 0.00              |         | (0.08               | )          | 0.27                  |       | 0.07                 |       |
|                                    |       |              |         |                |       |                  |       |                 |       |
| **Market price of common stock:**(3)    | ** ** | ** **        | ** **   | ** **          | ** ** | ** **            | ** ** | ** **           | ** ** |
| High                                    |       | $                 | 13.85        |                | $          | 17.49                 |       | $                    | 13.26      |   | $ | 20.35 |   |
| Low                                     |       | 9.15              |         | 10.69               |       | 8.12                  |       | 12.19                |       |
| Close                                   |       | 13.30             |         | 11.70               |       | 13.26                 |       | 19.80                |       |

----

| (1) |   | Second quarter 2007 and  2006 and fourth quarter 2007 net income (loss) includes provisions for  environmental remediation of $12.0 million, $30.0 million and $5.0 million,  respectively.                |
|-----|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) |   | Per share results for  the four quarters may differ from full-year per share results, as a separate  computation of the weighted average number of shares outstanding is made for  each quarter presented. |
| (3) |   | Principal market: New  York Stock Exchange.                                                                                                                                                                |

F-48

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**SelectedFinancial Data*****(1)***

*(Inmillions, except per share amounts)*

* *
| ** **                                                                              | ** ** | **2007**    | ** **      | **2006**   | ** ** | **2005**   | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|-----------------------------------------------------------------------------------------|------------|-------------|-----------------|------------|------------|------------|------------|------------|------------|------------|------------|
| **Statement of Operations**                                                             |       |        |            |       |       |       |       |       |       |       |       |
| Net sales                                                                               |       | **$**       | **3,115.2**     |       | $          | 2,826.5    |       | $          | 2,569.5    |       | $          | 2,259.9 |   | $ | 1,980.5 |   |
| Income (loss)  from continuing operations before income taxes and minority interest (2) | ** ** | **92.6**    |            | 60.8       |       | 109.7      |       | (395.1     | )          | (68.7      | )          |
| Minority interest in consolidated entities                                              | ** ** | **(18.1**   | **)**           | (34.4      | )          | (21.1      | )          | (8.7       | )          | 1.2        |       |
| Net income (loss) (2)                                                                   | ** ** | **80.3**    |            | 18.3       |       | 67.3       |       | (402.3     | )          | (55.2      | )          |
|                                                                                    | ** ** | ** **  |            |       |       |       |       |       |       |       |       |
| **Financial Position**                                                                  |       |        |            |       |       |       |       |       |       |       |       |
| Cash and cash equivalents                                                               | ** ** | **$**       | **480.5**       |       | $          | 536.3      |       | $          | 474.7      |       | $          | 510.4 |   | $ | 309.2 |   |
| Properties and equipment, net                                                           | ** ** | **706.1**   |            | 664.5      |       | 632.9      |       | 683.6      |       | 688.8      |       |
| Total assets                                                                            | ** ** | **3,869.0** |            | 3,637.4    |       | 3,538.6    |       | 3,553.1    |       | 2,882.3    |       |
| Total liabilities                                                                       | ** ** | **4,255.6** |            | 4,187.2    |       | 4,133.9    |       | 4,174.9    |       | 3,046.1    |       |
| Liabilities  subject to compromise (a subset of total liabilities)                      | ** ** | **3,277.5** |            | 3,221.6    |       | 3,155.1    |       | 3,207.7    |       | 2,452.3    |       |
| Shareholders’ equity (deficit)                                                     | ** ** | **(386.6**  | **)**           | (549.8     | )          | (595.3     | )          | (621.8     | )          | (163.8     | )          |
|                                                                                    | ** ** | ** **  | ** **      |       |       |       |       |       |       |       |       |
| **Cash Flow**                                                                           | ** ** | ** **  | ** **      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Operating activities                                                                    | ** ** | **$**       | **88.2**        |       | $          | 152.7      |       | $          | 67.3       |       | $          | 325.4 |   | $ | 111.7 |   |
| Investing activities                                                                    | ** ** | **(206.9**  | **)**           | (129.4     | )          | (77.9      | )          | (138.0     | )          | (110.0     | )          |
| Financing activities                                                                    | ** ** | **45.7**    |            | 21.9       |       | (10.1      | )          | (0.7       | )          | (4.7       | )          |
| Net cash flow                                                                           | ** ** | **(55.8**   | **)**           | 61.6       |       | (35.7      | )          | 201.2      |       | 25.6       |       |
|                                                                                    | ** ** | ** **  | ** **      |       |       |       |       |       |       |       |       |
| **Data Per Common Share (Diluted)**                                                     |       |        |            |       |       |       |       |       |       |       |       |
| Net income (loss) (2)                                                                   | ** ** | **$**       | **1.12**        |       | $          | 0.27       |       | $          | 1.00       |       | $          | (6.11 | ) | $ | (0.84 | ) |
| Average common  diluted shares outstanding (thousands)                                  |       | **71,600**  |            | 68,300     |       | 67,300     |       | 65,800     |       | 65,500     |       |
|                                                                                    |       | ** **  |            |       |       |       |       |       |       |       |       |
| **Other Statistics**                                                                    |       |        |            |       |       |       |       |       |       |       |       |
| Capital expenditures                                                                    | ** ** | **$**       | **136.9**       |       | $          | 119.2      |       | $          | 94.0       |       | $          | 75.3 |   | $ | 87.3 |   |
| Common stock price range                                                                | ** ** | **$**       | **18.86-30.65** |       | $          | 8.12-20.35 |       | $          | 6.75-13.79 |       | $          | 2.51-14.95 |   | $ | 1.48-5.52 |   |
| Common shareholders of record                                                           | ** ** | **9,153**   |            | 9,522      |       | 9,883      |       | 10,275     |       | 10,734     |       |
| Number of employees (approximately)                                                     | ** ** | **6,500**   |            | 6,500      |       | 6,400      |       | 6,500      |       | 6,300      |       |

----

| (1) | * * | Certain prior-year amounts have been reclassified to  conform to the 2007 presentation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|-----|----------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | * * | Amounts in 2007, 2006, and 2005 contain provisions  for environmental remediation of $17.0 million, $30.0 million, and $25.0  million, respectively. Amounts in 2004 reflect the following adjustments: a  $714.8 million pre-tax charge to increase Grace’s recorded asbestos-related  liability to the maximum amount permitted as a condition precedent under  Grace’s plan of reorganization (the “Debtors Plan”); a pre-tax credit for  expected insurance recovery related to asbestos liabilities of $238.2  million; a $94.1 million pre-tax charge to increase the interest to which  general unsecured creditors would be entitled under the Debtors Plan; a  $151.7 million pre-tax credit for net income tax benefits related to the  above items; and an $82.0 million tax liability on the expected taxable  distributions from foreign subsidiaries to fund the Debtors Plan. Amounts in  2003 contain a provision for environmental remediation of $142.5 million and  a provision for asbestos-related claims of $30.0 million. |

 

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**MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**Financial Summary for December 31,2007**

 

Following is a summary analysis of key financialmeasures of our performance for the year ended December 31, 2007 comparedwith the prior year. Our reportable operating segments reflect thetransfer of the packaging technologies product group to the Grace Davisonoperating segment, which was completed in the fourth quarter of 2007. Theprevious Grace Performance Chemicals operating segment has been renamed “GraceConstruction Products” as a result of the transfer. All segment informationcontained herein has been retrospectively restated to reflect this realignment.

 

·                  Sales for the year ended December 31,2007 were $3,115.2 million compared with $2,826.5 million for the prior year, a10.2% increase (6.4% before the effects of currency translation).  The increase was attributable to higherselling prices in response to rising raw material costs and to higher volumesin most product groups, particularly outside the United States.

 

·                  Net results for each period have beenprimarily affected by: 1) the performance of our businesses — which iscategorized as “core operations”; and 2) the impact of legal contingencies andother nonoperating liabilities — which is categorized as “noncore activities.”

 

·                  Net income for 2007 was $80.3 millioncompared with net income in 2006 of $18.3 million. The current year and prioryear periods were negatively affected by Chapter 11 expenses, litigation andother matters not related to core operations.

 

·                  Pre-tax income from core operations was$284.6 million for the year ended December 31, 2007 compared with $240.2million for the prior year, an 18.5% increase over the prior year, primarilyattributable to higher volumes in regions other than North America, higherselling prices to offset cost inflation, and from lower overall pension costs.

 

·                  Pre-tax operating income of our GraceDavison operating segment was $240.4 million compared with $209.1 million forthe prior year, a 15% increase over the prior year, with operating margins at12%, compared with 11.6% for the prior year. Full year operating results reflect higher sales to both refining andindustrial end markets, higher selling prices that offset higher raw materialcosts, which increased approximately 11% year-over-year, and cost savings fromproductivity initiatives.

 

·                  Pre-tax operating income of our GraceConstruction Products operating segment was $146.8 million compared with $138.5million for the prior year, a 6.0% increase, reflecting higher sales volumeglobally, selling price increases, and positive results from productivity andcost containment initiatives, which more than offset an approximate 5% increasein raw material costs.  Operating marginof 13.3% was about even with last year despite lower sales volumes in the UnitedStates.

 

·                  Net cash inflow from operating activitiesfor the full year ended December 31, 2007 was $88.2 million, compared witha net cash inflow of $152.7 million for the prior year.  The decrease in cash flow from operatingactivities was principally attributable to higher Chapter 11 related costs,higher working capital, dividends to joint venture partners and cash paid toresolve certain tax contingencies, offset by higher pre-tax operating income.

 

·                  Pre-tax loss from noncore activities was$(59.3) million and $(97.7) million for the years ended December 31, 2007and 2006, respectively.

 

We are attempting toresolve 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 resultsin the future.

 

We present the net costsof our reorganization under Chapter 11 of the U.S. Bankruptcy Code as 

 

F-50

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“Chapter 11 expenses, netof interest income,” a separate caption in our Consolidated Statements ofOperations. Chapter 11 expenses are not included in the measures of income fromcore operations or income (loss) from noncore operations.

 

**Description of Core Business**

 

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

 

***Grace Davison***includes:

 

·                  Refining Technologies products,including:

 

·                  fluid catalytic cracking, or FCC,catalysts, that help to “crack” the hydrocarbon chain in distilled crude oil toproduce transportation fuels, such as gasoline and diesel fuels, and otherpetroleum-based products; and FCC additives used to reduce sulfur in gasoline,maximize propylene production from refinery FCC units, and reduce emissions ofsulfur oxides, nitrogen oxides and carbon monoxide from refinery FCC units, and

 

·                  hydroprocessing catalysts, marketedthrough our Advanced Refining Technologies, LLC joint venture with ChevronProducts Company, in which Grace holds a 55% economic interest, that are usedin process reactors to upgrade heavy oils into lighter, more useful products byremoving impurities such as nitrogen, sulfur and heavy metals, allowing lessexpensive feedstocks to be used in the petroleum refining process, and

 

·                  Materials Technologies products, including:

 

·                  Silica-based and silica-alumina-basedengineered materials used in:

 

·                  industrial applications, such as rubberand tires, plastics, precision investment casting, refractory, insulating glasswindows, drying applications, fulfilling various functions such asreinforcement, high temperature binding and moisture scavenging, and

 

·                  consumer applications, as a free-flow,carrier or processing aid in food and personal care products; as a toothpasteabrasive; and for the processing and stabilization of edible oils andbeverages, and

 

·                  coatings and print media applicationsconsisting of functional additives that: provide matting effects and corrosion protection for industrialcoatings; enable enhanced media and paper quality in ink jet coatings; and actas a functional filler and retention aid in paper, and

 

·                  sealants and coatings used in rigid foodand beverage packaging, including can and closure sealants used to seal andenhance the shelf life of can and bottle contents, and coatings for cans andclosures that prevent metal corrosion, protect package contents from theinfluence of metal and ensure proper adhesion of sealing compounds andtechnologies designed to reduce off-taste effects and extend the shelf-life ofpackaged products, and

 

·                  Specialty Technologies products,including:

 

·                  polyolefin catalysts and catalystsupports that are essential components in the manufacture of polyethylene andpolypropylene resins, and other chemical catalysts used in a variety ofindustrial, environmental and consumer applications, and

 

·                  silica-based materials and chromatographycolumns, instruments, consumables and accessories used in analytical chemistryapplications and life sciences.

 

Hydroprocessing catalystsare sold through Advanced Refining Technologies, LLC (“ART”), our joint venturewith Chevron Products Company (“Chevron”). We report 100% of the revenues of the ART joint venture, but onlyreceive 55% of the income after minority interest is allocated to Chevron.

 

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

 

F-51

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Sales of our MaterialsTechnologies and Specialty Technologies product groups are affected by globaleconomic conditions, including the underlying growth rate of targeted end-useapplications.

 

***Grace Construction Products***includes:

 

·                  Specialty chemicals and buildingmaterials, including concrete admixtures and fibers used to improve thedurability and working properties of concrete, additives used in cementprocessing to improve energy efficiency, enhance the characteristics of finishedcement and improve ease of use, building materials used in commercial,infrastructure and residential construction and renovation to protect buildingsfrom water, vapor and air penetration, and fire protection materials used toprotect buildings in the event of fire.

 

Construction Productssales are primarily impacted by global non-residential construction activityand U.S. residential construction activity.

 

We manage theConstruction Products operating segment by major geographic regions as follows:

 

·                  **Americas**—which includes North, Central and SouthAmerica. Economic drivers impacting our performance in the region are ourstrong performance in the U.S. commercial sector and in the growing commercialconstruction sectors of Central and South America, offsetting a depressed U.S.new housing construction market. We have also raised selling prices to improvemargins and combat rising raw material costs from our suppliers.  We opened a new state of the art manufacturingplant in Mt. Pleasant, Tennessee, which has improved our manufacturing anddelivery efficiencies.

 

·                  **Europe**—which includes Eastern and WesternEurope, the Middle East, Africa, and India. Economic activity in this region was favorable allowing us to sellhigher volumes of products into the commercial and infrastructure constructionmarkets of Europe and the Middle East. A favorable currency exchange with theU.S. dollar was also an economic driver and we were able to optimize ourprocesses and improve efficiencies through full operation of a new R&Dfacility in Poznan, Poland.

 

·                  **Asia**—which includes Asia (excluding India),the Pacific Rim Countries, Australia and New Zealand. Our economic drivers inthis region lie in the double-digit growth in the commercial construction andinfrastructure market, higher selling prices in all product groups, and positiveresults from productivity and cost containment initiatives. Openings of a newplant in Viet Nam and new technical service facility in China supported growthin this region.

 

***Global scope***—We operate our business on a global scale withapproximately 67% of our revenue (see table below) and over 50% of ouroperating properties outside the United States. We conduct business in 41countries and in more than 20 currencies. We manage our operating segments on aglobal basis, to serve global markets. Currency fluctuations in relation to the U.S. dollar affect our reportedearnings, net assets and cash flows.

 

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

 

## **Percentage ofTotal Grace Sales**

 
| ** **                  | ** ** | **2007**   | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|-----------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Grace Davison               | ** ** | **64.5**   | **%**      | 63.6       | %          | 64.7       | %          |
| Grace Construction Products | ** ** | **35.5**   | **%**      | 36.4       | %          | 35.3       | %          |
| **Total**                   | ** ** | **100.0**  | **%**      | 100.0      | %          | 100.0      | %          |
| Grace U.S.                  | ** ** | **32.8**   | **%**      | 36.5       | %          | 36.8       | %          |
| Grace non-U.S.              | ** ** | **67.2**   | **%**      | 63.5       | %          | 63.2       | %          |
| **Total**                   | ** ** | **100.0**  | **%**      | 100.0      | %          | 100.0      | %          |

 

**Voluntary Bankruptcy Filing**

 

In response to a sharplyincreasing number of asbestos-related personal injury claims, on April 2,2001, Grace and 61 of our United States subsidiaries and affiliates, includingW. 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 the Chapter11 filing.

 

Under Chapter 11, we havecontinued to operate as debtors-in-possession under court protection fromcreditors 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 

 

F-52

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has approved all motionsnecessary to conduct normal 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 and asbestosproperty damage claimants or the representative of future asbestosclaimants.  On July 26, 2007, thebankruptcy court terminated our exclusive rights to propose a plan ofreorganization and solicit votes thereon. As a result of the termination of these rights, any party-in-interestcan propose a competing plan of reorganization. On November 5, 2007, the committee representing asbestos personalinjury claimants and the representative of future asbestos claimants filed aproposed plan of reorganization with the bankruptcy court.  The filing did not include a disclosurestatement, trust distribution procedures, exhibits or other supportingdocuments.  Under the terms of our proposedplan of reorganization, a trust would be established to which all pending andfuture asbestos-related claims would be channeled for resolution.  Under the terms of the plan of reorganizationproposed by the committee representing asbestos personal injury claimants andthe representative of future asbestos claimants, a trust would be establishedto which all pending and future asbestos-related personal injury claims wouldbe channeled for resolution.  A plan ofreorganization, including either of these plans and any other plan that may befiled in the future by a party-in-interest, can become effective only after avote of eligible creditors and with the approval of the bankruptcy court andthe U.S. District Court for the District of Delaware.

 

**Summary Financial Information andMetrics**

 

Set forth below is achart that lists our key operating statistics, and dollar and percentagechanges for the years ended December 31, 2007, 2006 and 2005. Please referto this Analysis of Continuing Operations chart when reading Management’sDiscussion and Analysis of Financial Condition and Results of Operations.

