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TABLE OF CONTENTS
Financial Supplement W. R. GRACE & CO. ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2008

Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



FORM 10-K

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

For the fiscal year ended December 31, 2008   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 21044-4098
410/531-4000
Securities registered pursuant 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 the Exchange Act:

None

         Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o    No ý

         Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes o    No ý

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

         Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulations S-K is not contained herein and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý

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

Large accelerated filer ý   Accelerated filer o   Non-accelerated filer o
(Do not check if a smaller reporting company)
  Smaller reporting company o

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

         The aggregate market value of W. R. Grace & Co. voting and non-voting common equity held by non-affiliates as of June 30, 2008 (the last business day of the registrant's most recently completed second fiscal quarter) based on the closing sale price of $23.49 as reported on the New York Stock Exchange was $1,432,123,521.*

         At January 31, 2009, 72,157,518 shares of W. R. Grace & Co. Common Stock, $.01 par value, were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

         None.

*
Based on 72,151,518 shares of outstanding Grace Common Stock, $.01 par value, as of June 30, 2008. Excludes 11,184,148 shares of outstanding W. R. Grace & Co. ("Grace") Common Stock held by directors, executive officers and stockholders whose beneficial ownership exceeds 10% of the outstanding shares of Grace Common Stock, as listed, in each case, in the Grace Annual Report on Form 10-K as filed with the SEC on February 29, 2008. Exclusion of shares held by any person should not be construed to indicate that such person possesses the power, direct or indirect, to direct or cause the direction of the management or policies of Grace, or that such person is controlled by or under common control with Grace.


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TABLE OF CONTENTS

PART I

       

Item 1.

 

Business

  1

Item 1A.

 

Risk Factors

 
17

Item 1B.

 

Unresolved Staff Comments

 
25

Item 2.

 

Properties

 
25

Item 3.

 

Legal Proceedings

 
26

Item 4.

 

Submission of Matters to a Vote of Security Holders

 
28

PART II

       

Item 5.

 

Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

  29

Item 6.

 

Selected Financial Data

 
30

Item 7.

 

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

 
30

Item 7A.

 

Quantitative and Qualitative Disclosures About Market Risk

 
30

Item 8.

 

Financial Statements and Supplementary Data

 
33

Item 9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 
33

Item 9A.

 

Controls and Procedures

 
33

Item 9B.

 

Other Information

 
33

PART III

       

Item 10.

 

Directors, Executive Officers and Corporate Governance

  34

Item 11.

 

Executive Compensation

 
36

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 
60

Item 13.

 

Certain Relationships, Related Transactions and Director Independence

 
62

Item 14.

 

Principal Accountant Fees and Services

 
63

PART IV

       

Item 15.

 

Exhibits and Financial Statement Schedules

  64

SIGNATURES

 
68

        Grace®, the Grace® logo and, except as otherwise indicated, the other product names used in the text of this report are trademarks, service marks, and/or trade names of operating units of W.R. Grace & Co. or its affiliates and/or subsidiaries. Responsible Care® is a trademark, registered in the United States and/or other countries, of Chemical Manufacturers Association, Inc. OCR® is a trademark, registered in the United States and/or other countries, of Chevron Intellectual Property, LLC.

        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 of websites mentioned in this report are not incorporated by reference or otherwise made a part of this report.


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PART I

Item 1.    BUSINESS

BUSINESS OVERVIEW

        W. R. Grace & Co. is engaged in the production and sale of specialty chemicals and 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 acquired both the Dewey and Almy Chemical Company and the Davison Chemical Company. During the 1980s and 1990s, we divested a substantial number of businesses that were not consistent with our business strategy. Grace is the successor to a company that originated in 1854 and originally became a public company in 1953.

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

        In the fourth quarter of 2007, we realigned our reportable operating segments to reflect the transfer of our packaging technologies product line to the Grace Davison operating segment. Our previous Grace Performance Chemicals operating segment was renamed "Grace Construction Products" as a result of the transfer. All segment information contained herein has been restated to reflect this realignment.

        Grace Davison markets its products primarily to a wide range of industrial customers, including those in the energy and refining industry, consumer, industrial and packaging industries, petro-/bio- chemical industry and the pharmaceutical and life sciences industry. Grace Davison includes the following product groups:

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        Grace Davison accounted for approximately 65% of our 2008 sales.

        Grace Construction Products, or GCP, produces and sells specialty construction chemicals and specialty building materials, including:

        Grace Construction Products accounted for approximately 35% of our 2008 sales.

        Our principal executive offices are located at 7500 Grace Drive, Columbia, Maryland 21044, telephone (410) 531-4000. As of December 31, 2008, we had approximately 6,300 full-time employees worldwide.

        Our strategy is to seek increased enterprise value by profitably growing our specialty chemicals and materials businesses in the global marketplace and achieving high levels of efficiency. To achieve these objectives, we plan to:

CHAPTER 11 FILING

        On April 2, 2001, Grace, along with 61 of our United States subsidiaries and affiliates, filed voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware. The cases are being jointly administered

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under case number 01-01139. Our non-U.S. subsidiaries and certain of our U.S. subsidiaries were not included in the bankruptcy filing.

Background of Chapter 11

        A bankruptcy filing under Chapter 11 of the United States Bankruptcy Code is generally a voluntary action taken by a debtor to resolve financial problems such as major liabilities. Chapter 11 gives a debtor the chance to restructure its finances so that it may continue to operate, provide its employees with jobs and pay its creditors. Chapter 11 can be used by debtors that are faced with large numbers of product liability lawsuits in multiple jurisdictions to provide a practical way to address the potential liabilities under the supervision of one court. A Chapter 11 filing generally stops all lawsuits against a debtor and prevents creditors from taking action to enforce claims or collect any monies or property that might be owed at the time of filing.

        Chapter 11 permits a debtor to define and resolve its liabilities under a court-supervised process generally referred to as a reorganization. Unlike a Chapter 7, or liquidation bankruptcy, which results in the sale or distribution of all of the assets of a business, Chapter 11 reorganization permits a debtor to continue its normal business operations. Existing management may continue to manage the debtor's operations during the reorganization. As a debtor-in-possession, a debtor is able to do business with suppliers and customers in a routine manner. Certain other activities, including transactions outside the ordinary course of business, generally require specific approval of the bankruptcy court.

        After a debtor files Chapter 11, one or more official committees that represent the interests of general unsecured creditors, other creditors and stockholders may be appointed. Normally these committees and their respective advisors are actively involved in the process to monitor the bankruptcy and protect the interests of their respective constituencies. The fees and expenses of these committees and advisors are paid by the debtor.

        The Chapter 11 process generally ends when the bankruptcy court approves a plan of reorganization for the debtor. In cases similar to ours with complex asbestos liabilities, debtors have taken several years to complete the Chapter 11 process.

Grace Chapter 11 Filing

        We voluntarily entered Chapter 11 to resolve comprehensively the nearly 130,000 asbestos personal injury and property damage claims against us, as well as any future demands which may be asserted. These claims and demands relate to past products and processes that involved asbestos, a mineral formerly used widely for many decades in building and other commercial products. Prior to 2000, we were able to resolve asbestos-related claims through direct negotiations and litigation, paying over $2 billion in claims and legal costs over a 20-year period. In most of the personal injury lawsuits, we are one of many defendants. In 2000 and the first quarter of 2001, the litigation environment changed with an unexpected 81% increase in personal injury claims filed against us, which we believe was caused by a surge in unmeritorious claims. We also became a defendant in class action lawsuits alleging damages from Zonolite® Attic Insulation, or ZAI, a former attic insulation product. Trends in claims filing and settlement demands showed no sign of returning to historic levels and these unfavorable trends were exacerbated by the bankruptcy filings of several of our co-defendants in asbestos personal injury litigation. These trends greatly increased the risk that we would not be able to resolve our pending and future asbestos-related claims under the state court system.

        After a thorough review of these developments, our Board of Directors concluded that a federal court-supervised bankruptcy process provided the best forum available to achieve fairness in resolving these claims and demands. On April 2, 2001, we, along with 61 of our United States subsidiaries and affiliates, filed voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware, referred

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to herein as the Bankruptcy Court. Since that time, we have been subject to the jurisdiction of the Bankruptcy Court.

        We are currently operating as a debtor-in-possession under court protection from creditors and claimants. We believe that our bankruptcy filing will permit a comprehensive resolution of the claims against us, while preserving the inherent value of our businesses. As a consequence of our bankruptcy filing, pending litigation against us is generally stayed (subject to certain exceptions in the case of governmental authorities), and no party may take any action to realize its pre-petition claims except pursuant to an order of the Bankruptcy Court. Since our bankruptcy filing, the Bankruptcy Court has approved all motions necessary for us to conduct normal business activities.

        Four committees have been appointed in the bankruptcy cases, two representing asbestos claimants, a third representing other unsecured creditors and a fourth representing shareholders. These committees, a legal representative of future asbestos personal injury claimants and a legal representative of future asbestos property damage claimants, have the right to be heard on all matters that come before the Bankruptcy Court and are playing important roles in the bankruptcy cases. We are required to bear certain costs of the committees and of the future asbestos claimants' representatives, including those of their counsel and financial advisors.

        See disclosure in this Report in Item 8 (Financial Statements and Supplemental Data) in the Financial Supplement under Note 2 (Chapter 11—Related Information) and Note 3 (Asbestos—Related Litigation) to the Consolidated Financial Statements for a description of our proposed joint plan of reorganization and the current status of our Chapter 11 cases.

PRODUCTS AND MARKETS

Specialty Chemicals and Specialty Materials Industry Overview

        Specialty chemicals and specialty materials are high-value-added products used as catalysts, intermediates, components, protectants or additives in a wide variety of products and applications. They are generally produced in relatively small volumes (compared with commodity chemicals) and must satisfy well-defined performance requirements and specifications. Specialty chemicals and specialty materials are often critical components of end products, catalysts for the production of end products or components used in end products. Consequently, they are tailored to meet customer needs, which generally results in a close relationship between the producer and the customer.

        We focus our business on the following, which we believe are important competitive factors in the specialty chemicals and specialty materials industry:

        We believe that our focus on these competitive factors enables us to deliver increased value to customers and competitive operating margins notwithstanding the increased customer service and research and development costs that this focus entails.

Grace Davison Operating Segment

        Grace Davison principally applies silica, alumina, zeolite and rubber and lattice technology in the design and manufacture of products to create significant value for our diverse customer base. Our customers include major oil refiners, plastics and chemical manufacturers, users of product packaging, consumer product manufacturers and pharmaceutical companies. We believe that our technological expertise provides a competitive advantage, allowing us to quickly design products and materials that help our customers create value in their markets.

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        The following table sets forth Grace Davison sales of similar products as a percentage of Grace total revenue.

 
  2008   2007   2006  
 
  Sales   % of
Grace
Revenue
  Sales   % of
Grace
Revenue
  Sales   % of
Grace
Revenue
 
 
  (In millions)
 

Refining Technologies

  $ 1,099.1     33.1 % $ 971.1     31.2 % $ 859.1     30.4 %

Materials Technologies

    694.8     20.9 %   663.5     21.3 %   592.8     21.0 %

Specialty Technologies

    374.7     11.3 %   374.6     12.0 %   345.4     12.2 %
                           

Total Grace Davison Revenue

  $ 2,168.6     65.3 % $ 2,009.2     64.5 % $ 1,797.3     63.6 %
                           

        The following table sets forth Grace Davison sales by region as a percentage of Grace Davison total revenue.

 
  2008   2007   2006  
 
  Sales   % of
Grace
Davison
Revenue
  Sales   % of
Grace
Davison
Revenue
  Sales   % of
Grace
Davison
Revenue
 
 
  (In millions)
 

North America

  $ 645.9     29.8 % $ 578.4     28.8 % $ 599.9     33.4 %

Europe Africa*

    913.4     42.1 %   915.6     45.6 %   761.1     42.4 %

Asia Pacific

    434.7     20.0 %   362.7     18.0 %   324.4     18.0 %

Latin America

    174.6     8.1 %   152.5     7.6 %   111.9     6.2 %
                           

Total Grace Davison Revenue

  $ 2,168.6     100 % $ 2,009.2     100 % $ 1,797.3     100 %
                           

*
Includes the Middle East.

Refining Technologies

FCC Catalysts

        We are a global leader in developing and manufacturing FCC catalysts and additives that enable petroleum refiners to increase profits by improving product yields and quality. Our FCC products also enable refiners to reduce emissions from their FCC units and reduce sulfur content in the gasoline that they produce.

        Oil refining is a highly specialized discipline, and FCC catalysts must be tailored to meet local variations in crude oil and a refinery's product mix. We work regularly with customers to help them find the most appropriate catalyst formulations for their changing needs. We are dependent on the economics of the petroleum industry, specifically, the impacts of demand for transportation fuels and petrochemical products and crude oil supply, which affect the extent to which our customers utilize the available capacity of their FCC units. In general, as a refinery utilizes more of its capacity, it needs a disproportionately greater amount of FCC catalyst.

        Refinery feedstocks vary in quality from sweet to heavy crude oil. Sweet crude feedstocks are more expensive than heavy crude and yield a greater proportion of high-value petroleum products. They also yield a lower proportion of residual oil, or "resid," which is generally the lowest-value feedstock contained in crude oil. Although heavy crude feedstocks with high resid content are less expensive than higher quality feedstocks, the processing of high resid feedstocks is more difficult because of their relatively high metals, nitrogen and sulfur contamination and higher boiling points. Refiners have increased their efforts to maximize the yield from resid feedstocks. We have designed our MIDAS®, IMPACT®, NEKTOR™, and NOMUS™ product portfolios to enable our customers to increase the efficiency and yield of resid refining.

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        Due to increased volatility in refinery feedstock prices and the recent high price of refinery feedstocks, over the past few years, refiners have increased their efforts to maximize the yield from resid feedstocks. We have designed our MIDAS®, IMPACT®, NEXTOR™, and NOMUS™ product portfolios to enable our customers to increase the efficiency and yield of resid refining.

        As a result of the increase in the relative price of diesel fuel as compared to gasoline, refiners are maximizing the yield of light cycle oil, a component of diesel fuel, from their FCC units. We have designed our MIDAS®-300 and DieseliseR products to enable our customers to increase the yield of light cycle oil from refinery FCC units.

        Many U.S. petroleum refiners have entered into consent decrees with the U.S. Environmental Protection Agency under which the refiners have agreed to reduce emissions of nitrogen oxides and sulfur oxides. The European Union has also imposed requirements on refineries with respect to nitrogen oxides and sulfur oxides emissions. FCC units are generally the largest emitters of these pollutants in a refinery. Our additives are designed to assist refineries in meeting their obligations to reduce these pollutants. Our Super DESOX® additive reduces sulfur oxides emissions from commercial FCC units. Our XNOx® and DENOX® additives are designed to achieve reductions in nitrogen oxides emissions comparable to those obtained from the capital-intensive alternatives available to a refinery.

        Global economic growth, especially in emerging countries, has increased the demand for plastics. As a result, our refinery customers have sought increased profits from petrochemicals by increasing the yield of propylene from their FCC units. Our zeolite-based technology, including our OlefinsMax® and OlefinsUltra® products, is designed to maximize the propylene output of FCC units.

        In recent years, many countries and regions, including the U.S., European Union and China have imposed or increased the regulatory limitations on the sulfur content of gasoline and diesel fuel. We have developed a portfolio of products designed to assist refiners in meeting their gasoline sulfur reduction targets including our D-PriSM® and GSR®-5 additives and our SuRCA® and Neptune™ catalyst families.

        Competition in FCC catalysts and additives is based on technology, product performance, customer service and price. Our principal FCC catalyst competitors are Albemarle and BASF which, with Intercat, are also principal competitors in FCC additives. We also have multiple regional competitors for FCC catalysts and additives.

Hydroprocessing Catalysts

        We market hydroprocessing catalysts through Advanced Refining Technologies, LLC, or ART, our joint venture with Chevron Products Company. We established ART to combine our technology with that of Chevron and to develop, market and sell hydroprocessing catalysts to customers in the petroleum refining industry worldwide.

        As discussed above, our business is dependent on the economics of the petroleum industry. Refineries increasingly use feedstocks that have high resid content. We are a leading supplier of hydroprocessing catalysts designed for processing these feedstocks. We offer fixed-bed, on-stream catalyst replacement (OCR®), ebullating bed and distillate products.

        We also offer a full line of catalysts used in processing ultra-low sulfur content gasoline and diesel fuel, including our SmART Catalyst System® and ApART™ catalyst system, that are customized for individual refiners. These products are designed to help refiners meet their obligations to reduce sulfur content in their products.

        Competition in the hydroprocessing catalyst industry is based on technology, product performance, customer service and price. Albemarle and Criterion are our leading global competitors in hydroprocessing catalysts. We also have multiple regional competitors.

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Materials Technologies

        We market silica-based and silica-alumina-based functional additives and process aids, such as silica gel, colloidal silica, zeolitic adsorbents, precipitated silica and silica-aluminas, for a wide variety of uses, and formulations used in food and beverage packaging, such as closure sealants and can coatings and sealants, 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®, CRYOSIV®, SAFETYSORB®

 

 

Chemical metal polishing aids and formulations for CMP/electronics applications

 

LUDOX®, PoliEdge®

Consumer

 

Toothpaste abrasives and thickening agents, free-flow agents, anticaking agents, tabletting aids, cosmetic additives and flavor carriers

 

SYLODENT®, SYLOID® FP™, 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®, SYLOWHITE™

 

 

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®

 

 

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®, Celox™

 

 

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®, Sistiaga™

 

 

Oxygen scavenging closure sealants and moisture scavenging silica sachets, polymeric desiccants and desiccants for bottlestopper applications

 

Celox™, SYLOSORB™, SAFETYSORB®

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        Our products are integrated into our customers' manufacturing processes and, when combined with our technical support, can increase the efficiency of their processes. By working closely with our customers, we help them to react quickly to the changing needs of brand owners and their other customers. We focus on high-growth markets and seek to develop and introduce new products that can add additional value to the current and anticipated product offerings of our customers. For example, our customers have incorporated our products into higher-resolution print media, active packaging, with oxygen or moisture scavenging functionality, less abrasive, high cleaning toothpastes and technologies that are friendly to the environment such as water-based and VOC-compliant coatings, green tires with less friction resistance and non-toxic anticorrosion protection. Our packaging technologies products are designed to address major industry trends such as flexible and lighter weight packaging, lower energy consumption, personal convenience, and highly individualized packaging. We seek to capitalize upon our innovation, customer service, worldwide infrastructure and expertise in global regulatory compliance (including food law compliance) to enhance our growth, especially in emerging regions.

        Our Materials Technologies product group is global, with more than 50% of our sales outside of the U.S. Our major competitors include PQ/INEOS, Degussa, UOP, Altana, PPG, Akzo Nobel and Valspar that, in each case, also sell their products on a worldwide basis. Competition is generally based on product performance and reliability, as well as additional value added features to address the needs of our customers, end-users and brand owners.

Specialty Technologies

Specialty Catalysts and Process Technologies

        We are a leading provider of catalyst systems and catalyst supports to the polyolefins industry for a variety of polyethylene and polypropylene process technologies. These types of catalysts are used for the manufacture of polyethylene and polypropylene resins used in products such as plastic film, high-performance plastic pipe and household containers. We use a combination of proprietary catalyst and support technology, as well as technology licensed from third parties, to provide unique catalyst-based solutions to industry, and to provide a broad technology portfolio for enhancing collaboration opportunities with technology leaders.

        Our Magnapore® polymerization catalyst is used to produce high performance polyethylene in the slurry loop process for pipe and film applications. POLYTRAK® polymerization catalyst, our newest family of products for polypropylene customers, is designed to achieve improved polymer performance, particularly for impact-resistant applications such as automobile bumpers.

        Our Sylobloc® polymer additives for producers and processors of plastic products prevent layers of polymer film from sticking together, improve dispersement of pigments and ease removal from molds.

        Our renewables product line draws upon our expertise in catalysis and separations to develop and provide technologies for purification, drying, and biofeedstock conversion, including our EnSieve® desiccants for ethanol dehydration and EnPure® adsorbents for biodiesel purification. Growth in our renewables business is driven by sales into ethanol dehydration and bio-diesel purification applications as a result of government mandates and escalating fuel prices. Our products provide customers with improved yields and process efficiencies.

        Our Davicat® standard and customized catalysts offer a wide range of chemical and physical properties based on our material science technology for supported catalysts and biotechnology applications such as nylon and artificial sweeteners. Our Raney® nickel, cobalt and copper hydrogenation and dehydrogenation catalysts are used for the synthesis of organic compounds for the fibers, pharmaceuticals, plastics, perfumes, soaps, color couplers and petroleum industries.

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        Our Sylobead® process adsorbents are used in petrochemical and natural gas processes for such applications as ethylene-cracked-gas-drying, natural gas drying and sulfur removal.

        The specialty catalyst industry is technology-intensive and suppliers must provide products formulated to meet customer specifications. There are many manufacturers of polyolefin and other specialty catalysts including PQ/INEOS, Albemarle, LyondellBasell, Univation and Sud Chemie, and most sell their products worldwide.

Discovery Sciences

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

Products
  Key Brands
Flash chromatography instruments, liquid and gas chromatography columns, high performance liquid chromatography (HPLC) detectors and other chromatography products including pumps and gas generators   Vydac®, Alltech®, and MODcol® Reveleris™, VisionHT™

Chromatography consumables and accessories including solid phase extraction (SPE) cartridges, vials, syringes, standards, and thin layer chromatography (TLC) plates

 

Prevail™, Maxi-Clean™, GracePure™, Flexit™

Specialty media for preparatory and process chromatography used by life sciences, food, beverage and chemical manufacturers

 

Davisil®, Vydac®

CO2 adsorbents for medical, marine, industrial and rescue applications

 

Sodasorb®

        Our chromatography products are used in a wide range of applications, including drug discovery and purification, for the pharmaceutical and biotechnology industries, environmental analysis, forensics, petrochemical analysis and the manufacture of food, cosmetics, vitamins and biofuels. We also market chromatography consumables and analytical and preparative columns packed with our specialty media. We can modify the base silica and surface chemistry for analytical, preparative and process scale customers in order to enhance our product performance for their unique applications.

        Our Discovery Sciences products compete on the basis of product quality, distinct technology and customer support. Competition for these products is highly fragmented with a large number of companies that sell their products on a global and regional basis, although a number of companies, such as Waters Corporation, Agilent Technologies and Thermo-Fisher, have a substantial global position and a relatively large installed customer base.

Manufacturing

        Our Grace Davison products are manufactured by a network of globally-coordinated plants that are positioned to service our customers regionally. Our integrated planning organization is responsible for the effective utilization of our manufacturing capabilities. Our Discovery Sciences product line has its own integrated planning organization. Our packaging products are manufactured in both large facilities to permit economies of scale and a network of smaller operations that enable customization to local market conditions.

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Marketing/Sales

        We use a global organization of technical professionals with extensive experience in refining processes, catalyst development, and catalyst applications to market our Refining Technologies catalysts and additives. These professionals work to tailor our technology to the needs of each specific customer. We generally negotiate prices for our refining catalysts because our formulations are specific to the needs of each customer and each customer receives special attention and technical service. Due to the current demand for hydroprocessing catalysts, we generally sell these products through long-term supply agreements with our geographically diverse customer base.

