<PAGE>

================================================================================

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


                                    FORM 10-Q

(Mark One)

[ X ]           QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                  FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003

                                       OR

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

                         Commission File Number 1-13953

                                W. R. GRACE & CO.

         Delaware                                             65-0773649
---------------------------                         ---------------------------
 (State of Incorporation)                                 (I.R.S. Employer
                                                         Identification No.)

                                7500 Grace Drive
                            Columbia, Maryland 21044
                                 (410) 531-4000
                        ---------------------------------
                          (Address and phone number of
                          principal executive offices)


Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

            Yes      X                             No
                -----------                           ----------

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).

            Yes      X                             No
                -----------                           ----------


65,556,244 shares of Common Stock, $0.01 par value, were outstanding at July 31,
2003.

================================================================================

<PAGE>

                       W. R. GRACE & CO. AND SUBSIDIARIES

                                Table of Contents

<TABLE>
<CAPTION>
                                                                                                      Page No.
                                                                                                      --------
<S>        <C>      <C>                                                                     <C>
PART I.    FINANCIAL INFORMATION

Item 1.             Financial Statements

                    Report of Independent Accountants                                                   I - 1

                    Consolidated Statement of Operations                                                I - 2

                    Consolidated Statement of Cash Flows                                                I - 3

                    Consolidated Balance Sheet                                                          I - 4

                    Consolidated Statement of Shareholders' Equity (Deficit)                            I - 5

                    Consolidated Statement of Comprehensive Income                                      I - 5

                    Notes to Consolidated Financial Statements                                     I - 6 to I - 20

Item 2.             Management's Discussion and Analysis of Results of Operations and
                    Financial Condition                                                           I - 21 to I - 34

Item 3.             Quantitative and Qualitative Disclosures About Market Risk                         I - 35

Item 4.             Controls and Procedures                                                            I - 35


PART II.   OTHER INFORMATION

Item 1.             Legal Proceedings                                                                  II - 1

Item 6.             Exhibits and Reports on Form 8-K                                                   II - 1

</TABLE>

<PAGE>

                        REPORT OF INDEPENDENT ACCOUNTANTS

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

We have reviewed the accompanying consolidated balance sheet of W. R. Grace &
Co. and its subsidiaries as of June 30, 2003, and the related consolidated
statements of operations, of shareholders' equity (deficit) and of comprehensive
income for each of the three-month and six-month periods ended June 30, 2003 and
June 30, 2002, and the consolidated statements of cash flows for the six-month
periods ended June 30, 2003 and June 30, 2002. These interim financial
statements are the responsibility of the Company's management.

We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with generally
accepted auditing standards, the objective of which is the expression of an
opinion regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.

Based on our review, we are not aware of any material modifications that should
be made to the accompanying consolidated interim financial statements for them
to be in conformity with accounting principles generally accepted in the United
States of America.

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

We previously audited in accordance with auditing standards generally accepted
in the United States of America, the consolidated balance sheet as of December
31, 2002, and the related consolidated statements of operations, of cash flows,
of shareholders' equity (deficit) and of comprehensive loss for the year then
ended (not presented herein). Our report, which was modified as to a matter
raising substantial doubt about the Company's ability to continue as a going
concern, was dated January 29, 2003. In our opinion, the information set forth
in the accompanying consolidated balance sheet as of December 31, 2002, is
fairly stated in all material respects in relation to the consolidated balance
sheet from which it has been derived.


/s/ PricewaterhouseCoopers LLP


Baltimore, Maryland
July 23, 2003


<PAGE>

<TABLE>
<CAPTION>
===================================================================================================================================
W. R. GRACE & CO. AND SUBSIDIARIES                                         THREE MONTHS ENDED              SIX MONTHS ENDED
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)                                JUNE 30,                       JUNE 30,
===================================================================================================================================
Dollars in millions, except per share amounts                              2003            2002           2003           2002
                                                                     --------------------------------------------------------------
<S>                                                                    <C>             <C>            <C>            <C>
Net sales.....................................................         $    503.4      $   471.8      $    948.2     $   885.0
Other income..................................................                2.1            4.8             7.9          10.8
                                                                     --------------------------------------------------------------
                                                                            505.5          476.6           956.1         895.8
                                                                     --------------------------------------------------------------


Cost of goods sold, exclusive of depreciation and
    amortization shown separately below.......................              329.7          294.2           626.4         554.1
Selling, general and administrative expenses, exclusive of
    net pension expense shown separately below................               94.7           83.6           186.4         167.1
Depreciation and amortization ................................               25.3           23.4            50.0          46.2
Research and development expenses ............................               14.2           13.3            28.3          26.1
Net pension expense ..........................................               13.2            4.5            26.7           9.6
Interest expense and related financing costs .................                4.1            5.6             8.3          10.4
Provision for environmental remediation ......................                0.5            2.0             2.5           5.8
                                                                     --------------------------------------------------------------
                                                                            481.7          426.6           928.6         819.3
                                                                     --------------------------------------------------------------

Income before Chapter 11 expenses, income taxes, and minority
    interest..................................................               23.8           50.0            27.5          76.5
Chapter 11 expenses, net .....................................               (6.8)          (8.4)           (9.5)        (12.8)
Provision for income taxes....................................              (10.2)         (19.1)          (13.3)        (29.2)
Minority interest in consolidated entities....................               (0.3)          (1.3)           (0.5)         (0.9)
                                                                     --------------------------------------------------------------

    NET INCOME ...............................................         $      6.5      $    21.2      $      4.2     $    33.6
===================================================================================================================================


BASIC EARNINGS PER COMMON SHARE ..............................         $     0.10      $    0.32      $     0.06     $    0.51

Average number of basic shares ...............................               65.6           65.4            65.6          65.4

DILUTED EARNINGS PER COMMON SHARE.............................         $     0.10      $    0.32      $     0.06     $    0.51

Average number of diluted shares..............................               65.7           65.6            65.6          65.5
===================================================================================================================================
</TABLE>

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


                                       I-2
<PAGE>

<TABLE>
<CAPTION>
====================================================================================================================================
W. R. GRACE & CO. AND SUBSIDIARIES                                                                      SIX MONTHS ENDED
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)                                                            JUNE 30,
====================================================================================================================================
Dollars in millions                                                                                 2003               2002
                                                                                             ---------------------------------------

<S>                                                                                          <C>                <C>
OPERATING ACTIVITIES
Income before Chapter 11 expenses, income taxes, and minority interest...................    $       27.5       $         76.5
Reconciliation to net cash provided by operating activities:
     Depreciation and amortization ......................................................            50.0                 46.2
     Interest accrued on pre-petition debt subject to compromise.........................             5.8                  7.4
     Loss on disposals of assets.........................................................             0.9                  0.4
     Provision for environmental remediation.............................................             2.5                  5.8
     Net income from life insurance policies.............................................            (4.3)                (4.8)
     Changes in assets and liabilities, excluding effect of businesses
     acquired/divested and foreign currency translation:
         Increase in working capital items...............................................           (43.4)               (35.3)
         Expenditures for asbestos-related litigation ...................................            (4.7)                (5.6)
         Proceeds from asbestos-related insurance .......................................            10.2                  9.5
         Expenditures for environmental remediation .....................................            (5.5)               (10.7)
         Expenditures for postretirement benefits .......................................            (5.7)               (11.2)
         Expenditures for retained obligations of discontinued operations ...............            (1.2)                (1.8)
         Changes in accruals and other non-cash items....................................            26.5                 13.1
                                                                                             ---------------------------------------
     NET CASH PROVIDED BY OPERATING ACTIVITIES BEFORE INCOME TAXES AND
     CHAPTER 11 EXPENSES ................................................................            58.6                 89.5
Chapter 11 expenses paid, net ...........................................................           (10.2)               (10.3)
Income taxes paid, net of refunds .......................................................           (12.4)               (12.3)
                                                                                             ---------------------------------------
     NET CASH PROVIDED BY OPERATING ACTIVITIES ..........................................            36.0                 66.9
                                                                                             ---------------------------------------