 

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 operating segment and between “coreoperations” and “noncore activities.” Core operations comprise the financialresults of Grace Davison, Grace Construction Products, and the costs ofcorporate activities that directly or indirectly support our businessoperations. In contrast, noncore activities comprise all other events andtransactions not directly related to the generation of operating revenue or thesupport 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 income from coreoperations, pre-tax income (loss) from noncore activities, pre-tax income fromcore operations as a percentage of sales, and pre-tax income from coreoperations before depreciation and amortization do not purport to representincome 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 income from coreoperations has material limitations as an operating performance measure becauseit excludes income and expenses that comprise our noncore activities, whichinclude, among other things, provisions for asbestos-related litigation andenvironmental remediation, income from insurance settlements, and legal defensecosts, all of which have been material components of our net income. Pre-taxincome from core operations before depreciation and amortization also hasmaterial limitations as an operating performance measure since it excludes theimpact 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 to

 

F-53

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generate revenue. Wecompensate for the limitations of these measurements by using these indicatorstogether with net income as measured under U.S. generally accepted accountingprinciples to present a complete analysis of our results of operations.  You should evaluate pre-tax income from coreoperations and pre-tax income from core operations before depreciation andamortization in conjunction with net income for a more complete analysis of ourfinancial results.

 

F-54

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| **Analysis  of Continuing Operations**

*(In millions)*                                          | ** ** | **2007**    | ** **  | **2006**   | ** ** | **$ Change Fav   (Unfav)** | ** ** | **% Change Fav   (Unfav)** | ** ** | **2005**   | ** ** | **$ Change Fav  (Unfav)** | ** ** | **% Change Fav   (Unfav)** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|-------------|-------------|------------|------------|---------------------------------|------------|----------------------------|------------|------------|------------|--------------------------------|------------|----------------------------|------------|
| **Net sales:**                                                                                   | ** ** | ** **  | ** **  | ** ** | ** ** | ** **                      | ** ** | ** **                 | ** ** | ** ** | ** ** | ** **                     | ** ** | ** **                 | ** ** |
| Grace Davison                                                                                    | ** ** | **$**       | **2,009.2** |       | $          | 1,797.3                         |       | $                          | 211.9      |       | 11.8       | %                              | $          | 1,663.2                    |       | $ | 134.1 |   | 8.1 | % |
| Refining  Technologies                                                                           | ** ** | **971.1**   |        | 859.1      |       | 112.0                           |       | 13.0                       | %          | 796.0      |       | 63.1                           |       | 7.9                        | %          |
| Materials  Technologies                                                                          | ** ** | **726.7**   |        | 654.4      |       | 72.3                            |       | 11.0                       | %          | 611.1      |       | 43.3                           |       | 7.1                        | %          |
| Specialty  Technologies                                                                          | ** ** | **311.4**   |        | 283.8      |       | 27.6                            |       | 9.7                        | %          | 256.1      |       | 27.7                           |       | 10.8                       | %          |
| Grace  Construction Products                                                                     | ** ** | **1,106.0** |        | 1,029.2    |       | 76.8                            |       | 7.5                        | %          | 906.3      |       | 122.9                          |       | 13.6                       | %          |
| Americas                                                                                         | ** ** | **587.1**   |        | 601.4      |       | (14.3                           | )          | (2.4                       | %)         | 532.5      |       | 68.9                           |       | 12.9                       | %          |
| Europe                                                                                           | ** ** | **380.6**   |        | 309.6      |       | 71.0                            |       | 22.9                       | %          | 268.4      |       | 41.2                           |       | 15.4                       | %          |
| Asia                                                                                             | ** ** | **138.3**   |        | 118.2      |       | 20.1                            |       | 17.0                       | %          | 105.4      |       | 12.8                           |       | 12.1                       | %          |
| **Total Grace net sales**                                                                        | ** ** | **$**       | **3,115.2** |       | $          | 2,826.5                         |       | $                          | 288.7      |       | 10.2       | %                              | $          | 2,569.5                    |       | $ | 257.0 |   | 10.0 | % |
| **Pre-tax operating income:**                                                                    | ** ** | ** **  | ** **  | ** ** | ** ** | ** **                      | ** ** | ** **                 | ** ** | ** ** | ** ** | ** **                     | ** ** | ** **                 | ** ** |
| Grace Davison(1)                                                                                 | ** ** | **$**       | **240.4**   |       | $          | 209.1                           |       | $                          | 31.3       |       | 15.0       | %                              | $          | 192.8                      |       | $ | 16.3 |   | 8.5 | % |
| Grace  Construction Products(2)                                                                  | ** ** | **146.8**   |        | 138.5      |       | 8.3                             |       | 6.0                        | %          | 115.4      |       | 23.1                           |       | 20.0                       | %          |
| Corporate costs:                                                                                 |       |        |        |       |       |                            |       |                       |       |       |       |                           |       |                       |       |
| Support  functions                                                                               | ** ** | **(45.9**   | **)**       | (45.2      | )          | (0.7                            | )          | (1.5                       | %)         | (41.4      | )          | (3.8                           | )          | (9.2                       | %)         |
| Pension,  performance-related compensation, and other                                            | ** ** | **(56.7**   | **)**       | (62.2      | )          | 5.5                             |       | 8.8                        | %          | (65.3      | )          | 3.1                            |       | 4.7                        | %          |
| Total Corporate  costs                                                                           | ** ** | **(102.6**  | **)**       | (107.4     | )          | 4.8                             |       | 4.5                        | %          | (106.7     | )          | (0.7                           | )          | (0.7                       | %)         |
| **Pre-tax income from core operations**                                                          | ** ** | **284.6**   |        | 240.2      |       | 44.4                            |       | 18.5                       | %          | 201.5      |       | 38.7                           |       | 19.2                       | %          |
| **Pre-tax  income (loss) from noncore activities**                                               | ** ** | **(59.3**   | **)**       | (97.7      | )          | 38.4                            |       | 39.3                       | %          | (30.3      | )          | (67.4                          | )          | NM                         |       |
| Interest expense                                                                                 | ** ** | **(72.1**   | **)**       | (73.2      | )          | 1.1                             |       | 1.5                        | %          | (55.3      | )          | (17.9                          | )          | (32.4                      | %)         |
| Interest income                                                                                  | ** ** | **7.7**     |        | 7.0        |       | 0.7                             |       | 10.0                       | %          | 3.6        |       | 3.4                            |       | 94.4                       | %          |
| **Income  before Chapter 11 expenses and income taxes**                                          | ** ** | **160.9**   |        | 76.3       |       | 84.6                            |       | 110.9                      | %          | 119.5      |       | (43.2                          | )          | (36.2                      | %)         |
| Chapter 11  expenses, net of interest income                                                     | ** ** | **(86.4**   | **)**       | (49.9      | )          | (36.5                           | )          | (73.1                      | %)         | (30.9      | )          | (19.0                          | )          | (61.5                      | %)         |
| Benefit from  (provision for) income taxes                                                       | ** ** | **5.8**     |        | (8.1       | )          | 13.9                            |       | 171.6                      | %          | (21.3      | )          | 13.2                           |       | 62.0                       | %          |
| **Net income**                                                                                   | ** ** | **$**       | **80.3**    |       | $          | 18.3                            |       | $                          | 62.0       |       | NM         |                           | $          | 67.3                       |       | $ | (49.0 | ) | (72.8 | %) |
| **Key Financial Measures:**                                                                      | ** ** | ** **  | ** **  | ** ** | ** ** | ** **                      | ** ** | ** **                 | ** ** | ** ** | ** ** | ** **                     | ** ** | ** **                 | ** ** |
| **Pre-tax  income from core operations as a percentage of sales:**                               | ** ** | ** **  | ** **  | ** ** | ** ** | ** **                      | ** ** | ** **                 | ** ** | ** ** | ** ** | ** **                     | ** ** | ** **                 | ** ** |
| Grace Davison                                                                                    |       | 12.0        | %           | 11.6       | %          | NM                              |       | 0.4                        | pts        | 11.6       | %          | NM                             |       | 0.0                        | pts        |
| Grace  Construction Products                                                                     |       | 13.3        | %           | 13.5       | %          | NM                              |       | (0.2                       | )pts       | 12.7       | %          | NM                             |       | 0.8                        | pts        |
| Total Core  Operations                                                                           |       | 9.1         | %           | 8.5        | %          | NM                              |       | 0.6                        | pts        | 7.8        | %          | NM                             |       | 0.7                        | pts        |
| Total Core  Operations adjusted for profit sharing of joint ventures(3)                          |       | 9.7         | %           | 9.7        | %          | NM                              |       | 0.0                        | pts        | 8.7        | %          | NM                             |       | 1.0                        | pts        |
| **Pre-tax  income from core operations before depreciation and amortization**                    | ** ** | $           | 398.0       |       | $          | 353.7                           |       | $                          | 44.3       |       | 12.5       | %                              | $          | 322.4                      |       | $ | 31.3 |   | 9.7 | % |
| **As a  percentage of sales**                                                                    |       | 12.8        | %           | 12.5       | %          | NM                              |       | 0.3                        | pts        | 12.5       | %          | NM                             |       | 0.0                        | pts        |
| **Depreciation and amortization**                                                                | ** ** | $           | 113.4       |       | $          | 113.5                           |       | $                          | 0.1        |       | 0.1        | %                              | $          | 120.9                      |       | $ | 7.4 |   | 6.1 | % |
| **Gross  profit percentage (sales less cost of goods sold as a percent of sales)****(4)*****:*** | ** ** | ** **  | ** **  | ** ** | ** ** | ** **                      | ** ** | ** **                 | ** ** | ** ** | ** ** | ** **                     | ** ** | ** **                 | ** ** |
| Grace Davison                                                                                    |       | 28.4        | %           | 29.7       | %          | NM                              |       | (1.3                       | )pts       | 28.5       | %          | NM                             |       | 1.2                        | pts        |
| Grace  Construction Products                                                                     |       | 36.3        | %           | 36.2       | %          | NM                              |       | 0.1                        | pts        | 36.1       | %          | NM                             |       | 0.1                        | pts        |
| Total Grace                                                                                      |       | 31.1        | %           | 31.9       | %          | NM                              |       | (0.8                       | )pts       | 30.9       | %          | NM                             |       | 1.0                        | pts        |
| **Net  Consolidated Sales by Region:**                                                           | ** ** | ** **  | ** **  | ** ** | ** ** | ** **                      | ** ** | ** **                 | ** ** | ** ** | ** ** | ** **                     | ** ** | ** **                 | ** ** |
| North America                                                                                    | ** ** | $           | 1,114.9     |       | $          | 1,158.8                         |       | $                          | (43.9      | )          | (3.8       | %)                             | $          | 1,087.1                    |       | $ | 71.7 |   | 6.6 | % |
| Europe Africa                                                                                    |       | 1,295.7     |        | 1,071.0    |       | 224.7                           |       | 21.0                       | %          | 936.1      |       | 134.9                          |       | 14.4                       | %          |
| Asia Pacific                                                                                     |       | 502.5       |        | 443.2      |       | 59.3                            |       | 13.4                       | %          | 403.2      |       | 40.0                           |       | 9.9                        | %          |
| Latin America                                                                                    |       | 202.1       |        | 153.5      |       | 48.6                            |       | 31.7                       | %          | 143.1      |       | 10.4                           |       | 7.3                        | %          |
| **Total**                                                                                        | ** ** | $           | 3,115.2     |       | $          | 2,826.5                         |       | $                          | 288.7      |       | 10.2       | %                              | $          | 2,569.5                    |       | $ | 257.0 |   | 10.0 | % |

----

NM = Not meaningful

 
| (1) |   | Grace Davison pre-tax  operating income includes minority interest related to the Advanced Refining  Technologies joint venture. |
|-----|--------|----------------------------------------------------------------------------------------------------------------------------------|
| (2) |   | Grace Construction Products  pre-tax operating income includes minority interests related to consolidated  joint ventures.       |
| (3) |   | Reflects the add-back of  minority interests in consolidated entities.                                                           |
| (4) |   | Includes depreciation and  amortization related to manufacturing of products.                                                    |

 

F-55

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**GraceOverview**

 

The following is an overview of our financialperformance for the years ended December 31, 2007, 2006 and 2005.

 

***Net Sales*****—**The following table identifies the year-over-yearincrease or decrease in sales attributable to changes in product volume,product price and/or mix, and the impact of foreign currency translation.

 
| **Net  Sales Variance Analysis** | ** ** | **2007 as a Percentage  Increase (Decrease) from 2006** | ** **    |
|---------------------------------------|------------|---------------------------------------------------------|---------------|
| ** **                            | **Volume** | ** **                                              | **Price/Mix** | ** ** | **Currency  Translation** | ** ** | **Total** | ** ** |
| Grace Davison                         |       | 4.1                                                     | %             | 4.0 | % | 3.7 | % | 11.8 | % |
| Grace Construction Products           |       | 0.8                                                     | %             | 2.8 | % | 3.9 | % | 7.5 | % |
| Net sales                             |       | 2.9                                                     | %             | 3.6 | % | 3.7 | % | 10.2 | % |
| **By Region:**                        | ** ** | ** **                                              | ** **    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| North America                         |       | (5.4                                                    | %)            | 1.4 | % | 0.2 | % | (3.8 | %) |
| Europe Africa                         |       | 8.0                                                     | %             | 4.9 | % | 8.1 | % | 21.0 | % |
| Asia Pacific                          |       | 1.6                                                     | %             | 8.9 | % | 2.9 | % | 13.4 | % |
| Latin America                         |       | 25.0                                                    | %             | 3.5 | % | 3.2 | % | 31.7 | % |

 
| ** **                  | ** ** | **2006 as  a Percentage   Increase (Decrease) from 2005** | ** ** |
|-----------------------------|------------|-----------------------------------------------------------|------------|
|                        | ** ** | **Volume**                                                | ** ** | **Price/Mix** | ** ** | **Currency  Translation** | ** ** | **Total** | ** ** |
| Grace Davison               |       | 5.8                                                       | %          | 2.3 | % | 0.0 | % | 8.1 | % |
| Grace Construction Products |       | 8.3                                                       | %          | 4.9 | % | 0.4 | % | 13.6 | % |
| Net sales                   |       | 6.7                                                       | %          | 3.2 | % | 0.1 | % | 10.0 | % |
| **By Region:**              | ** ** | ** **                                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| North America               |       | 4.0                                                       | %          | 2.3 | % | 0.3 | % | 6.6 | % |
| Europe Africa               |       | 10.1                                                      | %          | 4.8 | % | (0.5 | %) | 14.4 | % |
| Asia Pacific                |       | 7.6                                                       | %          | 1.8 | % | 0.5 | % | 9.9 | % |
| Latin America               |       | 3.1                                                       | %          | 2.5 | % | 1.7 | % | 7.3 | % |

 

Sales for 2007 werefavorably impacted by foreign currency translation, higher volumes and higherselling prices in response to rising raw material costs.  Acquisitions contributed $13.1 million or 0.5percentage points of the sales growth.

 

Sales for 2006 werefavorably impacted by higher volume, selling price increases and productmix.  Acquisitions contributed $13.2million or 0.5 percentage points of the sales growth.

 

**Grace Net Sales**

**($ in millions)**

 

 

***Pre-tax Income fromCore Operations***—Operatingprofit increased year-over-year for the three year period ended December 31,2007 mainly due to improved sales volume growth and selling price increases,partially offset by raw material cost inflation.

 

Corporate costs include corporate functional costs (such as financialand legal services, human resources, communications and informationtechnology), the cost of corporate governance (including directors and officersliability insurance) and pension costs related to both corporate employees andto the effects of changes in assets and liabilities for all of our pensionplans.  Corporate costs have decreased ineach of the last two years primarily due to lower pension costs from the effectof contributions made to defined benefit pension plans.

 

We value our U.S. inventoriesunder the last-in/first- out method, or LIFO, and our non-U.S. inventoriesunder the first-in/first-out, or FIFO, method. LIFO was selected in 1974 forU.S. financial reporting and tax purposes because it generally results in abetter 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 4.6% higher, 6.2% lower and 6.7%higher for the years ended December 31, 2007, 2006, and 2005,respectively. The significant change in inventory valuations between FIFO andLIFO relates primarily to price increases of commodity metals and energy usedin Grace Davison products and production processes.  We attempt to mitigate price volatilitythrough hedging techniques such as layering our 

 

F-56

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required supply underfixed delivery contracts, entering into commodity option and swap contractswith suppliers and financial institutions, and by negotiating sales contractsthat permit the partial pass-through of market price increases for thesevolatile commodity items.

 

We normally attempt tolock in raw material costs through long-term supply contracts and targetedhedging programs. Arrangements and programs can span a few months to severalyears. Major raw materials include natural gas, certain metals, petroleum-basedmaterials and certain industrial chemicals. The actual cost of these rawmaterials can differ significantly from spot prices at any point in time.  Our reported gross profit for the periodspresented has been favorably impacted by certain raw material supplyarrangements and unfavorably affected by others, relative to the then-currentmarket price. We expect that new supply agreements and hedging arrangementswill result in raw material costs that can be significantly favorable orunfavorable compared with prior periods. We attempt to mitigateperiod-over-period commodity-driven cost changes through utilization andcustomer pricing strategies; however, gross profit margins are still likely tobe affected when compared over time.

 

Within both Grace Davisonand Grace Construction Products, we conduct certain business activities invarious countries through joint ventures with unaffiliated third parties.  Minority interest in consolidated entitiesdecreased due to lower earnings of our joint ventures, particularly ART, ourlargest joint venture.  ART’syear-over-year net income can change materially based on refill order patternsof customers and changes in commodity-based raw materials.