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

        We use a global direct sales force for our Specialty Catalysts and Process Technologies products that seeks to maintain close working relationships with our customers. These relationships enable us to cooperate with major polymer and chemical producers to develop catalyst technologies that complement their process developments. We have geographically distributed our sales and technical service professionals to make them responsive to the needs of our geographically diverse customers. We typically operate under long-term contracts with our 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 in determining their needs for our products.

        Seasonality does not have a significant overall effect on our Grace Davison operating segment. However, sales of FCC catalysts tend to be lower in the first calendar quarter prior to the shift in production by refineries from home heating oil for the winter season to gasoline production for the summer season. FCC catalysts and ebullating-bed hydroprocessing catalysts are consumed at a relatively steady rate and are replaced regularly. Fixed-bed hydroprocessing catalysts are consumed over a period of years and are replaced in bulk in an irregular pattern. Since our customers periodically shut down their refining processes to replace fixed-bed hydroprocessing catalysts in bulk, our hydroprocessing catalyst sales to any customer can vary substantially over the course of a year and between years based on that customer's catalyst replacement schedule. Our packaging products and some of our construction-related products such as insulated glass desiccants are affected by seasonal and weather-related factors including the consumption of beverages, the size and quality of food crops and the level of construction activity. These impacts are softened by the global nature of this product line.

Raw Materials

        The principal 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 raw materials). Multiple suppliers are generally available for each of these materials; however some of our raw materials are provided by single sources of supply. We seek to mitigate the risk of using single source suppliers by identifying and qualifying alternative suppliers or, for unique materials, by using alternative formulations from other suppliers or by passing price increases on to customers. In some instances, we produce our own raw materials and intermediates.

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        Prices for some raw materials have increased significantly, particularly caustic soda and sulfuric acid. Prices for others, such as metals and petroleum-based specialty and commodity materials such as resins and solvents have been volatile in recent years. As in many chemical businesses, we consume significant quantities of natural gas in the production of Grace Davison products. World events and other economic factors have caused volatility in the price of natural gas. Increases in the cost of natural gas and raw materials can negatively impact our operating margins. Since we manufacture a substantial portion of our packaging products in developing countries using raw materials from suppliers in the U.S., Europe and other developed economies, currency revaluations versus the U.S. dollar and Euro in developing countries may adversely affect our raw material costs and the prices we may charge for our products.

Grace Construction Products Operating Segment

        Our GCP products include specialty construction chemicals and materials. We entered this business in 1954, with our acquisition of the Dewey and Almy Chemical Company.

        The following table sets forth GCP sales of similar products as a percentage of Grace total revenue.

 
  2008   2007   2006  
 
  Sales   % of Grace
Revenue
  Sales   % of Grace
Revenue
  Sales   % of Grace
Revenue
 
 
  (In millions)
 

Specialty Construction Chemicals*

  $ 741.3     22.4 % $ 744.3     23.9 % $ 694.0     24.5 %

Specialty Building Materials**

    407.1     12.3 %   361.7     11.6 %   335.2     11.9 %
                           

Total GCP Revenue

  $ 1,148.4     34.7 % $ 1,106.0     35.5 % $ 1,029.2     36.4 %
                           

*
Includes concrete and cement products.

**
Includes vermiculite products.

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

 
  2008   2007   2006  
(In millions)
  Sales   2008 vs
2007
  Sales   2007 vs
2006
  Sales  

GCP Americas

  $ 595.0     1.3 % $ 587.1     (2.4)  % $ 601.4  

GCP Europe Africa*

    407.1     7.0 %   380.6     22.9 %   309.6  

GCP Asia Pacific

    146.3     5.8 %   138.3     17.1 %   118.2  
                       

Total GCP Revenue

  $ 1,148.4     3.8 % $ 1,106.0     7.5 % $ 1,029.2  
                       

*
Includes the Middle East and India.

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        We are a supplier to the nonresidential (commercial and infrastructure) construction industry, and to a lesser extent, the residential construction and repair and restoration industries. The following table shows our principal specialty 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®, Verxite™, FRSV™

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®

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Products
  Uses   Customers   Key Brands
Residential building materials   Specialty roofing membranes and flexible flashings for windows, doors, decks and detail areas 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®, 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®

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

        In view of this diversity of customers and customer concerns, and because specialty construction chemicals and specialty building materials require intensive sales and customer service efforts, we maintain a direct sales and technical support team with sales personnel based in more than 35 countries worldwide. This sales and support team sells products under global contracts, under U.S. or regional contracts, and on a job-by-job basis. We also use distributors in both domestic and overseas markets. We compete globally with several large construction materials suppliers, and regionally and locally with numerous smaller competitors. In recent years, the cement and concrete industry has experienced some consolidation, thereby increasing the importance of servicing global customers. For some customer groups, such as producers and contractors, operational efficiency and total applied cost are key factors in making purchasing decisions, while for others, such as architects and engineers, product performance and design versatility are more important.

        Competition for our construction products is based on product performance, technical support and service, and brand name recognition in the construction industry. Our major global specialty construction chemicals competitors are BASF and Sika.

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

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        In addition to new product introductions, product enhancements and acquisitions, we look for growth opportunities in developing countries where increasing construction activity, improvement in building codes, and sophistication of construction practices can accelerate demand for our construction products. We continue to expand our commercial and manufacturing capabilities in these geographic areas.

        The key raw materials used in our specialty construction products are obtained from a variety of suppliers, including commodity chemical producers, petroleum companies and paper manufacturers. The majority of our raw materials are olefins and organic chemicals; we also make significant purchases of inorganic materials such as gypsum, as well as specialty materials including specialty films, papers, membranes and fibers. In most instances, these materials are available from multiple sources. Global supply and demand factors, currency revaluations against the U.S. dollar and petroleum prices significantly impacted the price and availability of key raw materials in recent years.

        The construction business is cyclical in response to economic conditions and construction demand. The construction business is also seasonal and dependent on favorable weather conditions, with a decrease in construction activity during the winter months. Demand for our specialty construction products is primarily impacted by global non-residential construction activity and U.S. residential construction activity. We seek to increase profitability and minimize the impact of cyclical downturns in regional economies by introducing technically advanced high-performance products and expanding geographically. Although in recent years these strategies have been successful in reducing the impact of cyclicality, a decline in U.S. and European construction activity in 2007 and 2008 has had a negative impact on our sales in North America and Western Europe.

FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS AND GEOGRAPHIC AREAS

        Disclosure of financial information about industry segments and geographic areas for 2008, 2007 and 2006 is provided in this Report in Item 8 (Financial Statements and Supplementary Data) in the Financial Supplement under Note 21 (Operating Segment Information) to the Consolidated Financial Statements which disclosure is incorporated herein by reference. Disclosure of risks attendant to our foreign operations is provided in this Report in Item 1A (Risk Factors).

INTELLECTUAL PROPERTY; RESEARCH ACTIVITIES

        Competition in the specialty chemicals and specialty materials industry is often based on technological superiority and innovation. Our ability to maintain our margins and effectively compete with other suppliers depends on our ability to introduce new products based on innovative technology, as well as our ability to obtain patent or other intellectual property protection. Our research and development programs emphasize development of new products and processes, improvement of existing products and processes and application of existing products and processes to new industries and uses. We conduct research in all regions, with North America and Europe accounting for the most activity.

        We therefore routinely file applications to obtain world-wide patents to protect our investments in innovation, research, and product development. Numerous patents and patent applications protect our products, formulations, manufacturing processes, equipment, and improvements. We also benefit from the use of trade secret information, including know-how and other proprietary information relating to many of our products and processing technologies. There can be no assurance, however, that our patents, patent applications and precautions to protect trade secrets and know-how will provide sufficient protection for our intellectual property. In addition, other companies may independently develop systems or processes that could circumvent our patents or may acquire patent rights applicable to our business.

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        Research and development expenses relating to continuing operations amounted to $83 million in 2008, $80 million in 2007 and $66 million in 2006. These amounts include depreciation and amortization expenses related to research and development and expenses incurred in funding external research projects. The amount of research and development expenses relating to government- and customer-sponsored projects (rather than projects that we sponsor) was not material during these periods.

ENVIRONMENTAL, HEALTH AND SAFETY MATTERS

        We are subject, along with other manufacturers of specialty chemicals, to stringent regulations under numerous U.S. federal, state and local and EU and other foreign environment, health and safety laws and regulations relating to the generation, storage, handling, discharge, disposition and stewardship of hazardous wastes and other materials. Environmental laws require that certain responsible parties, as defined in the relevant statute, fund remediation actions regardless of legality of original disposal or ownership of a disposal site. We are involved in remediation actions to address hazardous wastes or other materials as required by U.S. federal, state and local and foreign laws. During the Chapter 11 proceeding, we generally are not participating in the funding of investigation and remediation at sites that we do not own. Our ultimate liability with respect to many of these sites will be determined as part of the Chapter 11 proceeding.

        We have expended substantial funds to comply with environmental laws and regulations and expect to continue to do so in the future. The following table sets forth our expenditures in the past three years, and our estimated expenditures in 2009 and 2010, for (i) the operation and maintenance of manufacturing facilities and the disposal of wastes; (ii) capital expenditures for environmental control facilities; and (iii) site remediation:

Year
  Operation of
Facilities and
Waste Disposal
  Capital
Expenditures
  Site
Remediation
 
 
  (in $ millions)
  (in $ millions)
  (in $ millions)
 

2006

    59     8     11  

2007

    62     9     9  

2008

    51     5     257 *

2009

    54     9     16 **

2010

    56     7     7 **

        Additional information about our environmental remediation activities is provided in this Report in Item 3 (Legal Proceedings).

        We continuously seek to improve our environmental, health and safety performance. To the extent applicable, we extend the basic elements of the American Chemistry Council's Responsible Care® program to all our locations worldwide, embracing specific performance objectives in the key areas of management systems, product stewardship, employee health and safety, community awareness and emergency response, distribution, process safety and pollution prevention. We have

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implemented key elements of the new Responsible Care® Security Code for our operations and systems. We have completed a review of our existing security (including cyber-security) vulnerability and have taken actions to enhance our security systems and protect our assets. We have undertaken certain activities to comply with the Department of Homeland Security (DHS) Chemical Facility Anti-Terrorism Standards, including identifying facilities subject to the Standards and conducting Security Vulnerability Assessments as necessary.

EMPLOYEE RELATIONS

        As of December 31, 2008, we employed approximately 6,300 persons, of whom approximately 2,900 were employed in the United States. Of our total employees, approximately 3,800 work in Grace Davison facilities, approximately 1,700 work in Grace Construction Products facilities, and approximately 800 are dedicated to corporate activities and/or are shared through globally managed professional groups such as finance and legal services, human resources, information technology, supply chain and environment, health and safety.

        Approximately 800 of our manufacturing employees in the United States are represented for collective bargaining purposes by nine different local collective bargaining groups. We have operated without a labor work stoppage for more than 10 years.

        We have works councils representing the majority of our European sites serving approximately 1,800 employees.

RISK MANAGEMENT

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

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AVAILABILITY OF REPORTS AND OTHER DOCUMENTS

        We maintain an Internet website at www.grace.com. Our annual reports on Form 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) or 15(d) of the Securities Exchange Act of 1934, as amended, are available, free of charge, on our website as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the Securities and Exchange Commission, or SEC. These reports may be accessed through our website's investor information page.

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

        The information on our website is not, and shall not be deemed to be, a part of this report or incorporated into any other filings we make with the SEC.

        On March 27, 2008, our Chief Executive Officer submitted a certification to the New York Stock Exchange that, as of such date, he was not aware of any violation by Grace of the New York Stock Exchange corporate governance listing standards. Our Chief Executive Officer and Chief Financial Officer have submitted certifications to the SEC pursuant to the Sarbanes Oxley Act of 2002 as exhibits to this Report.

EXECUTIVE OFFICERS

        See Part III, Item 10 of this Report for information about our Executive Officers.

Item 1A.    RISK FACTORS

        This Report, including the Financial Supplement, contains, and our other public communications 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," or similar expressions and includes all statements regarding our Chapter 11 proceeding, expected financial position, results of operations, cash flows, financing plans, business strategy, budgets, capital and other expenditures, competitive positions, growth opportunities for existing products, benefits from new technology and cost reduction

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initiatives, plans and objectives of management and markets for securities. For these statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Like other businesses, we are subject to risks and uncertainties that could cause our actual results to differ materially from our projections or that could cause other forward-looking information to prove incorrect. Factors that could cause actual events to materially differ from those contained in the forward-looking statements include those factors set forth below and elsewhere in this Annual Report on Form 10-K. Further, our reported results should not be considered as an indication of our future performance. Readers are cautioned not to place undue reliance on our projections and forward-looking information, which speak only as of the date thereof. We undertake no obligation to publicly release any revisions to the projections and forward-looking information contained in this document, or to update them to reflect events or circumstances occurring after the date of this document.

        In addition to general economic, business and market conditions, we are subject to other risks and uncertainties, including, without limitation, the following:

COMPANY RISKS

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

        On February 27, 2009, supported by the Official Committee of Equity Security Holders, the Official Committee of Asbestos Personal Injury Claimants and the legal representative of future asbestos personal injury claimants, as co-proponents, we filed an amended proposed joint plan of reorganization, the Joint Plan, with the bankruptcy court that is designed to address all pending and future asbestos-related claims and all other pre-petition claims as outlined therein. The Joint Plan would, if confirmed and effective, substantially impact the value of the ownership interests of holders of currently outstanding Grace common stock. Although it is supported by the parties thereto, other parties-in-interest in our Chapter 11 case have objected to several provisions of the Joint Plan and others may object in the future. As a result, it is possible that the Joint Plan will not be confirmed by the bankruptcy court or the district court or become effective. Further, the effectiveness of the Joint Plan is subject to the fulfillment of numerous conditions that may not ultimately be fulfilled. One of these conditions is that we raise sufficient funds to pay certain claims in cash. We anticipate that we will need approximately $1.0 billion in new financing to fund the Joint Plan. Until the current crisis in the global credit markets more fully abates, traditional debt financing may be unavailable to us on acceptable terms. If we are unable to obtain the necessary financing on acceptable terms, our emergence from Chapter 11 may be delayed. No party currently has exclusive rights to propose a plan of reorganization and solicit votes thereon, so any party-in-interest can propose a competing plan of reorganization at any time. Therefore, until an ultimate plan of reorganization is confirmed and effective, the interests of the holders of Grace common stock remain subject to substantial dilution or cancellation. Accordingly, the value of Grace common stock is highly speculative and any investment in Grace common stock poses a high degree of risk.

If our proposed joint plan of reorganization is not confirmed or does not become effective, the outcome of our Chapter 11 cases could result in the substantial dilution or cancellation of Grace's currently outstanding common stock.

        If our proposed joint plan of reorganization is not confirmed or does not become effective, the outcome of our Chapter 11 cases would depend primarily upon the resolution of our asbestos-related and other contingent liabilities. We would likely return to the bankruptcy court estimation trial that was suspended in April 2008 due to the personal injury settlement. We expect that the estimate resulting from this process would form the basis for a plan of reorganization that would provide for the funding of a trust to which all pending and future asbestos-related claims would be channeled. If

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the amount of asbestos-related liabilities, as determined through estimation or otherwise, and other liabilities exceeded the assets available for funding, then we likely would issue additional shares of Grace common stock to satisfy such liabilities. The number of shares to be issued could substantially dilute the interests of current shareholders or result in a recapitalization of Grace that would cancel the shares of current shareholders and issue new shares to asbestos and other creditors. Because of this risk of substantial dilution or cancellation, the value of Grace common stock is highly speculative and any investment in Grace common stock poses a high degree of risk.

The bankruptcy process may disrupt our business.

        We have attempted to minimize the adverse effect of our Chapter 11 reorganization on our relationships with our employees, suppliers, customers and other parties. Nonetheless, as our reorganization becomes more protracted, our relationships with our customers, suppliers and employees may be adversely impacted and our operations could be materially and adversely affected. In addition, the continuation of our reorganization could negatively affect our ability to attract new employees and retain existing high performing employees.

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

        While we operate our businesses as debtor-in-possession under supervision by the bankruptcy court, we are required to obtain the approval of the bankruptcy court prior to engaging in activities or transactions outside the ordinary course of business. For example, our strategic plan includes the acquisition of businesses in the specialty chemicals industry. Such acquisitions generally require bankruptcy court approval. Bankruptcy court approval of non-ordinary course activities entails preparation and filing of appropriate motions with the bankruptcy court, negotiation with the various creditors' committees and other parties in interest and one or more hearings. The various creditors' committees and other parties in interest may be heard at any bankruptcy court hearing and may raise objections with respect to these motions. This process delays major decisions and limits our ability to respond quickly to opportunities and events in the marketplace. Furthermore, in the event the bankruptcy court does not approve a proposed activity or transaction, we would be prevented from engaging in activities and transactions that we believe are beneficial to Grace.

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

        Our financial statements reflect accounting for asbestos-related liabilities that is based on the conditions precedent to the amended plan of reorganization that we filed in 2005, the Prior Plan, rather than the Joint Plan. The Prior Plan and the Joint Plan would result in substantially different treatment of our asbestos-related liabilities in our financial statements. When we adjust our accounting based on the Joint Plan or another plan that is filed and/or confirmed, such adjustments could be material to our consolidated financial position and results of operations.

We do not expect to update the proforma and prospective financial information that we filed with the bankruptcy court as an exhibit to the Joint Plan to reflect events that occur after that filing.

        We provided proforma and prospective financial information in the exhibits to the Joint Plan filed with the bankruptcy court in compliance with the requirements of the U.S. Bankruptcy Code. That information is not included in or incorporated into this Report. We do not expect to update the Joint Plan proforma and prospective financial information to reflect events that occur after the filing of the Joint Plan with the bankruptcy court unless required to do so by the U.S. Bankruptcy Code or the bankruptcy court. Further, this information is prepared in a format that may not be comparable to information in our financial statements included in this Report or other Reports filed with the SEC. As

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a result, investors in Grace common stock should not rely upon the proforma and prospective financial information filed with the bankruptcy court in connection with the Joint Plan.

We may not be able to collect all asbestos-related insurance payments that may be due to us.

        We have insurance coverage for a portion of the asbestos-related claims against us. Under the Joint Plan, insurance policies that provide coverage for asbestos-related claims and proceeds, including interest, received after the date of the personal injury settlement, would be assigned to the personal injury trust established under the Joint Plan. We estimate that, assuming an ultimate payout of asbestos-related claims equal to the $1,700 million of asbestos-related liabilities recorded on our balance sheet, we should be entitled to approximately $500 million of insurance recovery. Accordingly, our December 31, 2008 balance sheet includes a long-term asset for estimated asbestos-related insurance of $500 million. Although this amount pertains only to insurance carriers with which we have asbestos settlement agreements, and/or which are currently solvent, we cannot be sure that all these amounts will be collected. We have entered into a settlement agreement with an underwriter of a portion of our excess insurance coverage. The insurer funded an escrow account for the benefit of the holders of claims that currently holds approximately $97.1 million, including interest earned on the account. The settlement agreement provides that unless we confirm a plan of reorganization by December 31, 2008 (which did not happen), 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. The timing and amount of future payments from our insurers depends on their continued solvency and the resolution of disputes regarding coverage under the insurance policies as well as the nature and timing of actual claims paid. Because of the significance of our future asbestos-related payments, the receipt of timely and complete payments from our insurers will be important to the success of our reorganization. Under the Joint Plan, insurance policies that provide coverage for asbestos-related claims and proceeds from those policies, including interest, received after the date of the personal injury settlement, would be assigned to the personal injury trust established under the Joint Plan.

Grace is currently under criminal indictment in connection with our former vermiculite mining and processing activities in Libby, Montana.

        Along with seven former senior level employees (one of whom is now deceased), Grace has been indicted in connection with our former vermiculite mining and processing activities in Libby, Montana. The indictment accuses Grace and the co-defendants of conspiracy to violate environmental laws and obstruct federal agency proceedings, violations of the federal Clean Air Act, and obstruction of justice. According to the U.S. Department of Justice, Grace could be subject to fines in an amount equal to twice the after-tax profit earned from our Libby operations or twice the alleged loss suffered by Libby victims, plus additional amounts for restitution to victims. The indictment alleges that our after-tax profits were $140 million. Grace has categorically denied any criminal wrongdoing and intends to vigorously defend itself at trial. We are unable to assess whether the indictment or any conviction will have a material adverse effect on our results of operations or financial condition or affect our bankruptcy proceedings. The trial commenced on February 19, 2009 and we expect it to last three to four months.

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

        Grace is subject to lawsuits and regulatory actions, in connection with current and former operations, for breaches of environmental laws that seek clean-up or other remedies. Grace is also subject to lawsuits and investigations by public and private parties under various environmental laws in connection with our current and former operations in various states, including with respect to off-site disposal at facilities where Grace has been identified as a potentially responsible party under

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the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, commonly referred to as CERCLA.

        We have established accounting accruals for all environmental matters for which sufficient information is available. As we receive new information, our estimated liability may change materially. We do not have sufficient information to accrue for all of Grace's environmental risks, and we cannot be sure that our actual costs will be equal to or less than our current estimates and accruals. Furthermore, it is reasonably possible that costs associated with those environmental matters for which we have established accruals may exceed our current accruals by material amounts. Some or all of our liability in connection with alleged violations of environmental laws may not be discharged upon confirmation of our proposed plan of reorganization.

Our capital resources are limited and we have limited access to additional financing.

        In addition to the cash requirements necessary to fund our ongoing operations, we currently are incurring, and anticipate that we will continue to incur significant professional fees and other restructuring costs in connection with our bankruptcy proceedings. We currently are funding our operations with cash flow from operations, foreign credit facilities that expire on various dates in 2009 in the aggregate amount of approximately $99 million with an aggregate borrowing availability as of December 31, 2008 of $65.6 million and a debtor-in-possession (DIP) loan facility that expires on April 1, 2010 in the aggregate amount of $165 million with a borrowing availability as of December 31, 2008 of $100.9 million. Based on our current and anticipated level of operations, we believe that our cash and short term investments and cash flow from operations are adequate to meet our current and anticipated cash requirements during our Chapter 11 cases. If such amounts are not sufficient to fund operations until a plan of reorganization is confirmed by the bankruptcy court, we may be required to reduce planned capital expenditures or seek additional financing. We anticipate that we will need approximately $1.0 billion in new financing to fund the Joint Plan. Until the current crisis in the global credit markets more fully abates, additional traditional debt financing to fund current operations or to pay claims under the Joint Plan or another plan of reorganization may be unavailable to us on acceptable terms. If we are unable to obtain the necessary financing on acceptable terms, our emergence from Chapter 11 may be delayed. As a result of the uncertainty surrounding our current circumstances, we cannot determine our long-term liquidity requirements or the adequacy of our capital resources until a plan of reorganization is confirmed by the Bankruptcy Court.

We have unfunded and underfunded pension plan liabilities. We will likely require current and future operating cash flow to fund the shortfall. We have no assurance that we will generate sufficient cash flow to satisfy these obligations.