INVESTING ACTIVITIES
Capital expenditures ....................................................................           (45.1)               (32.0)
Businesses acquired in purchase transactions, net of cash acquired ......................            (2.2)               (25.0)
Investment in life insurance policies....................................................            (9.1)               (12.6)
Proceeds from life insurance policies....................................................             5.4                  9.0
Proceeds from disposals of assets .......................................................             0.8                  0.7
                                                                                             ---------------------------------------
     NET CASH USED FOR INVESTING ACTIVITIES .............................................           (50.2)               (59.9)
                                                                                             ---------------------------------------

FINANCING ACTIVITIES
Net payments of loans secured by cash value of life insurance policies ..................            (1.4)                (3.0)
Borrowings under credit facilities, net of repayments....................................             4.7                 (0.5)
Borrowings under debtor-in-possession facility, net of fees .............................            27.0                 19.4
Repayments of borrowings under debtor-in-possession facility.............................            --                  (20.0)
                                                                                             ---------------------------------------
     NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES ...............................            30.3                 (4.1)
                                                                                             ---------------------------------------
Effect of currency exchange rate changes on cash and cash equivalents ...................            18.2                 10.1
                                                                                             ---------------------------------------
     INCREASE IN CASH AND CASH EQUIVALENTS ..............................................            34.3                 13.0
Cash and cash equivalents, beginning of period ..........................................           283.6                191.9
                                                                                             ---------------------------------------
Cash and cash equivalents, end of period ................................................    $      317.9       $        204.9
====================================================================================================================================
</TABLE>

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

                                       I-3
<PAGE>

<TABLE>
<CAPTION>
============================================================================================================================
W. R. GRACE & CO. AND SUBSIDIARIES                                                         JUNE 30,         DECEMBER 31,
CONSOLIDATED BALANCE SHEET (UNAUDITED)                                                       2003               2002
============================================================================================================================
Dollars in millions, except par value and shares
<S>                                                                                    <C>               <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents ..........................................................   $       317.9     $        283.6
Accounts and other receivables, net ...............................................            349.2              316.6
Inventories .......................................................................            208.0              173.6
Deferred income taxes .............................................................             25.9               28.0
Other current assets...............................................................             27.7               35.9
                                                                                      --------------------------------------
     TOTAL CURRENT ASSETS .........................................................            928.7              837.7

Properties and equipment, net of accumulated depreciation and
     amortization of $1,147.9 (2002- $1,071.7).....................................            637.4              622.2
Goodwill ..........................................................................             69.4               65.2
Cash value of life insurance policies, net of policy loans.........................             91.8               82.4
Deferred income taxes .............................................................            577.9              566.7
Asbestos-related insurance receivable..............................................            272.4              282.6
Other assets ......................................................................            253.1              234.9
                                                                                      --------------------------------------
     TOTAL ASSETS .................................................................    $     2,830.7     $      2,691.7
                                                                                      ======================================

LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
LIABILITIES NOT SUBJECT TO COMPROMISE
CURRENT LIABILITIES
Debt payable within one year ......................................................    $        37.4     $          4.3
Accounts payable ..................................................................            117.0              100.3
Income taxes payable ..............................................................             12.5               11.4
Other current liabilities .........................................................            127.2              131.3
                                                                                      --------------------------------------
     TOTAL CURRENT LIABILITIES ....................................................            294.1              247.3

Deferred income taxes .............................................................             35.9               30.5
Other liabilities .................................................................            333.1              301.4
                                                                                      --------------------------------------
     TOTAL LIABILITIES NOT SUBJECT TO COMPROMISE...................................            663.1              579.2

LIABILITIES SUBJECT TO COMPROMISE - NOTE 2.........................................          2,336.1            2,334.7
                                                                                      --------------------------------------
     TOTAL LIABILITIES.............................................................          2,999.2            2,913.9
                                                                                      --------------------------------------

COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS' EQUITY (DEFICIT)
Common stock issued, par value $0.01; 300,000,000 shares authorized;
     outstanding: 2003 - 65,553,711 (2002 - 65,466,725) ...........................              0.8                0.8
Paid-in capital ...................................................................            432.1              433.0
Accumulated deficit................................................................           (111.5)            (115.7)
Treasury stock, at cost:  shares: 2003 - 11,426,049 (2002 - 11,513,035)............           (136.0)            (137.0)
Accumulated other comprehensive loss...............................................           (353.9)            (403.3)
                                                                                      --------------------------------------
     TOTAL SHAREHOLDERS' EQUITY (DEFICIT) .........................................           (168.5)            (222.2)
                                                                                      --------------------------------------
     TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) .........................    $     2,830.7     $      2,691.7
============================================================================================================================
</TABLE>

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

                                       I-4
<PAGE>

<TABLE>
<CAPTION>
================================================================================================================================
W. R. GRACE & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT) (UNAUDITED)
================================================================================================================================
                                                                                           Accumulated           TOTAL
                                          Common Stock                                        Other           SHAREHOLDERS'
                                              and           Accumulated       Treasury    Comprehensive          EQUITY
Dollars in millions                     Paid-in Capital       Deficit          Stock           Loss             (DEFICIT)
--------------------------------------------------------------------------------------------------------------------------------

<S>                                    <C>              <C>                <C>          <C>                <C>
BALANCE, MARCH 31, 2003..............   $        433.0   $     (118.0)      $   (136.1)  $     (393.9)      $       (215.0)
Net income ..........................              -              6.5              -              -                    6.5
Stock plan activity .................             (0.1)           -                0.1            -                    -
Other comprehensive income...........              -              -                -             40.0                 40.0
                                        ----------------------------------------------------------------------------------------
   BALANCE, JUNE 30, 2003............   $        432.9   $     (111.5)      $   (136.0)  $     (353.9)      $       (168.5)
--------------------------------------------------------------------------------------------------------------------------------

BALANCE, DECEMBER 31, 2002...........   $        433.8   $     (115.7)      $   (137.0)  $     (403.3)      $       (222.2)
Net income ..........................             --              4.2             --             --                    4.2
Stock plan activity .................             (0.9)          --                1.0           --                    0.1
Other comprehensive income...........             --             --               --             49.4                 49.4
                                        ----------------------------------------------------------------------------------------
   BALANCE, JUNE 30, 2003............   $        432.9   $     (111.5)      $   (136.0)  $     (353.9)      $       (168.5)
================================================================================================================================
</TABLE>

<TABLE>
<CAPTION>
=================================================================================================================================
W. R. GRACE & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME                             THREE MONTHS ENDED            SIX MONTHS ENDED
(UNAUDITED)                                                                      JUNE 30,                     JUNE 30,
================================================================================================================================
Dollars in millions                                                         2003           2002          2003           2002
                                                                        ---------------------------------------------------------
<S>                                                                     <C>           <C>            <C>           <C>
NET INCOME.........................................................     $     6.5     $    21.2      $    4.2      $    33.6
                                                                        ---------------------------------------------------------

OTHER COMPREHENSIVE INCOME:
Foreign currency translation adjustments...........................          40.0          39.9          49.4           32.4
                                                                        ---------------------------------------------------------
COMPREHENSIVE INCOME ..............................................     $    46.5     $    61.1      $   53.6      $    66.0
=================================================================================================================================
</TABLE>

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

                                       I-5
<PAGE>


W. R. GRACE & CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

--------------------------------------------------------------------------------
1.   BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING AND FINANCIAL
     REPORTING POLICIES
--------------------------------------------------------------------------------

W. R. Grace & Co., through its subsidiaries, is engaged in specialty chemicals
and specialty materials businesses on a worldwide basis. These businesses
consist of catalyst and silica products ("Davison Chemicals") and construction
chemicals, building materials and sealants and coatings ("Performance
Chemicals").