 

**Grace**

**OperatingIncome and Margin**

**($in millions)**

 

 

***Pre-tax Income (Loss) from Noncore Activities***—Pre-taxincome (loss) from noncore activities reflects financial matters unrelated toour core operations.  This category ofcosts and income is expected to be volatile as potentially material items areaddressed through our Chapter 11 proceedings and/or as the financialimplications of our legal contingencies become apparent. Some noncoreactivities are shown as separate items on the Consolidated Statement ofOperations.  Those not separately listedare primarily included in selling, general and administrative expenses and inother (income) expense. The table below shows the components of noncoreactivities, and the captions in which each component is presented in theConsolidated Statements of Operations:

** **
| *(In millions)*                                                | ** ** | **2007**  | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------------------------------------|------------|-----------|------------|----------|------------|----------|------------|
| Provision for environmental remediation—vermiculite       | ** ** | **$**     | **(14.4**  | **)**    | $          | (29.4    | )          | $ | (22.3 | ) |
| Provision for environmental remediation—other sites       | ** ** | **(2.6**  | **)**      | (0.6     | )          | (2.7     | )          |
| **Total provision for environmental remediation**              | ** ** | **$**     | **(17.0**  | **)**    | $          | (30.0    | )          | $ | (25.0 | ) |
| Insurance settlements—environmental and  asbestos-related | ** ** | **1.0**   |       | 12.5     |       | 44.5     |       |
| COLI income, net                                               | ** ** | **5.4**   |       | 4.1      |       | 3.5      |       |
| Translation effects—intercompany loan                     | ** ** | **10.5**  |       | 23.1     |       | (35.9    | )          |
| Value of currency contracts                                    | ** ** | **(8.2**  | **)**      | (21.5    | )          | 35.7     |       |
| Other                                                          | ** ** | **0.5**   |       | 3.9      |       | 2.4      |       |
| **Total other (income) expense, net**                          | ** ** | **$**     | **9.2**    |     | $          | 22.1     |       | $ | 50.2 |   |
| Legal defense costs                                            | ** ** | **(19.2** | **)**      | (53.4    | )          | (22.0    | )          |
| D&O insurance cost—portion related to Chapter 11      | ** ** | **(6.0**  | **)**      | (6.1     | )          | (5.7     | )          |
| Asbestos administration                                        | ** ** | **(14.7** | **)**      | (11.6    | )          | (9.9     | )          |
| Postretirement benefit income—divested businesses         | ** ** | **1.9**   |       | 3.5      |       | 3.0      |       |
| Stock appreciation rights                                      | ** ** | **(1.9**  | **)**      | (2.9     | )          | —   |       |
| Other                                                          | ** ** | **(4.5**  | **)**      | (7.9     | )          | (8.4     | )          |
| **Total selling, general and administrative  expenses**        | ** ** | **$**     | **(44.4**  | **)**    | $          | (78.4    | )          | $ | (43.0 | ) |
| Net pension costs—divested businesses                     | ** ** | **(7.1**  | **)**      | (11.4    | )          | (12.5    | )          |
| **Total defined benefit pension expense**                      | ** ** | **$**     | **(7.1**   | **)**    | $          | (11.4    | )          | $ | (12.5 | ) |
| **Total pre-tax income (loss) from noncore  activities**       | ** ** | **$**     | **(59.3**  | **)**    | $          | (97.7    | )          | $ | (30.3 | ) |

 

The change in the pre-taxloss from noncore activities from 2006 to 2007 is attributable primarily to:

 

·                  Lower environmental remediation expenses($17.0 million in 2007 as compared to $30.0 million in 2006) to adjust ourestimate of costs to resolve environmental remediation claims; and

 

·                  Lower legal defense costs of $33.7million related to legal proceedings arising from our former vermiculite miningoperations in Montana (see Note 15 to the Consolidated Financial Statements formore information).

 

F-57

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The change in the pre-taxloss from noncore activities from 2005 to 2006 is attributable primarily to:

 

·                  An increase in legal defense costs of$31.4 million, primarily related to the Montana legal proceeding (see Note 15to the Consolidated Financial Statements for more information), and

 

·                  $44.5 million received from insurance carriers in 2005with respect to coverage for past environmental remediation costs andasbestos-related liability under liquidation arrangements or disputesettlements, as compared with $12.5 million in 2006.

 

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 offoreign currency 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 coincidewith loan 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.  We repaid €73.2 million and€65.9 million of loan principal in 2007 and 2006, respectively.  We recognized contract losses of $10.6million and $21.5 million in 2007 and 2006, respectively, offset by foreigncurrency gains of $13.6 million and $23.1 million in 2007 and 2006,respectively.

 

In November 2007, weexecuted an intercompany loan between our principal U.S. operating subsidiaryand a newly established German subsidiary as part of a legalrestructuring.  The intercompany loan, inthe amount of €250 million, is revalued each period and the change in the valuedue to movements in foreign currency exchange rates is recorded as a componentof other (income) expense in the Consolidated Statements of Operations.  In conjunction with the loan, our U.S.subsidiary entered into a series of foreign currency forward contracts tominimize the impact on earnings from foreign currency movements.  The forward contracts are aligned with thepayment schedule of the intercompany loan, which has annual principal andinterest payments in November 2009 through November 2013.  In 2007, we recognized a foreign currencyexchange loss on the loan of $2.4 million, offset by a contract gain of $2.5million.

 

***Chapter 11Expenses*****—**Althoughwe are unable to precisely measure the impact of the Chapter 11 proceedings onour overall financial performance, we incur significant added costs that aredirectly attributable to operating in Chapter 11. Net Chapter 11 expensesconsist primarily of legal, financial and consulting fees that we, the threecreditors’ committees, the equity committee and the legal representative offuture asbestos claimants, incur, reduced by interest income earned on cash andcash equivalents held by our entities subject to Chapter 11. We pay for thecosts of all committees, and the committees’ advisors.  These costs fluctuate with the activity inour Chapter 11 proceedings.

 

An analysis of Chapter 11costs follows:

 
| **Chapter 11 Expenses, net**

*(In millions)*  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                     | **2007**   | ** ** | **2006**   | ** ** | **2005**   | ** ** |
| **Costs related to:**                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Grace as debtor-in-possession                  | ** ** | **$**      | **62.1**   |       | $          | 39.6       |       | $ | 21.2 |   |
| General Unsecured Committee                    | ** ** | **6.0**    |       | 3.8        |       | 3.1        |       |
| Asbestos Property Damage Committee             | ** ** | **3.0**    |       | 3.8        |       | 7.7        |       |
| Asbestos Personal Injury Committee             | ** ** | **10.8**   |       | 5.7        |       | 3.4        |       |
| Future Asbestos Claims Representative          | ** ** | **10.7**   |       | 4.6        |       | 1.8        |       |
| Equity Committee                               | ** ** | **2.5**    |       | 0.4        |       | 1.2        |       |
| Total expenses                                 | ** ** | **95.1**   |       | 57.9       |       | 38.4       |       |
| Interest earned on filing entity cash balances | ** ** | **(8.7**   | **)**      | (8.0       | )          | (7.5       | )          |
| **Chapter 11 expenses, net**                   | ** ** | **$**      | **86.4**   |       | $          | 49.9       |       | $ | 30.9 |   |

 

Chapter 11 expenses increased due to a higher level of activity in ourbankruptcy proceeding related to claims adjudication and estimation.  We expect that we will experience continuedhigh levels of Chapter 11 expenses in 2008 for the duration of the proceeding.

 

F-58

----

 

We incur numerous otherindirect costs to manage the Chapter 11 proceedings such as: management timedevoted 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***—Interestexpense decreased in 2007 as compared to 2006. The change in interest expense is attributable to reductions in the primerate and reduced interest accruals in the second half of 2007 for certainpre-petition obligations, partially offset by the effects of compoundinginterest on certain liabilities subject to compromise over the course of theChapter 11 proceeding.  Interest expenseincreased in 2006 as compared to 2005 due to a change in the rate of intereston pre-petition bank debt (from a fixed rate to a prime rate) and the effectsof compounding interest.  Our plan ofreorganization states that each holder of an allowed general unsecured claimshall be paid in full, pluspost-petition interest. Post-petitioninterest shall accrue through the date of payment as follows:

 

·                  For the holders of pre-petition bankcredit facilities, beginning January 1, 2006, we agreed to pay interest onpre-petition bank debt at the prime rate, adjusted for periodic changes, andcompounded quarterly. The effective rates on pre-petition bank debt for thetwelve months ended December 31, 2007, 2006, and 2005 were 8.1%, 8.0%, and6.1%, respectively.

 

·                  For the holders of claims who, but forthe Chapter 11 filing, would be entitled under a contract or otherwise toaccrue or be paid interest on such claim in a non-default (or non-overduepayment) situation under applicable non-bankruptcy law, the rate provided inthe contract between the Grace entity and the claimant or such rate as mayotherwise apply under applicable non-bankruptcy law.

 

·                  For all other holders of allowed generalunsecured claims, at a rate of 4.19% per annum, compounded annually, unlessotherwise negotiated during the claim settlement process.

 

The average effectiveinterest rates on pre-petition obligations for 2007, 2006, and 2005 were 6.3%,6.7%, and 5.2%, respectively.  Suchinterest, which under the plan of reorganization is payable 85% in cash and 15%in Grace common stock, will not be paid until the plan of reorganization isconfirmed and funded.

 

***Income Taxes*****—**Income tax provision at the federal corporate rateof 35% for the years ended December 31, 2007, 2006, and 2005 was $26.1 million,$9.2 million, and $31.0 million, respectively. Our recorded tax benefit of $5.8million for 2007 reflects a net reduction from the statutory tax benefit due to(1) tax expense of $20.1 million related to the deferred tax liabilityassociated with the cash value of corporate owned life insurance policies inrecognition of the fact that the policies would likely be surrendered as partof Grace’s Chapter 11 financing plan, (2) a tax benefit in the amount of$44.8 million resulting from the reassessment of the deferred tax liabilitybalance in relation to future repatriations of foreign earnings, (3) a taxbenefit of $11.2 million related to the settlement of a 1999 tax issueinvolving the deduction of capital losses (see Note 4 to the Consolidated FinancialStatements), (4) recognition of the favorable impact of tax rate changesin certain foreign jurisdictions on deferred tax balances, and (5) afavorable reassessment regarding the recoverability of recorded tax assets andother changes to the accrual for uncertain tax positions (see Note 4 to theConsolidated Financial Statements).  In2006, our recorded tax provision of $8.1 million reflected a net reduction fromthe statutory tax provision due to (1) recognition of tax benefits by anon-U.S. subsidiary prompted by published final guidance on the deductibilityof certain expenses, (2) a final settlement offer issued by the UnitedStates Internal Revenue Service, (3) a favorable reassessment regardingthe recoverability of recorded tax assets, and (4) an increase in the taxprovision related to future repatriation of earnings from foreign subsidiaries.

 

As part of our evaluationand planning for the funding requirements of our plan of reorganization, werecognize that the financing of our plan of reorganization will involve cashand financing from non-U.S. subsidiaries. Accordingly, we implemented arepatriation plan in the fourth quarter of 2007 resulting in the U.S. parentcompany receiving payments of $442 million of which $382 million is representedby intercompany loans receivable at year-end. We maintain a deferred liability for U.S. federal, state, local andforeign income taxes related to future repatriations of approximately $10million and have not provided for U.S. federal, state, local and foreigndeferred income taxes on approximately $675 million of undistributed earningsof foreign subsidiaries that, based upon our current outlook and assumptionswith respect to the amount of 

 

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bankruptcy claims andforeign liquidity needs, we expect will be retained indefinitely by suchsubsidiaries.

 

We also have significantdeferred tax assets primarily associated with tax credit carryforwards and withasbestos and environmental liabilities that would reduce taxable income infuture periods as such liabilities are funded. In addition, we have deferredtax liabilities resulting primarily from deferred income, plant and equipment,and pension assets that may result in taxable amounts in future periods.Valuation allowances have been established and are maintained for certaindeferred tax assets that exceeded our analysis of the amounts reasonablyexpected to be realized in the future.

 

Because of our currentand future state tax profile and more restrictive laws governing utilization oftax loss carryforwards, we maintain a full valuation allowance against thebenefit of future state income tax deductions and loss carryforwards. Thevaluation allowances relating to future state tax benefits from the use ofoperating losses was reduced during 2007 by $25.9 million due to an equalreduction in the amount of operating losses that can be used to reduce futurestate taxable income. Foreign loss carryforwards and related valuationallowances increased by a net $6.4 million due primarily to the impact ofchanges in foreign exchange rates.

 

The net decrease in thevaluation allowance brings our total valuation allowance at the end of 2007 to$143.0 million on net tax assets of $906.6 million.  The total valuation allowance covers (1) statetax deductions with a tax value of approximately $121.0 million, which we donot expect to realize in reduced taxes due to timing limitations, and (2) foreignloss carryforwards with a tax value of $22.0 million, which are not reasonablyexpected to be utilized. Based upon future anticipated results, we haveconcluded that it is more likely than not that we will realize the remainingnet recorded deferred tax asset of $763.6 million over time.  A large proportion of such balance (primarilyassociated with asbestos- and environmental- related liabilities) is not yettime-limited as it pertains to liabilities not yet funded. Our recovery of suchnet tax assets could be materially affected by developments in our Chapter 11proceeding.

 

**OperatingSegment Overview**

 

Thefollowing is an overview of financial measures of the performance of ouroperating segments for the three years ended December 31, 2007, 2006 and2005.

 

***Grace Davison***

 
| **Net Sales by Region***(In millions)*        | ** ** | **2007**            | ** **  | **2006**            | ** ** | **2005**            | ** ** |
|-----------------------------------------------|------------|---------------------|-------------|---------------------|------------|---------------------|------------|
| North America                                 | ** ** | **$**               | **578.4**   |                | $          | 599.9               |       | $ | 587.0 |   |
| Europe Africa                                 | ** ** | **915.6**           |        | 761.1               |       | 667.4               |       |
| Asia Pacific                                  | ** ** | **362.7**           |        | 324.4               |       | 297.5               |       |
| Latin America                                 | ** ** | **152.5**           |        | 111.9               |       | 111.3               |       |
| **Total Grace Davison**                       | ** ** | **$**               | **2,009.2** |                | $          | 1,797.3             |       | $ | 1,663.2 |   |
| ** **                                    | ** ** | ** **          | ** **  | ** **          | ** ** | ** **          |       |
| **Percentage Change in  Net Sales by Region** | ** ** | **2007  vs.  2006** | ** **  | **2006  vs.  2005** | ** ** | **2005  vs.  2004** |       |
|                                          |       |                |        |                |       |                |       |
| North America                                 | ** ** | **(3.6**            | **%)**      | 2.2                 | %          | 9.2                 | %          |
| Europe Africa                                 | ** ** | **20.3**            | **%**       | 14.0                | %          | 11.9                | %          |
| Asia Pacific                                  | ** ** | **11.8**            | **%**       | 9.0                 | %          | 19.2                | %          |
| Latin America                                 | ** ** | **36.3**            | **%**       | 0.5                 | %          | 26.9                | %          |
| **Total Grace Davison**                       | ** ** | **11.8**            | **%**       | 8.1                 | %          | 13.0                | %          |

 

*Recent Acquisitions/Divestitures*

 

SeeNote 5 to the Consolidated Financial Statements for a description ofacquisitions and divestitures completed in 2007 and 2006.

 

*Sales*

 

Grace Davison operatingsegment sales are reported in the following product groups:

 

·                  RefiningTechnologies—catalysts and chemical additives used by petroleum refineries,where sales were up 13.0% and 7.9% in 2007 and 2006, respectively, from theprior years.

 

·                  MaterialsTechnologies—engineered materials, coatings and sealants used in numerous industrial,consumer and packaging applications, where sales were up 11.0% and 7.1% in 2007and 2006, respectively, from the prior years; and

 

·                  SpecialtyTechnologies—highly specialized catalysts and materials used in unique orproprietary applications and markets, where sales were up 9.7% and 10.8% in2007 and 2006, respectively, from the prior years.

 

Thekey factors contributing to the Grace Davison sales increase over thethree-year period were:

 

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·                  Increaseddemand for catalysts used by petroleum refiners, particularly FCC catalystsused to produce clean fuels, hydroprocessing catalysts that upgradelow-quality, heavy crude oil, and a variety of industrial, consumer andpackaging products.

 

·                  A generallymore favorable pricing environment for our products as customers acceptedpricing actions to offset escalating raw material costs.

 

·                  Pass-throughof higher costs for commodity metals and surcharges to partially offsetinflation in certain commodity metals.

 

European sales increasedover the three-year period due to growth in volume, higher selling prices inresponse to raw material inflation, and favorable effects of currencymovements.  North American sales wereunfavorably impacted by re-order patterns for certain hydroprocessing units andthe loss of one customer in Canada.  AsiaPacific and Latin America sales increased with strong volume growth fromproduct line portfolio extensions to these regions.

 

**Grace Davison Net Sales**

**($ in millions)**

 

###### *OperatingIncome and Margin*

###### * *

·                  Pre-tax operating income for the GraceDavison segment increased over the prior year, with operating margins at 12.0%compared with 11.6% for the prior year. Full year operating results reflect higher sales to both refining and industrialend markets, higher selling prices which offset higher raw material costs, andcost savings from productivity initiatives, partially offset by higher rawmaterial costs that have increased approximately 11% year-over-year.