        We maintain U.S. and non-U.S. defined benefit pension plans covering employees who meet age and service requirements. Our net pension liability and cost is materially affected by the discount rate used to measure pension obligations, the longevity and actuarial profile of our workforce, the level of plan assets available to fund those obligations and the expected long-term rate of return on plan assets. Significant changes in investment performance or a change in the portfolio mix of invested assets can result in corresponding increases and decreases in the valuation of plan assets, particularly equity securities, or in a change in the expected rate of return on plan assets. For example, our U.S. advance-funded pension plans, which collectively have the largest asset base of our advance-funded plans and a targeted asset allocation of 60% equities and 40% bonds, experienced an overall decline of 26% in 2008. Assets available to fund the pension benefit obligation of the U.S. advance-funded pension plans at December 31, 2008 were approximately $561 million, or approximately $380 million less than the measured pension benefit obligation. In addition, change in the discount rate would result in a significant increase or decrease in the valuation of pension obligations, affecting the reported funded status of our pension plans as well as the net periodic pension cost in the following years. Similarly, changes in the expected return on plan assets can result in significant changes in the net periodic pension cost in the following years.

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The international scope of our operations subjects us to the risks of doing business in foreign countries, which could adversely affect our business, financial condition and results of operations.

        We conduct a substantial portion of our business outside of the United States, with approximately 68% of our 2008 sales to non-U.S. customers. We currently have many production facilities, research and development facilities and administrative and sales offices located outside North America, including facilities and offices located in Europe, Latin America, Africa and Asia. We expect international sales to continue to represent a significant portion of our revenue. Accordingly, our business is subject to risks related to the differing legal, political, social and regulatory requirements and economic conditions of many jurisdictions. Risks inherent in international operations include the following:

        In addition, certain of our operations are in higher risk regions of the world such as the Middle East and portions of Asia, Africa, Eastern Europe and Latin America. Unanticipated events, such as geopolitical changes, could adversely affect these operations. Our success as a global business will depend, in part, upon our ability to succeed in differing legal, regulatory, economic, social and political conditions by developing, implementing and maintaining policies and strategies that are effective in each location where we do business.

We are exposed to currency exchange rate fluctuations that could impact our profitability.

        We are exposed to currency exchange rate risk through our non-U.S. operations. As we conduct a significant portion of our operations outside the United States, fluctuations in currencies of other countries, especially the Euro, may materially affect our operating results. For example, changes in currency exchange rates may affect the relative prices at which we and our competitors sell products in the same region and the cost of materials used in our operations. A substantial portion of our net 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 be reduced because the foreign currency will translate into fewer U.S. dollars.

        In addition to currency translation risks, we incur a currency transaction risk whenever one of our operating subsidiaries enters into either a purchase or a sales transaction using a currency different from the operating subsidiary's functional currency. Given the volatility of exchange rates,

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we may not be able to manage our currency transaction and/or translation risks effectively, or volatility in currency exchange rates may expose our financial condition or results of operations to a significant additional risk.

Our ability to use tax deductions to reduce future tax payments may be limited if there is a change in ownership of Grace or if Grace does not generate sufficient U.S. taxable income.

        Our ability to use future tax deductions, including net operating losses and deductions for the deferred payments contemplated in the Joint Plan, may be limited by Section 382 of the Internal Revenue Code of 1986, as amended, if we undergo an ownership change as a result of future changes in the ownership of outstanding Grace common stock. In addition, our ability to use future tax deductions is dependant on our ability to generate sufficient future taxable income in the U.S. In order to preserve these future tax deductions, the bankruptcy court has approved trading restrictions on Grace common stock until the effective date of a plan of reorganization. These restrictions prohibit (without the consent of Grace) a person from acquiring more than 4.75% of the outstanding Grace common stock or, for any person already holding more than 4.75%, from increasing such person's holdings. The Joint Plan provides that under certain circumstances, the Board of Directors would have the authority to impose restrictions on the transfer of Grace stock with respect to certain 5% shareholders in order to preserve these future tax deductions.

We may be subject to claims of infringement of the intellectual property rights of others, which could hurt our business.

        From time to time, we face infringement claims from our competitors or others alleging that our processes or products infringe on their proprietary technologies. Any claims that our products or processes infringe the intellectual property rights of others, regardless of the merit or resolution of the claims, could cause us to incur significant costs in responding to, defending and resolving the claims, and may divert the efforts and attention of our management and technical personnel from our business. If we are found to be infringing on the proprietary technology of others, we may be liable for damages, 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 infringing product. Even if we ultimately prevail, the existence of the lawsuit could prompt our customers to switch to products that are not the subject of infringement suits.

While Grace is in bankruptcy, we are not permitted to pay dividends on Grace common stock.

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

INDUSTRY RISKS

Prices for raw materials and energy are volatile; we may not be able to pass through increases in costs and expenses for raw materials and energy which may hurt our profitability.

        We use 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. Prices and the volatility of prices for these materials have increased significantly in recent

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years. To the extent this trend continues and we are unable to pass through increases in raw materials costs to our customers, our operating profit and results of operations may decline.

A substantial portion of our raw materials are commodities whose prices fluctuate as market supply/demand fundamentals change.

        We attempt to manage exposure to price volatility of major commodities through:

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

        We have a policy of maintaining, when available, multiple sources of supply for raw materials. However, certain of our raw materials are provided by single sources of supply. We may not be able to obtain sufficient raw materials due to unforeseen developments that would cause an interruption in supply. Even if we have multiple sources of supply for raw materials, these sources may not make up for the loss of a major supplier.

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

        As a manufacturer of specialty chemicals and materials, we are subject to stringent regulations under numerous U.S. federal, state, local and foreign environmental, health and safety laws and regulations relating to the generation, storage, handling, discharge, disposition and stewardship of hazardous wastes and other materials. We have expended substantial funds to comply with such laws and regulations. Legislative, regulatory and economic uncertainties make it difficult for us to project future spending for these purposes, and if there is an acceleration in new regulatory requirements, we may be required to expend substantial additional funds to remain in compliance.

The length and depth of product and industry business cycles in our segments may result in periods of reduced sales, operating margins and operating losses.

        Our operating segments are sensitive to the cyclical nature of the industries they serve. Our hydroprocessing catalyst product line and other hydroprocessing catalyst suppliers have experienced alternating periods of inadequate capacity and excess capacity for their products. Periods of inadequate capacity, including some due to raw material shortages, have usually resulted in increased selling prices and operating margins. This has often been followed by periods of capacity additions, which have resulted in declining capacity utilization rates, selling prices and operating margins.

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

        As of December 31, 2008, we had approximately 6,300 employees worldwide. Approximately 800 of our 2,900 U.S. employees are unionized. In addition, a large number of our employees are employed in countries in which employment laws provide greater bargaining or other rights to employees than the laws of the United States. Such employment rights require us to work

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collaboratively with the legal representatives of the employees to effect any changes to labor arrangements. For example, most of our employees in Europe are represented by workers' councils that have co-determination rights on any changes in conditions of employment, including salaries and benefits and staff changes, and may impede efforts to restructure our workforce. Collective bargaining agreements with unions representing employees at several of our facilities are scheduled to expire during 2009 and we expect that they will require renegotiation. Although we believe that we have a good working relationship with our employees, a strike, work stoppage or slowdown by our employees or significant dispute with our employees, whether or not related to these negotiations, could result in a significant disruption of our operations or higher ongoing labor costs.

We work with dangerous materials that can injure our employees, damage our facilities and disrupt our operations.

        Some of our operations involve the handling of hazardous materials that may pose the risk of fire, explosion, or the release of hazardous substances. Such events could result from terrorist attacks, natural disasters, or operational failures, and might cause injury or loss of life to our employees and others, environmental contamination, and property damage. These events might cause a temporary shutdown of an affected plant, or portion thereof, and we could be subject to penalties or claims as a result. A disruption of our operations caused by these or other events could have a material adverse effect on our results of operations.

Item 1B.    UNRESOLVED STAFF COMMENTS

        None.

Item 2.    PROPERTIES

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

        Our Grace Davison operating segment operates out of 39 facilities in the following regions:

Region
  Number of
Facilities
 

North America

    14  

Europe

    12  

Latin America

    2  

Asia Pacific

    11  

        Our largest Grace Davison facilities are located in Baltimore, Maryland; Lake Charles, Louisiana; and Worms, Germany. Our Grace Davison operating segment also operates sales offices and warehouses in various regions.

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        Our Grace Construction Products operating segment operates out of 56 facilities in the following regions:

Region
  Number of
Facilities
 

North America

    23  

Europe

    13  

Latin America

    3  

Asia Pacific

    17  

        Our largest GCP facilities are located in Cambridge, Massachusetts; Chicago, Illinois; and Slough, England. Because of the nature of our GCP products, GCP requires a greater number of facilities to service our customers than Grace Davison. Also, these facilities are generally smaller and less capital intensive than our Grace Davison facilities. For information on our net properties and equipment by region and country, see disclosure set forth in Item 8 (Financial Statements and Supplementary Data) in the Financial Supplement under Note 21 (Operating Segment Information) to our Consolidated Financial Statements which disclosure is incorporated herein by reference.

Item 3.    LEGAL PROCEEDINGS

CHAPTER 11 PROCEEDINGS

        Disclosure provided in this Report in Item 1 (Business) under the caption "Chapter 11 Filing" and in Item 8 (Financial Statements and Supplementary Data) in the Financial Supplement under Note 1 (Basis of Presentation and Summary of Significant Accounting and Financial Reporting Policies), under the caption "Voluntary Bankruptcy Filing," and Note 2 (Chapter 11—Related Information) to the Consolidated Financial Statements is incorporated herein by reference.

ASBESTOS LITIGATION

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

ENVIRONMENTAL INVESTIGATIONS, CLAIMS AND CIVIL PROCEEDINGS

        Disclosure provided in this Report in Item 1 (Business) under the caption "Environmental, Health and Safety Matters" and Item 8 (Financial Statements and Supplementary Data) in the Financial Supplement under Note 16 (Commitments and Contingent Liabilities), under the caption "Environmental Remediation," to the Consolidated Financial Statements is incorporated herein by reference.

        EPA has compiled for investigation a list of 245 facilities, Vermiculite Facilities, that at one time used, stored, or expanded vermiculite concentrate that originated from the Grace Libby vermiculite mine. Included in this list are 50 Vermiculite Facilities that Grace currently operates or formerly operated and 195 Vermiculite Facilities that Grace never owned or operated. Of the 50 Grace Vermiculite Facilities, EPA identified 17 that required remedial action. Grace, EPA, and/or other potentially responsible parties have conducted investigations and/or remedial actions at all of these 17 Grace Vermiculite Facilities. EPA has filed proofs of claim with respect to potential contamination at 11 of the 17 Grace Vermiculite Facilities and three additional Vermiculite Facilities that Grace never owned or operated. EPA's claims with respect to 10 of the 17 Grace Vermiculite Facilities, and the three non-Grace Vermiculite Facilities are to be resolved by the Multi-Site Agreement. EPA's claims with respect to a portion of the remaining Grace Vermiculite Facility in Libby, Montana, are resolved by the EPA Cost Recovery Agreement. Grace has completed remediation activities at a

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separate portion of the Libby Vermiculite Facility and is working in cooperation with EPA to investigate the Grace Libby vermiculite mine which constitutes the remainder of the Libby Vermiculite Facility.

        In addition, the Agency for Toxic Substances and Disease Registry ("ATSDR") of the Centers for Disease Control and Prevention, an agency of the U.S. Department of Health and Human Services, has conducted health consultations at: (i) 23 of the 50 Grace Vermiculite Facilities; and (ii) an additional five Vermiculite Facilities that Grace never owned or operated. ATSDR has conducted health screenings for current and former Grace employees and their household contacts at four of these locations. The cost of the health consultations are resolved through the Multi-Site Agreement. Grace's estimate of the cost of the health screenings of approximately $3.4 million (including indirect costs) is included in Grace's recorded environmental liability. Although these health consultations and screenings may result in asbestos-related personal injury claims, the proposed joint plan of reorganization provides that all future asbestos-related personal injury claims would be channeled for resolution to an asbestos trust to be established under Section 524(g) of the U.S. Bankruptcy Code.

        In February 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 on behalf of all owners of improved private real property situated within 12 miles of Libby, Montana. The action alleges that the class members have suffered harm in the form of environmental contamination and loss of property rights resulting from Grace's former vermiculite mining and processing operations. The complaint seeks remediation, property damages, and punitive damages. This case has been stayed as a result of the Chapter 11 filing. Approximately 85 members of the putative class filed proofs of claim which have been dismissed by the Bankruptcy Court. As described in this Report in Item 8 (Financial Statements and Supplementary Data) under Note 16 (Commitments and Contingent Liabilities) under the caption "Vermiculite Related Matters—EPA Cost Recovery Claim", the EPA has been conducting remediation activities in and around Libby, which include the remediation of private real property and the costs of such remediation activities are covered by the EPA Cost Recovery Agreement.

        In October 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 vermiculite expansion plant in Minneapolis, Minnesota. This case has been stayed as a result of the Chapter 11 filing. Approximately 60 members of the putative class filed proofs of claim which have been dismissed by the Bankruptcy Court. The EPA has completed a program for removing suspected vermiculite processing by-products from the former Grace vermiculite expansion plant in Minneapolis, Minnesota, which includes the remediation of private real property. The costs of this EPA program are covered by the Multi-Site Agreement.

MONTANA CRIMINAL PROCEEDING

        Disclosure provided in this Report in Item 8 (Financial Statements and Supplementary Data) in the Financial Supplement under Note 16 (Commitments and Contingent Liabilities), under the caption "Vermiculite Related Matters—Montana Criminal Proceeding," to the Consolidated Financial Statements is incorporated herein by reference.

LITIGATION RELATED TO FORMER PACKAGING AND MEDICAL CARE BUSINESSES

        Disclosure provided 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 Consolidated Financial Statements is incorporated herein by reference.

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TAX CLAIMS

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

ERISA LAWSUITS

        In June 2004, a purported class action complaint (Evans v. Akers et al.) was filed in U.S. District Court for the District of Massachusetts against the Grace Board of Directors, certain current and former Grace officers and employees, and others, relating to the Grace 401(k) Savings and Investment Plan, also known as the S&I Plan. The Evans complaint alleges that the decline in the price of Grace common stock from July 1999 through February 2004 resulted in significant losses to S&I Plan participants. The Evans complaint further alleges that the defendants breached their fiduciary duties under the Employee Retirement Income Security Act of 1974, as amended, or ERISA, by failing to sell or take other appropriate action with regard to Grace common stock held by the S&I Plan during that period, and by failing to disclose to S&I Plan participants the risk of investing in Grace common stock. The Evans complaint seeks compensatory damages for the S&I Plan from the defendants. Grace expects that it would have an obligation to indemnify the other defendants for any liability resulting from this litigation. Grace has $50 million of employers' fiduciary liability insurance coverage that Grace believes would be available to pay liabilities arising out of the Evans action.

        In October 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 the Eastern District of Kentucky against Grace, the Grace Investment and Benefits Committee, the Board of Directors, certain current and former Grace officers and employees, and others. The Bunch complaint alleged that Grace and its investment advisors breached fiduciary duties under ERISA by selling Grace common stock from the S&I Plan at a distressed price. The Bunch complaint further alleged that Grace breached fiduciary duties under ERISA by hiring State Street Bank and Trust Company, the investment manager for the S&I Plan that Grace retained in December 2003, to rapidly liquidate all of the employees' Grace common stock investment at an artificially low sales price. In 2005, the Kentucky District Court transferred the Bunch action to the Massachusetts District Court. In January 2008, the Massachusetts District Court ruled in favor of the defendants in the Bunch action, holding that State Street and Grace did not breach their fiduciary duties under ERISA. In February 2008, the Bunch plaintiffs appealed to the U.S. Court of Appeals for the First Circuit. In January 2009, the First Circuit upheld the ruling in favor of the defendants.

        Since all Grace employees who had interests in the S&I Plan during the relevant periods are members of the purported class of plaintiffs in each of the Bunch and Evans actions and Messrs. Corcoran, McGowan, Norris, Poling, Shelnitz and Tarola had interests in the S&I Plan during these periods, they have interests in these lawsuits that may be adverse to Grace.

OTHER CLAIMS RECEIVED PRIOR TO THE CHAPTER 11 BAR DATE

        Disclosure provided 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 "Claims Filings" to the Consolidated Financial Statements is incorporated herein by reference.

Item 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        This Item is inapplicable, as no matters were submitted to a vote of our security holders during the fourth quarter of 2008.

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PART II

Item 5.    MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

        Except as provided below, the disclosure required by this Item appears in the Financial Supplement, under the heading "Selected Financial Data" opposite the caption "Other Statistics—Common shareholders of record," and in this Report in Item 8 (Financial Statements and Supplementary Data) in the Financial Supplement in Note 17 (Shareholders' Equtiy (Deficit)) and Note 23 (Quarterly Summary and Statistical Information (Unaudited)), opposite the caption "Market price of common stock," to the Consolidated Financial Statements and is incorporated herein by reference.

SHAREHOLDER RIGHTS AGREEMENT

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

        Until these events occur, the rights will automatically trade with the Grace common stock, and separate certificates for the rights will not be distributed. The rights do not have voting or dividend rights.

        Generally, each right not owned by an acquiring person:

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

        Each share of Grace junior preferred stock will be entitled to a minimum preferential quarterly dividend payment of $1.00 per share but will be entitled to an aggregate dividend equal to 100 times the dividend declared per share of Grace common stock whenever such dividend is declared. In the event of liquidation, holders of Grace junior preferred stock will be entitled to a minimum preferential liquidation payment of $100 per share but will be entitled to an aggregate payment 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 together with the Grace common stock. Finally, in the event of any business combination, each share of Grace junior preferred stock will be entitled to receive an amount equal to 100 times the amount received per share of Grace common stock. These rights are protected by customary antidilution provisions.

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        The terms of the rights may be amended by the Board of Directors without the consent of the holders of the rights. The rights, which will remain outstanding under the proposed plan of reorganization expire on March 30, 2018.

        This summary of the rights does not purport to be complete and is qualified in its entirety by reference to the Rights Agreement, which has been filed with the SEC.

STOCK TRANSFER RESTRICTIONS

        In order to preserve significant tax benefits which are subject to elimination or limitation in the event of a change in control (as defined by the Internal Revenue Code) of Grace, the Bankruptcy Court has approved trading restrictions on Grace common stock until the effective date of a plan of reorganization. These restrictions prohibit (without the consent of Grace) a person from acquiring more than 4.75% of the outstanding Grace common stock or, for any person already holding more than 4.75%, from increasing such person's holdings. This summary of the stock transfer restrictions does not purport to be complete and is qualified in its entirety by reference to the order of the Bankruptcy Court, which has been filed with the SEC.

        Also, in order to preserve these tax assets in the event of a change in control (as defined by the Internal Revenue Code) of Grace after emergence from Chapter 11, the Joint Plan provides that under certain circumstances, the Board of Directors would have the authority to impose restrictions on the transfer of Grace stock with respect to certain 5% shareholders. These restrictions would generally not limit the ability of a person that holds less than 5% of Grace stock after emergence to either buy or sell stock on the open market.

Item 6.    SELECTED FINANCIAL DATA

        The disclosure required by this Item appears in the Financial Supplement under the heading "Selected Financial Data" which disclosure is incorporated herein by reference.

Item 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

        The disclosure required by this Item appears in the Financial Supplement under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" which disclosure is incorporated herein by reference.

Item 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk

        Our debt obligations, global operations, the nature of the specialty chemicals production process and the industries in which we engage expose us to various market risks. We utilize derivative financial instruments and derivative commodity instruments to mitigate certain market risks. The following is a discussion of our primary market risk exposures, how those exposures are managed, and certain quantitative data pertaining to our market risk sensitive instruments.

Interest Rate Risk

        Interest rate fluctuations directly affect interest expense and cash to be paid out in the form of interest payments on variable-rate debt, and can potentially lead to changes in the market value of the associated variable-rate debt.

        We have $500.0 million of outstanding pre-petition variable-rate borrowings under bank credit agreements, and interest is accrued on this debt based on the prime rate. Due to our Chapter 11

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filing, interest accrued on pre-petition debt is added to the principal balance. As of December 31, 2008 and 2007, total interest accrued on this debt and added to the $500.0 million principal was $323.5 million and $283.0 million, respectively. If the prime rate were to vary in the near-term by one percentage point, the effect would be to increase or decrease interest expense and accrued interest on outstanding principal by approximately $8.4 million over the twelve-month period ending December 31, 2009.

        We also maintain a $165 million debtor-in-possession facility. The interest rate under this facility is based on LIBOR, a variable rate. As of December 31, 2008, no amount was outstanding under this facility, and $100.9 million was available to us, net of letters of credit and holdback provisions.

        We do not currently use derivative instruments to attempt to mitigate interest rate risk.

Foreign Currency Exchange Rate Risk

        Because we do business in over 40 countries, our results of operations are exposed to fluctuations in foreign exchange rates. We seek to minimize exposure to these fluctuations by matching revenue streams in volatile currencies with expenditures in the same currencies, but it is not always possible to do so. From time to time, we use financial instruments such as foreign currency forward contracts, options, or combinations 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 not believe that such a level of hedging would be cost-effective, particularly translation exposures that are not expected to affect cash flows in the near-term. Significant uses of derivatives to mitigate the effects of changes in foreign currency exchange rates are as follows:

        In May 2004, we purchased forward contracts with a U.S. bank to minimize currency risk related to a Euro-denominated intercompany loan due from one of our German subsidiaries to one of our U.S. subsidiaries. In June 2005, we extended a portion of the forward contract amounts to dates that mature on the dates of the scheduled principal repayments. As part of the contract extension, we were required to pay a settlement premium of $9.3 million to the bank, which was recovered over time as the contracts settled. In 2008, our German subsidiary repaid to the United States the remaining outstanding principal and accrued interest on this intercompany loan, and the associated forward contracts were settled, with full premium recovered. Currency fluctuations on this loan were recorded as a component of operating results.

        In November 2007, we executed intercompany loans in the aggregate amount of €250 million (Euros) between our principal U.S. operating subsidiary and a newly established German subsidiary as part of a legal restructuring. In conjunction with the loans, our U.S. subsidiary entered into a series of foreign currency forward contracts in order to fix the dollar/euro exchange rate that will apply to convert euro principal payments under loans to dollars. The forward contracts are aligned with the anticipated payment dates of the intercompany loans, which extend from November 2009 through November 2013. The total amount outstanding under the intercompany loans was €248.9 million as of December 31, 2008 (approximately $345.7 million).

        The following tables provide information about our significant foreign currency forward exchange agreements as of December 31, 2008 and 2007, specifically, the notional, or contract, amounts (in millions of U.S. dollars), and weighted average exchange rates (U.S. dollars to Euros) by expected (contractual) maturity dates. These notional amounts generally are used to calculate the contractual payments to be exchanged under the contract. The fair values represent the fair value of the

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derivative contracts, and are presented as other assets or other liabilities and allocated between current and non-current, as appropriate, in the Consolidated Balance Sheets.