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., 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: In response to a sharply increasing number of
asbestos-related bodily injury claims, on April 2, 2001 (the "Filing Date"),
W. R. Grace & Co. and 61 of its United States subsidiaries and affiliates,
including Grace-Conn. (collectively, the "Debtors"), filed voluntary petitions
for reorganization (the "Filing") under Chapter 11 of the United States
Bankruptcy Code ("Chapter 11" or the "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.

During 2000 and the first quarter of 2001, Grace experienced several adverse
developments in its asbestos-related litigation, including: a significant
increase in bodily injury claims, higher than expected costs to resolve bodily
injury and certain property damage claims, and class action lawsuits alleging
damages from a former attic insulation product. (These claims are discussed in
more detail in Note 3 to the Consolidated Financial Statements.) After a
thorough review of these developments, the Board of Directors of Grace concluded
on April 2, 2001 that a federal court-supervised Chapter 11 process provided the
best forum available to achieve predictability and fairness in the claims
settlement process.

By filing under Chapter 11, Grace expects to be able to both obtain a
comprehensive resolution of the claims against it and preserve the inherent
value of its businesses. Under Chapter 11, the Debtors expect to continue to
operate their businesses as debtors-in-possession under court protection from
their creditors and claimants, while using the Chapter 11 process to develop and
implement a plan for addressing the asbestos-related claims against them.

Consequence of Filing - As a consequence of the Filing, pending litigation
against the Debtors for pre-petition matters is generally stayed (subject to
certain exceptions in the case of governmental authorities), and no party may
take action to realize its pre-petition claims except pursuant to an order of
the Bankruptcy Court.

The Debtors intend to address all of their pending and future asbestos-related
claims and all other pre-petition claims in a plan of reorganization. Such a
plan of reorganization may include the establishment of a trust through which
all pending and future asbestos-related claims would be channeled for
resolution. However, it is currently impossible to predict with any degree of
certainty the amount that would be required to be contributed to the trust, how
the trust would be funded, how other pre-petition claims would be treated or
what impact any reorganization plan may have on the shares of common stock of
the Company. The interests of the Company's shareholders could be substantially
diluted or cancelled under a plan of reorganization. The formulation and
implementation of the plan of reorganization is expected to take a significant
period of time.

Status of Chapter 11 Proceedings - Since the Filing, all motions necessary to
conduct normal business activities have been approved by the Bankruptcy Court.
In addition, the Debtors have received approval from the Bankruptcy Court to pay
or otherwise honor certain of its pre-petition obligations in the ordinary
course of business, including employee wages and benefits, customer programs,
shipping charges, and a limited amount of claims of essential trade creditors.

As provided by the Bankruptcy Code, the Debtors had the exclusive right to
propose a plan of reorganization for a 120-day period following the Filing Date.
The Debtors have received extensions of their exclusivity


                                       I-6
<PAGE>

period during which to file a plan of reorganization through August 1, 2003, and
extensions of the Debtors' exclusive rights to solicit acceptances of a
reorganization plan through October 1, 2003. The Debtors have filed a motion
with the Bankruptcy Court to further extend the exclusivity periods for an
additional six months.

Three creditors' committees, two representing asbestos claimants and the third
representing other unsecured creditors, and a committee representing
shareholders have been appointed in the Chapter 11 Cases. These committees have
the right to be heard on all matters that come before the Bankruptcy Court and,
together with a legal representative of future asbestos claimants (whom Grace
expects to be appointed by the Bankruptcy Court in the future), are likely to
play important roles in the Chapter 11 Cases. The Debtors are required to bear
certain of the committees' and the future asbestos claimants representative's
costs and expenses, including those of their counsel and financial advisors.

The Debtors' Chapter 11 cases have been assigned to Judge Alfred M. Wolin, a
senior federal judge who sits in Newark, New Jersey. Judge Wolin is presiding
over asbestos bodily injury matters and the fraudulent conveyance litigation
described below. He has assigned the Debtors' other bankruptcy matters to Judge
Judith Fitzgerald, a U.S. bankruptcy judge from the Western District of
Pennsylvania, sitting in Wilmington, Delaware.

Claims Filings - The Bankruptcy Court established a bar date of March 31, 2003
for claims of general unsecured creditors, asbestos-related property damage
claims and medical monitoring claims related to asbestos. The bar date did not
apply to asbestos-related bodily injury claims or claims related to Zonolite(R)
attic insulation ("ZAI"), which will be dealt with separately.

Approximately 15,000 proofs of claim were filed by the bar date. Of these
claims, approximately 10,000 were non-asbestos related, approximately 4,000 were
for asbestos-related property damage, and approximately 1,000 were for medical
monitoring. In addition, approximately 400 proofs of claim were filed after the
bar date. The discussion below refers to claims filed before 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. The other non-asbestos related claims include claims
for payment for goods and services; taxes; product warranties; amounts due under
leases; contracts rejected in the Bankruptcy Court; environmental remediation;
indemnification or contribution from actual or potential co-defendants in
asbestos-related and other litigation; pending non-asbestos related litigation;
and non-asbestos related personal injury.

The Debtors' preliminary analysis indicates that many claims are duplicates,
represent the same claim filed against more than one of the Debtors, lack any
supporting documentation, or provide insufficient supporting documentation. The
Debtors have begun to file with the Bankruptcy Court non-substantive objections
with respect to such claims. The Debtors expect to file a substantial number of
additional objections, both non-substantive and substantive, as analysis and
evaluation of the claims progresses.

As claims are resolved, Grace will make adjustments to the liabilities recorded
on its financial statements as appropriate. Any such adjustments could be
material to the Company's consolidated financial position and results of
operations. Because of the uncertainties of the Chapter 11 process, the
in-progress state of the Debtors' investigation of submitted claims, and the
lack of documentation submitted in support of many claims, Grace, at this time,
is not able to estimate the value of the claims that may ultimately be
determined and allowed by the Bankruptcy Court.

Litigation Proceedings in Bankruptcy Court - In July 2002, the Bankruptcy Court
approved special counsel to represent the ZAI claimants, at the Debtors'
expense, in a proceeding to determine certain threshold scientific issues
regarding ZAI. The court has set a litigation schedule that would result in
pretrial hearings on these issues in September of 2003. (See Note 3 for
background information.)

On November 29, 2002, Sealed Air Corporation ("Sealed Air") and Fresenius
Medical Care AG ("Fresenius") each announced that they had reached agreements in
principle with the Official Committee of Asbestos Personal Injury Claimants and
the Official Committee of Asbestos Property Damage Claimants to settle asbestos
and fraudulent conveyance claims related to the 1998 transaction involving
Grace's former packaging business and Sealed Air, and the 1996 transaction
involving Grace's former medical care business and Fresenius, respectively.
Under the terms of the Fresenius settlement, as subsequently revised and subject
to certain conditions, Fresenius would contribute $115.0 million to the Grace
estate. In July 2003, the Fresenius settlement was approved by


                                      I-7
<PAGE>

the Bankruptcy Court. Under the terms of the proposed Sealed Air settlement,
Sealed Air would make a payment of $512.5 million (plus interest at 5.5% per
annum, commencing on December 21, 2002) and nine million shares of Sealed Air
common stock, valued at $428.9 million as of June 30, 2003, as directed by the
Bankruptcy Court upon confirmation of Grace's plan of reorganization. The Sealed
Air settlement remains subject to the approval of the Bankruptcy Court and the
fulfillment of specified conditions. Grace is unable to predict how these
settlements may ultimately affect its plan of reorganization.

Impact on Debt Capital - All of the Debtors' pre-petition debt is in default due
to the Filing. The accompanying Consolidated Balance Sheet as of June 30, 2003
reflects 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 with Bank of America, N. A. (the "DIP facility") in the
aggregate amount of $250 million. The term of the DIP facility, originally set
to expire April 1, 2003, has been extended for up to an additional three years
through April 1, 2006.