 

**GraceDavison**

**OperatingIncome and Margin**

**($in millions)**

 

*** ***

***Grace Construction Products***

** **
| **Net Sales by Product Group***(In millions)*        | ** ** | **2007**            | ** **  | **2006**            | ** ** | **2005**            | ** ** |
|------------------------------------------------------|------------|---------------------|-------------|---------------------|------------|---------------------|------------|
| Construction Chemicals                               | ** ** | **$**               | **744.3**   |                | $          | 694.0               |       | $ | 608.0 |   |
| Building Materials                                   | ** ** | **361.7**           |        | 335.2               |       | 298.3               |       |
| **Total Grace Construction Products**                | ** ** | **$**               | **1,106.0** |                | $          | 1,029.2             |       | $ | 906.3 |   |
| ** **                                           | ** ** | ** **          |        |                |       |                |       |
| **Percentage Change in  Net Sales by Product Group** | ** ** | **2007  vs.  2006** | ** **  | **2006  vs.  2005** | ** ** | **2005  vs.  2004** |       |
| Construction Chemicals                               | ** ** | **7.2**             | **%**       | 14.1                | %          | 16.4                | %          |
| Building Materials                                   | ** ** | **7.9**             | **%**       | 12.4                | %          | 12.1                | %          |
| **Total Grace Construction Products**                | ** ** | **7.5**             | **%**       | 13.6                | %          | 14.9                | %          |

 

*Sales*

 

Salesof this operating segment are grouped along geographic regions as follows:

 

·                  Americas—productssold to customers in North, Central and South America, where sales were down2.4% and up 12.9% in 2007 and 2006, respectively, from the prior years;

 

·                  Europe—productssold to customers in Eastern and Western Europe, the Middle East, Africa andIndia, where sales were up 22.9% and 15.4% in 2007 and 2006, respectively, fromthe prior years; and

 

·                  Asia—productssold to customers in Asia (excluding India), Pacific Rim countries, Australiaand New Zealand, where sales were up 17.0% and 12.1% in 2007 and 2006,respectively, from the prior years.

 

The key factorscontributing to the increase in sales from our Grace Construction Productsoperating segment over the three-year period were:

 

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·                  Strategic focus on regional managementstructure and investment in operations drove positive results in growth areas;

 

·                  Higher volume of products sold intocommercial and infrastructure construction in Europe, the Middle East, AsiaPacific, and Latin America, where economic activity was favorable;

 

·                  Higher selling prices in all majorgeographic regions and product groups; and

 

·                  Favorable translation effects from salesdenominated in foreign currencies.

 

Sales growth wasattributable to growth in Europe and Asia, offset by softness in the Americasfrom a nearly 28% decline in housing starts in the United States.

 

**GraceConstruction Products Net Sales**

**($in millions)**

 

*Operating Income and Margin*

 

Grace ConstructionProducts 2007 operating income increased compared with 2006, reflecting highersales volume globally, selling price increases, and positive results fromproductivity and cost containment initiatives, which more than offset anapproximate 5% increase in raw material costs. Operating margin of 13.3% was about even with last year despite lowersales volumes in the United States.

 

**GraceConstruction Products**

**OperatingIncome and Margin**

**($in millions)**

 

*** ***

***Operating Returns on Assets Employed*****—**The following tables set forth the GraceDavison and Grace Construction Products total asset position and pre-tax returnon average total assets as of December 31, 2007, 2006 and 2005.  We use the measure pre-tax return on averagetotal assets as an indicator of our efficiency in using our assets andallocating our resources to generate earnings. We devote significantly higher capital to the manufacture of GraceDavison products than to the manufacture of Grace Construction Productsproducts. Conversely, non-manufacturing costs, particularly selling expenses,are significantly higher for Grace Construction Products than for GraceDavison.

 
| **Grace Davison***(In millions)*       | ** ** | **2007**   | ** **  | **2006** | ** ** | **2005** | ** ** |
|----------------------------------------|------------|------------|-------------|----------|------------|----------|------------|
| Trade receivables                      | ** ** | **$**      | **295.9**   |     | $          | 234.8    |       | $ | 227.0 |   |
| Inventory                              | ** ** | **239.7**  |        | 230.5    |       | 214.1    |       |
| Other current assets                   | ** ** | **31.5**   |        | 25.7     |       | 32.4     |       |
| Total current assets                   | ** ** | ** ** | **567.1**   |     | 491.0      |     |       | 473.5 |   |
| Properties and equipment, net          | ** ** | **484.7**  |        | 463.3    |       | 449.9    |       |
| Goodwill and other intangible assets   | ** ** | **116.4**  |        | 116.3    |       | 105.3    |       |
| Other assets                           | ** ** | **17.4**   |        | 2.0      |       | 3.0      |       |
| Total assets                           | ** ** | **$**      | **1,185.6** |     | $          | 1,072.6  |       | $ | 1,031.7 |   |
| Pre-tax return on average total assets | ** ** | **21.1**   | **%**       | 19.2     | %          | 18.4     | %          |

 

Grace Davison’s totalassets increased by $113.0 million in 2007 compared with the prior year. Theincrease was primarily due to higher trade receivables from strong 2007 fourthquarter sales, coupled with $50.7 million in higher foreign currencytranslation reflecting a weaker U.S. dollar period over period.

 

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| **Grace****Construction Products***(In millions)* | ** ** | **2007**   | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| Trade receivables                                 | ** ** | **$**      | **201.2**  |     | $          | 190.7    |       | $ | 174.0 |   |
| Inventory                                         | ** ** | **63.9**   |       | 54.1     |       | 64.2     |       |
| Other current assets                              | ** ** | **9.5**    |       | 6.9      |       | 7.6      |       |
| Total current assets                              | ** ** | ** ** | **274.6**  |     |       | 251.7    |       |   | 245.8 |   |
| Properties and equipment, net                     | ** ** | **194.6**  |       | 181.0    |       | 167.2    |       |
| Goodwill and other intangible assets              | ** ** | **88.2**   |       | 85.3     |       | 86.4     |       |
| Other assets                                      | ** ** | **4.2**    |       | 3.2      |       | 3.5      |       |
| Total assets                                      | ** ** | **$**      | **561.6**  |     | $          | 521.2    |       | $ | 502.9 |   |
|                                              | ** ** | ** ** |       |     |       |     |       |
| Pre-tax return on average total assets            | ** ** | **26.1**   | **%**      | 26.2     | %          | 22.8     | %          |

 

Grace ConstructionProducts’ total assets increased by $40.4 million in 2007 compared with theprior year. The increase was primarily due to higher properties and equipmentfrom increased capital investment in new production plants, coupled with $24.7million in higher foreign currency translation due to a weaker U.S. dollarperiod over period.

 

**Noncore Liabilities**

 

We have a number offinancial 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.

 

The following tablesummarizes our net noncore liabilities at December 31, 2007 and December 31,2006:

 
| **Net****Noncore Liabilities***(In millions)* | ** ** | **December 31,  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                     | ** ** | **(368.6**                  | **)**        | (361.1                      | )          |
| Postretirement benefits                       | ** ** | **(84.0**                   | **)**        | (72.7                       | )          |
| Income taxes                                  | ** ** | **(89.3**                   | **)**        | (141.2                      | )          |
| Retained obligations and other                | ** ** | **(36.2**                   | **)**        | (23.3                       | )          |
| **Net noncore liability**                     | ** ** | **$**                       | **(1,778.1** | **)**                       | $          | (1,798.3 | ) |

 

The resolution of most ofthese noncore recorded and contingent liabilities will be determined throughthe Chapter 11 proceedings. We cannot predict with any certainty how, and forwhat amounts, any of these contingencies will be resolved. The amounts of theseliabilities as ultimately determined through the Chapter 11 proceedings couldbe materially different from amounts we recorded at December 31, 2007.

 

**Grace 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. Ourplan 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.

 

On November 5, 2007,the committee representing asbestos personal injury claimants and therepresentative of future asbestos claimants filed a proposed plan ofreorganization with the bankruptcy court. The filing did not include a disclosure statement, trust distributionprocedures, exhibits or other supporting documents.  Under the terms of our proposed plan ofreorganization, a trust would be established to which all pending and futureasbestos-related claims would be channeled for resolution.  Under the terms of the plan of reorganizationproposed by the committee representing asbestos personal injury claimants andthe representative of future asbestos claimants, a trust would be establishedto which all pending and future asbestos-related personal injury claims wouldbe channeled for resolution.  A plan ofreorganization, including either of these plans and

 

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any other plan that maybe filed in the future by a party-in-interest, can become effective only aftera vote of eligible creditors and with the approval of the bankruptcy court andthe U.S. District Court for the District of Delaware.

 

See Note 2 to theConsolidated Financial Statements for more information on these plans ofreorganization.

 

***Risks of Our Plan of Reorganization***—We intend to address all pending andfuture asbestos-related claims and all other pre-petition claims as outlined inour plan of reorganization. However, we may not be successful in obtainingapproval of our plan of reorganization by the bankruptcy court.  Instead, a materially different plan of reorganizationmay ultimately be approved and, under the ultimate plan of reorganization, theinterests of our shareholders could be substantially diluted or cancelled. Thevalue of Grace common stock following a plan of reorganization, and the extentof any recovery by non-asbestos-related creditors, will depend principally onthe amount of our asbestos-related liability under a confirmed plan ofreorganization.

 

Our proposed plan ofreorganization assumes several fundamental conditions including that:

 

·                  Our asbestos-related liabilities can beresolved at a net present value cost of no more than $1,700 million, includingpre-petition asbestos-related contractual settlements and judgments, allproperty damage claims, all claims related to our former Zonolite AtticInsulation product, and all pending and future personal injury claims; and

 

·                  The benefit of assets from litigationsettlement agreements with Sealed Air Corporation and its subsidiary, Cryovac, Inc.,and Fresenius Medical Care Holdings, Inc. will be available to satisfyliabilities under our plan of reorganization.

 

There can be no guaranteethat 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, otherthan that reflected in our 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 our plan of reorganization as facts and circumstanceswarrant.

 

The following tablesummarizes our estimated claims payable, by class of claim, at the date ofemergence and those claims that will be reinstated, as of December 31,2007.

 

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**Analysis of Claims and Interest inPlan of Reorganization—Amounts as of December 31, 2007**

*(In millions) (Unaudited)*

 
| ** **                                                 | ** ** | **Estimated Effective Date Liabilities** | ** **  | ** **   | ** ** | **Total Liabilities** | ** ** |
|------------------------------------------------------------|------------|------------------------------------------|-------------|--------------|------------|-----------------------|------------|
| **Description of Claims**                                  | ** ** | **Base Claim**                           | ** **  | **Interest** | ** ** | **Total**             | ** ** | **Reinstated Liabilities** | ** ** | **Subject to Compromise** | ** ** |
| ** **                                                 | ** ** | ** **                               | ** **  | ** **   | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Administrative Expense Claims:**                         | ** ** | ** **                               | ** **  | ** **   | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Environmental—reserve for owned sites                 |       | $                                        | 2.3         |         | $          | —                |       | $ | 2.3 |   | $ | 44.3 |   | $ | 46.6 |   |
| Special pension arrangements                               |       | 14.8                                     |        | —       |       | 14.8                  |       | — |   | 14.8 |   |
| Leases                                                     |       | —                                   |        | —       |       | —                |       | 4.6 |   | 4.6 |   |
| Letter of credit fees                                      |       | 3.0                                      |        | —       |       | 3.0                   |       | — |   | 3.0 |   |
| **Total  Administrative Expense Claims**                   | ** ** | **20.1**                                 | ** **  | **—**   | ** ** | **20.1**              | ** ** | **48.9** | ** ** | **69.0** | ** ** |
| ** **                                                 | ** ** | ** **                               | ** **  | ** **   | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Priority Tax Claims**                                    | ** ** | **2.7**                                  | ** **  | **4.2**      | ** ** | **6.9**               | ** ** | **82.4** | ** ** | **89.3** | ** ** |
| ** **                                                 | ** ** | ** **                               | ** **  | ** **   | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Class 3—Unsecured Employee-Related Claims**    | ** ** | ** **                               | ** **  | ** **   | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Postretirement health benefits                             |       | —                                   |        | —       |       | —                |       | 77.2 |   | 77.2 |   |
| Special pension arrangements                               |       | —                                   |        | —       |       | —                |       | 83.9 |   | 83.9 |   |
| **Total  Class 3 Claims**                             | ** ** | **—**                               | ** **  | **—**   | ** ** | **—**            | ** ** | **161.1** | ** ** | **161.1** | ** ** |
| ** **                                                 | ** ** | ** **                               | ** **  | ** **   | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Classes 6, 7, and 8—Asbestos Claims**               | ** ** | ** **                               | ** **  | ** **   | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Asbestos PI-SE, PI-AO, and PD claims                       | ** ** | **1,483.0**                              | ** **  | **—**   | ** ** | **1,483.0**           | ** ** | **130.0** | ** ** | **1,613.0** | ** ** |
|                                                       | ** ** | ** **                               | ** **  | ** **   | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Class 9—General Unsecured Claims**             | ** ** | ** **                               | ** **  | ** **   | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revolving credit facility—bank debt                   |       | 500.0                                    |        | 283.0        |       | 783.0                 |       | — |   | 783.0 |   |
| Letters of credit (drawn) / capital leases                 |       | 23.6                                     |        | 3.3          |       | 26.9                  |       | — |   | 26.9 |   |
| **Total  Debt / LOCs / Capital Leases**                    | ** ** | **523.6**                                | ** **  | **286.3**    | ** ** | **809.9**             | ** ** | **—** | ** ** | **809.9** | ** ** |
| ** **                                                 | ** ** | ** **                               | ** **  | ** **   | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Environmental, Accounts Payable, Litigation and  Other** | ** ** | **421.4**                                | ** **  | **61.8**     | ** ** | **483.2**             | ** ** | **52.0** | ** ** | **535.2** | ** ** |
| ** **                                                 | ** ** | ** **                               | ** **  | ** **   | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Total  Class 9 Claims**                             | ** ** | **945.0**                                | ** **  | **348.1**    | ** ** | **1,293.1**           | ** ** | **52.0** | ** ** | **1,345.1** | ** ** |
| ** **                                                 | ** ** | ** **                               | ** **  | ** **   | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Total Claims**                                           | ** ** | **$**                                    | **2,450.8** | ** **   | **$**      | **352.3**             | ** ** | **$** | **2,803.1** | ** ** | **$** | **474.4** | ** ** | **$** | **3,277.5** | ** ** |

 

There are no Class 2(Secured Claims), Class 4 (Workers’ Compensation Claims) or Class 5(Intercompany Claims) outstanding as of December 31, 2007.

 

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*** ***

***Proforma Financial Information***—The unaudited proforma financialinformation presented below reflects the accounting effects of our proposedplan of reorganization (1) as if it were put in effect on the date of ourmost recent consolidated balance sheet—December 31, 2007, and (2) asif it were in effect for the full year ended December 31, 2007. Proformaadjustments for tax effects have been applied at a 35% tax rate.  The proforma financial information includedherein may not be consistent with our plan of reorganization documents filed onJanuary 13, 2005 due to subsequent changes in operations and accountingestimates. Such proforma financial statements reflect how our assets,liabilities, equity and income would be affected by our plan of reorganizationas follows:

 

A.           Borrowings Under New Debt Agreements andContingencies

 

Our plan of reorganization reflects the assumption that $1,000 millionin debt financing will be available to fund settled claims payable at theeffective date of the plan of reorganization (approximately $800 million) andto provide working capital (approximately $200 million) for continuingoperations.  No such financing currently existsbut, we expect, based on discussions with prospective lenders, our sustainedlevel of core operations while we have operated under Chapter 11, and publiclyavailable information regarding funding available to comparable companies, thatwe could obtain financing at this level before our 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 ourplan 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

 

Our plan of reorganization reflects the value, in the form of cash andsecurities, expected to be realized under litigation settlement agreements asfollows: $115.0 million of cash from Fresenius; and, $1,087.4 million ofestimated value from Cryovac, Inc., a subsidiary of Sealed Air (calculatedas of December 31, 2007) in the form of $512.5 million of cash plusaccrued interest at 5.5% from December 21, 2002 compounded annually(approximately $158.4 million), and 18 million shares of Sealed Air common stockvalued at $23.14 per share (approximately $416.5 million). Tax accounts havebeen adjusted to reflect the satisfaction of our recorded liabilities by way ofthese third-party agreements. The Fresenius settlement amount will be payabledirectly to Grace and will be accounted for as income; however, we havepresented the amount of the settlement as a proforma balance sheet adjustmentonly in order to avoid distorting the predictive value of the proformastatement of operations with this one-time gain. Payments under the Sealed Airsettlement will be paid directly to the asbestos trust by Cryovac and will beaccounted for as satisfaction of a portion of our recorded asbestos-relatedliability and a credit to shareholders’ equity. Both the Sealed Air and Freseniussettlements are subject to the fulfillment of specified conditions. The $(40.3)million adjustment to deferred income taxes in the proforma balance sheetrepresents the tax impact of the $115.0 million Fresenius settlement.  The $(380.6) million adjustment to deferredincome taxes represents the tax impact of the $1,087.4 million Sealed Airsettlement. Proforma adjustments related to the Fresenius and Sealed Airsettlements have been denoted by the capital letter **“B”** in the proforma balance sheet presented below.

 

C.             Payment of Pre-Petition Liabilities

 

The plan of reorganization reflects the transfer of funds andsecurities to settle estimated obligations payable under our plan ofreorganization at the effective date. We would be required to issue approximately22.5 million shares of Grace common stock, based on the closing price per shareof $26.18 on December 31, 2007, for total proceeds of $589.6 million, andutilize cash of $1,176.1 million to settle these estimated obligations (see theadjustments denoted by the capital letter **“C”**in the proforma balance sheet below). The following table provides a calculation of the proforma shareissuance:

 

F-66

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| **Proforma Issuance of Shares*******($ and shares in millions) (Unaudited)*                  | ** ** | **December 31,  2007** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|
|                                                                                              |       |                        |       |
| Payment of asbestos claims                                                                        |       | $                           | 482.6      |   |
| Less: portion related to general unsecured claims                                                 |       | (87.0                       | )          |
|                                                                                              |       | $                           | 395.6      |   |
| Value of unsecured claims paid with equity (15%)                                                  |       | 194.0                       |       |
| Equity value distributable at emergence (22.5  million shares)                                    |       | $                           | 589.6      |   |
| Equity value distributable post-emergence for PI-AO  claims (5.0 million shares)                  |       | 130.0                       |       |
| Total value of equity to satisfy claims                                                           |       | $                           | 719.6      |   |
| Closing price of shares at 12/31/07                                                               |       | $                           | 26.18      |   |
| Proforma shares to satisfy asbestos and general  unsecured claims and post-emergence PI-AO claims |       | 27.5                        |       |
| Add: Shares issuable upon exercise of in-the-money  stock options                                 |       | 1.9                         |       |
| **Proforma issuance of shares**                                                                   |       | 29.4                        |       |

 

In our proforma presentation, we have assumed that our emergence frombankruptcy will give rise to 1) the payment of pre-petition liabilities, 2) theFresenius/Sealed Air payments, and 3) the securing of emergence financing bynon-U.S. subsidiaries and payment of dividends as further described below.