 
  Euro Forward Contracts—December 31, 2008
Expected Maturity Date
 
Foreign Currency Forward Exchange Agreements
  2009   2010   2011   2012   2013   Total   Fair Value  

Contract amount

    72.7     72.5     72.5     72.6     72.9     363.2     21.0  

Average contractual exchange rate

    1.45     1.45     1.45     1.45     1.46     1.45     N/A  

 

 
  Euro Forward Contracts—December 31, 2007
Expected Maturity Date
 
Foreign Currency Forward Exchange Agreements
  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  

Commodity Price Risk

        We operate in markets where the prices of raw materials and energy are commonly affected by cyclical movements of the economy and other economic factors. The principal raw materials used in our products include caustic, alumina, rare earths, nickel, aluminum, cobalt carbonate, kaolin, molybdenum, sodium aluminate, sodium silicate, olefins, gypsum, resins, rubber and latices. Natural gas is the largest single energy source that we purchase. These commodities are generally available to be purchased from more than one supplier. In order to minimize the risk of increasing prices on certain raw materials and energy, we use a centralized supply chain organization for procurement in order to improve purchasing activities. We have a risk management committee to review proposals to hedge purchases of raw materials, energy and currency.

        We have implemented an energy risk management program under which our goal is to hedge natural gas supply in a way that provides protection against price volatility of the natural gas market. In order to mitigate volatile natural gas prices, we have entered into fixed price swaps to hedge a portion of our 2009 natural gas requirements.

        The following tables provide information about our commodity derivatives that are sensitive to changes in commodity prices, specifically natural gas prices. Contract volumes, or notional amounts, are presented in millions of British thermal units (MMBtu), weighted average contract prices are presented in U.S. dollars per MMBtu, and the total contract amount and fair value are presented in millions of U.S. dollars. The fair values represent the fair value of the derivative contracts. The fair value for swaps represents the excess of the variable price (market price) over the fixed price (pay price) multiplied by the nominal contract volumes. The fair value of forward contracts represents the excess of the market value amounts (as quoted on commodity exchanges) over the contract amount. All commodity derivative instruments mature in the subsequent year.

 
  Commodity Derivatives—December 31, 2008  
Type of Contract
  Contract
Volumes
  Weighted
Average
Price
  Total
Contract
Amount
  Fair
Value
 

Swaps

    4.7     8.36     39.5     (10.8 )

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  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 )

        The fair value of commodity swaps and options derivative contracts are presented as other assets or other liabilities and allocated between current and non-current, as appropriate, in the Consolidated Balance Sheets. Our forward contracts for natural gas qualify for the normal purchases and normal sales exception from SFAS No. 133, as they do not contain net settlement provisions, and result in physical delivery of natural gas from suppliers. Therefore, the fair values of these contracts are not recorded in our Consolidated Balance Sheets.

Item 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

        The disclosure required by this Item appears in the Financial Supplement which disclosure is incorporated herein by reference.

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

        None.

Item 9A.    CONTROLS AND PROCEDURES

        Except as provided below, the disclosure required by this Item appears in the Financial Supplement under the heading "Management's Report on Financial Information and Internal Controls" which disclosure is incorporated herein by reference.

        There was no change in Grace's internal control over financial reporting during the quarter ended December 31, 2008 that has materially affected, or is reasonably likely to materially affect, Grace's internal control over financial reporting.

Item 9B.    OTHER INFORMATION

        None.

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PART III

Item 10.    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

        Our current directors and executive officers are listed below. Our Certificate of Incorporation provides for the division of the Board of Directors into three classes, each to serve for a three-year term or until their respective successors are elected. In view of the Chapter 11 filing, the directors are continuing to serve beyond the expiration of their respective terms. Executive officers are elected to serve until the next annual meeting of the Board of Directors or until their respective successors are elected.

Name and Age
  Office   First
Elected
 

John F. Akers (74)

  Class II Director     5/09/97  

H. Furlong Baldwin (77)

  Class I Director     1/16/02  

Ronald C. Cambre (70)

  Class III Director     9/01/98  

Alfred E. Festa (49)

  Class II Director     9/08/04  

  Chairman of the Board     1/1/08  

  President and Chief Executive Officer     6/01/05  

Marye Anne Fox (61)

  Class I Director     5/10/96  

John J. Murphy (77)

  Class II Director     5/09/97  

Paul J. Norris (61)

  Class III Director     1/01/99  

Christopher J. Steffen (67)

  Class I Director     11/01/06  

Mark E. Tomkins (53)

  Class III Director     9/06/06  

Thomas A. Vanderslice (77)

  Class I Director and Lead Independent Director     5/10/96  

D. Andrew Bonham (48)

  Vice President & President, Grace Construction Products     9/11/07  

William M. Corcoran (59)

  Vice President, Public and Regulatory Affairs     6/01/99  

Hudson La Force III (44)

  Senior Vice President & Chief Financial Officer     4/01/08  

W. Brian McGowan (59)

  Senior Vice President, Administration     7/09/98  

Gregory E. Poling (53)

  Vice President & President, Grace Davison     3/03/05  

Mark A. Shelnitz (50)

  Vice President, General Counsel & Secretary     4/27/05  

        Mr. Akers served as Chairman of the Board and Chief Executive Officer of International Business Machines Corporation from 1985 until his retirement in 1993. He is also a director of Lehman Brothers Holdings, Inc.

        Mr. Baldwin served as a director of Mercantile Bankshares Corporation from 1970 to 2003, as Chairman of the Board from 1984 to 2003 and as President and Chief Executive Officer from 1976 to 2001. Mr. Baldwin is Chairman of NASDAQ OMX Group, Inc., and is a director of Platinum Underwriters Holdings, Ltd. and Allegheny Energy Inc.

        Mr. Cambre is retired Chairman of the Board and CEO of Newmont Mining Corporation. He joined Newmont as Vice Chairman and CEO in 1993 and retired as CEO in 2000 and as Chairman in 2001. He is also a director of Cliffs Natural Resources Inc. and McDermott International, Inc.

        Mr. Festa joined Grace in 2003 as President and Chief Operating Officer. He was elected Chief Executive Officer in 2005 and Chairman in January 2008. Prior to joining Grace, Mr. Festa was a partner of Morganthaler Private Equity Partners, a venture capital and buyout firm from 2002 to 2003. From 2000 to 2002, he was with ICG Commerce, Inc., a private company providing on-line procurement services, where he last served as President and Chief Executive Officer. Prior to that, he served as Vice President and General Manager of AlliedSignal's performance fibers business. Mr. Festa is a director of NVR, Inc., a publicly held home builder.

        Dr. Fox has been Chancellor of the University of California San Diego and Distinguished Professor of Chemistry at that institution since 2004. She was Chancellor of North Carolina State

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University from 1998 to 2004. She is also a director of Boston Scientific Corporation and Red Hat, Inc.

        Mr. Murphy served as Chairman of the Board of Dresser Industries, Inc., a supplier of products and 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 owned investment group. Mr. Murphy is also a director of Coastal Energy Company.

        Mr. Norris was actively engaged in Grace's business from 1998 until his retirement as Chief Executive Officer in 2005. Since his retirement, Mr. Norris has provided consulting services to Grace. He is also a director of FMC Corporation and Nalco Company and Non-Executive Chairman of Sealy Corp. He performs advisory services for Kohlberg Kravis Roberts & Co., currently the majority shareholder of Sealy Corp.

        Mr. Steffen most recently served as Vice Chairman of Citicorp and its principal subsidiary, Citibank N.A. Since his retirement in 1996, he has been a consultant to a number of companies and public accounting firms and served on committees advising the Financial Accounting Standards Board. Mr. Steffen is also a director of Accelrys, Inc., ViaSystems, Inc. and several private companies in which he has an ownership stake.

        Mr. Tomkins served as Senior Vice President and Chief Financial Officer of Innovene, a petrochemical and oil refining company that is now part of the INEOS Group, from 2005 until January 2006. He served as CFO of Vulcan Materials Company from 2001 to 2005. Mr. Tomkins is a member of the Board of Directors of CVR Energy, Inc., a publicly held oil refining company and Elevance Renewable Sciences Inc.

        Mr. Vanderslice served as Chairman and Chief Executive Officer of M/A-COM, Inc., a designer and manufacturer of radio frequency and microwave components, devices and subsystems for commercial and defense applications, from 1989 until 1995. He is currently a private investor. As Lead Independent Director, Mr. Vanderslice presides at all executive sessions of the Board.

        Messrs. Corcoran, McGowan, Poling and Shelnitz have been actively engaged in Grace's business for the past five years. Mr. Poling is a director of Foamex International, Inc.

        Mr. Bonham joined Grace in 2005 as Vice President and General Manager of Grace Construction Products' European operations. Prior to joining Grace, he was President and General Manager, from 2004 to 2005, and Vice President and General Manager, from 2002 to 2004, of Invensys Controls Americas. Before joining Invensys Controls, Mr. Bonham held positions of increasing responsibility at General Electric and Honeywell.

        Mr. La Force joined Grace in 2008 as Senior Vice President and Chief Financial Officer. Prior to joining Grace, he was Chief Operating Officer and Senior Counselor to the Secretary at the U.S. Department of Education. Prior to entering public service in 2005, Mr. La Force held general management and financial management positions of increasing responsibility at Dell Inc. and AlliedSignal, Inc. (now Honeywell). Mr. La Force is a member of the advisory board of Madison Capital Partners, a Chicago-based private equity firm.

Audit Committee

        We have a standing Audit Committee established in accordance with the provisions of 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, Christopher J. Steffen, Mark E. Tomkins and Thomas A. Vanderslice, each of whom meets the independence standards of the SEC and New York Stock Exchange. Mr. Tomkins serves as Chair of the Audit Committee. The Board of Directors has determined that all Audit Committee members are audit committee financial

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experts as defined by SEC regulations. A complete description of the responsibilities of the Audit Committee is set forth in the Grace Audit Committee Charter which is available on the Internet at www.grace.com/About/Leadership/Governance/.

Other Committees

        We have standing Nominating and Governance, Compensation and Corporate Responsibility 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 whom meets the independence standards of the New York Stock Exchange. Mr. Vanderslice serves as Chair of the Nominating and Governance Committee, Mr. Akers serves as Chair of the Compensation Committee and Dr. Fox serves as Chair of the Corporate Responsibility Committee. A complete description of the responsibilities of the Board committees is set forth in their respective committee charters which are available on the Internet at www.grace.com/About/Leadership/Governance/.

Section 16(a) Beneficial Ownership Reporting Compliance

        Under Section 16 of the Securities Exchange Act of 1934, as amended, our directors, certain of our officers, and beneficial owners of more than 10% of the outstanding Grace common stock are required to file reports with the SEC concerning their ownership of and transactions in Grace common stock or other Grace securities; these persons are also required to furnish us with copies of these reports. Based upon the reports and related information furnished to us, we believe that all such filing requirements were complied with in a timely manner during and with respect to 2008.

Code of Ethics for Principal Officers

        The Board of Directors and the Audit Committee have adopted Business Ethics and Conflicts of Interest policies, which apply to all of our directors, officers, and employees, including our principal officers. These policies are accessible through our Internet website, www.grace.com/About/Leadership/Governance/ and are available in hard copy, free of charge, by contacting Grace Shareholder Services at 410-531-4167. We granted no waivers to these policies during 2008. We intend to promptly post on our website any amendments or waivers to these policies affecting any principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions.

Item 11.    EXECUTIVE COMPENSATION

Compensation Discussion and Analysis

Overview

        The Board of Directors has designated seven Grace officers (including the five current executive officers named in the Summary Compensation Table) as "executive officers." The executive officers include the Chief Executive Officer (CEO), Chief Financial Officer and vice presidents who are in charge of operating segments or principal functions or who have policy-making authority for Grace. The Board of Directors has delegated authority for administering the compensation program for executive officers and other members of senior management to the Compensation Committee. The Board has appointed all of the independent members of the Board to serve as members of the Compensation Committee.

        A complete description of the responsibilities of the Compensation Committee is set forth in the Grace Compensation Committee Charter, which is available on the Internet at www.grace.com/About/Leadership/Governance/. The Compensation Committee and the Board review

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and revise the charter as necessary. In this Compensation Discussion and Analysis, unless the context otherwise requires, the terms "we", "our" and "the committee" refer to the Compensation Committee.

        We are responsible for reviewing and approving all executive officers' compensation, including:

        We also review and approve all corporate goals and objectives used in determining the incentive compensation of each executive officer. We evaluate each executive officer's performance in light of those goals and objectives and we approve each executive officer's incentive compensation based on this evaluation. In determining the long-term incentive component of an executive officer's compensation, we consider the value of similar incentive awards to executive officers with similar titles at comparable companies and the awards given to the executive officer in previous years. We also approve the annual and long-term incentive programs applicable to other salaried personnel in which the executive officers participate.

        We receive advice and legal and administrative assistance from the Grace human resources department and legal services group in meeting our responsibilities. We also have authority to retain advisors from outside of Grace. During 2008, we used the services of Watson Wyatt Worldwide, a human resources consulting firm, and we expect to continue working with Watson Wyatt during 2009. We instructed Watson Wyatt to compile competitive compensation data and, based upon such data, to recommend ranges of annual and long-term compensation that are consistent with our compensation philosophy and objectives as discussed below. We also asked Watson Wyatt to provide suggestions and alternatives regarding the form of various elements of executive compensation. We expect Watson Wyatt and Grace executive officers, including the CEO, General Counsel and Senior Vice President of Administration, and their respective subordinates, to meet, exchange information and otherwise cooperate in the performance of their respective duties outside committee meetings. Watson Wyatt also provides consulting services to Grace in connection with employee benefit plans.

Executive Compensation Philosophy and Objectives

General

        The key objective of the Grace executive compensation program is to enable Grace to compete effectively with other firms in attracting, motivating and retaining the executives that Grace needs to ensure its future growth and business success. We intend the incentive compensation portion of the program to align closely the financial interests of Grace executives with those of Grace's stakeholders (including creditors, security holders and others with an interest in the Chapter 11 proceedings). Because senior executives have a substantial ability to influence business success, we believe that the portion of compensation that is at-risk based on corporate performance should increase as the level of responsibility of the executive increases. We also expect the executive compensation programs to be consistent with a culture of ethical conduct, personal integrity and compliance with Grace policies and applicable law. We require executives to set an example for

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employees and other Grace business associates in emphasizing the Grace Core Values 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 corporate culture.

        The program is designed to reward executives for the achievement of corporate goals and objectives, taking into account both individual performance and contributions to the success of the overall management team. The individual performance evaluation is based on our assessment of an executive officer's leadership, technical skill, management and operational performance, and potential to contribute to Grace's future success. In evaluating executive officers other than the CEO, we receive substantial input from the CEO. The CEO proposes compensation levels for the other executive officers and, although not a member of the committee, attends our meetings and participates in our deliberations regarding compensation levels for the other executive officers. The CEO is excused from deliberations regarding 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 the committee.

        Once we have completed an evaluation of an executive's overall performance, we review the executive's existing compensation and compensation potentially payable to the executive. Due to the age and modest value of outstanding stock options held by Grace executives, we have not considered an executive's outstanding equity-based awards in setting future compensation. We then consult with Watson Wyatt for an assessment of the competitiveness of Grace executive officer compensation relative to certain benchmark companies in the chemicals, materials and specialty chemicals industry that we deem our peer group, and relative to certain broad industry data. We selected the benchmark companies as our peer group based upon our judgment regarding the likelihood that they would compete with us for executive talent and the availability of public information regarding their compensation practices. We periodically review the composition of the peer group to ensure that it remains relevant. For 2008, the peer group consisted of:

Albemarle

  Hercules

Cabot

  International Flavors & Fragrances

Eastman Chemical

  PPG Industries

EcoLab

  Rohm & Haas

Fuller (H.B.)

  Sigma-Aldrich

        The broad industry data that we generally review is included in studies produced by Mercer, Towers Perrin, Hewitt and Watson Wyatt for any given compensation year. The chemicals and non-durable goods sections of these surveys were used, in each case, adjusted to reflect Grace's revenues. This data is used as a secondary reference for executive officer compensation, largely as a check on the peer group levels, as well as to determine if there are any identifiable non-industry trends in compensation.

        We intend that the annual compensation paid to Grace executives (consisting of salary plus annual incentive compensation) fall within a range that approximates the 50th percentile, and that long-term incentive compensation fall within a range that approximates the 60th percentile, of the practices of the peer group companies and broad industry data when performance objectives are achieved. We selected these percentile targets because they are generally consistent with the historical practices of the peer group. In applying these targets, we do not base our decision on a mathematical analysis of the available data; rather, we use our judgment after considering all available information. If performance objectives are exceeded, we believe that incentive compensation should be above these levels, and when performance objectives are not achieved, incentive compensation should be below these levels. The bias toward incentive compensation reflected in these percentages is in keeping with our intention to align executive and stakeholder interests.

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        As a result of the Grace Chapter 11 filing in 2001, and the uncertainty with respect to the amount of Grace's asbestos-related liability, we discontinued the use of equity-based compensation, such as stock options, restricted stock and stock appreciation rights, that were traditional elements of our long-term incentive programs. Accordingly, from the Grace Chapter 11 filing to 2008, Grace incentive compensation awards were solely cash-based. In April 2008, Grace reached an agreement in principle with representatives of asbestos personal injury claimants and in September 2008, Grace, with representatives of personal injury claimants and equity security holders, proposed a joint plan of reorganization that is designed to address all pending and future asbestos-related claims and all other pre-Chapter 11 claims as outlined therein. The agreement-in-principle and the joint plan contemplate that outstanding Grace Common Stock will remain outstanding, and that holders of outstanding Grace Common Stock will control Grace, upon Grace's emergence from Chapter 11. Accordingly, we determined that for the 2008-2010 Long-Term Incentive Program, or LTIP, a portion of executive compensation should be directly aligned with the interests of Grace shareholders and that equity-based incentive compensation would best accomplish this objective. We have requested that the Corporate Secretary inform the committee if an executive officer wishes to enter into any transaction involving Grace equity securities.

        For purposes of the cash portion of Grace incentive compensation, we believe that income before interest and taxes is generally the best indicator of the performance of the Grace business. Income before interest and taxes includes the factors that the executive team generally has the ability to affect and excludes the cost of capital and tax rates that we believe are generally unrelated to business performance or management control. However, this income measure is significantly affected by other factors that Grace executives are generally unable to influence such as the substantial costs of the Chapter 11 cases, legacy liabilities, income from insurance settlements and pension income and expense. As a result, our performance metric for cash incentive compensation purposes is pre-tax income from core operations (calculated as described in "Management's Discussion and Analysis of Financial Condition and Results of Operations—Summary Financial Information and Metrics" in the Financial Supplement) adjusted to eliminate the effect of: certain unusual or one-time events; changes in pension expense (related to core operations) and LTIP expense from year to year; and, for the LTIP, the effect of major acquisitions or divestments. We generally refer to this performance metric as pre-tax income from core operations as adjusted. Grace core operations are comprised of the financial results of Grace Davison, Grace Construction Products, and the costs of corporate activities that directly or indirectly support their business operations. Excluded from pre-tax income from core operations and pre-tax income from core operations as adjusted are all other events and transactions not directly related to the generation of operating revenue or the support of our core operations.

Chief Executive Officer

        Our process for determining the compensation of the CEO is similar to the process we apply to other executive officers. We review and approve corporate goals and objectives used in determining the compensation of the CEO. We evaluate the CEO's performance in light of those goals and objectives and have sole authority to determine the CEO's compensation based on this evaluation subject to the terms of his employment agreement. The terms of the CEO's employment agreement are discussed below in this Compensation Discussion and Analysis and under the Summary Compensation Table and Potential Payments Upon Termination or Change-In-Control Table. The CEO plays no part in our deliberations or approval of his compensation.

        We believe the CEO's compensation should be substantially higher than the compensation of other executive officers because the CEO is uniquely positioned to influence all aspects of Grace's operations and performance and the resulting return to our stakeholders. In addition, we believe there exists a robust competition for effective CEO talent among companies the size of Grace and,

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in this environment, a competitive compensation package is essential for retention. Our view is consistent with the practices of the peer group companies and the broad industry data that we have reviewed.

Base Salary

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

        For 2008, Grace established a guideline for base salary merit increases applicable to all Grace U.S. salaried employees of 3.7%. Grace determined the amount of the guideline based on a review of projected wage increases in the U.S. chemical industry and certain additional data applicable to the geographic regions in which Grace has its major operations. Base salary merit increases for the Grace executive officers listed in the Summary Compensation Table (other than Mr. Tarola, who left Grace during the year), referred to herein as named executive officers, were generally in line with those of other salaried employees, ranging from 3.8% to 4.7%.

Annual Incentive Compensation

        The Annual Incentive Compensation Program, or AICP, is a cash-based pay-for-performance incentive program. Its purpose is to motivate and reward executive officers, and other upper- and middle-level employees, for their contributions to Grace performance and align their financial interests with those of Grace stakeholders by making a significant portion of their annual compensation variable and dependent upon Grace's annual financial performance. The amount of an individual incentive award payment under the AICP is based upon:

        The AICP targets for the named executive officers (other than Mr. Festa) for 2008 range from 65% to 80% of base salary and actual awards may range from $-0- to an amount equal to twice the target amount, based on business and individual performance. The AICP targets for executive officers are generally set within the target range based on the median annual bonus paid to individuals who hold comparable positions at the peer group companies. Although these factors also apply to Mr. Festa, his AICP target is also subject to the terms of his employment agreement, which requires a minimum AICP target of 100% of base salary. For 2008, Mr. Festa's AICP target is 100% of base salary.

        For 2008, the target performance objective was an 8% increase, and the maximum compensable performance objective was a 35% increase, in pre-tax earnings from core operations as adjusted over pre-tax earnings from core operations for 2007. The target performance objective reflects our collective view of good performance by Grace based upon Grace's historical performance and the long-term historical performance of the peer group. Generally, no awards are earned for any year if pre-tax earnings from core operations as adjusted is less than 80% of the prior year's pre-tax earnings from core operations; provided however, that we have discretion to

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establish or increase the size of the incentive pool even if performance measures are not achieved. We usually set AICP target awards during the first quarter for the current compensation year.

        Based on 2008 operating performance, the aggregate AICP pool was established at 71.4% of the targeted awards. The 2008 AICP payments to the named executive officers ranged from 79% (for Mr. Festa) to 97% of their respective target awards reflecting our view of the respective individual performances of the named executive officers in the context of the challenging economic and, in the case of Mr. Shelnitz, legal environment faced by Grace during 2008.

        In recognition of Mr. Tarola's service as Chief Financial Officer, we determined that Mr. Tarola should receive the payment under the 2008 AICP that he would have been entitled to receive had he been employed by Grace on the March 2009 payment date for the AICP, prorated for the three months of 2008 that he served as Chief Financial Officer.

Long-Term Incentive Compensation

        The LTIPs are designed to motivate and reward approximately 190 eligible upper-level Grace employees, including the executive officers, for their contributions to Grace performance over a multi-year period and align their financial interests with those of Grace stakeholders by making a significant portion of their total compensation variable and dependent upon Grace's sustained financial performance. The LTIP targets for eligible employees are based on the 60th percentile of long-term compensation opportunities of individuals who hold comparable positions at the peer group companies (in the case of the executive officers) and broad industry data for other participants.