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 Debtors' assets
and the liquidation of certain 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, a
plan of reorganization could materially change the amounts and classifications
reported in the Consolidated Financial Statements, which do not currently give
effect to any adjustments to the carrying value or classification of assets or
liabilities that might be necessary as a consequence of a plan of
reorganization.

Pursuant to SOP 90-7, Grace's pre-petition liabilities that are subject to
compromise are required to be reported separately on the balance sheet at an
estimate of the amount that will ultimately be allowed by the Bankruptcy Court.
As of June 30, 2003, 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). The recorded amounts of such
liabilities generally reflect accounting measurements as of the Filing Date,
adjusted as warranted for changes in facts and circumstances and/or rulings
under Grace's Chapter 11 proceedings subsequent to the Filing. (See Note 2 to
the Consolidated Financial Statements for detail of the liabilities subject to
compromise as of June 30, 2003, and December 31, 2002.) Obligations of Grace
subsidiaries not covered by the Filing continue to be classified on the
Consolidated Balance Sheet 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.

BASIS OF PRESENTATION: The interim Consolidated Financial Statements presented
herein are unaudited and should be read in conjunction with the Consolidated
Financial Statements presented in the Company's 2002 Annual Report on Form 10-K.
Such interim Consolidated Financial Statements reflect all adjustments that, in
the opinion of management, are necessary for a fair presentation of the results
of the interim periods presented; all such adjustments are of a normal recurring
nature. Potential accounting adjustments discovered during normal reporting and
accounting processes are evaluated on the basis of materiality, both
individually and in the aggregate, and are recorded in the accounting period
discovered, unless a restatement of a prior period is necessary. All significant
intercompany accounts and transactions have been eliminated.

The results of operations for the three-month and six-month interim periods
ended June 30, 2003 are not necessarily indicative of the results of operations
for the year ending December 31, 2003.

RECLASSIFICATIONS: Certain amounts in prior years' Consolidated Financial
Statements have been reclassified to conform to the 2003 presentation.

EFFECT OF NEW ACCOUNTING STANDARDS: In January 2003, the Financial Accounting
Standards Board ("FASB") issued FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46").


                                      I-8
<PAGE>

Grace early adopted the provisions of FIN 46 in the fourth quarter of 2002. The
adoption of FIN 46 required Grace to consolidate Advanced Refining Technologies
LLC. The impact of this consolidation was not material.

In December 2002, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure, an amendment of SFAS Statement No. 123." SFAS No. 148 amends SFAS
No. 123 to provide alternative methods of transition for a voluntary change to
the fair value based method of accounting for stock-based compensation. In
addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The disclosure provisions of SFAS
No. 148, which Grace adopted in December 2002, are incorporated below.

In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements of Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). Grace adopted FIN 45 in the
first quarter of 2003. FIN 45 did not have a material effect on the Consolidated
Financial Statements. (See Note 13 for required disclosures.)

In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 addresses significant issues
relating to the recognition, measurement, and reporting of costs associated with
exit and disposal activities, including restructuring activities. Grace adopted
SFAS No. 146 in the first quarter of 2003. SFAS No. 146 did not have a material
effect on the Consolidated Financial Statements.

In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 requires the accrual of asset retirement obligations
by increasing the initial carrying amount of the related long-lived asset, and
systematically expensing the cost of such obligations over the asset's useful
life. Grace adopted SFAS No. 143 in the first quarter of 2003. SFAS No. 143 did
not have a material effect on the Consolidated Financial Statements.

STOCK INCENTIVE PLANS: SFAS No. 123, "Accounting for Stock-Based Compensation,"
permits the Company to follow the measurement provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and
not recognize compensation expense for its stock-based incentive plans. Had
compensation cost for the Company's stock-based incentive compensation plans
been determined based on the fair value at the grant dates of awards under those
plans, consistent with the fair value methodology prescribed by SFAS No. 123,
the Company's net income and related earnings per share for the three- and
six-month periods ended June 30, 2003 and 2002 would have been reduced to the
pro forma amounts indicated below:

<TABLE>
<CAPTION>
=============================================================
PRO FORMA EARNINGS
UNDER SFAS NO. 123          THREE MONTHS        SIX MONTHS
(Dollars in millions,          ENDED              ENDED
except per share amounts)     JUNE 30,           JUNE 30,
=============================================================
                             2003    2002    2003     2002
                            ---------------------------------
<S>                         <C>      <C>    <C>     <C>
Net income, as reported ... $  6.5  $ 21.2 $  4.2   $33.6
Deduct:
Total stock-based employee
  compensation expense
  determined under fair
  value based method for
  all awards, net of
  related tax effects......   (0.4)   (1.0)  (0.7)   (2.1)
                            ---------------------------------
Pro forma net income (1)... $  6.1   $20.2  $ 3.5   $31.5
                            =================================
Basic earnings per share:
As reported................ $  0.10  $ 0.32 $ 0.06  $ 0.51
Pro forma net income (1) .. $  0.09  $ 0.31 $ 0.05  $ 0.48
Diluted earnings per
 share:
As reported................ $  0.10  $ 0.32 $ 0.06  $ 0.51
Pro forma net income (1) .. $  0.09  $ 0.31 $ 0.05  $ 0.48
=============================================================
</TABLE>
(1)  These pro forma amounts may not be indicative of future income (loss) and
     earnings (loss) per share due to Grace's Chapter 11 Filing.

To determine compensation cost under SFAS No. 123, the fair value of each option
is estimated on the date of grant using the Black-Scholes option pricing model,
with the following historical weighted average assumptions applied to grants in
2001 and 2000:

<TABLE>
<CAPTION>
=============================================================
OPTION VALUE ASSUMPTIONS                 2001        2000
-------------------------------------------------------------
<S>                                     <C>        <C>
Dividend yield...................         --%         --%
Expected volatility..............         61%         59%
Risk-free interest rate..........          5%          7%
Expected life (in years).........          4           4
=============================================================
</TABLE>

Based upon the above assumptions, the weighted average fair value of each option
granted was $1.28 per share for 2001 and $6.86 per share for 2000.

USE OF ESTIMATES: The preparation of financial statements in conformity with
U.S. generally accepted accounting principles requires that management make
estimates and assumptions affecting the assets and liabilities reported at the
date of the Consolidated Financial Statements, and the revenues and expenses
reported for the periods presented. Actual amounts could differ from those
estimates. Changes in


                                      I-9
<PAGE>

estimates are recorded in the period identified. Grace's accounting measurements
that are most affected by management's estimates of future events are:

o    Contingent liabilities such as asbestos-related matters, environmental
     remediation, income taxes, and retained obligations of divested businesses.

o    Pension and postretirement liabilities that depend on assumptions regarding
     discount rates and/or total returns on invested funds.

o    Depreciation and amortization periods for long-lived assets, including
     property and equipment, intangible, and other assets.

o    Realization values of various assets such as trade receivables,
     inventories, insurance receivables, income taxes, and goodwill.

The accuracy of these and other estimates may also be materially affected by the
uncertainties arising under the Chapter 11 Cases.

--------------------------------------------------------------------------------
2.   CHAPTER 11 RELATED FINANCIAL INFORMATION
--------------------------------------------------------------------------------

As a result of the Filing, Grace's Consolidated Balance Sheet separately
identifies the liabilities that are "subject to compromise" as a result of the
Chapter 11 proceedings. In Grace's case, "liabilities subject to compromise"
represent pre-petition liabilities as determined under U.S. generally accepted
accounting principles. Changes to the recorded amount of such liabilities will
be based on developments in the Chapter 11 Cases and management's assessment of
the claim amounts that will ultimately be allowed by the Bankruptcy Court.
Changes to pre-petition liabilities subsequent to the Filing Date reflect: 1)
cash payments under approved court orders; 2) the accrual of interest on
pre-petition debt at the pre-petition contractual rate; 3) accruals for
employee-related programs; and 4) changes in estimates related to pre-petition
contingent liabilities and assets.