 

The payments result in changing the nature of our tax assets fromreserves for tax-deductible obligations such as asbestos claims andenvironmental claims to time-limited tax net operating losses (see theadjustments denoted by the capital letter **“D”**in the proforma balance sheet below).  Wehave assumed non-asbestos and pass-through liabilities will be paid in cashwhen due.  A portion of the fundingrequired to meet our emergence obligations will involve repatriating moniesthrough a dividend from certain non-U.S. subsidiaries.  We believe that the reserve related torepatriation of funds presently recorded will be adequate to absorb the U.S.tax effects of this dividend, assuming that we employ (as intended) certain taxplanning strategies to preserve our net operating losses.

 

The following table presents a detailed description of the proforma taxeffects of these payments on the balance of both (i) net operating losscarryforwards and (ii) temporary differences, net of valuation allowance.

 
| **Summary of Change in    Deferred Tax Asset Balances***(In millions)**(Unaudited)* | ** ** | **Tax Effects of  Net Operating  Loss Carry-  Forwards** | ** ** | **Temporary  Differences, Net  of Valuation  Allowance** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                                                    | ** ** | ** **                                               | ** ** | ** **                                                    | ** ** |
| **December 31, 2007 Balance As Reported**                                                |       | $                                                        | —     |                                                          | $          | 767.5 |   |
| **Proforma Adjustments:**                                                                     | ** ** | ** **                                               | ** ** | ** **                                                    | ** ** |
| Contingent liabilities                                                                        |       | —                                                   |       | 26.3                                                          |       |
| Fresenius payment                                                                             |       | (40.3                                                    | )          | —                                                        |       |
| Sealed Air payment                                                                            |       | —                                                   |       | (380.6                                                        | )          |
| **Emergence Payments & Other:**                                                      | ** ** | ** **                                               | ** ** | ** **                                                    | ** ** |
| Accrued interest                                                                              |       | 70.7                                                     |       | (70.7                                                         | )          |
| Asbestos claims                                                                               |       | 168.9                                                    |       | (168.9                                                        | )          |
| Environmental claims                                                                          |       | 105.2                                                    |       | (105.2                                                        | )          |
| Special pensions                                                                              |       | 5.2                                                      |       | (5.2                                                          | )          |
| Insurance recovery                                                                            |       | (175.0                                                   | )          | 175.0                                                         |       |
| Repatriation of foreign earnings                                                              |       | (10.0                                                    | )          | 10.0                                                          |       |
| Other                                                                                         |       | 10.3                                                     |       | (10.3                                                         | )          |
| Subtotal                                                                                      |       | 175.3                                                    |       | (175.3                                                        | )          |
| **December 31, 2007 Proforma Balance**                                                   |       | $                                                        | 135.0      |                                                          | $          | 237.9 |   |

 

D.            Proforma Consolidated Statement of Operations andCapital Structure

 

The proforma income adjustments to our December 31, 2007Consolidated Statements of Operations consist of:

 

·                  The elimination of all recorded charges and expenses directly relatedto Chapter 11, as these costs would not continue after effectiveness of our planof reorganization, and the elimination of provisions recorded for environmentalremediation obligations as we expect this risk would be resolved under our planof reorganization (these eliminations are denoted by the capital letter **“E”** in the proforma statements ofoperations below);

 

·                  Adjustments to reduce Selling, General and Administrative Expenses and OtherIncome to eliminate noncore legal expenses, and noncore insurance incomerelated to asbestos litigation, as the liabilities to which these noncoreactivities relate would be resolved as part of our plan of reorganization(these adjustments are denoted by the letter **“F”**in the proforma statements of operations below);

 

·                  The elimination of interest expense associated with pre-petition bankdebt, and the addition of interest expense associated with the new $1,000million in financing as discussed above, which results in the net change ininterest expense denoted by the adjustments marked by the letter **“G”** in the proforma statements ofoperations below;

 

F-67

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

 

·                  The addition of new shares of Grace common stock related to the assumedfinancing of our plan of reorganization (see the adjustments denoted by thecapital letter **“I”** in the proformastatements of operations below).

 

Proforma expenses reflect an assumed 7.4% average interest rate onoutstanding borrowings, based on market conditions as of December 31,2007.  A hypothetical 1/8 percentvariance in interest rates would increase or decrease our proforma net incomeby approximately $0.7 million for the year ended December 31, 2007.

 

For purposes of proforma earnings per share and proforma share capital,we used the trading price of $26.18 per share as of December 31, 2007 forcalculating issued and outstanding shares. At this per share valuation, weassume that 22.5 million shares will be issued at the effective date of ourplan of reorganization to fund asbestos and general unsecured claims, 5.0million shares would be issuable upon exercise of warrants to satisfy ourestimate of PI-AO claims, and 1.9 million shares would be issued upon exerciseof in-the-money stock options. We use the year-end trading value solely to showproforma Consolidated Statements of Operations. This trading value may not beindicative of the actual trading value of Grace common stock following theeffective date of our plan of reorganization. If our distributable value per share at the effective date of our planof reorganization is at or below approximately $8.00 per share, we would berequired to revalue our balance sheet for a change in control. (The tradingvalue of Grace common stock over the twelve-month period ended December 31,2007 was between $18.86 and $30.65 per share.) These proforma financialstatements reflect no change in assets or income related to this potentialaccounting outcome.

 

E.              Non-asbestos Contingencies

 

The accompanying proforma financial information assumes allnon-asbestos related contingencies (including environmental, tax and civil andcriminal litigation) are settled for recorded amounts as of December 31,2007.  Certain liabilities are assumed tobe paid at the effective date of our plan of reorganization based on ourestimate of amounts that will be determinable and payable. The remainder, whichwould also be subject to our plan of reorganization, if approved, is assumed tobe paid subsequent to the effective date of our plan of reorganization asamounts are either not due until a later date or will be determined throughpost-effective-date litigation. The ultimate value of such claims may changematerially as Chapter 11 and other legal proceedings further define ournon-asbestos related obligations.

 

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| *** ***                                                                                                                       | ** ** | ** **                               | ** ** | **Proforma Adjustments**                                       | ** ** | ** ** | ** **                             | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|----------------------------------------------------------------|------------|------------|----------------------------------------|------------|
| **W. R.  Grace & Co and Subsidiaries**

**Proforma  Condensed Consolidated  Balance Sheet**

*(In  millions) (Unaudited)* | ** ** | **December 31,  2007  As Reported** | ** ** | **Borrowings  Under  New Debt  Agreements and  Contingencies** | ** ** | ** ** | **Sealed  Air/Fresenius  Settlements** | ** ** | ** ** | **Payment  of Pre-  Petition Liabilities** | ** ** | ** ** | **December 31,  2007  Proforma** | ** ** |
| **ASSETS**                                                                                                                         | ** ** | ** **                               | ** ** | ** **                                                     | ** ** | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Current Assets**                                                                                                                 | ** ** | ** **                               | ** ** | ** **                                                     | ** ** | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash and cash equivalents                                                                                                          |       | $                                        | 480.5      |                                                           | $          | 800.0      | ** **                             | **A**      | $ | 115.0 |   | **B** | $ | (1,176.1 | ) | **C** | $ | 219.4 |   |
| Other current assets                                                                                                               |       | 1,098.0                                  |       | —                                                         |       |       | —                                 |       |   | — |   |   | 1,098.0 |   |
| **Total Current  Assets**                                                                                                          |       | 1,578.5                                  |       | 800.0                                                          |       |       | 115.0                                  |       |   | (1,176.1 | ) |   | 1,317.4 |   |
| Non-current  operating assets                                                                                                      |       | 1,023.0                                  |       | —                                                         |       |       | —                                 |       |   | — |   |   | 1,023.0 |   |
| **Deferred income taxes:**                                                                                                         | ** ** | ** **                               | ** ** | ** **                                                     | ** ** | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net operating loss carryforwards                                                                                                   |       | —                                   |       | —                                                         |       |       | (40.3                                  | )          | **B** | 175.3 |   | **D** | 135.0 | ** ** |
| Temporary differences, net of valuation allowance                                                                                  |       | 767.5                                    |       | 26.3                                                           | ** ** | **A**      | (380.6                                 | )          | **B** | (175.3 | ) | **D** | 237.9 |   |
| Asbestos-related  insurance                                                                                                        |       | 500.0                                    |       | —                                                         |       |       | —                                 |       |   | — |   |   | 500.0 |   |
| **Total Assets**                                                                                                                   |       | $                                        | 3,869.0    |                                                           | $          | 826.3      |                                   |       | $ | (305.9 | ) |   | $ | (1,176.1 | ) |   | $ | 3,213.3 |   |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY (DEFICIT)**                                                                           | ** ** | ** **                               | ** ** | ** **                                                     | ** ** | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total current liabilities                                                                                                          |       | $                                        | 521.1      |                                                           | $          | —     |                                   |       | $ | — |   |   | $ | — |   |   | $ | 521.1 |   |
| Long-term debt                                                                                                                     |       | 0.3                                      |       | 800.0                                                          | ** ** | **A**      | —                                 |       |   | — |   |   | 800.3 |   |
| Other noncurrent liabilities                                                                                                       |       | 456.7                                    |       | —                                                         |       |       | —                                 |       |   | — |   |   | 456.7 |   |
| **Total Liabilities Not Subject  to Compromise**                                                                                   |       | 978.1                                    |       | 800.0                                                          |       |       | —                                 |       |   | — |   |   | 1,778.1 |   |
| Pre-petition bank debt plus accrued interest                                                                                       |       | 783.0                                    |       | —                                                         |       |       | —                                 |       |   | (783.0 | ) | **C** | — |   |
| Drawn letters of credit plus accrued interest                                                                                      |       | 26.9                                     |       | —                                                         |       |       | —                                 |       |   | (26.9 | ) | **C** | — |   |
| Asbestos-related contingencies                                                                                                     |       | 1,700.0                                  |       | —                                                         |       |       | (1,087.4                               | )          | **B** | (482.6 | ) | **C** | 130.0 | ** ** |
| Environmental contingencies                                                                                                        |       | 368.6                                    |       | —                                                         |       |       | —                                 |       |   | (300.7 | ) | **C** | 67.9 |   |
| Postretirement benefits                                                                                                            |       | 172.7                                    |       | —                                                         |       |       | —                                 |       |   | (14.8 | ) | **C** | 157.9 |   |
| Income tax contingencies                                                                                                           |       | 89.3                                     |       | —                                                         |       |       | —                                 |       |   | (6.9 | ) | **C** | 82.4 |   |
| Other liabilities and accrued interest                                                                                             |       | 137.0                                    |       | —                                                         |       |       | —                                 |       |   | (100.8 | ) | **C** | 36.2 |   |
| Other nonoperating liabilities, including plan of  reorganization contingencies                                                    |       | —                                   |       | 150.0                                                          | ** ** | **A**      | —                                 |       |   | (50.0 | ) | **C** | 100.0 | ** ** |
| **Total Liabilities Subject to  Compromise**                                                                                       |       | 3,277.5                                  |       | 150.0                                                          |       |       | (1,087.4                               | )          |   | (1,765.7 | ) |   | 574.4 |   |
| **Total Liabilities**                                                                                                              |       | 4,255.6                                  |       | 950.0                                                          |       |       | (1,087.4                               | )          |   | (1,765.7 | ) |   | 2,352.5 |   |
| **Shareholder’s Equity (Deficit)**                                                                                            | ** ** | ** **                               | ** ** | ** **                                                     | ** ** | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Share capital                                                                                                                      |       | 432.3                                    |       | —                                                         |       |       | —                                 |       |   | 589.6 | ** ** | **C** | 1,021.9 |   |
| Retained earnings and other equity items                                                                                           |       | (818.9                                   | )          | (123.7                                                         | )          | **A**      | 781.5                                  |       | **B** | — | ** ** | ** ** | (161.1 | ) |
| **Total Shareholders’ Equity  (Deficit)**                                                                                     |       | (386.6                                   | )          | (123.7                                                         | )          |       | 781.5                                  |       |   | 589.6 |   |   | 860.8 |   |
| **Total Liabilities and  Shareholders’ Equity (Deficit)**                                                                     |       | $                                        | 3,869.0    |                                                           | $          | 826.3      |                                   |       | $ | (305.9 | ) |   | $ | (1,176.1 | ) |   | $ | 3,213.3 |   |

 

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

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

**Proforma Consolidated Statement of Operations**

*(In millions, except per share amounts)**(Unaudited)* | ** **           | **Year Ended  December 31, 2007** | ** **                |
|------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------|----------------------------------------|---------------------------|
| ** **                                                                                                                                                 | **As Reported** | ** **                             | **Proforma  Adjustments** | ** ** | ** ** | **Proforma** | ** ** |
| **Net Sales**                                                                                                                                              |                 | $                                      | 3,115.2                   |   | $ | — |   |   | $ | 3,115.2 |   |
|                                                                                                                                                       |                 |                                   |                      |   |   |   |   |   |
| Cost of goods sold                                                                                                                                         |                 | 2,147.4                                |                      | — |   |   | 2,147.4 |   |
| Selling, general and administrative expenses                                                                                                               |                 | 600.6                                  |                      | (40.0 | ) | **F** | 560.6 |   |
| Research and development expenses                                                                                                                          |                 | 79.6                                   |                      | — |   |   | 79.6 |   |
| Defined benefit pension expense                                                                                                                            |                 | 52.6                                   |                      | — |   |   | 52.6 |   |
| Interest expense and related financing costs                                                                                                               |                 | 72.1                                   |                      | (11.3 | ) | **G** | 60.8 |   |
| Provision for environmental remediation                                                                                                                    |                 | 17.0                                   |                      | (17.0 | ) | **E** | — |   |
| Chapter 11 expenses, net of interest income                                                                                                                |                 | 86.4                                   |                      | (86.4 | ) | **E** | — |   |
| Other (income) expense, net                                                                                                                                |                 | (33.1                                  | )                         | 1.0 | ** ** | **F** | (32.1 | ) |
| **Total costs and expenses**                                                                                                                               |                 | 3,022.6                                |                      | (153.7 | ) |   | 2,868.9 |   |
| **Income before income taxes and minority interest**                                                                                                       |                 | 92.6                                   |                      | 153.7 |   |   | 246.3 |   |
| Benefit from (provision for) income taxes                                                                                                                  |                 | 5.8                                    |                      | (42.3 | ) | **H** | (36.5 | ) |
| Minority interest in consolidated entities                                                                                                                 |                 | (18.1                                  | )                         | — |   |   | (18.1 | ) |
| **Net income**                                                                                                                                             |                 | $                                      | 80.3                      |   | $ | 111.4 |   |   | $ | 191.7 |   |
| **Basic earnings per common share**                                                                                                                        |                 | $                                      | 1.15                      |   | $ | — |   |   | $ | 2.03 |   |
| Weighted average number of basic shares                                                                                                                    |                 | 70.1                                   |                      | 24.4 | ** ** | **I** | 94.5 |   |
| **Diluted earnings per common share**                                                                                                                      |                 | $                                      | 1.12                      |   | $ | — |   |   | $ | 1.90 |   |
| Weighted average number of diluted shares                                                                                                                  |                 | 71.6                                   |                      | 29.4 | ** ** | **I** | 101.0 |   |

 

F-69

----

 

**Financial Condition, Liquidity and CapitalResources**

# ** **

***Chapter 11-Related Information—***See Note 2 tothe Consolidated Financial Statements.

 

***Asbestos-Related Litigation—***See Note 3 tothe Consolidated Financial Statements.

 

***Environmental Matters*****—**See Note 15 to theConsolidated Financial Statements.

 

***Defined Contribution Retirement Plans*****—**We sponsor a defined contributionretirement plan for our employees in the United States. This plan qualifiesunder section 401(k) of the U.S. tax code. At the present time, wecontribute an amount equal to 100% of employee contributions, up to 6% of anindividual employee’s salary or wages. Our costs related to this benefit planwere $12.4 million, $14.0 million, and $13.0 million for the years ended December 31,2007, 2006, and 2005, respectively.