        The Bankruptcy Court has approved the LTIPs for each of the 2006-2008, 2007-2009 and 2008-2010 performance periods. Awards under the 2006 and 2007 LTIPs are payable solely in cash and awards under the 2008 LTIPs are payable in cash and options to purchase Grace Common Stock. Stock options awarded as part of the 2008 LTIP were issued on the terms and conditions of the Grace 2000 Stock Incentive Plan.

        Awards under cash-based LTIPs are payable based on the extent to which Grace achieves certain performance targets. These LTIP payouts are based on the compound annual growth in our pre-tax income from core operations as adjusted over the performance period using results for the year prior to the first year of the performance period as the baseline. We generally refer to this growth objective as a CAGR. For cash-based LTIPs, the CAGR objective is 6% and the maximum compensable CAGR objective is 25%. The CAGR objective reflects our collective view of good performance by Grace based upon Grace's historical performance and the long-term historical performance of the peer group. The LTIP target is lower than the AICP target because the LTIPs are designed to incentivize sustained growth over a long-term period, which we believe is generally more difficult to achieve than annual performance targets. The LTIP award payouts may range from $-0- to an amount equal to twice the target amount, based on Grace's operating performance. No award payouts are earned under the cash-based LTIPs if the CAGR for the performance period is zero or negative.

        In determining the value of stock option awards, we considered an analysis of stock option value calculated by Watson Wyatt and based, in part, on the Black-Scholes Option Pricing Model. We approved the stock option grants included in the 2008 LTIP on September 11, 2008, after approval of the 2008 LTIP by the Bankruptcy Court on August 26, 2008. The exercise price of the options was $19.71, which was the average of the high and low trading prices of Grace Common Stock on the New York Stock Exchange on September 11, 2008. The stock option component of the 2008-2010 LTIP represented 55% to 66% of the total target LTIP award value for the named executive officers.

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        In recognition of Mr. Tarola's service as Chief Financial Officer, we determined that Mr. Tarola should receive the payments under the 2006-2008 and 2007-2009 LTIPs that he would have been entitled to receive had he been employed by Grace on the relevant payment dates (March 2009 for the initial payment on the 2007-2009 LTIP and the final payment on the 2006-2008 LTIP and March 2010 for the final payment on the 2007-2009 LTIP). Payments under these LTIPs will be prorated for the portion of the respective performance periods completed as of Mr. Tarola's departure on October 31, 2008.

        We believe that the cash-based LTIP awards encourage executive retention because the right to any pending payment under an LTIP is generally subject to forfeiture if the executive ceases employment with us prior to age 62. We generally grant LTIP awards during the first year of the performance period.

Pension Plan/Supplemental Executive Retirement Plan

        As described below under "Pension Benefits," payments under Grace's tax-qualified pension plan are calculated using annual compensation, including base salary and AICP awards, and years of credited Grace service. We believe that retirement compensation that increases with increases in years of service and annual compensation is an effective recruiting and retention tool for our employees, including our executive officers. For 2008, federal income tax law limits to $230,000 the annual compensation on which benefits under the tax-qualified pension plan may be based. As a result, we have implemented a Supplemental Executive Retirement Plan, generally referred to as a SERP, that currently applies to approximately 70 upper-level employees, including the executive officers, whose annual compensation exceeds that amount, under which each such employee will receive the full pension to which that employee would be entitled in the absence of the limitations described above and other limitations imposed under federal income tax law. The SERP is unfunded and is not qualified for tax purposes.

Savings and Investment Plan/Replacement Payment Program

        We generally offer a tax-qualified 401(k)-type Savings and Investment Plan, or S&I Plan, to employees under which they may save a portion of their annual compensation in investment accounts on a pre- or post- tax basis. Grace currently matches 100% of employee savings under the S&I Plan up to six percent of the employee's base salary and annual incentive compensation. We believe that a 401(k)-type plan with a substantial company match that increases (in dollar amount, not percentage of compensation) with the level of participation in the plan and increases in the employee's annual compensation is an effective recruiting and retention tool for our employees, including our executive officers. For 2008, federal income tax law limits the total contributions, which include an employee's contribution plus the employer's matching contributions, that can be made to an employee's 401(k) plan account to $46,000 and qualifying annual compensation for 401(k) plan purposes to $230,000. As a result, we have implemented an S&I Plan Replacement Payment Program that currently applies to approximately 70 of our employees, including our executive officers, whose annual compensation exceeds $230,000, under which each such employee will receive the full Grace matching payments to which that employee would be entitled in the absence of the limitations described above and other limitations imposed under federal income tax law.

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Executive Personal Benefits

        We believe that executives generally should not be treated differently than the general employee population when it comes to personal benefits and therefore, we have limited executive personal benefits. Mr. Festa has access to corporate aircraft at Grace expense for reasonable personal travel, though he is responsible for paying income taxes on the value of such travel as determined by the Internal Revenue Service. Due to his overseas assignment in Belgium, Mr. Bonham received certain expatriate benefits that are generally available to all executives that are on overseas assignments. We intend that these benefits compensate Grace's expatriate executives for the additional economic costs they face as a result 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. Mr. Bonham also received certain benefits related to his relocation, at Grace's request, from his former home in Virginia to Massachusetts that are generally available to all employees who relocate at Grace's request.

Change-In-Control Severance Agreements

        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 caused by a material reduction in his or her authority or responsibility or by certain other circumstances) following a "change in control." A change in control situation often undermines an executive officer's job security, and it is to Grace's and its stakeholders' benefit to encourage the Grace executive officers to seek out beneficial transactions and to remain employed through the closing of any transaction, even though their future employment at Grace may be uncertain. The change-in-control severance agreements are designed to reinforce and encourage the continued attention and dedication of the executive officers to their assigned duties without distraction in the face of potentially adverse circumstances arising from the possibility of a change in control of Grace. Certain terms of these agreements are described below under the Potential 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

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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. Festa pursuant to which he serves as CEO of Grace. Certain terms of this employment agreement are described below under the Summary Compensation Table and Potential Payments Upon Termination or Change-In-Control Table. This agreement was approved by the Bankruptcy Court and was designed to encourage Mr. Festa to accept his appointment as CEO of Grace, remain with Grace and work diligently in pursuit of corporate objectives. Mr. Festa's employment agreement includes a minimum salary and AICP target that were negotiated with Mr. Festa and are based on his business experience, his past performance as Chief Operating Officer of Grace and a competitive analysis of the base salary and annual bonus paid to CEOs at the peer group companies. The agreement also provides for retention payments that have been paid and severance payments that are designed to encourage and reinforce Mr. Festa's continued attention and dedication to his assigned duties without undue concern regarding his job security.

        Grace has also entered into an employment agreement with Mr. La Force pursuant to which he serves as CFO of Grace. Certain terms of this employment agreement are described below under the Summary Compensation Table and Potential Payments Upon Termination or Change-In-Control Table. This agreement provides for salary, a signing bonus and AICP and LTIP targets and provisions regarding severance payments. This agreement was negotiated on an arms-length basis prior to the time Mr. La Force joined Grace. The payments required by this agreement were designed to encourage Mr. La Force to join and remain with Grace in lieu of other employment opportunities available to him.

Deductibility of Executive Compensation

        Under the Omnibus Budget Reconciliation Act of 1993, provisions were added to the Internal Revenue Code of 1986, as amended, under Section 162(m) that limit the tax deduction for compensation expense in excess of $1 million paid to executive officers unless such compensation is "performance-based" and satisfies certain other conditions. We believe that compensation payable to executive officers should generally meet the conditions required for full deductibility under Section 162(m). Tax deductibility is one criterion we consider when establishing compensation programs. The AICP and LTIPs are structured with the intention that the compensation payable thereunder, with the exception of any discretionary AICP payments or other non-performance-based payments, will qualify as deductible "performance-based" compensation. While we believe that it is important to preserve the ability to structure compensation programs to meet a variety of corporate objectives even if the compensation is not deductible, due to our focus on performance-based compensation plans, we expect that the vast majority of compensation paid to the named executive officers will be tax deductible.

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Compensation Committee Report

        We, the undersigned members of the Compensation Committee of the Board of Directors of Grace, have reviewed Grace's Compensation Discussion and Analysis for 2008 and have discussed it with Grace management. Based on our review and this discussion, we recommend to the Board that the Compensation Discussion and Analysis be included in Grace's Annual Report on Form 10-K.

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Summary Compensation Table

        The following table sets forth the compensation we paid for services rendered during the fiscal year ended December 31, 2008 to each individual who served as our Chief Executive Officer or our Chief Financial Officer and each of our other three most highly compensated executive officers who were executive officers as of December 31, 2008, determined by reference to total compensation (reduced by the amount set forth in the table below under the caption "Change in Pension Value and Nonqualified Deferred Compensation Earnings") earned by such individuals for the 2008 fiscal year.

 
   
   
   
   
   
   
   
  Change in
Pension
Value and
Nonqualified
Deferred
Compensation
Earnings
($)(e)
   
   
 
 
   
   
   
   
   
  Non-Equity
Incentive Plan
Compensation ($)
   
   
 
 
   
  Salary
($)
  Bonus
($)
  Stock
Awards
($)
  Option
Awards
($)(c)
  All Other
Compensation
($)(f)
  Total
($)
 
Name and Principal Position
  Year   AICP   LTIP(d)  

A. E. Festa

    2008     921,000     1,000,000 (a)   -0-     145,023     725,000     2,433,600     188,000     166,965     5,579,588  
 

Chairman,

    2007     862,500     750,000 (a)   -0-     -0-     1,375,000     2,399,800     326,000     166,470     5,879,770  
   

President & Chief Executive Officer

    2006     789,167     -0-     -0-     -0-     1,250,000     1,502,233     56,000     244,525     3,841,925  

H. La Force III*

   
2008
   
307,500
   
250,000

(b)
 
-0-
   
59,357
   
225,000
   
242,500
   
-0-
   
15,769
   
1,100,126
 
 

Senior Vice President & Chief Financial Officer

                                                             

G. E. Poling

   
2008
   
434,667
   
-0-
   
-0-
   
90,097
   
275,000
   
880,667
   
460,000
   
58,418
   
2,198,849
 
 

Vice President &

    2007     412,667     -0-     -0-     -0-     500,000     743,333     560,000     53,342     2,269,342  
   

President Grace Davison

    2006     385,000     -0-     -0-     -0-     460,000     771,667     158,000     77,407     1,852,074  

D. A. Bonham

   
2008
   
370,870
   
-0-
   
-0-
   
51,484
   
250,000
   
498,667
   
53,000
   
893,683
   
2,117,704
 
 

Vice President & President Grace Construction Products

    2007     311,667     -0-     -0-     -0-     360,000     301,765     33,000     488,537     1,494,969  

M. A. Shelnitz

   
2008
   
354,667
   
-0-
   
-0-
   
53,632
   
200,000
   
440,333
   
172,000
   
43,173
   
1,263,805
 
 

Vice President, Secretary and General Counsel

    2007     336,000     -0-     -0-     -0-     335,000     453,167     237,000     39,957     1,401,124  

R. M. Tarola**

   
2008
   
370,000
   
-0-
   
-0-
   
-0-
   
62,000
   
563,550
   
328,000
   
144,358
   
1,487,908
 
 

Former Chief

    2007     439,333     -0-     -0-     -0-     440,000     611,833     682,000     58,594     2,231,760  
   

Financial Officer

    2006     426,667     -0-     -0-     -0-     460,000     769,500     295,000     101,284     2,052,451  

*
Mr. La Force was elected Senior Vice President & Chief Financial Officer effective April 1, 2008.

**
Mr. Tarola stepped down as Chief Financial Officer on March 31, 2008 and left Grace on October 31, 2008.

(a)
Consists of retention payments paid pursuant to Mr. Festa's employment agreement.

(b)
Consists of sign-on bonus paid pursuant to Mr. La Force's employment agreement.

(c)
Amount represents the dollar amount recognized for financial reporting purposes related to grants of options, without any reduction for risk of forfeiture, calculated in accordance with the provisions of SFAS No. 123(R). We calculate compensation expense related to stock options using the Black-Scholes Option Pricing Model. We amortize compensation expense over the service period and do not adjust the expense based on actual gains or losses or changes in the price of Grace Common Stock after the grant date. The compensation expense in the "Option Awards" column is related to stock options awarded in 2008. The assumptions used to calculate the compensation expense reported for 2008 are described in this Report in Item 8 (Financial Statements and Supplementary Data) in the Financial Supplement under Note 19 (Stock Incentive Plans) to the Consolidated Financial Statements and are incorporated herein by reference.

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(d)
The 2008 amount consists of the following payments that we expect to make in March 2009 pursuant to the 2006-2008 and 2007-2009 Long-Term Incentive Programs, or LTIPs, as follows:
Name
  Final Payment
Payment
2006-2008 LTIP
($)
  Initial
Payment
2007-2009 LTIP
($)
  Total
Payment
($)
 

A. E. Festa

    1,870,267     563,333     2,433,600  

H. La Force III

    180,000     62,500     242,500  

G. E. Poling

    664,000     216,667     880,667  

D. A. Bonham

    332,000     166,667     498,667  

M. A. Shelnitz

    332,000     108,333     440,333  

R. M. Tarola

    461,712     101,838     563,550  
(e)
The 2008 amount consists of the aggregate change in the actuarial present value of the individual's accumulated benefit under the Grace Pension Plan, 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, 2007 to December 31, 2008, 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 20 (Pension Plans and Other Postretirement Benefits Plans) to the Consolidated Financial Statements. Mr. Tarola has elected early retirement under the Grace Pension Plan, Grace Supplemental Executive Retirement Plan and his supplemental arrangements. Mr. La Force is not a member of the Grace Pension Plan or the Grace Supplemental Executive Retirement Plan because he has not completed one year of credited service under the plans. The 2007 and 2008 amounts reflect changes from the method used in prior years to calculate pension values including our revised data collection procedures.

(f)
The 2008 amount consists of the following:
Name
  Personal
Benefits
($)(1)
  S&I Plan
Matching
Payments
($)
  S&I Plan
Replacement
Payments
($)
  Liability
Insurance
($)
  Life
Insurance
($)
  Severance and
Vacation
Payments
($)(2)
  Total
($)
 

A. E. Festa

    25,608     13,800     123,960     1,200     2,397     -0-     166,965  

H. La Force III

    -0-     10,095     4,650     600     424     -0-     15,769  

G. E. Poling

    -0-     13,800     42,280     900     1,438     -0-     58,418  

D. A. Bonham

    848,673     13,800     30,000     900     310     -0-     893,683  

M. A. Shelnitz

    -0-     13,207     27,580     900     1,486     -0-     43,173  

R. M. Tarola

    -0-     13,800     34,800     900     3,782     91,076     144,358  

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CEO Employment Agreement

        Grace has entered into an employment agreement with Mr. Festa pursuant to which he serves as CEO of Grace. Under this employment agreement, Mr. Festa is entitled to an initial base annual salary of $760,000. His targeted award under the AICP for 2005 and each calendar year thereafter is 100% of his base salary earned during the applicable year (or greater, as determined by the Board). Under the agreement, Mr. Festa may also participate in the LTIPs. The agreement also provides for certain payments in the event that Mr. Festa's employment is involuntarily terminated. These severance payments are discussed below under "Potential Payments Upon Termination or Change-In-Control."

CFO Employment Agreement

        Grace has entered into an employment agreement with Mr. La Force. Under the terms of this agreement, Mr. La Force received a "sign-on" bonus of $250,000, which he has agreed to re-pay if he terminates his employment with Grace before April 1, 2009. He is entitled to an initial base salary of $410,000 and to participate in the AICP. For the 2008 calendar year his targeted award is 75% of base salary earned in 2008. In addition, this agreement provides for targeted awards of $500,000 under each of the 2008-2010, 2007-2009 and 2006-2008 LTIPs, prorated, in each case, to reflect the actual time during the respective performance period that Mr. La Force was a Grace employee. Mr. La Force's actual award under the 2008-2010 LTIP is described below in the "Grants of Plan-Based Awards in 2008" table. The agreement also provides for certain payments in the event that Mr. La Force's employment is involuntarily terminated. These severance payments are discussed below under "Potential Payments Upon Termination or Change-In-Control."

Former CFO Agreement

        Grace has entered into an agreement with Mr. Tarola pursuant to which he resigned his position as Chief Financial Officer and retired from Grace. Under the terms of this agreement, if the Grace Chapter 11 cases are resolved and Grace emerges from Chapter 11 bankruptcy on or before October 31, 2009 and the then current senior officers of Grace are awarded cash bonuses related to such resolution and emergence, the Chief Executive Officer shall consider recommending Mr. Tarola for such a bonus based on his evaluation regarding whether such a bonus is appropriate and his assessment of Mr. Tarola's contributions to such resolution and emergence. This agreement also includes provisions contained in his employment agreement regarding severance payments and enhanced pension payments that are discussed below under "Pension Benefits" and "Potential Payments Upon Termination or Change-In-Control."

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Grants of Plan-Based Awards in 2008

        The following table provides information regarding grants under our Annual Incentive Compensation Program, or AICP, and Long Term Incentive Program, or LTIP, to the executive officers named in the Summary Compensation Table during 2008.

 
   
   
   
   
   
  All Other
Option
Awards:
Number of
Securities
Underlying
Options
(#)
   
   
 
   
   
  Estimated Future Payouts
Under Non-Equity
Incentive Plan Awards(a)
   
   
 
   
   
  Exercise or
Base Price
of Option
Awards
($/Sh)(c)
  Grant Date
Fair Value
of Option
Awards
($)(d)
Name
  Plan   Option
Grant Date
  Threshold
($)
  Target
($)(b)
  Maximum
($)(b)

A. E. Festa

  2008 AICP   n/a     230,250     921,000     1,842,000   n/a   n/a   n/a

  2008-2010 LTIP (Cash)   n/a     -0-     845,000     1,690,000   n/a   n/a   n/a

  2008-2010 LTIP (Option)(e)   09/11/08     n/a     n/a     n/a   171,490   19.7100   1,019,508

H. La Force III

  2008 AICP(f)   n/a     57,656     230,625     461,250   n/a   n/a   n/a

  2008-2010 LTIP (Cash)   n/a     -0-     250,000     500,000   n/a   n/a   n/a

  2008-2010 LTIP (Option)(e)   09/11/08     n/a     n/a     n/a   70,190   19.7100   417,280

  2007-2009 LTIP(f)   n/a     -0-     291,500     583,000   n/a   n/a   n/a

  2006-2008 LTIP(f)   n/a     -0-     125,000     250,000   n/a   n/a   n/a

G. E. Poling

  2008 AICP   n/a     86,933     347,733     695,466   n/a   n/a   n/a

  2008-2010 LTIP (Cash)   n/a     -0-     325,000     650,000   n/a   n/a   n/a

  2008-2010 LTIP (Option)(e)   09/11/08     n/a     n/a     n/a   106,540   19.7100   633,380

D. A. Bonham

  2008 AICP   n/a     69,538     278,153     556,306   n/a   n/a   n/a

  2008-2010 LTIP (Cash)   n/a     -0-     250,000     500,000   n/a   n/a   n/a

  2008-2010 LTIP (Option)(e)   09/11/08     n/a     n/a     n/a   60,880   19.7100   361,932

M. A. Shelnitz

  2008 AICP   n/a     57,633     230,533     461,066   n/a   n/a   n/a

  2008-2010 LTIP (Cash)   n/a     -0-     162,500     325,000   n/a   n/a   n/a

  2008-2010 LTIP (Option)(e)   09/11/08     n/a     n/a     n/a   63,420   19.7100   377,032

R. M. Tarola

  2008 AICP(g)   n/a     21,645     86,580     173,160   n/a   n/a   n/a

(a)
Actual payments pursuant to the 2008 AICP, final payments pursuant to the 2006-2008 LTIP and initial payments pursuant to the 2007-2009 LTIP that we expect to pay in March 2009 have been determined and are reflected in the Summary Compensation Table.

(b)
For AICP, amounts are based upon base salary actually paid during 2008.

(c)
The exercise price was determined based on the average of the high and low trading prices of Grace Common Stock on the New York Stock Exchange on the grant date.

(d)
The grant date fair value is generally the amount that Grace would expense in its financial statements over the award's service period, but does not include a reduction for forfeitures.

(e)
Options are exercisable in 50% annual increments beginning on March 1, 2010.

(f)
Mr. La Force's AICP and LTIP amounts reflect proration for the portion of the relevant performance period that he was employed by Grace.

(g)
Mr. Tarola's AICP amount reflects proration for the portion of the AICP performance period that he served as Chief Financial Officer.

Annual Incentive Compensation Program (AICP)

        Our Annual Incentive Compensation Program, or AICP, is a cash-based pay-for-performance incentive program. Awards under the AICP are allocated from the corporate incentive pool that is determined by the extent to which business performance objectives are achieved. In order to generate an incentive pool amount sufficient to pay all participants their target award, our pre-tax income from core operations, as adjusted, must be 8% higher than the prior year's pre-tax income from core operations. If our pre-tax income from core operations, as adjusted, is greater than or equal to 35% higher than the prior year's pre-tax income from core operations, the incentive pool is funded in an amount sufficient to pay all participants two times their target award. If our pre-tax income from core operations, as adjusted, is 80% of the prior year's pre-tax income from core

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operations, the incentive pool is funded in an amount sufficient to pay all participants 25% of their target award. Generally, no awards are 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 to establish or increase the size of the incentive pool even if performance measures are not achieved. Once the incentive pool is established, an executive officer's award payment is determined based on the individual's target award, performance and other factors determined by the Compensation Committee.

        In order to receive an AICP award payment for a specific calendar year, employees generally must be actively employed by Grace through the payout date, which is typically in March of the following year. See "Potential Payments Upon Termination or Change-In-Control—Termination and Change-in-Control Arrangements" for a description of the circumstances under which AICP payments would be made upon termination of an executive's employment with Grace.

Long-Term Incentive Program (LTIP)

        Our long-term incentive programs are multi-year, pay-for-performance incentive programs. Awards under our 2008-2010 LTIP consist of awards of a cash-based LTIP award with terms comparable to our 2006-2008 and 2007-2009 LTIPs and awards of stock options under our 2000 Stock Incentive Plan.

        Cash-Based LTIP.    Cash-based awards under the LTIPs are payable based on the extent to which we achieve a specified compound annual growth in our pre-tax income from core operations as adjusted over the three-year performance period using results for the year prior to the first year 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 be 25%. No awards are earned if the CAGR is zero or negative.

LTIP Compound Annual Growth Rate (CAGR) as of December 31, 2008

LTIP
  CAGR  

2006-2008 LTIP (full 3-year period)

    14.4 %

2007-2009 LTIP (partial 2-year period)

    17.2 %

        Employees who become entitled to cash payments under an LTIP are paid in two installments: one in March of the third year of the performance period (as partial payment based on the first two years of the performance period but limited to 50% of the LTIP target for those two years); and the other in March of the year following the performance period (as final payment based on the complete three-year performance period but offset by the prior partial payment).

        Based on 2006-2008 operating performance, final payments under the 2006 LTIP are calculated based upon 144% of the target for each participant. Based on 2007-2008 operating performance, partial payments under the 2007 LTIP are calculated based upon 159% of the target for each participant but limited to 50% of the target amount for those two years.