Components of liabilities subject to compromise are as follows:

<TABLE>
<CAPTION>
================================================================
(Dollars in millions)                JUNE 30,      December 31,
(Unaudited)                            2003            2002
================================================================
<S>                               <C>            <C>
Debt, pre-petition plus
  accrued interest............    $      546.5   $      538.8
Asbestos-related liability....           968.5          973.2
Income taxes..................           234.8          227.8
Environmental remediation.....           197.5          201.1
Postretirement benefits other
  than pension ...............           141.9          147.2
Special pension
  arrangements ...............            76.2           74.9
Retained obligations of
  divested businesses ........            55.3           55.3
Accounts payable .............            32.3           32.4
Other accrued liabilities ....            83.1           84.0
                                  ------------------------------
                                  $    2,336.1   $    2,334.7
================================================================
</TABLE>

Set forth below is a reconciliation of the changes in pre-filing date liability
balances for the period from the Filing Date through June 30, 2003.

<TABLE>
<CAPTION>
================================================================
                                                  Cumulative
(Dollars in millions)                            Since Filing
================================================================
<S>                                            <C>
Balance, Filing Date.........................  $    2,366.0
Cash disbursements and/or reclassifications
  under Bankruptcy Court orders:
   Freight and distribution order............          (5.7)
   Trade accounts payable order..............          (9.1)
Other court orders including employee wages
  and benefits, sales and use tax, and
  customer programs..........................        (161.2)
Expense/(income) items:
   Interest on pre-petition debt.............          41.4
   Current period employee-related accruals .          24.0
   Change in estimate of environmental
     contingencies...........................          79.0
   Change in estimate of income tax
     contingencies...........................          26.0
Balance sheet reclassifications..............         (24.3)
                                               -----------------
Balance, end of period.......................  $    2,336.1
================================================================
</TABLE>

Additional liabilities subject to compromise may arise due to the rejection of
executory contracts or unexpired leases, or as a result of the allowance of
contingent or disputed claims.

                                      I-10
<PAGE>

The Debtors' Chapter 11 expenses for the three-month and six-month periods ended
June 30, 2003 and 2002 consist of:

<TABLE>
<CAPTION>
===============================================================
                             THREE MONTHS       SIX MONTHS
                                 ENDED             ENDED
(Dollars in millions)          JUNE 30,          JUNE 30,
===============================================================
                            2003      2002     2003     2002
                           ------------------------------------
<S>                        <C>      <C>       <C>      <C>
Legal and financial
  advisory fees........... $   6.9  $  8.5    $   9.7  $ 13.0
Interest income ..........    (0.1)   (0.1)      (0.2)   (0.2)
                           ------------------------------------
Chapter 11 expenses, net.. $   6.8  $  8.4    $   9.5  $ 12.8
===============================================================
</TABLE>

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

Condensed financial information of the Debtors is presented below:

<TABLE>
<CAPTION>
==============================================================
W. R. GRACE & CO. - CHAPTER 11
FILING ENTITIES
DEBTOR-IN-POSSESSION STATEMENT
OF OPERATIONS                           SIX MONTHS ENDED
(Dollars in millions) (Unaudited)           JUNE 30,
==============================================================
                                      2003          2002
                                   ---------------------------
<S>                                <C>         <C>
Net sales, including intercompany .$    476.6  $    495.1
Other income.......................      32.5        31.4
                                   ---------------------------
                                        509.1       526.5
                                   ---------------------------
Cost of goods sold, including
   intercompany, exclusive of
   depreciation and amortization
   shown separately below..........     328.5       314.5
Selling, general and
   administrative expenses.........     139.9       122.4
Research and development expenses..      21.6        20.8
Depreciation and amortization .....      31.3        30.4
Interest expense and related
   financing costs.................       8.3         9.9
                                   ---------------------------
                                        529.6       498.0
                                   ---------------------------
(Loss) income before Chapter 11
   expenses, income taxes, and
   equity in net income of
   non-filing entities ............     (20.5)       28.5
Chapter 11 expenses, net ..........      (9.5)      (12.8)
Provision for income taxes ........       0.6       (16.3)
Equity in net income of
   non-filing entities ............      33.6        34.2
                                   ---------------------------
   NET INCOME  .................... $     4.2  $     33.6
==============================================================
</TABLE>

<TABLE>
<CAPTION>
===============================================================
W. R. GRACE & CO. - CHAPTER 11 FILING
ENTITIES
DEBTOR-IN-POSSESSION CONDENSED
STATEMENT OF CASH FLOWS
(Dollars in millions)                      SIX MONTHS ENDED
(Unaudited)                                    JUNE 30,
===============================================================
                                          2003        2002
                                       ------------------------
<S>                                    <C>         <C>
OPERATING ACTIVITIES
Net income.............................$    4.2    $   33.6
Reconciliation to net cash used for
  (provided by) operating activities:
Non-cash items, net....................    36.2        37.4
Changes in other assets and
   liabilities, excluding the effect
   of businesses acquired/divested.....   (40.6)      (45.2)
                                       ------------------------
NET CASH (USED FOR) PROVIDED BY
   OPERATING ACTIVITIES................    (0.2)       25.8

NET CASH USED FOR INVESTING ACTIVITIES.   (34.1)      (29.9)

NET CASH PROVIDED BY (USED FOR)
   FINANCING ACTIVITIES................    16.5        (3.0)
                                       ------------------------

NET DECREASE IN CASH AND CASH
   EQUIVALENTS.........................   (17.8)       (7.1)
Cash and cash equivalents, beginning
   of period...........................    56.8        38.0
                                       ------------------------
Cash and cash equivalents, end of
   period..............................$   39.0    $   30.9
===============================================================
</TABLE>

<TABLE>
<CAPTION>
===============================================================
W. R. GRACE & CO. - CHAPTER 11
FILING ENTITIES
DEBTOR-IN-POSSESSION BALANCE
SHEET
(Dollars in millions)                 JUNE 30,   DECEMBER 31,
(Unaudited)                             2003         2002
===============================================================
<S>                                 <C>          <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents .......   $       39.0 $       56.8
Accounts and other receivables,
   net ..........................          114.2        114.7
Receivables from non-filing
   entities, net ................           35.0         43.4
Inventories .....................           78.3         70.5
Other current assets.............           41.7         53.0
                                    ---------------------------
   TOTAL CURRENT ASSETS .........          308.2        338.4

Properties and equipment, net....          390.5        389.7
Cash value of life insurance
  policies, net of policy loans..           91.8         82.4
Deferred income taxes ...........          578.0        567.0
Asbestos-related insurance
  expected to be realized after
  one year.......................          272.4        282.6
Loans receivable from non-filing
  entities, net .................          495.6        444.4
Investment in non-filing entities          292.4        244.7
Other assets ....................          101.0         92.2
                                    ---------------------------
   TOTAL ASSETS .................   $    2,529.9 $    2,441.4
===============================================================
</TABLE>


                                      I-11
<PAGE>

<TABLE>
<CAPTION>
===============================================================
                                      JUNE 30,   DECEMBER 31,
(Dollars in millions) (Unaudited)       2003         2002
---------------------------------------------------------------
<S>                                 <C>          <C>
LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT)
LIABILITIES NOT SUBJECT TO
COMPROMISE
Current liabilities .............   $    119.5   $       99.3
Other liabilities ...............        242.8          229.6
                                    ---------------------------
  TOTAL LIABILITIES NOT SUBJECT
  TO COMPROMISE..................        362.3          328.9

LIABILITIES SUBJECT TO
  COMPROMISE.....................      2,336.1        2,334.7
                                    ---------------------------
  TOTAL LIABILITIES..............      2,698.4        2,663.6

  SHAREHOLDERS' EQUITY (DEFICIT).       (168.5)        (222.2)
                                    ---------------------------
  TOTAL LIABILITIES AND
  SHAREHOLDERS'
  EQUITY (DEFICIT) ..............   $  2,529.9   $    2,441.4
===============================================================
</TABLE>

In addition to Grace's financial reporting obligations as prescribed by the U.S.
Securities and Exchange Commission ("SEC"), the Debtors are also required, under
the rules and regulations of the Bankruptcy Code, to periodically file certain
statements and schedules and a monthly operating report with the Bankruptcy
Court. This information is available to the public through the Bankruptcy Court.
This information is prepared in a format that may not be comparable to
information in Grace's quarterly and annual financial statements as filed with
the SEC. The monthly operating reports are not audited, do not purport to
represent the financial position or results of operations of Grace on a
consolidated basis, and should not be relied on for such purposes.