 

***Defined BenefitPension Plans*****—**Wesponsor defined benefit pension plans for our employees in the United States,Canada, the United Kingdom, Australia, Germany, Italy, France, Spain,Netherlands, Japan, Philippines, South Korea, Taiwan, South Africa, Brazil andMexico and fund government sponsored programs in other countries where weoperate.  Certain of our sponsored plansare advance-funded and others are pay-as-you-go. The advance-funded plans areadministered by trustees who direct the management of plan assets and arrangeto have obligations paid when due out of a trust. The most significantadvance-funded plans cover our salaried employees in the U.S. and U.K. andemployees covered by collective bargaining agreements 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)*                      | ** ** | **2007**   | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|---------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| Annual pension benefits earned                                            | ** ** | **$**      | **23.8**   |       | $          | 24.7       |       | $ | 23.3 |   |
| Interest on opening liability—advance-funded plans                   | ** ** | **66.7**   |       | 65.2       |       | 64.7       |       |
| Expected return on plan assets                                            | ** ** | **(80.0**  | **)**      | (71.3      | )          | (66.6      | )          |
| Net financing cost (benefit) of advance-funded plans                      | ** ** | **(13.3**  | **)**      | (6.1       | )          | (1.9       | )          |
| Interest on opening liability—pay-as-you-go plans                    | ** ** | **12.2**   |       | 10.8       |       | 10.3       |       |
| Net pension financing cost (benefit)                                      | ** ** | **(1.1**   | **)**      | 4.7        |       | 8.4        |       |
| **Amortization of:**                                                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Plan changes  related to prior service                                    | ** ** | **3.1**    |       | 3.2        |       | 5.8        |       |
| Accumulated  differences between actual and assumed performance (1)       | ** ** | **26.4**   |       | 31.1       |       | 31.0       |       |
| Net curtailment and settlement loss                                       | ** ** | **0.4**    |       | —     |       | 3.4        |       |
| Net pension catch-up expense                                              | ** ** | **29.9**   |       | 34.3       |       | 40.2       |       |
| **Total Net Pension Expense**                                             | ** ** | **$**      | **52.6**   |       | $          | 63.7       |       | $ | 71.9 |   |
| ** **                                                                | ** ** | ** ** |       |       |       |       |       |
| **Cash Contributions to Defined Benefit Pension  Plans**

*(In millions)* | ** ** | **2007**   | ** ** | **2006**   | ** ** | **2005**   |       |
| U.S. advance-funded plans                                                 | ** ** | **$**      | **76.0**   |       | $          | 101.4      |       | $ | 24.1 |   |
| U.S. pay-as-you-go plans                                                  | ** ** | **5.1**    |       | 5.2        |       | 10.9       |       |
| Foreign advance-funded plans                                              | ** ** | **18.3**   |       | 9.5        |       | 7.6        |       |
| Foreign pay-as-you-go plans                                               | ** ** | **6.3**    |       | 5.4        |       | 5.1        |       |
| **Total Cash Contributions**                                              | ** ** | **$**      | **105.7**  |       | $          | 121.5      |       | $ | 47.7 |   |

----

| (1) | Primarily related to return on assets, termination,  and mortality. |
|-----|---------------------------------------------------------------------|

 

F-70

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The following tablepresents the funded status of fully-funded, underfunded, and unfunded pensionplans:

 
| **Funded Status of Pension Plans**

*(In millions)* | *** *** | **Fully-Funded  (1)**

**Pension  Plans** | ** ** | **Underfunded  (1)**

**Pension  Plans** | ** ** | **Unfunded  (2)**

**Pension  Plans** | ** ** |
|-----------------------------------------------------|--------------|-------------------------------------------|------------|------------------------------------------|------------|---------------------------------------|------------|
| ** **                                          | **2007**     | ** **                                | **2006**   | ** **                               | **2005**   | ** **                            | **2007**   | ** ** | **2006** | ** ** | **2005** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** |   |
| Projected benefit obligation                        | ** **   | **$**                                     | **254.8**  |                                     | $          | 243.8                                 |       | $ | 218.7 | ** ** | **$** | **948.3** |   | $ | 961.4 |   | $ | 1,017.7 | ** ** | **$** | **245.9** |   | $ | 227.8 |   | $ | 222.1 |   |
| Fair value of plan assets                           | ** **   | **308.9**                                 |       | 282.2                                    |       | 232.8                                 | ** ** | **779.2** |   | 738.5 |   | 649.8 | ** ** | **—** |   | — |   | — |   |
| Funded status (PBO basis)                           | ** **   | **$**                                     | **54.1**   |                                     | $          | 38.4                                  |       | $ | 14.1 | ** ** | **$** | **(169.1** | **)** | $ | (222.9 | ) | $ | (367.9 | ) | **$** | **(245.9** | **)** | $ | (227.8 | ) | $ | (222.1 | ) |
| Benefits paid                                       | ** **   | **$**                                     | **(11.5**  | **)**                                    | $          | (10.4                                 | )          | $ | (9.0 | ) | **$** | **(85.3** | **)** | $ | (88.0 | ) | $ | (81.2 | ) | **$** | **(11.5** | **)** | $ | (10.4 | ) | $ | (15.9 | ) |

----

| (1) | Plans intended to be  advance-funded. |
|-----|---------------------------------------|
| (2) | Plans intended to be  pay-as-you-go.  |

 

Fully-funded plans include several defined benefit pension plans wherethe fair value of the plan assets exceeds the projected benefit obligation, orPBO.  This group of plans was overfundedby $54.1 million as of December 31, 2007, and the overfunded status isreflected as “overfunded defined benefit pension plans” in the ConsolidatedBalance Sheet. Underfunded plans include a group of defined benefit pensionplans that are underfunded on a PBO basis by a total of $169.1 million as of December 31,2007. Additionally, we have several plans that are funded on a pay-as-you-gobasis, and therefore, the entire PBO of $245.9 million at December 31,2007 is unfunded.  The combined balanceof the underfunded and unfunded plans was $415.0 million as of December 31,2007 and is presented as a liability on the Consolidated Balance Sheet asfollows - $12.5 million in “other current liabilities,” $169.1 million includedin “underfunded defined benefit pension plans”, $137.9 million included in“unfunded pay-as-you-go defined benefit pension plans”, and $95.5 million in“liabilities subject to compromise.”

 

Beginningin 2007, on a quarterly basis, we analyze pension assets and pensionliabilities along with the resulting funded status and update our estimate ofthese measures.  Funded status isadjusted for contributions, benefit payments, actual return on assets, currentdiscount rates and other identifiable and material actuarial changes.

 

At the December 31,2007 measurement date for the U.S. advance-funded defined benefit pensionplans, the PBO was approximately $932 million as measured under U.S. generallyaccepted accounting principles. The PBO is measured as the present value (usinga 6.25% discount rate as of December 31, 2007) 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, 2007 were approximately $774 million, or approximately$158 million less than the measured obligation.

 

It is our intention to satisfy obligations under the pension plans andto comply with the requirements of the Employee Retirement Income Security Actof 1974. On June 20, 2007, we obtained bankruptcy court approval to fundminimum required payments of approximately $54 million for the period from July 2007through January 2008.  In thatregard, we contributed approximately $9 million in July 2007 andapproximately $15 million in each of September 2007, October 2007,and January 2008 to the trusts that hold assets of the Plans.  While we intend to continue to fund allminimum required payments under the Plans, there can be no assurance that thebankruptcy court will continue to approve the funding needs of the Plans.  Contributions to non-U.S. plans are notsubject to bankruptcy court approval and we intend to fund such plans based onapplicable legal requirements, and actuarial and trustee recommendations; $24.6million was funded in 2007.

 

Total pension expense for2007 was approximately $53 million, and benefit payments to retirees aggregatedapproximately $108 million for all pension programs in 2007.

 

***PostretirementBenefits Other Than Pensions*****—**We provide certain health care and life insurancebenefits for retired employees, a large majority of whom are retirees ofdivested businesses. These plans are unfunded, and we pay the costs of benefitsunder these plans as they are incurred. Our share of benefits under thisprogram was $9.8 million in 2007, compared with $13.9 million during 2006. Wereceived Medicare subsidy payments of $4.8 million in 2007.  Our recorded liability for postretirementbenefits of $84.0 million at December 31, 2007 is stated at net presentvalue

 

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discounted at 6.25% (asdiscussed under Defined Benefit Pension Plans). Our proposed plan ofreorganization provides for the continuation of these benefits.

 

***Tax Matters—***See Note 4 to the Consolidated Financial Statementsand “Income Taxes” above for further discussion of our tax accounting and taxcontingencies.

 

***Other Contingencies—***See Note 15 to the Consolidated Financial Statementsfor a discussion of our other contingent matters.

 

***Cash Resources and Available Credit Facilities*****—**At December 31, 2007, wehad cash and cash equivalents of $480.5 million, short-term investmentsecurities of $100.9 million, and net cash value of life insurance of $81.0million.

 

Investment securities of$100.9 million and $2.4 million at December 31, 2007 and 2006,respectively, consist of direct or indirect investments in debt securities.Prior to the fourth quarter of 2007, our investment in the Columbia StrategicCash Fund was classified in cash and cash equivalents as redemptions wereavailable in cash. In December 2007, the fund began an orderly liquidationthat is expected to continue through 2008 and restricted redemptions to anin-kind distribution of securities held by the fund. We have elected to remainin the fund and to value the fund based on the underlying securities asdetermined by the fund principals.  Thestrategic cash investment fund was valued at $98.3 million at December 31,2007, which includes an impairment loss of $1.4 million recorded in the fourthquarter of 2007 due to unfavorable conditions of the credit markets.  The impairment loss is recorded as an offsetto interest income earned on the Columbia Strategic Cash Fund, which is netagainst Chapter 11 expenses in the Consolidated Statements of Operations.  This impairment was deemed to be other thantemporary, and as such, was recorded in earnings. 

 

Net cash value of lifeinsurance represents the cash value of premiums paid by us for life insurancepolicies in the names of current and former executive officers.  We have presented $77.1 million of the $81.0million total value at December 31, 2007 as a current asset, as it is ourexpectation that this amount may be accessed in 2008 as part of ourreorganization financing.  At December 31,2006, the full amount of net cash value of life insurance policies waspresented as a long-term asset, as we did not have an expectation at that timeof liquidating any portion of the assets. In November and December 2007, we surrendered and terminatedlife insurance policies and received approximately $14.8 million of net cashvalue from the terminations.  As a resultof the terminations, gross cash value of the policies was reduced byapproximately $36.3 million and policy loans of approximately $20.9 millionwere satisfied. Grace’s insurance benefits in force was reduced byapproximately $60.1 million.

 

Wehave access to committed credit facilities in the U.S., Germany, France,Brazil, Singapore, India and China.  Inthe U.S., under the $250 million DIP facility, $178.5 million was available at December 31,2007, net of letters of credit and holdback provisions. The term of the DIP facility expires April 1,2008.   We have requested a two-yearextension of this DIP facility from the lenders and a hearing before thebankruptcy court with respect to the extension is scheduled for March 17,2008.

 

The following tablesummarizes our U.S. and non-U.S. credit facilities as of December 31,2007:

 
| **Credit Facilities***(In millions)* | ** ** | **Maximum  Borrowing  Amount** | ** ** | **Amount  Available** | ** ** | **Expiration  Date** | ** ** |
|--------------------------------------|------------|--------------------------------|------------|-----------------------|------------|----------------------|------------|
| ** **                           | ** ** | ** **                     | ** ** | ** **            | ** ** | ** **           | ** ** |
| **Country**                          | ** ** | ** **                     | ** ** | ** **            | ** ** | ** **           | ** ** |
| U.S.                                 |       | $                              | 250.0      |                  | $          | 178.5                |       | 04/01/08 |   |
| Germany                              |       | 72.5                           |       | 72.5                  |       | 12/31/09             |       |
| Germany                              |       | 17.4                           |       | 6.7                   |       | 09/30/08             |       |
| France                               |       | 5.2                            |       | 5.2                   |       | 06/30/08             |       |
| Brazil                               |       | 1.1                            |       | 1.1                   |       | 03/31/08             |       |
| Singapore                            |       | 5.2                            |       | 3.1                   |       | 03/31/08             |       |
| India                                |       | 3.0                            |       | 1.9                   |       | 03/31/08             |       |
| China                                |       | 4.7                            |       | 1.0                   |       | 03/31/08             |       |
| **Total**                            |       | $                              | 359.1      |                  | $          | 270.0                |       |   |   |

 

We believe that these funds and credit facilities will be sufficient tofinance our business strategy while in Chapter 11.

 

***Debt and OtherContractual Obligations—***Total debt outstanding at December 31, 2007 was$814.9 million, including $286.2 million of accrued interest on pre-petitiondebt.  As a result of the Chapter 11filing, we are now in default on $523.6 million of pre-petition debt, which,together with accrued interest thereon, has been included in “liabilitiessubject to compromise” as of December 31, 2007. The automatic stayprovided under the bankruptcy code prevents our lenders from taking any actionto collect the principal amounts as well as related accrued interest. However,we will continue to accrue and report interest on such debt during the Chapter11 proceedings unless further developments lead management to conclude that itis probable that such interest will be compromised.

 

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Set forth below are ourcontractual obligations as of December 31, 2007:

** **

 
| *** ***                                                 | ** ** | **Payments due by Period** | ** ** | **Payments due**      | ** ** |
|--------------------------------------------------------------|------------|----------------------------|------------|-----------------------|------------|
| **Contractual Obligations**

*(In millions)*                 | ** ** | **Total**                  | ** ** | **Less than  1 Year** | ** ** | **1-3  Years** | ** ** | **Thereafter** | ** ** | **Upon  Emergence  from  Chapter 11** | ** ** | **After  Emergence  from  Chapter 11** | ** ** |
| Operating commitments (1)                                    |       | $                          | 56.7       |                  | $          | 35.5 |   | $ | 17.8 |   | $ | 3.4 |   | $ | — |   | $ | — |   |
| Debt                                                         |       | 5.0                        |       | 4.7                   |       | 0.3 |   | — |   | — |   | — |   |
| Capital leases                                               |       | 0.9                        |       | 0.2                   |       | 0.7 |   | — |   | — |   | — |   |
| Operating leases                                             |       | 76.4                       |       | 23.1                  |       | 38.8 |   | 14.5 |   | — |   | — |   |
| **Liabilities subject to compromise (2):**                   | ** ** | ** **                 | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Pre-petition  bank debt plus accrued interest                |       | 783.0                      |       | —                |       | — |   | — |   | 783.0 |   | — |   |
| Drawn letters of  credit plus accrued interest               |       | 26.9                       |       | —                |       | — |   | — |   | 26.9 |   | — |   |
| Asbestos-related  contingencies                              |       | 1,700.0                    |       | —                |       | — |   | — |   | 1,570.0 |   | 130.0 |   |
| Income tax  contingencies                                    |       | 89.3                       |       | —                |       | — |   | — |   | 6.9 |   | 82.4 |   |
| Environmental  contingencies                                 |       | 368.6                      |       | —                |       | — |   | — |   | 300.7 |   | 67.9 |   |
| Postretirement  benefits                                     |       | 184.8                      |       | 12.1                  |       | — |   | — |   | 14.8 |   | 157.9 |   |
| Other  liabilities and accrued interest                      |       | 137.0                      |       | —                |       | — |   | — |   | 100.8 |   | 36.2 |   |
| Total  liabilities subject to compromise                     |       | $                          | 3,289.6    |                  | $          | 12.1 |   | $ | — |   | $ | — |   | $ | 2,803.1 |   | $ | 474.4 |   |
| Pension funding  requirements per  ERISA (3)                 |       | 208.4                      |       | 53.6                  |       | 119.5 |   | 35.3 |   | — |   | — |   |
| Pension funding  requirements for non-U.S. pension plans (4) |       | 74.1                       |       | 13.7                  |       | 44.2 |   | 16.2 |   | — |   | — |   |
| **Total Contractual Obligations**                            |       | $                          | 3,711.1    |                  | $          | 142.9 |   | $ | 221.3 |   | $ | 69.4 |   | $ | 2,803.1 |   | $ | 474.4 |   |
|                                                              |            |                            |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

| (1) | Amounts do not include open purchase commitments,  which are routine in nature and normally settle within 90 days or obligations  to employees under annual or long-term incentive programs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | See Note 2 to the consolidated financial statements  set forth elsewhere herein for a discussion of liabilities subject to  compromise.  Liabilities subject to  compromise consist of estimated balances that may become due on the date of  emergence from bankruptcy protection, which date is not certain at this time,  or subsequent to emergence.  Estimated  amounts that may become due upon emergence have been presented in the “Upon  Emergence from Chapter 11” column above and estimated amounts that may become  due subsequent to emergence have been presented in the “After Emergence from  Chapter 11” column, as we are not able to determine when these amounts will  ultimately be settled.  Amounts reflect  the estimated claims payable pursuant to our plan of reorganization.  It is possible that we could settle a  portion of these claims at a date before emergence from Chapter 11 at the  stated amounts or at amounts different from those recorded.  In accordance with SFAS No. 158, we  have presented $12.1 million of certain estimated pension and postretirement  obligations subject to compromise as current obligations in the  December 31, 2007 Consolidated Balance Sheet. |
| (3) | Based on the U.S. qualified pension plans’ status as  of December 31, 2007, funding requirements under ERISA have been  estimated for the next five years.   Amounts in subsequent years have not yet been determined.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| (4) | Based on the non-U.S. pension plans’ status as of  December 31, 2007, funding requirements have been estimated for the next  five years.  Amounts have been  translated at the applicable December 31, 2007 exchange rates.  Amounts in subsequent years have not yet  been determined.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |

 

See Note 15 to theConsolidated Financial Statements for a discussion of financial assurances.

 

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**Analysisof Cash Flows**

 

Net cash provided by operating activities in 2007 was $88.2 million,compared with $152.7 million for the prior year period. We attribute the lowernet cash flow in 2007 to higher Chapter 11-related costs, higher workingcapital, dividends to joint venture partners and cash paid to resolve certaintax contingencies, partially offset by higher pre-tax operating income.  Net cash used for investing activities in2007 was $206.9 million, compared with $129.4 million in 2006.  The increase in investing activities isprimarily due to routine capital improvements, capacity expansion at certainproduction sites, one acquisition, an equity investment, and investments inshort-term debt securities.  Net cashinflow from financing activities in 2007 was $45.7 million, compared with $21.9million in 2006, with the increase primarily attributable to cash received fromstock options exercised.

 

Net cash flow provided by operating activities in 2005 was $67.3million.  The higher net cash inflow in2006 was due to improved core operating results and positive working capitalchanges.  Other major factors affectingthe change in operating cash include the nonrecurring payment of $119.7 millionto settle tax and environmental contingencies in 2005 and a significantincrease in 2006 in defined benefit pension plan funding.  Net cash used for investing activities in2005 was $77.9 million.  The increase ininvesting activities in 2006 versus 2005 was due to the expansion of productionfacilities, acquisition of catalyst assets and technology, and capital forfacilities maintenance.  Net cash outflowfrom financing activities in 2005 was $10.1 million primarily from debt serviceand reduced stock option activity.