        In order to receive a cash LTIP award payment, employees generally must be actively employed by Grace through the payout date, which is in March following the second and third years of the LTIP performance period. See "Potential Payments Upon Termination or Change-In-Control—Contractual Termination Provisions" for a description of the circumstances under which LTIP payments would be made upon termination of an executive's employment with Grace.

        Equity-Based LTIP.    Stock options granted under the 2000 Stock Incentive Plan are exercisable in 50% annual increments beginning on March 1, 2010.

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Outstanding Equity Awards at Fiscal Year-End

        The following table provides information regarding outstanding stock options held by the executive officers named in the Summary Compensation Table as of December 31, 2008.

 
  Option Awards  
Name
  Number of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
  Number of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable
  Option
Exercise
Price
($)
  Option
Expiration
Date
 

A. E. Festa

    -0-     171,490 *   19.7100     9/11/13  

H. La Force III

    -0-     70,190 *   19.7100     9/11/13  

G. E. Poling

    -0-
35,000
16,500
    106,540
-0-
-0-
*

  19.7100
13.4688
2.4000
    9/11/13
5/09/10
3/07/11
 

D. A. Bonham

    -0-     60,880 *   19.7100     9/11/13  

M. A. Shelnitz

    -0-
22,000
25,000
8,200
    63,420
-0-
-0-
-0-
*


  19.7100
12.8125
13.4688
2.4000
    9/11/13
3/03/09
5/09/10
3/07/11
 

R. M. Tarola

    100,000
75,000
27,900
    -0-
-0-
-0-
    16.1875
13.4688
2.4000
    5/10/09
5/09/10
3/07/11
 

*
Options are exercisable in 50% annual increments beginning on March 1, 2010.

Option Exercises and Stock Vested

        The following table provides information regarding the exercise of options held by the executive officers named in the Summary Compensation Table during 2008.

 
  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-  

H. La Force III

    -0-     -0-     -0-     -0-  

G. E. Poling

    50,000 *   32,980     -0-     -0-  

D. A. Bonham

    -0-     -0-     -0-     -0-  

M. A. Shelnitz

    13,000 *   8,575     -0-     -0-  

R. M. Tarola

    -0-     -0-     -0-     -0-  

*
Exercised options had an expiration date of March 31, 2008.

Pension Benefits

        The following table provides information regarding benefits under our Retirement Plan for Salaried Employees, or Pension Plan, our Supplemental Executive Retirement Plan, or SERP, and

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any supplemental pension arrangements under employment agreements for the executive officers named in the Summary Compensation Table.

Name
  Plan Name   Number
of Years
Credited
Service
(years)
  Present
Value of
Accumulated
Benefit(a)
($)
  Payments
During
Last
Fiscal Year
($)
 

A. E. Festa

  Pension Plan     5.08     77,000     -0-  

  SERP     5.08     578,000     -0-  

H. La Force III

  Pension Plan(b)     .75     -0-     -0-  

  SERP(b)     .75     -0-     -0-  

G. E. Poling

  Pension Plan     29.42     568,000     -0-  

  SERP     29.42     1,516,000     -0-  

D. A. Bonham

  Pension Plan     3.25     43,000     -0-  

  SERP     3.25     79,000     -0-  

M. A. Shelnitz

  Pension Plan     25.17     412,000     -0-  

  SERP     25.17     725,000     -0-  

R. M. Tarola

  Pension Plan     9.42     246,000     3,684  

  SERP     9.42     830,000     -0-  

  Supplemental(c)     9.42     1,076,000     -0-  

(a)
Amounts comprise the actuarial present value of the executive officer's accumulated benefit under the Pension Plan, SERP and, in the case of Mr. Tarola, supplemental pension arrangements, as of December 31, 2008, 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 20 (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 elect early retirement ranging from a 17% reduction for retirement at age 55 to no reduction for retirement at age 62. Effective upon his October 31, 2008 departure date, Mr. Tarola elected early retirement under the Pension Plan, SERP and his supplemental arrangements at age 58, accordingly his payments under these plans and arrangements are reduced by 7%. He also elected to have his benefits paid out in a 662/3% joint and survivor benefit.

(b)
Mr. La Force will not be a member of the Grace Pension Plan or the Grace Supplemental Executive Retirement Plan until he completes one year of credited service.

(c)
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 has been credited with one additional year of credited service for each year of credited service under those plans that he actually earned during his period of employment with Grace.

Retirement Plan for Salaried Employees

        Full-time salaried employees who are 21 or older and who have one or more years of service are eligible to participate in our Retirement Plan for Salaried Employees, or Pension Plan. Under this basic retirement plan, pension benefits are based upon (a) the employee's average annual compensation for the 60 consecutive months in which his or her compensation is highest during the last 180 months of continuous participation, and (b) the number of years of the employee's credited Grace service. The normal retirement age under the Pension Plan is 62, but participants may elect reduced payments upon early retirement beginning at age 55. For purposes of the Pension Plan, compensation generally includes base salary and AICP awards; however, for 2008, federal income tax law limits to $230,000 the annual compensation on which benefits under the Pension Plan may be based.

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Supplemental Executive Retirement Plan

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

Supplemental Pension Arrangement

        Mr. Tarola had an employment agreement that expired on November 10, 2002. Mr. Tarola's supplemental pension benefit that is described in the table above is provided pursuant to the terms of this agreement that survived the expiration date. The supplemental pension benefit will be paid to Mr. Tarola from our general assets. The description of Mr. Tarola's supplemental pension arrangement in Item 11 of this Report does not purport to be complete and is qualified in its entirety by reference to the agreement, which has been filed with the SEC.

Non-Qualified Deferred Compensation Plan

        The following table summarizes the compensation deferred by the named executive officer pursuant to the provisions of Grace's incentive compensation program in 1998, under which certain employees were permitted to voluntarily defer receipt of shares of Grace common stock. Such deferred shares were contributed to a "rabbi trust" held for the benefit of the deferred compensation plan participants. Shares held in the plan are fully vested and may be distributed to the plan beneficiary upon retirement or termination of service with us. Since 1998, executives may no longer defer receipt of shares under the plan, although existing balances remain in place.

Fiscal Year 2008 Non-Qualified Deferred Compensation

Name
  Executive
Contributions
in Fiscal Year
2008
($)
  Registrant
Contributions
in Fiscal Year
2008
($)
  Aggregate
Earnings
in Fiscal
Year 2008
($)
  Aggregate
Withdrawals/
Distributions
in Fiscal
Year 2008
($)
  Aggregate
Balance at
Fiscal Year
2008 End
($)
 

M. A. Shelnitz

    -0-     -0-     (190,396 )(a)   -0-     56,242 (b)

(a)
Amount represents the decrease in value of 9,420.8496 shares of Grace common stock held in the plan based on the closing prices of Grace common stock on December 31, 2007 and December 31, 2008. Amounts reflected are not included in the "Summary Compensation Table" because the earnings are not "above-market."

(b)
Amount represents the value of 9,420.8496 shares of Grace common stock held in the plan based on the closing price of Grace common stock on December 31, 2008.

Potential Payments Upon Termination or Change-In-Control

        The following table sets forth potential payments to executive officers named in the Summary Compensation Table in the event of the listed events calculated under the assumption that employment terminated on the last business day of 2008; provided however, that with respect to Mr. Tarola, amounts reflect actual and estimated payments that have been paid or that Grace expects to pay in respect of the termination of his employment with Grace on October 31, 2008. The

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following table does not include payments pursuant to contracts, agreements, plans and arrangements that do not discriminate in scope, terms or operation, in favor of executive officers and that are available generally to all salaried employees. The value of payments to be made following termination of employment pursuant to the Grace Retirement Plan, Grace SERP and Mr. Tarola's supplemental pension arrangements are described above under the caption "Pension Benefits." The value of payments to be made following termination of employment pursuant to Mr. Shelnitz's deferred shares arrangement are described above under the caption "Non-Qualified Deferred Compensation Plan."

Name
  Involuntary
Termination
Without Cause(a)
($)
  Involuntary
Termination
Without Cause
Following
Change-in-
Control(c)(d)
($)
  Death
(c)(e)
($)
  Disability
(c)(g)
($)
 

A. E. Festa

    3,276,000     8,894,600     4,872,194 (f)   4,348,994 (f)

H. La Force III

    615,000     2,540,833     798,333     548,916  

G. E. Poling

    880,000     3,581,666     1,645,666     1,293,666  

D. A. Bonham

    562,500     2,717,416     1,123,666     879,916  

M. A. Shelnitz

    720,000     2,384,834     962,834     674,834  

R. M. Tarola

    1,717,218 (b)   n/a     n/a     n/a  

(a)
Consists: (i) in the case of Mr. Tarola, of actual and estimated payments pursuant to his severance agreement or as otherwise approved by the Compensation Committee in respect of his actual departure from Grace on October 31, 2008; (ii) in the case of Mr. Festa, minimum severance payments pursuant to his employment agreement as described below under "—CEO Termination Provisions;" and (iii) minimum severance payments pursuant to severance agreements in the case of the other executive officers as described below under "—Termination and Change-in-Control Arrangements." Other than for Mr. Tarola, amount excludes AICP and/or LTIP payments executive officers may receive under certain circumstances in the discretion of the Compensation Committee as described below under "—Termination and Change-in-Control Arrangements."

(b)
Consists of: (i) severance payment of $74,000, 2008 AICP payment of $62,000, 2006-2008 LTIP final payment of $461,712 and 2007-2009 LTIP initial payment of $101,838 that have been separately reported in the Summary Compensation Table; and (ii) severance payment of $814,000 and estimated 2007-2009 LTIP final payment of $203,668 that are not reflected in the Summary Compensation Table and that Grace expects to pay under the terms of Mr. Tarola's severance agreement. AICP amount reflects pro ration for the portion of the AICP performance period that Mr. Tarola served as Chief Financial Officer and LTIP amounts reflect pro ration for the portion of the relevant LTIP performance periods that Mr. Tarola was employed by Grace. The estimated payment under the 2007-2009 LTIP is calculated as described below under "—Termination and Change-in-Control Arrangements—Long Term Incentive Program." All payments of LTIP and AICP to Mr. Tarola were approved by the Compensation Committee.

(c)
Includes actual LTIP payments (as included in the Summary Compensation Table) and estimated LTIP payments calculated as described below under "—Termination and Change-in-Control Arrangements—Long Term Incentive Program."

(d)
Includes contractual payments pursuant to each executive's respective Change-in-Control Severance Agreement calculated under the assumption that no excise tax will apply.

(e)
Includes 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

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(f)
Includes 2008 AICP payment calculated solely on the basis of Grace's 2008 financial performance.

(g)
Includes 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 $216,000 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, Grace expects that the other executive officers would not receive any additional payments under the plan after the first year of disability. For Mr. Festa, amount includes AICP payment pursuant to his employment agreement. For other executive officers, amount excludes AICP payments they may receive under certain circumstances in the discretion of the Compensation Committee as described below under "—Termination and Change-in-Control Arrangements."

Termination and Change-in-Control Arrangements

        Change-in-Control Severance Agreements.    We have entered into severance agreements with all of our executive officers, which renew automatically unless the Board elects not to renew them. These agreements generally provide that in the event of the involuntary termination of the individual's employment without cause (including constructive termination caused by a material reduction in his or her authority or responsibility or by certain other circumstances) following a "change in control," he or she will generally receive a severance payment equal to three times the sum of his or her annual base salary plus target annual incentive compensation, subject to reduction, pro rata in the case of an executive officer who is within 36 months of normal retirement age (65) or, under certain circumstances, to minimize the effect of certain excise taxes if applicable. For purposes of the severance agreements, "change in control" means the acquisition of 20% or more of the outstanding Grace Common Stock (but not if such acquisition is the result 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 class of the Board of Directors, the occurrence of a transaction in which the Grace shareholders immediately preceding such transaction do not own more than 50% of the combined voting power of the entity resulting from such transaction, or the liquidation or dissolution of Grace. As a result of Grace's Chapter 11 filing, the following events will not constitute a "change in control": (i) the acquisition of Grace Common Stock by a trust established for purposes of administering asbestos-related claims pursuant to a plan of reorganization; and (ii) a corporate transaction pursuant to Section 363 of the U.S. Bankruptcy Code or a plan of reorganization. The description of the severance agreements in Item 11 of this Report does not purport to be complete and is qualified in its entirety by reference to the form of such agreement, which has been filed with the SEC.

        CEO Severance Arrangements.    In 2005, the Compensation Committee and the Bankruptcy Court approved the terms of an employment agreement, dated January 19, 2005, pursuant to which Mr. Festa assumed the position of Chief Executive Officer of Grace on June 1, 2005. The term of

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this agreement is four years, ending on May 31, 2009. Under the terms of this agreement, Mr. Festa will not be entitled to any unpaid award under the AICP or any LTIP if his employment with Grace terminates prior to the date that the award is paid to active Grace employees, except that Mr. Festa would be entitled to a pro-rated portion of such an unpaid award in the event that we terminate his employment without cause or he terminates his employment as a result of constructive discharge after Grace emerges from Chapter 11, or his employment terminates as a result of his death or disability, in each case, before the applicable payment date. Assuming Mr. Festa's employment was terminated as of December 31, 2008 under any of the above listed circumstances, Mr. Festa would be eligible to receive an AICP payment calculated as described above under "Summary Compensation Table" and LTIP payments as described below under the caption "Termination and Change-in-Control Arrangements—Long Term Incentive Program." Also, under the terms of the agreement, if we terminate Mr. Festa's employment without cause, or he terminates his employment as a result of constructive discharge, prior to the expiration of the agreement, he would be entitled to a severance payment equal to two times a dollar amount equal to 175% of his annual base salary at the time of his termination. The description of Mr. Festa's employment agreement in Item 11 of this Report does not purport to be complete and is qualified in its entirety by reference to the agreement, which has been filed with the SEC.

        Other Executive Officer Severance Arrangements.    We have entered into severance agreements that establish severance arrangements with Messrs. La Force (included in his employment agreement), Poling and Shelnitz. Mr. Bonham's severance arrangements were established by Compensation Committee approval. Under the terms of the severance arrangements applicable to these named executive officers, in the event of the involuntary termination of the executive officer's employment under circumstances that would qualify the executive officer for severance pay under the severance plan that generally covers our salaried employees, the executive officer would be entitled to severance pay equal to two times his or her annual base salary, in the case of Messrs. Poling and Shelnitz, or one and one-half times his annual base salary, in the case of Messrs. La Force and Bonham. Other than with respect to the amount of severance, the severance arrangements for these named executive officers are the same. The description of the severance arrangements in Item 11 of this Report does not purport to be complete and is qualified in its entirety by reference to Mr. La Force's employment agreement, the form of executive severance agreement and the Grace Severance Pay Plan for Salaried Employees, each of which has been filed with the SEC.

        Executive Salary Protection Plan.    All executive officers participate in the Executive Salary Protection Plan which provides that, in the event of a participant's disability or death prior to age 70, we will continue to pay all or a portion of base salary to the participant or a beneficiary for a period based on the participant'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 payment under the plan as a result of disability would be reduced by the amount of disability income received under Grace's long-term and short-term disability plans that are generally applicable to U.S. salaried employees. The description of the plan in Item 11 of this Report does not purport to be complete and is qualified in its entirety by reference to the text of the Executive Salary Protection Plan, as amended, which is filed with the SEC.

        Annual Incentive Compensation Program.    An employee whose employment terminates prior to an AICP payout date will generally not receive an AICP payment. However, in the discretion of the Compensation Committee, an employee whose employment terminates prior to the payout date may receive an AICP award payment if the employee has more than three months' service under the AICP and employment terminates for any of the following reasons: retirement under a Grace retirement plan; death; disability; divestment; or other termination of employment by Grace that is not for cause. If such an employee receives an AICP payment, the amount of the AICP payment will

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generally be prorated for the period of the employee's service during the year. See "—CEO Severance Arrangements" for a description of the circumstances under which AICP payments would be made to Mr. Festa in the event his employment with Grace is terminated. The description of the AICP in Item 11 of this Report does not purport to be complete and is qualified in its entirety by reference to the text of the AICP which is filed with the SEC.

        Long Term Incentive Program.    An employee whose employment terminates prior to the payout date will forfeit any unpaid LTIP award payment if employment terminates for any of the following reasons:

        An employee whose employment terminates prior to the payout date will receive an LTIP award payment if employment terminates for any of the following reasons:

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

        See "—CEO Severance Arrangements" above for a description of the circumstances under which LTIP payments would be made to Mr. Festa in the event his employment with Grace is terminated. The description of the LTIPs in Item 11 of this Report does not purport to be complete and is qualified in its entirety by reference to the text of the LTIPs, which are filed with the SEC.

        If an employee whose employment terminates prior to the end of an LTIP performance period receives an LTIP award payment for that performance period, the amount of the LTIP award payment will be prorated for the period of the employee's service during the performance period. Assuming the employment of the executive officers named in the Summary Compensation Table (other than Mr. Tarola) was terminated as of December 31, 2008 and the 2007 and 2008 LTIPs pay

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out at the target amounts, under any of the above-listed circumstances, the executive officers would be eligible for payments under their outstanding LTIPs as follows:

Name
  2006-2008 LTIP
($)
  2007-2009 LTIP
($)
  2008-2010 LTIP
($)
  Total
($)
 

A. E. Festa

    1,870,267     1,126,667     281,666     3,278,600  

H. La Force III

    180,000     125,000     83,333     388,333  

G. E. Poling

    664,000     433,333     108,333     1,205,666  

D. A. Bonham

    332,000     333,333     83,333     748,666  

M. A. Shelnitz

    332,000     216,667     54,167     602,834  

R. M. Tarola*

    461,712     305,500     -0-     767,212  

*
Amounts reflect pro ration for the portion of the relevant performance period that Mr. Tarola was employed by Grace prior to this departure on October 31, 2008.

        2000 Stock Incentive Plan.    Any stock option held by an employee whose employment terminates prior to exercise will:

        In the event of a Change in Control, any stock options outstanding under the 2000 Stock Incentive Plan, that are not exercisable and vested, shall become fully exercisable and vested to the full extent of the original grant. For purposes of the 2000 Stock Incentive Plan, "change in control" means the acquisition of 20% or more of the outstanding Grace Common Stock (but not if such acquisition is the result of the sale of Grace common stock by Grace that has been approved by the Board), the failure of Board-nominated directors to constitute a majority of any class of the Board of Directors, the occurrence of a transaction in which the Grace shareholders immediately preceding such transaction do not own more than 50% of the combined voting power of the entity resulting from such transaction, or the liquidation or dissolution of Grace. The description of the 2000 Stock Incentive Plan in Item 11 of this Report does not purport to be complete and is qualified in its entirety by reference to the text of the 2000 Stock Incentive Plan, which is filed with the SEC.

Director Compensation

        Under the compensation program for nonemployee directors in effect during 2008, each nonemployee director received an annual retainer of $105,000 in cash, 50% of which was paid in January and 50% of which was paid in December. In addition, directors received $6,000 (plus $3,000 for the lead independent director and the Audit Committee chair and $2,000 for other committee chairs) in cash for each meeting date in respect of the Board meeting and all committee meetings held on that date. We reimburse directors for expenses they incur in attending Board and committee meetings and other activities incidental to their service as directors. Our directors, and all Grace employees, are entitled to participate in the Grace Foundation's Matching Grants Program. We also maintain business travel accident insurance coverage for our directors. Mr. Festa's compensation is described above in the Summary Compensation Table. Mr. Festa receives no additional compensation for serving as a member of the Board of Directors.

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        The following table sets forth amounts paid by Grace to our nonemployee directors in connection with their services to Grace during 2008.

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
($)
  All Other
Compensation
($)(b)
  Total
($)
 

J. F. Akers

    153,000     -0-     -0- (c)   -0-     -0-     3,000 (b)   156,000  

H. F. Baldwin

    147,000     -0-     -0-     -0-     -0-     -0-     147,000  

R. C. Cambre

    147,000     -0-     -0-     -0-     -0-     3,000 (b)   150,000  

M. A. Fox

    161,000     -0-     -0-     -0-     -0-     3,000 (b)   164,000  

J. J. Murphy

    165,000     -0-     -0- (c)   -0-     -0-     -0-     165,000  

P. J. Norris

    147,000     -0-     -0-     -0-     -0-     81,125 (d)   228,125  

C. J. Steffen

    147,000     -0-     -0-     -0-     -0-     -0-     147,000  

M. E. Tomkins

    150,000     -0-     -0-     -0-     -0-     -0-     150,000  

T. A. Vanderslice

    182,000     -0-     -0- (c)   -0-     -0-     -0-     182,000  

(a)
Amount consists of annual retainer in the amount of $105,000, meeting fees in the amount of $42,000 (other than Mr. Akers who received meeting fees of $36,000) and additional payments to: Mr. Akers for serving as Chair of the Compensation Committee in the amount of $12,000; Dr. Fox for serving as Chair of the Corporate Responsibility Committee in the amount of $14,000; Mr. Murphy for serving as Chair of the Audit Committee in the amount of $18,000; Mr. Tomkins for serving as Chair of the Audit Committee in the amount of $3,000; and Mr. Vanderslice for serving as Chair of the Nominating and Governance Committee and Lead Independent Director in the amount of $35,000.

(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 2008.

(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.

Norris Consulting Agreement

        The Compensation Committee and the Bankruptcy Court have approved a consulting agreement between Grace and Mr. Norris dated January 19, 2005, under which Mr. Norris monitors our Chapter 11 proceedings and provides consulting services and advice to our CEO, certain of our employees and the Board of Directors, regarding those proceedings and other matters. Under the agreement, Mr. Norris' current retainer under the agreement has been reduced to $4,000 per month. The description of Mr. Norris' consulting agreement in Item 11 of this Report does not purport to be complete and is qualified in its entirety by reference to the agreement that has been filed with the SEC.

Compensation Committee Interlocks And Insider Participation

        During 2008, the Compensation Committee of the Board was comprised of Messrs. Akers (Chair), Baldwin, Cambre, Murphy, Vanderslice, Tomkins and Steffen and Dr. Fox. None of these persons is our current or former officer or employee, nor did we have any reportable transactions

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with any of these persons. None of our executive officers serves or in the past has served as a member of the board of directors or compensation committee of any entity that has one or more of its executive officers serving on our Board of Directors or our Compensation Committee.