--------------------------------------------------------------------------------
3.   ASBESTOS-RELATED LITIGATION
--------------------------------------------------------------------------------

Grace is a defendant in property damage and bodily injury lawsuits relating to
previously sold asbestos-containing products. On April 2, 2001, Grace filed
voluntary petitions for reorganization under Chapter 11 to use the
court-supervised reorganization process to develop and implement a plan for
addressing pending and future asbestos-related claims. (See Note 1 for further
discussion.)

As of the Filing Date, Grace was a defendant in 65,656 asbestos-related
lawsuits, 17 involving claims for property damage (one of which has since been
dismissed), and the remainder involving 129,191 claims for bodily injury. Due to
the Filing, holders of asbestos-related claims are stayed from continuing to
prosecute pending litigation and from commencing new lawsuits against the
Debtors. Additional asbestos-related claims will be subject to the Chapter 11
process established by the Bankruptcy Court. Separate creditors' committees
representing the interests of property damage and bodily injury claimants have
been appointed in the Chapter 11 Cases. Grace's obligations with respect to
present and future claims will be determined through proceedings in the
Bankruptcy Court and negotiations with each of the official committees appointed
in the Chapter 11 Cases and a legal representative of future asbestos claimants,
which negotiations are expected to provide the basis for a plan of
reorganization.

PROPERTY DAMAGE LITIGATION

The plaintiffs in asbestos property damage lawsuits generally seek to have the
defendants absorb the cost of removing, containing or repairing the
asbestos-containing materials in the affected buildings. Each property damage
case is unique in that the age, type, size and use of the building, and the
difficulty of asbestos abatement, if necessary, vary from structure to
structure. Information regarding product identification, the amount of product
in the building, the age, type, size and use of the building, the jurisdictional
history of prior cases and the court in which the case is pending has provided
meaningful guidance as to the range of potential costs. Grace has recorded an
accrual for all outstanding property damage cases for which sufficient
information is available to form a reasonable estimate of such exposure. (See
"Asbestos-Related Liability" below.)

Out of 380 asbestos property damage cases filed prior to the Filing Date, 141
were dismissed without payment of any damages or settlement amounts; judgments
were entered in favor of Grace in nine cases (excluding cases settled following
appeals of judgments in favor of Grace); judgments were entered in favor of the
plaintiffs in eight cases (one of which is on appeal) for a total of $86.1
million; 207 property damage cases were settled for a total of $696.8 million;
and 16 cases remain outstanding (including the one on appeal). Of the 16
remaining cases, eight relate to ZAI and eight relate to a number of former
asbestos-containing products (two of which also involve ZAI). Approximately
4,000 additional asbestos property damage claims were filed prior to the March
31, 2003 bar date established by the Bankruptcy Court. The Debtors are in the
process of analyzing the validity and potential liability related to these
additional claims.

The ZAI cases were filed as class action lawsuits in 2000 and 2001 on behalf of
owners of homes containing ZAI. These cases seek damages and equitable relief,
including the removal, replacement and/or disposal of all such insulation. The
plaintiffs assert that this product is in millions of homes throughout the U.S.
and that the

                                      I-12
<PAGE>

cost of removal could be several thousand dollars per home. As a result of the
Filing, these cases have been transferred to the U.S. Bankruptcy Court. Based on
Grace's investigation of the claims described in these lawsuits, and testing and
analysis of this product by Grace and others, Grace believes that the product
was and continues to be safe for its intended purpose and poses little or no
threat to human health. At this time, Grace is not able to assess the extent of
any possible liability related to this matter. In July 2002, the Bankruptcy
Court approved special counsel to represent the ZAI claimants, at the Debtors'
expense, in a proceeding to determine certain threshold scientific issues
regarding ZAI. The court has set a litigation schedule that would result in
pretrial hearings on these issues in September of 2003.

BODILY INJURY LITIGATION

Asbestos bodily injury claims are generally similar to each other (differing
primarily in the type of asbestos-related illness allegedly suffered by the
plaintiff). However, Grace's estimated liability for such claims has been
influenced by numerous variables, including the solvency of other former
producers of asbestos containing products, cross-claims by co-defendants, the
rate at which new claims are filed, the jurisdiction in which the claims are
filed, and the defense and disposition costs associated with these claims.
Grace's bodily injury liability reflects management's estimate, as of the Filing
Date, of the number and ultimate cost of present and future bodily injury claims
expected to be asserted against Grace given demographic assumptions of possible
exposure to asbestos containing products previously manufactured by Grace.

Through the Filing Date, 16,354 asbestos bodily injury lawsuits involving
approximately 35,720 claims were dismissed without payment of any damages or
settlement amounts (primarily on the basis that Grace products were not
involved), and approximately 55,489 lawsuits involving approximately 163,698
claims were disposed of (through settlement and judgments) for a total of $645.6
million. (See "Asbestos-Related Liability" below.)

Approximately 1,000 claims for medical monitoring were filed against the Debtors
prior to the March 31, 2003 bar date. These claims were made by individuals for
medical monitoring, but not bodily injury, due to exposure to asbestos through
Grace's products or operations. The Debtors are in the process of analyzing the
validity and potential liability related to these claims.

ASBESTOS-RELATED LIABILITY

Asbestos-related litigation is stayed by the Chapter 11 Cases. Ongoing costs are
generally limited to claims administration costs and to defense costs incurred
in connection with litigation permitted by the Bankruptcy Court. Other
adjustments to the recorded liability will be based on developments in the
Chapter 11 Cases. Recently, federal legislation has been proposed to address
asbestos bodily injury claims. In addition, several states have enacted or
proposed legislation affecting asbestos bodily injury claims. At this time,
Grace cannot predict what impact any such legislation would have on Grace's
asbestos bodily injury liability, or its ultimate plan of reorganization.

For periods prior to and as of the Filing Date, Grace's estimated property
damage and bodily injury liabilities were based on its experience with, and
recent trends in, asbestos litigation. Its recorded liabilities covered
indemnity and defense costs for pending property damage cases for which
sufficient information was available, and for pending and projected future
bodily injury claims. However, due to the Filing and the uncertainties of
asbestos-related litigation, actual amounts could differ materially from the
recorded liability. Since the Filing, Grace is aware that bodily injury claims
have continued to be filed against co-defendant companies, and at higher than
historical rates. Grace believes that had it not filed for Chapter 11
reorganization, it likely would have received thousands more claims than it had
previously projected.

The total asbestos-related liability balances as of June 30, 2003 and December
31, 2002 were $968.5 million and $973.2 million, respectively. The decrease in
the liability is primarily due to the payment of normal post-Filing
administrative costs relating to claims management and defense costs in
connection with litigation permitted by the Bankruptcy Court. The recorded
asbestos-related liability is included in "liabilities subject to compromise."