 

***Cash Flow FromCore Operations—***Cash inflows from core operations were $139.3million, $186.2million, and $154.1 million for 2007, 2006 and 2005, respectively. This decreasein cash flows from core operations in 2007 as compared to 2006 and 2005 wasprimarily attributable to higher investment in working capital and highercapital spending, partially offset by higher pre-tax operating income from coreoperations.

 
| **Core Operations**

*(In  millions)*                      | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                 | **2007**   | ** **            | **2006**   | ** ** | **2005** |   |
| ** **                                                 | ** ** | ** **            |       |   |   |   |   |
| **Cash flows:**                                            | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Pre-tax operating income                                   | ** ** | **$**                 | **284.6**  |   | $ | 240.2 |   | $ | 201.5 |   |
| Depreciation and amortization                              | ** ** | **113.4**             |       | 113.5 |   | 120.9 |   |
| **Pre-tax earnings before depreciation and  amortization** | ** ** | **398.0**             |       | 353.7 |   | 322.4 |   |
| Working capital and other changes                          | ** ** | **(131.8**            | **)**      | (28.7 | ) | (68.8 | ) |
| **Cash flow before investing**                             | ** ** | **266.2**             |       | 325.0 |   | 253.6 |   |
| Proceeds from sale of product line                         | ** ** | **21.8**              |       | — |   | — |   |
| Capital expenditures                                       | ** ** | **(136.9**            | **)**      | (119.2 | ) | (94.0 | ) |
| Purchase of equity investment                              | ** ** | **(6.3**              | **)**      | — |   | — |   |
| Businesses acquired                                        | ** ** | **(5.5**              | **)**      | (19.6 | ) | (5.5 | ) |
| **Net cash flow from core operations**                     | ** ** | **$**                 | **139.3**  |   | $ | 186.2 |   | $ | 154.1 |   |

 

We expect to continue toinvest excess cash flow and/or other available capital resources in our corebusiness base. These investments are likely to be in the form of additionalplant capacity, product line extensions and geographic market expansions,and/or acquisitions in existing product lines. Investments that are outside the ordinary course of business may besubject to bankruptcy court approval and review by the Chapter 11 creditorcommittees.

 

***Cash Flow FromNoncore Activities—***The cash flow from our noncore activities can be volatile.******Expenditures aregenerally governed by bankruptcy court rulings and receipts are generally nonrecurring.Much of the noncore spending in the past three years has been under Chapter 11first-day motions that allow us to fund postretirement benefits and requiredenvironmental remediation on Grace-owned sites. Cash inflows have been fromasbestos-related insurance recovery on pre-Chapter 11 liability payments, andunusual events.  In 2005, we made a $90million payment to the U.S. Internal Revenue Service to fund taxes and intereston settled amounts as approved by the bankruptcy court.

 

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| **Noncore Activities**

*(In millions)*         | ** ** | **December 31,** | ** ** |
|-------------------------------------------------|------------|-----------------------|------------|
| ** **                                      | **2007**   | ** **            | **2006**   | ** ** | **2005** |   |
| ** **                                      | ** ** | ** **            |       |   |   |   |   |
| **Cash flows:**                                 | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Pre-tax income (loss) from noncore activities   | ** ** | **$**                 | **(59.3**  | **)** | $ | (97.7 | ) | $ | (30.3 | ) |
| Non-cash charges                                | ** ** | **32.5**              |       | 41.4 |   | 49.9 |   |
| **Cash spending for:**                          | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Investments in  short term debt securities, net | ** ** | **(99.7**             | **)**      | — |   | — |   |
| Noncore  contingencies:                         | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Tax settlement                                  | ** ** | **(10.3**             | **)**      | — |   | (90.0 | ) |
| Environmental  settlement                       | ** ** | **—**            |       | — |   | (29.7 | ) |
| Environmental  remediation                      | ** ** | **(9.5**              | **)**      | (10.9 | ) | (6.7 | ) |
| Postretirement  benefits                        | ** ** | **(5.0**              | **)**      | (13.9 | ) | (11.9 | ) |
| Retained  obligations and other                 | ** ** | **(1.0**              | **)**      | (3.6 | ) | (1.0 | ) |
| **Net cash flow from noncore activities**       | ** ** | **$**                 | **(152.3** | **)** | $ | (84.7 | ) | $ | (119.7 | ) |

 

Net cash flow from core operations and net cash flow from noncoreactivities do not represent income or cash flow as defined under generallyaccepted accounting principles, and you should not consider them to be analternative to such measures as an indicator of our performance. We providethese measures to permit you to distinguish operating results of our currentbusiness base from results and related assets and liabilities of pastbusinesses, discontinued products, and corporate legacies and the effect of ourChapter 11 proceedings.

 

**Inflation**

 

The financial statementsare presented on a historical cost basis and do not fully reflect the impact ofprior years’ inflation.  While the U.S.inflation rate has been modest for several years, we operate in internationaleconomies with both inflation and currency risks. The ability to pass oninflation costs is an uncertainty due to general economic conditions andcompetitive situations.  The cost ofreplacing our property and equipment today is estimated to be greater than itshistorical cost.  Accordingly, depreciationexpense would be greater if the expense were stated on a current cost basis.

 

**Critical Accounting Estimates**

 

The preparation of financial statements in conformity with U.S.generally accepted accounting principles requires that we make estimates andassumptions affecting the assets and liabilities reported at the date of theConsolidated Financial Statements, and the revenues and expenses reported forthe periods presented. We believe that our accounting estimates are appropriateand the related balances are reasonable; however, actual amounts could differfrom the original estimates, requiring adjustments in future periods. Changesin estimates are recorded in the period identified. Our accounting policies aredescribed in Note 1 to the Consolidated Financial Statements.  Critical accounting estimates are describedin this section.

 

An accounting estimate isconsidered critical if the estimate requires management to make assumptionsabout matters that were highly uncertain at the time the estimate was made, ifdifferent estimates reasonably could have been used, or if changes in theestimate are reasonably likely to occur from period to period that could have amaterial impact on our financial condition or results of operations.  As part of our quarterly disclosure controlsand procedures, management has discussed the development, selection anddisclosure of the critical accounting estimates with the Audit Committee of theBoard of Directors.  The accuracy ofthese and other estimates may be materially affected by the uncertaintiesarising under our Chapter 11 proceeding.

 

***Contingent Liabilities*****—**We have recorded a liability for the resolution ofcontingencies related to asbestos lawsuits, environmental remediation, incometaxes and litigation.  We record aliability if we have determined that a loss is probable, and we are able toreasonably estimate the amount of the loss or have another reasonable basis forrecording a liability.  We havedetermined that each of the contingencies discussed below involves anaccounting judgment that is material to our Consolidated Financial Statements.

 

Asbestos-Related Lawsuits

 

We are a defendant inproperty damage and personal injury lawsuits relating to previously soldasbestos-containing products.  See Note 3to the Consolidated Financial Statements for a discussion of the background andstatus of the asbestos-related lawsuits, and how we are attempting to resolvethem as part of our Chapter 11 proceeding. We have recorded a liability for our asbestos-related obligations asdiscussed below.

 

Prior to the Chapter 11filing, we estimated our asbestos personal injury liability based on ourexperience with the cost to resolve such claims given the prevailing conditionsin the asbestos tort system. Those conditions meant that the costs forresolution were driven by many factors beyond the merits of the claims. Thecost to resolve asbestos 

 

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personal injury claims wasinfluenced by numerous variables, including the nature of the disease alleged,product identification, negotiation factors, the solvency of other formerproducers of asbestos-containing products, cross-claims by co-defendants, therate at which new claims were being filed, the jurisdiction in which the claimswere filed, and the defense and disposition costs associated with these claims.

 

Prior to the chapter 11filing, we estimated asbestos property damage liability based upon the cost toresolve such claims in the tort system. The cost to resolve asbestos propertydamage claims was influenced by factors such as 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.

 

Since the Chapter11 filing, we have requested that the bankruptcy court conduct proceedings todetermine the value of our asbestos-related liabilities.  In January 2008, the bankruptcy courtcommenced a trial for estimating our asbestos personal injury liability.  The bankruptcy court is also consideringseveral pending motions that seek the adjudication of most of the remainingasbestos property damage claims. We expect that thebankruptcy court proceedings may provide the basis for determining the amountthat must be paid into a trust on the effective date of a plan ofreorganization in respect of our asbestos-related claims.

 

Under our proposed plan of reorganization, it is a condition toconfirmation of our proposed plan of reorganization that the bankruptcy courtshall conclude that the amount necessary to fund all pending and futureasbestos personal injury claims and property damage claims (and trustadministration costs and expenses) is not greater than $1,613 million.  This amount was based in part on our 2004evaluation of (1) existing but unresolved personal injury and propertydamage claims, (2) actuarially-based estimates  of future personal injury claims, (3) therisk of loss from the Zonolite attic insulation litigation, (4) proposedclaim payments reflected in our plan of reorganization, and (5) the costof the trust administration and litigation. This condition precedent is the basis for our currently recordedasbestos-related liability.

 

A wide range of asserted liabilityhas been put forth by stakeholders in the bankruptcy proceedings, from amountsthat would indicate liability less than that recorded at December 31,2007, to amounts that would exceed the business value of Grace. Therefore, wewill adjust our recorded asbestos-related liability, as necessary, to reflectrulings by the bankruptcy court.

 

Our asbestos-relatedinsurance receivable is directly dependent on the amount and nature of ourasbestos-related liability.  We estimatethe amount of the receivable based on our analysis of coverage remaining underinsurance policies for the 1962 to 1985 period, and the terms of settlementagreements in effect with certain insurers.

 

Ourliability for asbestos-related matters has had a material impact on ourfinancial condition and results of operations, and future changes in suchliability, if required, will likely lead to material adjustments to theConsolidated Financial Statements.  Weexpect the ultimate determination of the resolution cost of this obligationwill have a material impact on our liquidity and capital resources.

 

Environmental Remediation

 

We are obligated under applicable law to remediate certain propertiesrelated to our business or former businesses. At some sites we finance all or a portion of remediation conducted bythird parties (generally state or Federal authorities) and at others, weperform the required remediation ourselves. Our environmental remediation obligation has a significant impact on ourConsolidated Financial Statements.  SeeNote 15 to the Consolidated Financial Statements for a discussion of ourenvironmental remediation liabilities.

 

At sites where third parties conduct remediation, we estimate ourobligations from information available from regulatory authorities including actualcosts incurred, expected future costs and time to completion.

 

At sites where we conduct remediation, we work with regulatoryauthorities to define compliance requirements and then estimate the costrequired to meet those requirements.  Webase our estimates on our historical knowledge and engineering assessmentsspecific to conditions at each site and we update our estimates as necessary.

 

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Our estimates can fluctuate significantly due to the extended durationof some remediation projects. The accuracy of our estimates is dependent on thevalidity of assumptions regarding such matters as labor rates, indirect costsand capital costs (such as building materials), which are difficult to forecastover extended periods. We cannot estimate the impact on our ConsolidatedFinancial Statements of using other reasonably possible assumptions because weprimarily rely on the assumptions and estimates of the applicable regulatoryauthorities.  Future changes in estimates,if required, will more than likely lead to material adjustments to ourConsolidated Financial Statements, and we expect the ultimate resolution ofthese obligations to have a material impact on our liquidity and capitalresources.

 

Litigation

 

We are subject to legal proceedings and claims arising out of thenormal course of business.  We arecurrently a party to various legal proceedings, both civil and criminal innature, in which we have been named as a defendant.  See Note 15 to the Consolidated FinancialStatements for a discussion of our significant legal proceedings.

 

To estimate the cost to resolve our legal obligations, we review thefacts of each matter to determine the merits of the case and the correspondingprobability of a loss.  If we determinethat a loss is probable, we determine if there is sufficient information tomake a reasonable estimate of the loss amount. Our estimates regarding the outcome of our legal proceedings and claimsinvolve substantial uncertainties that could cause our actual losses to differmaterially from our estimates.  Inestimating the likely outcome of a legal proceeding, we consider the nature ofthe specific claim (or unasserted claim), our experience with similar claims,the jurisdiction in which the proceeding is filed, court rulings, the status ofany settlement negotiations, the likelihood of resolution through settlement oralternative dispute resolution, the proceeding’s current status and otherrelevant information and events.  Weadjust our recorded liability for litigation contingencies as necessary toreflect our current evaluation of these and other factors.

 

***Pension and OtherPostretirement Benefits Expenses and Liabilities*****—**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.  SeeNote 19 to the Consolidated Financial Statements for a detailed discussion ofour pension plans and other postretirement benefit plans.

 

In order to estimate our pension and otherpostretirement benefits expenses and liabilities, we evaluate the range ofpossible assumptions to be used in the calculation of pension and otherpostretirement benefits expenses and liabilities.  We select the assumptions that we believe tobe most indicative of factors such as participant demographics, pastexperiences and market indices, and provide the assumptions to independentactuaries.  These assumptions are updatedannually and primarily include factors such as discount rates, health care costtrend rates, expected return on plan assets, mortality rates, retirement rates,and rate of compensation increase.  Theindependent actuaries review our assumptions for reasonableness, and use theassumptions to calculate our estimated liability and future pensionexpense.  We review the actuarial reportsfor reasonableness and adjust our expenses and liabilities to reflect theamounts calculated in the actuarial reports.

 

On a quarterly basis, weanalyze the rollforward of pension assets and pension liabilities along withthe resulting funded status to assure that the Consolidated Balance Sheetreflects an updated estimate of these measures each period.  Funded status is adjusted for actualcontributions, benefit payments, return on assets and other identifiable andmaterial actuarial changes. Discount rates are also evaluated for reasonablenesseach period.

 

***Income Taxes—***We are a global enterprise withoperations in more than 40 countries. This global reach results in a complexity of tax regulations, whichrequire assessments of applicable tax law and judgments in estimating our ultimateincome tax liability.  See Note 4 to theConsolidated Financial Statements for a detailed discussion of our estimatesused in accounting for income taxes and income tax contingencies.

 

F-77

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We recognize the tax benefit from an uncertain tax position only if itis more likely than not that the tax position will be sustained uponexamination by the taxing authorities, based on the technical merits of theposition. We measure tax benefits in our financial statements from such aposition as the largest benefit that has a greater than fifty percentlikelihood of being realized upon ultimate settlement.  Unrecognized tax benefits are tax benefitsclaimed in our tax returns that do not meet these recognition and measurementstandards.

 

We record a liability for income tax contingencies when it is morelikely than not that a tax position we have taken will not be sustained uponaudit. We evaluate such likelihood based on relevant facts and tax law.   We adjust our recorded liability for incometax matters due to changes in circumstances or new uncertainties, such asamendments to existing tax law.  Ourultimate tax liability depends upon many factors, including negotiations withtaxing authorities in the jurisdictions in which we operate, outcomes of taxlitigation and resolution of disputes arising from federal, state, andinternational tax audits.  Due to thevarying tax laws in each jurisdiction senior management, with the assistance oflocal tax advisors as necessary, assesses individual matters in eachjurisdiction on a case-by-case basis.   We research and evaluate our income tax positions, including why webelieve they are compliant with income tax regulations, and these positions aredocumented internally.

 

Deferred income taxes result from the differences between the financialand tax basis of our assets and liabilities and are adjusted for changes in taxrates and tax laws when changes are enacted. If it is more likely than not that all or a portion of deferred tax assetswill not be realized, a valuation allowance is provided against such deferredtax assets. Significant judgment is required in evaluating the need for andmagnitude of appropriate valuation allowances against deferred tax assets.  The assessment of realization of deferred taxassets is performed annually under scenarios of future taxable income and taxplanning alternatives that are considered reasonable in the circumstances.

 

**RecentAccounting Pronouncements**

 

See Note 1 ofConsolidated Financial Statements for a discussion of recent accountingpronouncements and their effect on us.

 

**MarketRisk**

 

Our debt obligations,global operations, the nature of the specialty chemicals production process andthe industries in which we engage expose us to various market risks.  We utilize derivative financial instrumentsand derivative commodity instruments to mitigate certain market risks.  The following is a discussion of our primarymarket risk exposures, how those exposures are managed, and certainquantitative data pertaining to our market risk sensitive instruments.

 

*InterestRate Risk*

 

Interest ratefluctuations directly affect interest expense and cash to be paid out in theform of interest payments on variable-rate debt, and can potentially lead tochanges in the market value of the associated variable-rate debt.

 

We have $500.0 million ofoutstanding pre-petition variable-rate borrowings under bank revolving creditagreements, and interest is accrued on this debt based on the prime rate.  Due to our Chapter 11 filing, interestaccrued on pre-petition debt is added to the principal balance.  As of December 31, 2007 and 2006, totalinterest accrued on this debt and added to the $500.0 million principal was$283.0 million and $223.1 million, respectively.  If the prime rate were to vary in thenear-term by one percentage point, the effect would be to increase or decreaseinterest expense and accrued interest on outstanding principal by approximately$8.2 million over the twelve-month period ended December 31, 2008.

 

We also maintain a $250million debtor-in-possession facility. The interest rate under this facility isbased on LIBOR, a variable rate.  As of December 31,2007 and 2006, no amount was outstanding under this facility, and $178.5million and $175.0 million, respectively, was available to us, net of lettersof credit and holdback provisions.

 

We do not currently usederivative instruments to attempt to mitigate interest rate risk.