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 stock beneficially owned, directly or indirectly, as of January 31, 2009 by:

Name and Address of Beneficial Owner(1)
  Shares of Common Stock
Beneficially Owned
  Percent  
FMR LLC(2)
Fidelity Management & Research Company
Edward C. Johnson 3d

82 Devonshire Street
Boston, Massachusetts 02109
    10,801,627     15.0 %

Peninsula Partners, L.P.(3)
404B East Main Street
2nd Floor
Charlottesville, VA 22902

 

 

10,765,600

 

 

14.9

%

J. F. Akers

 

 

38,996
74,535
15,196


 (O)
 (T)

 

*

 

H. F. Baldwin

 

 

21,918
15,000


 (T)

 

*

 

R. C. Cambre

 

 

28,494

 

 

*

 

A. E. Festa

 

 

100,000

 

 

*

 

M. A. Fox

 

 

55,346
8,942


 (T)

 

*

 

J. J. Murphy

 

 

38,930
15,528
18,629


 (O)
 (T)

 

*

 

P. J. Norris

 

 

138,822

 

 

*

 

C. J. Steffen

 

 

-0-

 

 

-0-

 

M. E. Tomkins

 

 

-0-

 

 

-0-

 

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Name and Address of Beneficial Owner(1)
  Shares of Common Stock
Beneficially Owned
  Percent  
T. A. Vanderslice     39,522
69,876
14,932

 (O)
 (T)
  *  

D. A. Bonham

 

 

-0-

 

 

-0-

 

H. La Force III

 

 

50,000

 

 

*

 

G. E. Poling

 

 

51,500
18,000

 (O)
 (T)

 

*

 

M. A. Shelnitz

 

 

53,500
55,200
9,421


 (O)
 (T)

 

*

 

Directors and executive officers as a group

 

 

565,528
266,639
100,120


 (O)
 (T)

 

1.3

%

*
Indicates less than 1%

(O)
Shares covered by stock options exercisable on or within 60 days after January 31, 2009.

(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 Schedule 13G/A filed with the SEC jointly by FMR LLC ("FMR"), Fidelity Management & Research Company ("Fidelity") and Edward C. Johnson 3d ("Mr. Johnson") on February 17, 2009. FMR and Mr. Johnson have sole voting power with respect to 619,737 shares and sole dispositive power with respect to all 10,801,627 shares. Mr. Johnson is Chairman of FMR and members of Mr. Johnson's family may be deemed a controlling group with respect to FMR due to their ownership of FMR voting shares and their entry into a voting agreement with respect to such shares. Fidelity is a wholly-owned subsidiary of FMR. Mr. Johnson and FMR, through its control of Fidelity, each has sole dispositive power over 10,100,690 shares owned by various investment companies for which Fidelity serves as investment advisor. Pyramis Global Advisors Trust Company ("PGATC"), 53 State Street, Boston, Massachusetts, 02109, is a wholly-owned indirect subsidiary of FMR. Mr. Johnson and FMR, through its control of PGATC, each has sole dispositive power over 639,637 shares and sole voting power over 554,737 shares of Common Stock owned by institutional accounts managed by PGATC. Mr. Johnson is Chairman of FIL Limited ("FIL"), Pembroke Hall, 42 Crow Lane, Hamilton, Bermuda, and partnerships controlled predominantly by members of Mr. Johnson's family, or trusts for their benefit, own FIL shares representing approximately 47% of the total votes which may be cast by all holders of FIL voting stock. FMR and FIL disclaim that they are acting as a "group" for purposes of Section 13(d) under the Securities Exchange Act of 1934. FIL and various foreign-based subsidiaries provide investment advisory and management services to a number of non-U.S. investment companies and certain institutional investors. FIL is the beneficial owner of 61,300 shares.

(3)
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.

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EQUITY COMPENSATION PLAN INFORMATION

        The following table sets forth information as of December 31, 2008 with respect to our compensation plans under which shares of Grace common stock are authorized for issuance upon the exercise of options, warrants or other rights. The only such compensation plans in effect are stock incentive plans providing for 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

    3,193,646     16.33     2,804,657  

Item 13.    CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

BOARD INDEPENDENCE

        The Board has determined that all directors, other than Mr. Festa (who is also Chief Executive Officer) and Mr. Norris (who was Chief Executive Officer until June 1, 2005 and is currently a consultant to Grace) are independent under New York Stock Exchange rules because none of such directors has any direct or indirect material relationship with Grace or our affiliates, other than through his or her service as a director and as an owner of less than 1% of Grace common stock. In addition to the application of the New York Stock Exchange rules, this determination was based on a number of factors, principal among them were the following:

        Only independent directors serve on our Audit, Nominating and Governance, Compensation and Corporate Responsibility Committees. Mr. Vanderslice has been appointed Lead Independent Director and, in this capacity, presides at executive sessions of independent directors. Interested parties may communicate with Mr. Vanderslice by writing him at the following address: Thomas A. Vanderslice—Lead Independent Director, c/o W. R. Grace & Co., 7500 Grace Drive, Columbia, Maryland 21044.

REVIEW, APPROVAL OR RATIFICATION OF TRANSACTIONS WITH RELATED PARTIES

        The Board recognizes that transactions involving related persons in which Grace is a participant can present conflicts of interest, or the appearance thereof, so the Board has adopted a written policy as part of the Grace Corporate Governance Principles (which are available on our website at www.grace.com/About/Leadership/Governance/) with respect to related person transactions. The

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policy applies to transactions involving related persons that are required to be disclosed pursuant to SEC regulations, which are generally transactions in which:

        Each such related person transaction shall be reviewed, determined to be in, or not inconsistent with, the best interests of Grace and its stockholders and approved or ratified by:

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

Item 14.    PRINCIPAL ACCOUNTANT FEES AND SERVICES

        The Audit Committee of the Board of Directors selected PricewaterhouseCoopers LLP, or PwC, to act as our principal independent accountants for 2008. The following table sets forth the fees that we incurred for the services of PwC for the fiscal years ended December 31, 2008 and 2007:

 
  2008   2007  

Audit Fees

  $ 4,161,200   $ 4,666,400  

Audit-Related Fees

    261,400     244,400  

Tax Fees

    44,100     20,000  
           
 

Total Fees

  $ 4,466,700   $ 4,930,800  
           

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

        Audit-Related Services primarily consisted of (1) an audit of the financial statements of Advanced Refining Technologies, LLC (a joint venture with Chevron Products Company), (2) an audit of Grace's 401(k) plan, and (3) audits of subsidiary benefit plans as required.

        Tax Services consisted of tax advice and compliance for non-U.S. subsidiaries, including preparation of tax returns, and advice relating to Grace's transfer pricing policies.

        The Audit Committee has adopted a preapproval policy that requires the Audit Committee to specifically preapprove the annual engagement of the independent accountants for the audit of our Consolidated Financial Statements and internal controls. The policy also provides for general preapproval of certain audit-related, tax and other services provided by the independent accountants. Any other services must be specifically preapproved by the Audit Committee. However, the Chair of the Audit Committee has the authority to preapprove services requiring immediate engagement between scheduled meetings of the Audit Committee. The Chair must report any such preapproval decisions to the full Audit Committee at its next scheduled meeting. During 2008, no audit-related, tax, or other services were performed by PwC without specific or general approval as described above

63


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PART IV

Item 15.    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

        Financial Statements and Schedules.    The required information is set forth in the Financial Supplement under the heading "Index to Consolidated Financial Statements and Financial Statement Schedule and Exhibit" which is incorporated herein by reference.

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

        For purposes of describing these exhibits, "Old Grace" means W. R. Grace & Co., a Delaware corporation (subsequently renamed Sealed Air Corporation), a predecessor to the Company, and "Grace New York" means W. R. Grace & Co., a New York corporation (subsequently renamed Fresenius Medical Care Holdings, 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 Joint Plan of Reorganization of W. R. Grace & Co. and its debtor subsidiaries dated February 27, 2009

 

Filed herewith

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 2/27/09)

4.1

 

Amended and Restated Rights Agreement dated as of March 25, 2008 between W. R. Grace & Co. and Mellon Investor Services LLC, as Rights Agent

 

Exhibit 4.1 to Form 10/A (filed 3/25/08)

4.2

 

Order of Delaware Bankruptcy Court limiting certain transfers of Grace equity securities

 

Filed herewith

4.3

 

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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EXHIBIT
NO.
  EXHIBIT   WHERE LOCATED
4.4   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)

4.5

 

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 Trust and 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)

4.6

 

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)

4.7

 

Amendment No. 1 and Limited Waiver to Post-Petition Loan and Security Agreement

 

Exhibit 4 to Form 10-Q (filed May 13, 2003)

4.8

 

Amendment No. 2 and Limited Waiver to Post-Petition Loan and Security Agreement

 

Exhibit 4.1 to Form 10-Q (filed May 9, 2006)

4.9

 

Amendment No. 3 and Limited Waiver to Post-Petition Loan and Security Agreement

 

Exhibit 4.2 to Form 10-Q (filed May 9, 2006)

4.10

 

Amendment No. 4 and Limited Waiver to Post-Petition Loan and Security Agreement

 

Exhibit 4.3 to Form 10-Q (filed May 9, 2006)

4.11

 

Amendment No. 5 and Limited Waiver to Post-Petition Loan and Security Agreement

 

Exhibit 4.1 to Form 8-K (filed April 2, 2008)

4.12

 

Amendment No. 6 and Limited Waiver to Post-Petition Loan and Security Agreement

 

Exhibit 4.2 to Form 8-K (filed April 2, 2008)

4.13

 

Amendment No. 7 and Limited Waiver to Post-Petition Loan and Security Agreement

 

Filed herewith

4.14

 

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)

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EXHIBIT
NO.
  EXHIBIT   WHERE LOCATED
10.3   W. R. Grace & Co. 2000 Stock Incentive Plan, as amended   Exhibit 10 to Form 10-Q (filed 8/14/00)*

10.4

 

W. R. Grace & Co. 1998 Stock Incentive Plan

 

Exhibit 10.4 to Form 10-K (filed 3/13/03)*

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. Supplemental Executive Retirement Plan, as amended

 

Exhibit 10.7 to Form 10-K (filed 3/28/02)*

10.7

 

W. R. Grace & Co. Executive Salary Protection Plan, as amended

 

Exhibit 10.8 to Form 10-K (filed 3/28/02)*

10.8

 

Form of Stock Option Agreements

 

Exhibit 10.5 to Form 10-Q (filed 5/15/98)*

10.9

 

Form of 2005-2007 Long-Term Incentive Program Cash Award

 

Exhibit 10.1 to Form 8-K (filed 7/21/05)*

10.10

 

Form of 2006-2008 Long-Term Incentive Program Cash Award

 

Exhibit 10.1 to Form 8-K (filed 11/06/06)*

10.11

 

Form of 2007-2009 Long-Term Incentive Program Cash Award

 

Exhibit 10.1 to Form 10-Q (filed 11/08/07)*

10.12

 

Form of 2008-2010 Long-Term Incentive Program Cash Award

 

Filed herewith

10.13

 

Form of Executive Severance Agreement between Grace and certain officers

 

Exhibit 10.17 to Form 10-K (filed 3/13/03)*

10.14

 

Severance Pay Plan for Salaried Employees

 

Exhibit 10.17 to Form 10-K (filed 3/02/07)*

10.15

 

Employment Agreement dated May 11, 1999 between Grace and Robert M. Tarola

 

Exhibit 10.1 to Form 10-Q (filed 8/13/99)*

10.16

 

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)*

10.17

 

Form of Indemnification Agreement between Grace and certain officers and directors

 

Exhibit 10.27 to Form 10-K (filed 4/16/01)*

10.18

 

Form of Retention Agreement between Grace and certain officers (includes enhanced severance provision)

 

Exhibit 10.28 to Form 10-K (filed 4/16/01)*

10.19

 

Annual Incentive Compensation Program

 

Exhibit 10.26 to Form 10-K (filed 3/13/03)*

10.20

 

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)*

10.21

 

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)*

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EXHIBIT
NO.
  EXHIBIT   WHERE LOCATED
10.22   Letter Agreement dated February 28, 2008 between Fred Festa, on behalf of Grace, and Hudson La Force III (includes enhanced severance provision)   Exhibit 10.1 to Form 8-K (filed 3/07/08)*

10.23

 

Letter Agreement dated March 31, 2008 between Fred Festa, on behalf of Grace, and Robert M. Tarola

 

Exhibit 10.1 to Form 10-Q (filed 5/09/08)*

10.24

 

Settlement Agreement dated March 11, 2008 between Grace and the U.S. Government

 

Exhibit 10.1 to Form 8-K (filed 3/11/08)

12

 

Computation of Ratio of Earnings to Fixed Charges and Combined Fixed Charges and Preferred Stock Dividends

 

Filed herewith 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 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-Oxley Act of 2002

 

Filed herewith in this Report in Item 8 (Financial Statements and Supplementary Data) in the Financial Supplement

31(i).2

 

Certification of Periodic Report by Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002

 

Filed herewith in this Report in Item 8 (Financial Statements and Supplementary Data) in the Financial Supplement

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 in this Report in Item 8 (Financial Statements and Supplementary Data) in the Financial Supplement

67


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SIGNATURES

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

  W. R. GRACE & CO.

 

By:

 

/s/ ALFRED E. FESTA

Alfred E. Festa
(President, Chairman and
Chief Executive Officer)

 

By:

 

/s/ HUDSON LA FORCE III

Hudson La Force III
(Senior Vice President and
Chief Financial Officer)

Dated: February 27, 2009

        Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on February 27, 2009.

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

(Alfred E. Festa)
  President, Chairman, Chief Executive Officer and Director
(Principal Executive Officer)

/s/ HUDSON LA FORCE III

(Hudson La Force III)

 

Senior Vice President and Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)

*
By signing his name hereto, Mark A. Shelnitz is signing this document on behalf of each of the persons indicated above pursuant to powers of attorney duly executed by such persons and filed with the Securities and Exchange Commission.
  By:   /s/ MARK A. SHELNITZ

Mark A. Shelnitz
(Attorney-in-Fact)

68


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Financial Supplement

W. R. GRACE & CO.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2008


Table of Contents


FINANCIAL SUPPLEMENT
to
Annual Report on Form 10-K for the Year Ended December 31, 2008

W. R. GRACE & CO. AND SUBSIDIARIES

Index to Consolidated Financial Statements
and Financial Statement Schedule and Exhibit

Management's Report on Financial Information and Internal Controls

  F-2

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, 2008

 
F-6

Consolidated Statements of Cash Flows for the three years in the period ended December 31, 2008

 
F-7

Consolidated Balance Sheets at December 31, 2008 and 2007

 
F-8

Consolidated Statements of Shareholders' Equity (Deficit) for the three years in the period ended December 31, 2008

 
F-9

Consolidated Statements of Comprehensive Income (Loss) for the three years in the period ended December 31, 2008

 
F-10

Notes to Consolidated Financial Statements

 
F-11

Selected Financial Data

 
F-71

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

 
F-72

Financial Statement Schedule
Schedule II—Valuation and Qualifying Accounts and Reserves

 
F-104

Exhibit 12: Computation of Ratio of Earnings to Fixed Charges and Combined Fixed Charges and Preferred Stock Dividends

 
F-105

        The financial data listed above appearing in this Financial Supplement are incorporated by reference herein. The Financial Statement Schedule should be read in conjunction with the Consolidated Financial Statements and Notes thereto. Financial statements of less than majority-owned persons and other persons accounted for by the equity method have been omitted as provided in Rule 3-09 of the United States Securities and Exchange Commission's (SEC) Regulation S-X. Financial Statement Schedules not included have been omitted because they are not applicable or the required information is shown in the Consolidated Financial Statements or Notes thereto.


Table of Contents


Management's Report on Financial Information and Internal Controls

        Responsibility For Financial Information—We are responsible for the preparation, accuracy, integrity and objectivity of the Consolidated Financial Statements and the other financial information included in this report. Such information has been prepared in conformity with accounting principles generally accepted in the United States of America and accordingly, includes certain amounts that represent management's best estimates and judgments. Actual amounts could differ from those estimates.

        Responsibility for Internal Controls—We are also responsible for establishing and maintaining adequate internal controls over financial reporting. These internal controls consist of policies and procedures that are designed to assess and monitor the effectiveness of the control environment including: risk identification, governance structure, delegations of authority, information flow, communications and control activities. A chartered Disclosure Committee oversees Grace's public financial reporting process and key managers are required to confirm their compliance with Grace's policies and internal controls quarterly. While no system of internal controls can ensure elimination of all errors and irregularities, Grace's internal controls, which are reviewed and modified in response to changing conditions, have been designed to provide reasonable assurance that assets are safeguarded, policies and procedures are followed, transactions are properly executed and reported, and appropriate disclosures are made. The concept of reasonable assurance is based on the recognition that there are limitations in all systems of internal control and that the costs of such systems should be balanced with their benefits. The Audit Committee of the Board of Directors, which is comprised solely of independent directors, meets regularly with Grace's senior financial management, internal auditors and independent registered public accounting firm to review audit plans and results, as well as the actions taken by management in discharging its responsibilities for accounting, financial reporting and internal controls. The Audit Committee is responsible for the selection and compensation of the independent registered public accounting firm. Grace's financial management, internal auditors and independent registered public accounting firm have direct and confidential access to the Audit Committee at all times.

        Report On Internal Control Over Financial Reporting—We and our management have evaluated Grace's internal control over financial reporting as of December 31, 2008. This evaluation was based on criteria for effective internal control over financial reporting set forth in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, we and our management have concluded that Grace's internal control over financial reporting is effective as of December 31, 2008. Grace's independent registered public accounting firm that audited our financial statements included in Item 15 has also audited the effectiveness of Grace's internal control over financial reporting as of December 31, 2008, as stated in their report, which appears on the following page.

F-2


Table of Contents

        Report On Disclosure Controls And Procedures—As of December 31, 2008, we carried out an evaluation of the effectiveness of the design and operation of Grace's disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Based upon that evaluation, we concluded that Grace's disclosure controls and procedures are effective in ensuring that information required to be disclosed in Grace's periodic filings under the Exchange Act is accumulated and communicated to us to allow timely decisions regarding required disclosures, and such information is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms.

/s/ A. E. Festa

A. E. Festa
President and
Chief Executive Officer
  /s/ Hudson La Force III

Hudson La Force III
Senior Vice President and
Chief Financial Officer

February 27, 2009

 

 

F-3


Table of Contents


Report of Independent Registered Public Accounting Firm

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

        In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial position of W. R. Grace & Co. and its subsidiaries (the "Company") at December 31, 2008 and December 31, 2007, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2008 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008 based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying management's Report On 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 over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

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

        As discussed in Note 10 to the accompanying consolidated financial statements, the Company changed its method of accounting for the cost of its U.S inventories from the Last-in-First-Out (LIFO) inventory valuation method for U.S. inventories to the First-In-First-Out (FIFO) inventory valuation method. As discussed in Note 4 to the consolidated financial statements, the Company changed the manner in which it accounts for income tax uncertainties effective January 1, 2007 to comply with a recently issued financial accounting standard. Also as discussed in Note 20 to the consolidated financial statements, the Company changed the manner in which it accounts for defined benefit pension and other postretirement plans effective December 31, 2006 to comply with a recently issued financial accounting standard.

F-4


Table of Contents

        A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company's assets that could have a material effect on the financial statements.

        Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
McLean, Virginia
February 27, 2009


EXHIBIT 23

        

Consent of Independent Registered Public Accounting Firm

        We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-37024, 333-49083 and 333-49515) of W. R. Grace & Co. of our report dated February 27, 2009 relating to the financial statements, financial statement schedule and the effectiveness of internal control over financial reporting, which appears in this Form 10-K.

/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
McLean, Virginia
February 27, 2009

F-5


Table of Contents


Consolidated Financial Statements

W. R. Grace & Co. and Subsidiaries

Consolidated Statements of Operations

(In millions, except per share amounts)

 
  Year Ended December 31,  
 
  2008   2007   2006  

Net sales

  $ 3,317.0   $ 3,115.2   $ 2,826.5  
               

Cost of goods sold

    2,338.7     2,127.9     1,946.8  

Selling, general and administrative expenses

    595.0     600.6     593.8  

Research and development expenses

    82.7     79.5     65.6  

Defined benefit pension expense

    56.8     52.6     63.7  

Interest expense and related financing costs

    54.2     72.1     73.2  

Provision for environmental remediation

    14.6     17.0     30.0  

Chapter 11 expenses, net of interest income

    65.8     86.4     49.9  

Other (income) expense, net

    (32.0 )   (33.1 )   (34.3 )
               

    3,175.8     3,003.0     2,788.7  
               

Income before income taxes and minority interest

    141.2     112.2     37.8  

Benefit from (provision for) income taxes

    (4.3 )   1.1     (2.8 )

Minority interests in consolidated entities

    (15.4 )   (24.5 )   (26.4 )
               
 

Net income

  $ 121.5   $ 88.8   $ 8.6  
               

Basic earnings per share:

                   
 

Net income

  $ 1.69   $ 1.27   $ 0.13  
 

Weighted average number of basic shares

    72.0     70.1     67.9  

Diluted earnings per share:

                   
 

Net income

  $ 1.68   $ 1.24   $ 0.13  
 

Weighted average number of diluted shares

    72.5     71.6     68.3  

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

F-6


Table of Contents


W. R. Grace & Co. and Subsidiaries

Consolidated Statements of Cash Flows

(In millions)

 
  Year Ended December 31,  
 
  2008   2007   2006  

OPERATING ACTIVITIES

                   

Net income

  $ 121.5   $ 88.8   $ 8.6  

Reconciliation to net cash provided by operating activities:

                   
 

Depreciation and amortization

    118.7     113.4     113.5  
 

Chapter 11 expenses, net of interest income

    65.8     86.4     49.9  
 

(Benefit from) provision for income taxes

    4.3     (1.1 )   2.8  
 

Income taxes paid, net of refunds

    (42.4 )   (51.1 )   (51.6 )
 

Minority interests in consolidated entities

    15.4     24.5     26.4  
 

Dividends paid to minority interests in consolidated entities

    (13.4 )   (12.0 )   (6.7 )
 

Interest accrued on pre-petition liabilities subject to compromise

    49.4     70.9     71.3  
 

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

    (14.1 )   (1.9 )   (0.6 )
 

Defined benefit pension expense

    56.8     52.6     63.7  
 

Payments under defined benefit pension arrangements

    (67.7 )   (105.7 )   (121.5 )
 

Payments under postretirement benefit plans

    (6.6 )   (5.0 )   (13.9 )
 

Net income from life insurance policies

    (3.0 )   (5.4 )   (4.1 )
 

Provision for (recovery of) uncollectible receivables

    2.2     (0.4 )   3.5  
 

Provision for environmental remediation

    14.6     17.0     30.0  
 

Expenditures for environmental remediation

    (4.9 )   (9.5 )   (10.9 )
 

Expenditures for retained obligations of divested businesses

    (1.1 )   (1.0 )   (3.6 )
 

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)

    56.2     (67.1 )   29.1  
   

Other accruals and non-cash items

    (28.8 )   (2.8 )   17.1  
               
 

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

    322.9     190.6     203.0  

Cash paid to resolve contingencies subject to Chapter 11

    (252.0 )   (10.3 )    

Chapter 11 expenses paid

    (69.3 )   (92.1 )   (50.3 )
               
 

Net cash provided by operating activities

    1.6     88.2     152.7  
               

INVESTING ACTIVITIES

                   

Capital expenditures

    (132.2 )   (136.9 )   (119.2 )

Investments in short term debt securities

        (124.7 )    

Proceeds from sales of investment securities

    70.7          

Purchases of equity investment

    (4.0 )   (6.3 )    

Businesses acquired, net of cash acquired

        (5.5 )   (19.6 )

Proceeds from sale of business/product line

        21.8      

Proceeds from termination of life insurance policies

    12.7     14.8     0.3  

Net investment in life insurance policies

    (0.1 )   (1.2 )   (0.5 )