ASBESTOS INSURANCE

Grace previously purchased insurance policies with respect to its
asbestos-related lawsuits and claims. Insurance coverage for asbestos-related
liabilities has not been commercially available since 1985. Grace has settled
with and has been paid by all of its primary insurance carriers with respect to
both property damage and bodily injury cases and claims. Grace has also settled
with its excess insurance carriers that wrote policies available for property
damage cases; those settlements involve amounts paid and to be paid to


                                      I-13
<PAGE>

Grace. Grace believes that certain of these settlements may cover ZAI claims as
well as other property damage claims. In addition, Grace believes that
additional coverage for ZAI claims may exist under excess insurance policies not
subject to settlement agreements. Grace has settled with excess insurance
carriers that wrote policies available for bodily injury claims in layers of
insurance that Grace believes may be reached based on its current estimates.

The asbestos-related insurance asset represents amounts expected to be received
from carriers under settlement agreements for defense and disposition costs to
be paid by Grace. Estimated insurance reimbursements are based on the recorded
amount of the asbestos-related liability and are only collectible as liabilities
are satisfied. In the event that Grace's ultimate asbestos-related liability is
determined to exceed recorded amounts, insurance exists to cover a portion of
such incremental liability, but generally in a lower proportion than the
currently recorded insurance receivable bears to the currently recorded
liability.

--------------------------------------------------------------------------------
4.   ACQUISITIONS AND JOINT VENTURES
--------------------------------------------------------------------------------

In April 2003, Grace, through its subsidiary The Separations Group, acquired the
business and assets of MODcol Corporation, a manufacturer of preparative
chromatography columns and provider of custom column packaging services, for a
total cash cost of $2.2 million, net of cash acquired. Goodwill of $0.6 million
was recognized in the transaction, and was assigned to Davison Chemicals.

In the first quarter of 2002, Grace completed two business combinations for a
total cash cost of $25.0 million as follows:

o    In January 2002, Grace, through its Swedish subsidiary, acquired the
     catalyst manufacturing assets of Borealis A/S.

o    In March 2002, Grace acquired the business and assets of Addiment,
     Incorporated, a leading supplier of specialty chemicals to the concrete
     paver and masonry industries in the U.S. and Canada.

Goodwill recognized in those transactions amounted to $3.5 million, $0.6 million
of which was assigned to Davison Chemicals and $2.9 million of which was
assigned to Performance Chemicals.

Pro forma results of operations have not been presented because the effects of
these acquisitions were not material on either an individual or aggregate basis.

--------------------------------------------------------------------------------
5.   OTHER INCOME
--------------------------------------------------------------------------------

Components of other income are as follows:

<TABLE>
<CAPTION>
================================================================
                             THREE MONTHS        SIX MONTHS
OTHER INCOME                     ENDED              ENDED
(Dollars in millions)          JUNE 30,            JUNE 30,
================================================================
                            2003      2002     2003      2002
                           -------------------------------------
<S>                        <C>      <C>       <C>      <C>
Investment income......... $   1.2  $  1.9    $   4.3  $  4.8
Interest income ..........     1.3     0.8        2.5     1.6
Net loss on dispositions
  of assets...............    (0.6)   (0.2)      (0.9)   (0.4)
Tolling revenue...........     0.2     0.4        0.7     0.9
Foreign currency..........    (2.3)   (0.4)      (3.6)   --
Other miscellaneous
  income .................     2.3     2.3        4.9     3.9
                           -------------------------------------
Total other income........ $   2.1  $  4.8    $   7.9  $ 10.8
================================================================
</TABLE>


<PAGE>


--------------------------------------------------------------------------------
6.   OTHER BALANCE SHEET ACCOUNTS
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
================================================================
                                          JUNE 30,  December 31,
(Dollars in millions)                      2003        2002
--------------------------------------- ----------- ------------
<S>    <C>     <C>                      <C>         <C>
ACCOUNTS AND OTHER RECEIVABLES, NET
Trade receivables, less allowance of
  $4.2 (2002 - $3.7)...............     $   330.5   $   302.8
Other receivables, less allowances of
  $1.7 (2002 - $1.7)...............          18.7        13.8
                                        ----------- ------------
                                        $   349.2   $   316.6
================================================================
INVENTORIES
Raw materials .....................     $    46.2   $    39.2
In process ........................          34.8        30.3
Finished products .................         132.3       110.8
General merchandise ...............          30.5        26.8
Less:  Adjustment of certain
  inventories to a last-in/first-out
  (LIFO) basis ....................         (35.8)      (33.5)
                                        ----------- ------------
                                        $   208.0   $   173.6
================================================================
OTHER ASSETS
Deferred pension costs.............     $   108.8   $   104.2
Deferred charges ..................          43.0        38.7
Long-term receivables, less
  allowances of $0.8 (2002 - $0.8).           8.5         2.0
Patents, licenses and other
  intangible assets, net ..........          65.9        63.4
Pension-unamortized prior service
  cost ............................          26.4        26.4
Investments in unconsolidated
  affiliates and other.............           0.5         0.2
                                        ----------- ------------
                                        $   253.1   $   234.9
================================================================
OTHER CURRENT LIABILITIES
Accrued compensation ..............     $    31.9   $    40.0
Accrued interest ..................           7.1         6.4
Deferred tax liability ............           0.9         0.8
Customer volume rebates ...........          17.0        21.2
Accrued commissions ...............           6.7         6.0
Accrued reorganization fees .......           8.0         9.4
Other accrued liabilities .........          55.6        47.5
                                        ----------- ------------
                                        $   127.2   $   131.3
================================================================
</TABLE>


                                      I-14
<PAGE>

<TABLE>
<CAPTION>
================================================================
                                          JUNE 30,  December 31,
(Dollars in millions)                       2003       2002
================================================================
<S>                                      <C>        <C>
OTHER LIABILITIES
Pension-underfunded plans .........      $  325.3   $   295.1
Other accrued liabilities .........           7.8         6.3
                                        ------------------------
                                        $   333.1   $   301.4
================================================================
</TABLE>

--------------------------------------------------------------------------------
7.   LIFE INSURANCE
--------------------------------------------------------------------------------

Grace is the beneficiary of life insurance policies on certain current and
former employees with a net cash surrender value of $91.8 million and $82.4
million at June 30, 2003 and December 31, 2002, respectively. The policies were
acquired to fund various employee benefit programs and other long-term
liabilities and are structured to provide cash flow (primarily tax-free) over an
extended number of years. The following table summarizes activity in these
policies for the six months ended June 30, 2003 and 2002, and components of the
net cash value at June 30, 2003 and December 31, 2002:

<TABLE>
<CAPTION>
================================================================
LIFE INSURANCE -
ACTIVITY SUMMARY                        SIX MONTHS ENDED
(Dollars in millions)                       JUNE 30,
================================================================
                                     2003             2002
                                --------------------------------
<S>                             <C>              <C>
Earnings on policy assets....   $      21.3      $      22.4
Interest on policy loans.....         (17.0)           (17.6)
Policy loan repayments.......           1.4              3.0
Net investing activity.......           3.7              3.6
                                --------------------------------
  Change in net cash value ..   $       9.4      $      11.4
================================================================
Tax-free proceeds received ..   $       5.4      $       9.0
================================================================
COMPONENTS OF                      JUNE 30,       December 31,
NET CASH VALUE                       2003             2002
================================================================
Gross cash value.............   $     465.3      $     471.3
Principal - policy loans.....        (365.8)          (365.4)
Accrued interest - policy
 loans.......................          (7.7)           (23.5)
                                --------------------------------
   Net cash value............   $      91.8      $      82.4
================================================================
Insurance benefits in force..   $   2,216.0      $   2,240.8
================================================================
</TABLE>

Grace's financial statements display income statement activity and balance sheet
amounts on a net basis, reflecting the contractual interdependency of policy
assets and liabilities.