 

F-78

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*ForeignCurrency Exchange Rate Risk*

 

Because we do business inover 40 countries, our results of operations are exposed to fluctuations inforeign exchange rates. We seek to minimize exposure to these fluctuations bymatching revenue streams in volatile currencies with expenditures in the samecurrencies, but it is not always possible to do so.  From time to time, we use financialinstruments such as foreign currency forward contracts, options, orcombinations of the two to reduce the risk of certain specific transactions. However,we do not have a policy of hedging all exposures, because management does notbelieve that such a level of hedging would be cost-effective, particularlytranslation exposures that are not expected to affect cash flows in thenear-term.  Significant uses ofderivatives to mitigate the effects of changes in foreign currency exchangerates are as follows:

 

In May 2004, wepurchased forward contracts with a U.S. bank to minimize currency risk relatedto a Euro-denominated intercompany loan due from one of our German subsidiariesto one of our U.S. subsidiaries.  In June 2005,we extended a portion of the forward contract amounts to dates that mature onthe dates of the scheduled principal repayments.  As part of the contract extension, we wererequired to pay a settlement premium of $9.3 million to the bank.  We expect this settlement premium will berecovered over time as the contracts are settled at rates greater than theinitial rates in the May 2004 foreign currency forward contracts.  Currency fluctuations on this loan arerecorded as a component of operating results. The loan is denominated in Euros, and the total amount outstanding underthe intercompany loan was €61.6 million and €134.8 million as of December 31,2007 and 2006, respectively (approximately $89.9 million and $177.6 million,respectively).

 

In November 2007, weexecuted an intercompany loan in the amount of €250 million (Euros) between ourprincipal U.S. operating subsidiary and a newly established German subsidiaryas part of a legal restructuring.  Inconjunction with the loan, our U.S. subsidiary entered into a series of foreigncurrency forward contracts to attempt to minimize the impact to earnings fromforeign currency movements.  The forwardcontracts are aligned with the payment schedule of the intercompany loan, whichhas annual principal and interest payments in November 2009 through November 2013.The total amount outstanding under the intercompany loan was €250.0 million asof December 31, 2007 (approximately $364.7 million).

 

The following tablesprovide information about our significant foreign currency forward exchangeagreements as of December 31, 2007 and 2006, specifically, the notional,or contract, amounts (in millions of $U.S.), and weighted average exchangerates ($U.S. to Euros) by expected (contractual) maturity dates.  These notional amounts generally are used tocalculate the contractual payments to be exchanged under the contract. The fairvalues represent the fair value of the derivative contracts, and are presentedas other assets or other liabilities and allocated between current andnon-current, as appropriate, in the Consolidated Balance Sheets.

 
| **Foreign  Currency Forward Exchange Agreements** | ** **                 | **Euro Forward Contracts—December 31, 2007** | ** ** |
|---------------------------------------------------|----------------------------|--------------------------------------------------------|------------|
| ** **                                        | **Expected Maturity Date** | ** **                                             |
| ** **                                        | **2008**                   | ** **                                             | **2009**   | ** ** | **2010** | ** ** | **2011** | ** ** | **2012** | ** ** | **2013** | ** ** | **Total** | ** ** | **Fair Value** | ** ** |
| Contract amount                                   |                       | 79.1                                                   |       | 72.7 |   | 72.5 |   | 72.5 |   | 72.6 |   | 72.9 |   | 442.3 |   | (11.1 | ) |
| Average contractual exchange rate                 |                       | 1.28                                                   |       | 1.45 |   | 1.45 |   | 1.45 |   | 1.45 |   | 1.46 |   | 1.42 |   | N/A |   |

 
| **Foreign  Currency Forward Exchange Agreements** | ** **                  | **Euro  Forward Contracts—December 31, 2006** | ** ** |
|---------------------------------------------------|-----------------------------|---------------------------------------------------------|------------|
| ** **                                        | **Expected  Maturity Date** | ** **                                              |
| ** **                                        | **2007**                    | ** **                                              | **2008**   | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **2012** | ** ** | **2013** | ** ** | **Total** | ** ** | **Fair  Value** | ** ** |
| Contract amount                                   |                        | 92.8                                                    |       | 79.1 |   | — |   | — |   | — |   | — |   | — |   | 171.9 |   | (11.6 | ) |
| Average contractual exchange rate                 |                        | 1.27                                                    |       | 1.28 |   | — |   | — |   | — |   | — |   | — |   | 1.27 |   | N/A |   |

 

*CommodityPrice Risk*

 

We operate in marketswhere the prices of raw materials and energy are commonly affected by cyclicalmovements of the economy.  The principalraw materials used in our products include caustic, alumina, rare earths,nickel, aluminum, cobalt carbonate, kaolin, molybdenum, sodium aluminate, 

 

F-79

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sodium silicate, olefins,gypsum, resins, rubber and latices. Natural gas is the largest single energy source that we purchase. Thesecommodities are generally available to be purchased from more than onesupplier.  In order to minimize the riskof increasing prices on certain raw materials and energy, we use a centralizedsupply chain organization for procurement in order to improve purchasingactivities.  We have a risk managementcommittee to review proposals to hedge purchases of raw materials, energy andcurrency.

 

We have implemented anenergy risk management program under which our goal is to hedge natural gassupply in a way that provides protection against price volatility of thenatural gas market.  In order to mitigatevolatile natural gas prices, we have entered into fixed price swaps to hedge aportion of our 2008 natural gas requirements.

 

The following tablesprovide information about our commodity derivatives that are sensitive tochanges in commodity prices, specifically natural gas prices.  Contract volumes, or notional amounts, arepresented in millions of British thermal units (MMBtu), weighted averagecontract prices are presented in $U.S. per MMBtu, and the total contract amountand fair value are presented in millions of $U.S.  The fair values represent the fair value ofthe derivative contracts.  The fair valuefor swaps represents the excess of the variable price (market price) over thefixed price (pay price) multiplied by the nominal contract volumes.  The fair value of forward contractsrepresents the excess of the market value amounts (as quoted on commodityexchanges) over the contract amount.  Allcommodity derivative instruments mature in the subsequent year.

 
| ** **           | ** ** | **Commodity Derivatives—December 31, 2007**  | ** ** |
|----------------------|------------|--------------------------------------------------------|------------|
| **Type of Contract** | ** ** | **Contract  Volumes**                                  | ** ** | **Weighted  Average  Price** | ** ** | **Total  Contract  Amount** | ** ** | **Fair  Value** | ** ** |
| Swaps                |       | 1.8                                                    |       | 8.18 |   | 14.7 |   | (1.0 | ) |
|                 |       |                                                   |       |   |   |   |   |   |   |
| ** **           | ** ** | **Commodity  Derivatives—December 31, 2006** | ** ** |
| **Type of Contract** | ** ** | **Contract  Volumes**                                  | ** ** | **Weighted  Average  Price** | ** ** | **Total  Contract  Amount** | ** ** | **Fair  Value** | ** ** |
| Forwards             |       | 0.6                                                    |       | 10.56 |   | 6.0 |   | 3.5 |   |
| Swaps                |       | 2.0                                                    |       | 8.10 |   | 16.2 |   | (1.7 | ) |

 

Thefair value of commodity swaps and options derivative contracts are presented asother assets or other liabilities and allocated between current andnon-current, as appropriate, in the Consolidated Balance Sheets.  Our forward contracts for natural gas qualifyfor the normal purchases and normal sales exception from SFAS No. 133, asthey do not contain net settlement provisions, and result in physical deliveryof natural gas from suppliers. Therefore, the fair values of these contracts are not recorded in ourConsolidated Balance Sheets.

 

F-80

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

VALUATION ANDQUALIFYING ACCOUNTS AND RESERVES

*(Inmillions)*

 

**For theYear Ended December 31, 2007**

 
| ** **                                                   | ** ** | **Additions/(deductions)**                | ** ** |
|--------------------------------------------------------------|------------|-------------------------------------------|------------|
| **Description**                                              | ** ** | **Balance at  beginning  of period** | ** ** | **Charged/**

**(credited)  to costs  and  expenses** | ** ** | **Cash  received/  (paid)** | ** ** | **Other  net****(2)** | ** ** | **Balance at  end of  period** | ** ** |
| **Valuation and qualifying accounts deducted from  assets:** | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Allowances for  notes and accounts receivable                |       | $                                         | 8.3        |   | $ | (1.4 | ) | $ | — |   | $ | — |   | $ | 6.9 |   |
| Allowances for  long-term receivables                        |       | 0.5                                       |       | (0.5 | ) | — |   | — |   | — |   |
| Allowances for  inventory obsolescence                       |       | 6.8                                       |       | (1.3 | ) | — |   | — |   | 5.5 |   |
| Valuation allowance  for deferred tax assets                 |       | 185.2                                     |       | (42.2 | ) | — |   | — |   | 143.0 |   |
| **Reserves:**                                                | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Reserves for  asbestos-related litigation                    |       | 1,700.0                                   |       | — |   | — |   | — |   | 1,700.0 |   |
| Reserves for  environmental remediation                      |       | 361.1                                     |       | 17.0 |   | (9.5 | ) | — |   | 368.6 |   |
| Reserves for  retained obligations of divested businesses    |       | $                                         | 23.3       |   | $ | — |   | $ | (1.0 | ) | $ | 13.9 |   | $ | 36.2 |   |

 

**For the Year Ended December 31,2006**

 
| ** **                                                   | ** ** | **Additions/(deductions)**                |
|--------------------------------------------------------------|------------|-------------------------------------------|
| **Description**                                              | ** ** | **Balance at  beginning  of period** | ** ** | **Charged/**

**(credited)  to costs  and  expenses** | ** ** | **Cash  received/  (paid)** | ** ** | **Other  net****(1)** | ** ** | **Balance at  end of  period** | ** ** |
| **Valuation and qualifying accounts deducted from  assets:** | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Allowances for  notes and accounts receivable                |       | $                                         | 6.7 |   | $ | 1.6 |   | $ | — |   | $ | — |   | $ | 8.3 |   |
| Allowances for  long-term receivables                        |       | 0.7                                       |   | (0.2 | ) | — |   | — |   | 0.5 |   |
| Allowances for  inventory obsolescence                       |       | 6.7                                       |   | 0.1 |   | — |   | — |   | 6.8 |   |
| Valuation  allowance for deferred tax assets                 |       | 245.3                                     |   | (60.1 | ) | — |   | — |   | 185.2 |   |
| **Reserves:**                                                | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Reserves for  asbestos-related litigation                    |       | 1,700.0                                   |   | — |   | — |   | — |   | 1,700.0 |   |
| Reserves for  environmental remediation                      |       | 342.0                                     |   | 30.0 |   | (10.9 | ) | — |   | 361.1 |   |
| Reserves for  retained obligations of divested businesses    |       | $                                         | 23.4 |   | $ | 4.0 |   | $ | (3.6 | ) | $ | (0.5 | ) | $ | 23.3 |   |

 

**For theYear Ended December 31, 2005**

 
| ** **                                                   | ** ** | **Additions/(deductions)**                |       |
|--------------------------------------------------------------|------------|-------------------------------------------|------------|
| **Description**                                              | ** ** | **Balance at  beginning  of period** | ** ** | **Charged/**

**(credited)  to costs  and  expenses** | ** ** | **Cash  received/  (paid)** | ** ** | **Other  net****(1)** | ** ** | **Balance at  end of  period** | ** ** |
| **Valuation  and qualifying accounts deducted from assets:** |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Allowances for  notes and accounts receivable                |       | $                                         | 7.5        |   | $ | (0.8 | ) | $ | — |   | $ | — |   | $ | 6.7 |   |
| Allowances for  long-term receivables                        |       | 0.8                                       |       | (0.1 | ) | — |   | — |   | 0.7 |   |
| Allowances for  inventory obsolescence                       |       | 9.1                                       |       | (2.4 | ) | — |   | — |   | 6.7 |   |
| Valuation  allowance for deferred tax assets                 |       | 242.6                                     |       | 2.7 |   | — |   | — |   | 245.3 |   |
| **Reserves:**                                                | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Reserves for  asbestos-related litigation                    |       | 1,700.0                                   |       | — |   | — |   | — |   | 1,700.0 |   |
| Reserves for  environmental remediation                      |       | 345.0                                     |       | 25.0 |   | (6.7 | ) | (21.3 | ) | 342.0 |   |
| Reserves for  retained obligations of divested businesses    |       | $                                         | 25.1       |   | $ | 5.0 |   | $ | (4.7 | ) | $ | (2.0 | ) | $ | 23.4 |   |

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| (1) | Various miscellaneous adjustments against reserves. |
|-----|-----------------------------------------------------|
| (2) | Primarily represents a reclass from tax reserves    |

 

F-81

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**Exhibit 12**

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

COMPUTATION OFRATIO OF EARNINGS TO FIXED CHARGES AND

COMBINED FIXEDCHARGES AND PREFERRED STOCK DIVIDENDS (1)

(In millions,except ratios)

(Unaudited)

 
| ** **                                                                                    | *** *** | **Years Ended December 31,**(2) | ** ** |
|-----------------------------------------------------------------------------------------------|--------------|--------------------------------------|------------|
| ** **                                                                                    | *** *** | **2007**(3)                          | ** ** | **2006**(3) | ** ** | **2005**(3) | ** ** | **2004**(4) | ** ** | **2003**(5) | *** *** |
| Net income (loss) from continuing operations                                                  | ** **   | **$**                                | **80.3**   |   | $ | 18.3 |   | $ | 67.3 |   | $ | (402.3 | ) | $ | (55.2 | ) |
| Provision for (benefit from) income taxes                                                     | ** **   | **(5.8**                             | **)**      | 8.1 |   | 21.3 |   | (1.5 | ) | (12.3 | ) |
|                                                                                          |         |                                 |       |   |   |   |   |   |   |   |   |
| Minority interest in income (loss) of majority owned  subsidiaries                            | ** **   | **17.7**                             |       | 32.8 |   | 19.7 |   | 8.1 |   | (1.5 | ) |
|                                                                                          |         |                                 |       |   |   |   |   |   |   |   |   |
| Equity in unremitted losses (earnings) of less than  50%-owned companies                      | ** **   | **—**                           |       | — |   | — |   | — |   | 0.3 |   |
|                                                                                          |         |                                 |       |   |   |   |   |   |   |   |   |
| Interest expense  and related financing costs, including amortization of capitalized interest | ** **   | **73.0**                             |       | 74.1 |   | 56.6 |   | 112.6 |   | 17.5 |   |
|                                                                                          |         |                                 |       |   |   |   |   |   |   |   |   |
| Estimated amount  of rental expense deemed to represent the interest factor                   | ** **   | **6.9**                              |       | 6.2 |   | 6.2 |   | 5.6 |   | 5.1 |   |
|                                                                                          |         |                                 |       |   |   |   |   |   |   |   |   |
| Income (loss) as adjusted                                                                     | ** **   | **$**                                | **172.1**  |   | $ | 139.5 |   | $ | 171.1 |   | $ | (277.5 | ) | $ | (46.1 | ) |
|                                                                                          |         |                                 |       |   |   |   |   |   |   |   |   |
| Combined fixed charges and preferred stock  dividends:                                        |         |                                 |       |   |   |   |   |   |   |   |   |
| Interest expense  and related financing costs, including capitalized interest                 | ** **   | **$**                                | **84.2**   |   | $ | 74.2 |   | $ | 54.9 |   | $ | 100.7 |   | $ | 18.0 |   |
|                                                                                          |         |                                 |       |   |   |   |   |   |   |   |   |
| Estimated amount  of rental expense deemed to represent the interest factor                   | ** **   | **6.9**                              |       | 6.2 |   | 6.2 |   | 5.6 |   | 5.1 |   |
|                                                                                          |         |                                 |       |   |   |   |   |   |   |   |   |
| Fixed charges                                                                                 | ** **   | **91.1**                             |       | 80.4 |   | 61.1 |   | 106.3 |   | 23.1 |   |
|                                                                                          |         |                                 |       |   |   |   |   |   |   |   |   |
| Combined fixed charges and preferred stock dividends                                          | ** **   | **$**                                | **91.1**   |   | $ | 80.4 |   | $ | 61.1 |   | $ | 106.3 |   | $ | 23.1 |   |
|                                                                                          |         |                                 |       |   |   |   |   |   |   |   |   |
| Ratio of earnings to fixed charges                                                            | ** **   | **1.89**                             |       | 1.74 |   | 2.80 | * * | **(6** | **)** | **(6** | **)** |
|                                                                                          |         |                                 |       |   |   |   |   | ** ** | ** ** | ** ** | ** ** |
| Ratio of  earnings to combined fixed charges and preferred stock dividends                    | ** **   | **1.89**                             |       | 1.74 |   | 2.80 | * * | **(6** | **)** | **(6** | **)** |

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| (1) | Grace preferred stocks were retired in 1996.                                                                                                                                                                                                                                                                                                                                                                |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Certain amounts have been restated to conform to the  2007 presentation.                                                                                                                                                                                                                                                                                                                                    |
| (3) | Amounts in 2007, 2006, and 2005 contain provisions  for environmental remediation of $17.0 million, $30.0 million, and $25.0  million, respectively.                                                                                                                                                                                                                                                        |
| (4) | Amounts reflect the following adjustments:  a $476.6 million accrual to increase our  recorded asbestos-related liability, net of expected insurance recovery of  $238.2 million; a $94.1 million accrual to increase our estimate of interest  to which general unsecured creditors would be entitled; and a $151.7 million  credit for net income tax benefits related to the items described above. |
| (5) | Amounts include $172.5 million for pre-tax charges to  adjust our estimated liability for environmental remediation and  asbestos-related property damage.                                                                                                                                                                                                                                                  |
| (6) | As a result of the losses incurred for the years  ended December 31, 2004 and 2003, we were unable to fully cover the  indicated fixed charges (a shortfall of $383.8 million and $69.2 million,  respectively).                                                                                                                                                                                       |

 

F-82

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