Proceeds from sales of investments and disposals of assets

    21.8     31.1     9.6  
               
 

Net cash used for investing activities

    (31.1 )   (206.9 )   (129.4 )
               

FINANCING ACTIVITIES

                   

Net payment of loans secured by cash value of life insurance policies

        (0.1 )   (0.1 )

Net (repayments) borrowings under credit arrangements

    6.7     8.3     0.3  

Fees paid under debtor-in-possession credit facility

    (2.3 )   (2.6 )   (2.4 )

Proceeds from exercise of stock options

    9.6     40.1     24.1  
               
 

Net cash provided by financing activities

    14.0     45.7     21.9  
               

Effect of currency exchange rate changes on cash and cash equivalents

    (4.9 )   17.2     16.4  
               
 

Increase (decrease) in cash and cash equivalents

    (20.4 )   (55.8 )   61.6  

Cash and cash equivalents, beginning of period

    480.5     536.3     474.7  
               

Cash and cash equivalents, end of period

  $ 460.1   $ 480.5   $ 536.3  
               

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

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W. R. Grace & Co. and Subsidiaries

Consolidated Balance Sheets

(In millions, except par value and shares)

 
  December 31,
2008
  December 31,
2007
 

ASSETS

             

Current Assets

             

Cash and cash equivalents

  $ 460.1   $ 480.5  

Investment securities

    21.6     98.3  

Cash value of life insurance policies, net of policy loans

    67.2     77.1  

Trade accounts receivable, less allowance of $5.0 (2007—$5.2)

    462.6     500.6  

Inventories

    354.8     362.9  

Deferred income taxes

    45.8     37.7  

Other current assets

    86.1     80.8  
           
 

Total Current Assets

    1,498.2     1,637.9  

Properties and equipment, net of accumulated depreciation and amortization of $1,545.3 (2007—$1,545.0)

    710.6     706.1  

Goodwill

    117.1     122.3  

Deferred income taxes

    851.7     747.5  

Asbestos-related insurance

    500.0     500.0  

Overfunded defined benefit pension plans

    48.6     54.1  

Other assets

    149.3     140.5  
           
 

Total Assets

  $ 3,875.5   $ 3,908.4  
           

LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)

             

Liabilities Not Subject to Compromise

             

Current Liabilities

             

Debt payable within one year

  $ 11.2   $ 4.7  

Accounts payable

    230.4     191.3  

Other current liabilities

    291.5     325.1  
           
 

Total Current Liabilities

    533.1     521.1  

Debt payable after one year

    0.6     0.3  

Deferred income taxes

    7.1     32.7  

Minority interests in consolidated entities

    73.1     73.2  

Underfunded defined benefit pension plans

    392.3     169.1  

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

    136.7     137.9  

Other liabilities

    46.6     46.2  
           
 

Total Liabilities Not Subject to Compromise

    1,189.5     980.5  

Liabilities Subject to Compromise—Note 2

             

Pre-petition bank debt plus accrued interest

    823.5     783.0  

Drawn letters of credit plus accrued interest

    30.0     26.9  

Income tax contingencies

    121.0     89.3  

Asbestos-related contingencies

    1,700.0     1,700.0  

Environmental contingencies

    152.2     394.7  

Postretirement benefits

    169.7     172.7  

Other liabilities and accrued interest

    116.5     110.9  
           
 

Total Liabilities Subject to Compromise

    3,112.9     3,277.5  
           
 

Total Liabilities

    4,302.4     4,258.0  
           

Commitments and Contingencies

             

Shareholders' Equity (Deficit)

             

Common stock issued, par value $0.01; 300,000,000 shares authorized; outstanding: 2008—72,157,518 (2007—71,627,901)

    0.8     0.8  

Paid-in capital

    436.6     431.5  

Accumulated deficit

    (246.6 )   (368.1 )

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

    (57.4 )   (63.7 )

Accumulated other comprehensive income (loss)

    (560.3 )   (350.1 )
           
 

Total Shareholders' Equity (Deficit)

    (426.9 )   (349.6 )
           
 

Total Liabilities and Shareholders' Equity (Deficit)

  $ 3,875.5   $ 3,908.4  
           

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

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Table of Contents


W. R. Grace & Co. and Subsidiaries

Consolidated Statements of Shareholders' Equity (Deficit)

(In millions)

 
  Common
Stock and
Paid-in Capital
  Accumulated
Deficit
  Treasury
Stock
  Accumulated
Other
Comprehensive
Income (Loss)
  Total
Shareholders'
Equity (Deficit)
 

Balance, December 31, 2005

  $ 424.2   $ (467.7 ) $ (119.7 ) $ (393.9 ) $ (557.1 )

Net income

        8.6             8.6  

Stock plan activity

    0.4         23.7         24.1  

Other comprehensive income (loss)

                105.4     105.4  

Adoption of FASB Statement No. 158 (Note 20)

                (102.3 )   (102.3 )
                       

Balance, December 31, 2006

  $ 424.6   $ (459.1 ) $ (96.0 ) $ (390.8 ) $ (521.3 )
                       

Cumulative effect of adoption of FASB Interpretation No. 48

        2.2             2.2  
                       

Balance, January 1, 2007

  $ 424.6   $ (456.9 ) $ (96.0 ) $ (390.8 ) $ (519.1 )
                       

Net income

        88.8             88.8  

Stock plan activity

    7.7         32.3         40.0  

Other comprehensive income (loss)

                40.7     40.7  
                       

Balance, December 31, 2007

  $ 432.3   $ (368.1 ) $ (63.7 ) $ (350.1 ) $ (349.6 )
                       

Net income

        121.5             121.5  

Stock plan activity

    5.1         6.3         11.4  

Other comprehensive income (loss)

                (210.2 )   (210.2 )
                       

Balance, December 31, 2008

  $ 437.4   $ (246.6 ) $ (57.4 ) $ (560.3 ) $ (426.9 )
                       

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

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Table of Contents


W. R. Grace & Co. and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

(In millions)

 
  Year Ended December 31,  
 
  2008   2007   2006  

Net income

  $ 121.5   $ 88.8   $ 8.6  

Other comprehensive income (loss):

                   
 

Foreign currency translation adjustments

    (58.7 )   44.6     36.8  
 

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

    (6.6 )   0.8     (1.3 )
 

Minimum pension liability adjustments, net of income taxes

            69.9  
 

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

    (144.9 )   (4.7 )    
               
 

Total other comprehensive income (loss)

    (210.2 )   40.7     105.4  
               

Comprehensive income (loss)

  $ (88.7 ) $ 129.5   $ 114.0  
               

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

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Table of Contents


Notes to Consolidated Financial Statements

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

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

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

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

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

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

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

        Principles of Consolidation—The Consolidated Financial Statements include the accounts of Grace and entities as to which Grace exercises control over operating and financial policies. Grace consolidates the activities of variable interest entities in circumstances where management determines that Grace is the primary beneficiary of the variable interest entity. Intercompany transactions and balances are eliminated in consolidation. Investments in affiliated companies in which Grace can significantly influence operating and financial policies are accounted for under the equity method, unless Grace's investment is deemed to be temporary, in which case the investment is accounted for under the cost method.

        Operating Segments—Grace reports financial results of each of its operating segments that engage in business activities that generate revenues and expenses, and whose operating results are

F-11


Table of Contents


Notes to Consolidated Financial Statements (Continued)

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


regularly reviewed by Grace's Chief Executive Officer. Grace reports two operating segments: Grace Davison, which includes specialty catalysts and materials used in a wide range of energy, refining, consumer, industrial, packaging and life sciences applications; and Grace Construction Products, which includes specialty chemicals and materials used in commercial, infrastructure and residential construction.

        Minority Interests in Consolidated Entities—Grace conducts certain of its business through joint ventures with unaffiliated third parties that require profit sharing. For joint ventures in which Grace has a controlling financial interest, Grace consolidates the results of such joint ventures in the Consolidated Financial Statements. Grace recognizes a liability for cumulative amounts due to the third parties based on the financial results of the joint ventures, and deducts the annual amount of profit sharing in the measurement of its consolidated net income.

        Change in Accounting Principle—In the third quarter of 2008, Grace changed its method of accounting for the cost of its U.S inventories from the last-in/first-out method, or LIFO, to the first-in/first-out method, or FIFO. Grace decided to make this change in order to achieve a consistent inventory costing method for both U.S. and non-U.S. inventories. Grace has retrospectively restated prior periods' financial statements for all periods presented herein to account for all inventories using FIFO in compliance with SFAS 154. See Note 10 for further discussion.

        Reclassifications—Certain amounts in prior years' Consolidated Financial Statements have been reclassified to conform to the 2008 presentation. Such reclassifications have not materially affected previously reported amounts in the Consolidated Financial Statements.

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

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

        Revenue Recognition—Grace recognizes revenue when all of the following criteria are satisfied: risk of loss and title transfer to the customer; the price is fixed and determinable; and

F-12


Table of Contents


Notes to Consolidated Financial Statements (Continued)

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


collectability is reasonably assured. Certain customer arrangements include conditions for volume rebates. Grace accrues a rebate allowance and reduces recorded sales for anticipated selling price adjustments at the time of sale. Grace regularly reviews rebate accruals based on actual and anticipated sales patterns.

        Cash Equivalents—Cash equivalents consist of liquid instruments and investments with maturities of three months or less when purchased. The recorded amounts approximate fair value.

        Investment Securities—Investment securities consist of direct and indirect investments in debt securities and are classified as available-for-sale securities. These investments are reported at fair value as determined by independent pricing sources and/or professional market participants, with temporary unrealized gains and losses included in other comprehensive income. Losses that are deemed to be other than temporary are considered impairments and are recorded in earnings. Grace reflects these securities as current assets as they are actively in the process of being liquidated.

        Inventories—Inventories are stated at the lower of cost or market. The method used to determine cost is first-in/first-out, or "FIFO." Market values for raw materials are based on current cost and, for other inventory classifications, net realizable value. Inventories are evaluated regularly for salability, and slow moving and/or obsolete items are adjusted to expected salable value. Inventory values include direct and certain indirect costs of materials and production. Abnormal costs of production are expensed as incurred.

        Properties and Equipment—Properties and equipment are stated at cost. Depreciation of properties and equipment is generally computed using the straight-line method over the estimated useful life of the asset. Estimated useful lives range from 20 to 40 years for buildings, 3 to 7 years for information technology equipment, 3 to 10 years for machinery and equipment and 5 to 10 years for furniture and fixtures. Interest is capitalized in connection with major project expenditures. Fully depreciated assets are retained in properties and equipment and related accumulated depreciation accounts until they are removed from service. In the case of disposals, assets and related accumulated depreciation are removed from the accounts and the net amount, less any proceeds from disposal, is charged or credited to operations. Obligations for costs associated with asset retirements, such as requirements to restore a site to its original condition, are accrued at net present value and amortized along with the related asset. Grace reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable.

        Goodwill—Goodwill arises from certain purchase business combinations. Grace reviews its goodwill for impairment on an annual basis and whenever events or changes in circumstances indicate that the carrying amount may not be fully recoverable. Recoverability is assessed at the reporting unit level most directly associated with the business combination that generated the goodwill.

        Income Taxes—Deferred tax assets and liabilities are recognized with respect to the expected future tax consequences of events that have been recorded in the Consolidated Financial Statements and tax returns. If it is more likely than not that all or a portion of deferred tax assets will not be realized, a valuation allowance is provided against such deferred tax assets. The assessment

F-13


Table of Contents


Notes to Consolidated Financial Statements (Continued)

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


of realization of deferred tax assets is performed annually under scenarios of future taxable income and tax planning alternatives that are considered reasonable in the circumstances.

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

        Foreign Currency Translation—Assets and liabilities of foreign subsidiaries (other than those located in countries with highly inflationary economies) are translated into U.S. dollars at current exchange rates, while revenues, costs and expenses are translated at average exchange rates during each reporting period. The resulting translation adjustments are included in the "accumulated other comprehensive income (loss)" caption of the Consolidated Balance Sheets. The financial statements of subsidiaries located in countries with highly inflationary economies, if any, are remeasured as if the functional currency were the U.S. dollar; the remeasurement creates translation adjustments that are reflected in "net income" in the Consolidated Statements of Operations.

        Financial Instruments—Grace periodically enters into commodity forward, swap and/or option contracts, and foreign exchange forward and/or option contracts to manage exposure to fluctuations in commodity prices and foreign currency exchange rates. Grace does not hold or issue derivative financial instruments for trading purposes. Derivative instruments are recorded in the Consolidated Balance Sheets as either assets or liabilities at their fair value. For derivative instruments designated as fair value hedges, changes in the fair values of the derivative instruments closely offset changes in the fair values of the hedged items in other income (expense) in the Consolidated Statements of Operations. For derivative instruments designated as cash flow hedges, if the derivative instruments qualify for hedge accounting pursuant to FAS 133, "Accounting for Derivative Instruments and Hedging Activities", the effective portion of any hedge is reported as accumulated other comprehensive income (loss) in the Consolidated Balance Sheets until it is cleared to earnings during the same period in which the hedged item affects earnings. The ineffective portion of all hedges, and changes in the fair values of derivative instruments that are not designated as hedges, are recorded in current period earnings. Cash flows from derivative instruments are reported in the same category as the cash flows from the items being hedged.

        Effect of New Accounting Standards—In December 2008, the Financial Accounting Standards Board ("FASB") issued FASB Staff Position ("FSP") No. FAS 140-4 and FIN 46 (R)-8 "Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities." The disclosures required by this FSP are intended to provide greater transparency to financial statement users about a transferor's continuing involvement with transferred financial assets and an enterprise's involvement with variable interest entities and qualifying Special Purpose Entities ("SPEs"). This FSP is effective for the first reporting period ending after December 15, 2008. Grace adopted these disclosure requirements in 2008.

        In December 2008, the FASB issued FSP No. FAS 132(R)-1 "Disclosures about Postretirement Benefit Plan Assets." This FSP amends FASB Statement No. 132 (revised 2003), Employers' Disclosures about Pensions and Other Postretirement Benefits, to provide guidance on an employer's disclosures about plan assets of a defined benefit pension or other postretirement plan.

F-14


Table of Contents


Notes to Consolidated Financial Statements (Continued)

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

This FSP shall be effective for fiscal years ending after December 15, 2009. Grace will adopt these disclosure requirements in 2009.

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

        In April 2008, the FASB issued FSP No. FAS 142-3, "Determination of the Useful Life of Intangible Assets." FSP 142-3 will improve the consistency between the useful life of a recognized intangible asset under Statement 142 and the period of expected cash flows used to measure the fair value of the asset under FASB Statement No. 141 (revised 2007), Business Combinations, and other U.S. generally accepted accounting principles. This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Grace will adopt this standard in 2009.

        In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133." SFAS No. 161 expands the current disclosure framework by requiring entities to provide qualitative disclosures about the objectives and strategies for using derivatives, quantitative data about the fair value of and gains and losses on derivative contracts, and details of credit-risk-related contingent features in their hedged positions. SFAS No. 161 is effective for fiscal years beginning after November 15, 2008. Grace will adopt these dislosure requirements in 2009.

        In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations." SFAS No. 141(R) will require the acquirer in a business combination to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with acquisition-related costs recognized separately from the acquisition. SFAS No. 141(R) applies prospectively to business combinations occurring on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Grace will adopt this standard in 2009.

        In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements." SFAS No. 160 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 is effective for fiscal years beginning on or after December 15, 2008. Grace will adopt this standard in 2009.

        In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." SFAS No. 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. In February 2008, the FASB issued FSP 157-1, "Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13", and FSP 157-2, "Effective Date of FASB Statement No. 157".

F-15


Table of Contents


Notes to Consolidated Financial Statements (Continued)

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


FSP 157-1 amends SFAS No. 157 to remove certain leasing transactions from its scope. FSP 157-2 delays the effective date of SFAS No. 157 for all non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), until fiscal years beginning after November 15, 2008. In October 2008, the FASB issued FSP No. FAS 157-3 "Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active." This FSP clarifies the application of SFAS No. 157 and illustrates key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. This FSP is effective upon issuance, including prior periods for which financial statements have not been issued. Grace adopted SFAS No. 157 and the related FSPs in the first quarter of 2008, and the adoption for Grace's financial assets and liabilities did not have a material impact on its Consolidated Financial Statements. Grace does not believe the adoption of SFAS No. 157 for its non-financial assets and liabilities, effective January 1, 2009, will have a material impact on its Consolidated Financial Statements. See Note 7 for further discussion of SFAS No. 157.

2. Chapter 11—Related Information

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

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

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

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

F-16


Table of Contents


Notes to Consolidated Financial Statements (Continued)

2. Chapter 11—Related Information (Continued)


Committee and the PI FCR filed a proposed plan of reorganization (the "PI Plan") with the Bankruptcy Court.

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

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

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

        On October 17, 2008, the Ontario Superior Court of Justice, in the Grace Canada, Inc. proceeding pending under the Companies' Creditors Arrangement Act, approved an agreement (the "Minutes of Settlement"), entered into by the Company, Grace Canada and legal representatives of Canadian ZAI property damage claimants on September 2, 2008, that would settle all Canadian ZAI property damage claims and demands. Under the Minutes of Settlement, all Canadian ZAI property damage claims and demands would be paid through a separate Canadian ZAI property damage claims fund funded with CDN$6.5 million. The Minutes of Settlement are subject to the confirmation and effectiveness of the Joint Plan.

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

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

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

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

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2. Chapter 11—Related Information (Continued)


and Canadian ZAI property damage claims, would be channeled to a separate asbestos trust (the "PD Trust").

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

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

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

Asbestos-Related Personal Injury Claims

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

        The PI Trust would be funded with:

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2. Chapter 11—Related Information (Continued)

Asbestos-Related Property Damage Claims

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

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

        The PD account would be funded with:

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2. Chapter 11—Related Information (Continued)

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

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

Other Claims

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

Effect on Company Common Stock

        The Joint Plan assumes that Company common stock will remain outstanding at the effective date of the Joint Plan, but that the interests of existing shareholders would be subject to dilution by additional shares of Company common stock issued under the warrant or in the event of default in respect of the deferred payment obligations to the PI Trust or the PD Trust under the Company's security obligation. In order to preserve significant tax benefits which are subject to elimination or limitation in the event of a change in control (as defined by the Internal Revenue Code) of Grace, the Joint Plan provides that under certain circumstances, the Board of Directors would have the authority to impose restrictions on the transfer of Grace stock with respect to certain 5% shareholders. These restrictions will generally not limit the ability of a person that holds less than 5% of Grace stock after emergence to either buy or sell stock on the open market. In addition, the

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2. Chapter 11—Related Information (Continued)


Bankruptcy Court has approved trading restrictions on Grace common stock until the effective date of a plan of reorganization. These restrictions prohibit (without the consent of Grace) a person from acquiring more than 4.75% of the outstanding Grace common stock or, for any person already holding more than 4.75%, from increasing such person's holdings. This summary of the stock transfer restrictions does not purport to be complete and is qualified in its entirety by reference to the order of the Bankruptcy Court, which has been filed with the SEC.

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

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

        Approximately 7,000 of the non-asbestos related claims involve claims by employees or former employees for future retirement benefits such as pension and retiree medical coverage. Grace views most of these claims as contingent and has proposed to retain such benefits under the Joint Plan. The remaining non-asbestos claims include claims for payment of goods and services, taxes, product warranties, principal and interest under pre-petition credit facilities, amounts due under leases and other contracts, leases and other executory contracts rejected in the Chapter 11 Cases, environmental remediation, pending non-asbestos- related litigation, and non-asbestos-related personal injury. Claims for indemnification or contribution to actual or potential codefendants in asbestos-related and other litigation were also filed.

        The Debtors analyzed the claims filed pursuant to the March 31, 2003 bar date and found that many are duplicates, represent the same claim filed against more than one of the Debtors, lack any supporting documentation, or provide insufficient supporting documentation. As of December 31, 2008, of the approximately 4,300 non-ZAI PD Claims filed, approximately 360 claims have been resolved, approximately 3,850 claims have been expunged, reclassified by the Debtors or withdrawn by claimants, leaving approximately 90 claims to be addressed through the property damage case management order approved by the Bankruptcy Court and/or the Joint Plan or another plan of reorganization. As of December 31, 2008, of the approximately 3,270 non-asbestos claims filed, approximately 1,890 have been expunged or withdrawn by claimants, approximately 1,155 have been resolved, and an additional approximately 225 claims are to be addressed through the claim objection process and the dispute resolution procedures approved by the Bankruptcy Court.

        Additionally, by order dated June 17, 2008, the Bankruptcy Court established October 31, 2008 as the bar date for ZAI PD Claims related to property located in the U.S. As of December 31, 2008, approximately 17,955 US ZAI PD Claims have been filed. In addition, on October 21, 2008, the Bankruptcy Court entered an order establishing August 31, 2009 as the bar date for ZAI PD Claims related to property located in Canada. The Joint Plan provides for the channeling of US ZAI PD Claims and Canadian ZAI PD Claims to the Asbestos PD Trust created under the Joint Plan, and the subsequent transfer of Canadian ZAI PD Claims to a Canadian fund. No bar date has been set for personal injury claims related to ZAI. The Joint Plan provides that ZAI PI Claims would be channeled to the Asbestos PI Trust created under the Joint Plan.

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2. Chapter 11—Related Information (Continued)

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

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

        On November 29, 2002, Sealed Air (and Cryovac) and Fresenius each announced that they had reached agreements in principle with the PI and PD Committees to settle asbestos, successor liability and fraudulent transfer claims related to such transactions. Under the terms of the Fresenius Settlement, subject to the fulfillment of certain conditions, Fresenius would pay $115.0 million to the Debtors' estate as directed by the Bankruptcy Court upon confirmation of the Debtors' plan of reorganization. In July 2003, the Fresenius Settlement was approved by the Bankruptcy Court. Under the terms of the Sealed Air Settlement, subject to the fulfillment of certain conditions, Cryovac would make a payment of $512.5 million (plus interest at 5.5% compounded annually, commencing on December 21, 2002) and nine million shares (now 18 million shares to reflect a two-for-one stock split) of Sealed Air common stock (collectively valued at $976.8 million as of December 31, 2008), as directed by the Bankruptcy Court upon confirmation of a plan of reorganization. In June 2005, the Sealed Air Settlement was approved by the Bankruptcy Court.

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

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

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

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Notes to Consolidated Financial Statements (Continued)

2. Chapter 11—Related Information (Continued)

        Pursuant to SOP 90-7, Grace's pre-petition and future liabilities that are subject to compromise are required to be reported separately on the balance sheet at an estimate of the amount that will ultimately be allowed by the Bankruptcy Court. As of December 31, 2008, such pre-petition liabilities include fixed obligations (such as debt and contractual commitments), as well as estimates of costs related to contingent liabilities (such as asbestos-related litigation, environmental remediation, and other claims). Obligations of Grace subsidiaries not covered by the Filing continue to be classified on the Consolidated Balance Sheets based upon maturity dates or the expected dates of payment. SOP 90-7 also requires separate reporting of certain expenses, realized gains and losses, and provisions for losses related to the Filing as reorganization items. Grace presents reorganization items as "Chapter 11 expenses, net of interest income," a separate caption in its Consolidated Statements of Operations.

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