--------------------------------------------------------------------------------
8.   DEBT
--------------------------------------------------------------------------------

On June 30, 2003, and December 31, 2002, Grace's debt was as follows:

<TABLE>
<CAPTION>
==============================================================
COMPONENTS OF DEBT                JUNE 30,      December 31,
(Dollars in millions)               2003            2002
==============================================================
<S>                             <C>            <C>
DEBT PAYABLE WITHIN ONE YEAR
DIP facility ................   $      30.0    $      --
Other short-term borrowings..           7.4            4.3
                                ------------------------------
                                $      37.4    $       4.3
                                ==============================
DEBT PAYABLE AFTER ONE YEAR
DIP facility ................   $      --      $      --

DEBT SUBJECT TO COMPROMISE
Bank borrowings .............   $     500.0    $     500.0
Other borrowings ............           2.9            1.0
Accrued interest ............          43.6           37.8
                                ------------------------------
                                $     546.5    $     538.8
                                ==============================
Annualized weighted average
  interest rates on total
  debt ......................          2.2%           2.8%
==============================================================
</TABLE>

In April 2001, the Debtors entered into the DIP facility for a two-year term in
the aggregate amount of $250 million. The DIP facility is secured by a priority
lien on substantially all assets of the Debtors, and bears interest based on
LIBOR. The Debtors have extended the term of the DIP facility for up to an
additional three years through April 1, 2006, and modified certain other
provisions. As of June 30, 2003, there were $30.0 million of borrowings and
$23.5 million of standby letters of credit outstanding under the facility. The
letters of credit, which reduce available funds under the facility, were issued
mainly for trade-related matters such as performance bonds, and certain
insurance and environmental matters.

--------------------------------------------------------------------------------
9.   SHAREHOLDERS' EQUITY (DEFICIT)
--------------------------------------------------------------------------------

The Company is authorized to issue 300,000,000 shares of common stock. Of the
common stock unissued on June 30, 2003, approximately 10,008,019 shares were
reserved for issuance pursuant to stock option and other stock incentive plans.
In the first six months of 2003 and the year ended December 31, 2002, Grace did
not grant any stock options.

For additional information, see Notes 15 and 17 to the Consolidated Financial
Statements in Grace's 2002 Form 10-K.


                                      I-15
<PAGE>

--------------------------------------------------------------------------------
10.  EARNINGS PER SHARE
--------------------------------------------------------------------------------

The following table shows a reconciliation of the numerators and denominators
used in calculating basic and diluted earnings per share.

<TABLE>
<CAPTION>
=============================================================
EARNINGS PER SHARE
(Dollars in millions,      THREE MONTHS       SIX MONTHS
except per share              ENDED              ENDED
amounts)                     JUNE 30,           JUNE 30,
=============================================================
                          2003      2002     2003     2002
                        -------------------------------------
<S>                     <C>        <C>      <C>     <C>
NUMERATORS
  Net income .......... $   6.5    $ 21.2   $   4.2 $ 33.6
                        =====================================
DENOMINATORS
  Weighted average
  common shares -
  basic calculation....    65.6      65.4      65.6   65.4

  Dilutive effect of
  employee stock
  options and
  restricted shares....     0.1       0.2      --      0.1
                        -------------------------------------

  Weighted average
  common shares
  diluted calculation..    65.7      65.6      65.6   65.5
                        =====================================

BASIC EARNINGS PER
 SHARE ................ $  0.10    $ 0.32   $  0.06 $  0.51
                        =====================================
DILUTED EARNINGS PER
 SHARE ................ $  0.10    $ 0.32   $  0.06 $  0.51
=============================================================
</TABLE>

--------------------------------------------------------------------------------
11.  COMPREHENSIVE INCOME (LOSS)
--------------------------------------------------------------------------------

Grace's other comprehensive income (loss) consists entirely of foreign currency
translation adjustments. The table below presents the pre-tax, tax and after-tax
amounts of Grace's other comprehensive income (loss) for the three months and
six months ended June 30, 2003 and 2002:

<TABLE>
<CAPTION>
=============================================================
                                                    After-
                             Pre-Tax      Tax         Tax
(Dollars in millions)         Amount    Benefit     Amount
=============================================================
<S>                         <C>        <C>         <C>
THREE MONTHS ENDED:
  June 30, 2003........     $   40.0   $   --      $   40.0
  June 30, 2002........     $   39.9   $   --      $   39.9
SIX MONTHS ENDED:
  June 30, 2003........     $   49.4   $   --      $   49.4
  June 30, 2002........     $   32.4   $   --      $   32.4
=============================================================
</TABLE>

The table below presents the components of Grace's accumulated other
comprehensive loss at June 30, 2003 and December 31, 2002:

<TABLE>
<CAPTION>
=============================================================
COMPONENTS OF ACCUMULATED
OTHER COMPREHENSIVE LOSS         JUNE 30,      December 31,
(Dollars in millions)              2003            2002
=============================================================
<S>                            <C>            <C>
Foreign currency translation.. $   (70.2)     $   (119.6)
Minimum pension liability ....    (283.7)         (283.7)
                               ------------------------------
Accumulated other
  comprehensive loss.......... $  (353.9)     $   (403.3)
=============================================================
</TABLE>

--------------------------------------------------------------------------------
12.  COMMITMENTS AND CONTINGENT LIABILITIES
--------------------------------------------------------------------------------

ASBESTOS-RELATED LITIGATION - SEE NOTE 3

ENVIRONMENTAL REMEDIATION

General Matters and Discussion

Grace is subject to loss contingencies resulting from extensive and evolving
federal, state, local and foreign environmental laws and regulations relating to
the generation, storage, handling, discharge and disposition of hazardous wastes
and other materials. Grace accrues for anticipated costs associated with
investigative and remediation efforts where an assessment has indicated that a
probable liability has been incurred and the cost can be reasonably estimated.
These accruals do not take into account any discounting for the time value of
money. At June 30, 2003, Grace's liability for environmental investigative and
remediation costs related to continuing and discontinued operations totaled
$197.5 million, as compared to $201.1 million at December 31, 2002. This
estimate of environmental cost is based on funding and/or remediation agreements
in place and Grace's best estimate of its cost for sites not subject to a formal
remediation plan. The amounts of cash expenditures below have been charged
against previously established reserves for the periods presented.

<TABLE>
<CAPTION>
=============================================================
                         THREE MONTHS        SIX MONTHS
                             ENDED              ENDED
(Dollars in millions)      JUNE 30,           JUNE 30,
=============================================================
                         2003    2002      2003       2002
                        ------- -------- --------- ----------
<S>                     <C>              <C>       <C>
Continuing operations..  $2.7    $6.9      $5.5      $10.7
Discontinued
  operations...........   0.2     0.1       0.5        0.2
-------------------------------------------------------------
Total..................  $2.9    $7.0      $6.0      $10.9
=============================================================
</TABLE>

During the three-month and six-month periods ended June 30, 2003, Grace recorded
pre-tax charges of $0.5 million and $2.5 million, respectively, primarily for
Grace's current estimate of defense costs in connection with a cost recovery
lawsuit brought by the U.S. government relating to Grace's former vermiculite


                                      I-16
<PAGE>

mining and processing activities near Libby, Montana. The environmental risks
related to such activities could result in additional material future charges to
Grace's earnings, the amounts of which are not currently determinable. (See
discussion under "Vermiculite Related Matters" below.)

Grace's environmental liabilities are reassessed whenever circumstances become
better defined or remediation efforts and their costs can be better estimated.
These liabilities are evaluated based on currently available information,
including the progress of remedial investigation at each site, the current
status of discussions with regulatory authorities regarding the method and
extent of remediation at each site, existing technology, prior experience in
contaminated site remediation and the apportionment of costs among potentially
responsible parties. Grace expects that the funding of environmental remediation
activities will be affected by the Chapter 11 proceedings; any such effect could
be material. Grace's environmental liabilities are included in "liabilities
subject to compromise" as of June 30, 2003.

Vermiculite Related Matters

From the 1920's until 1990, Grace and previous owners conducted vermiculite
mining and related activities near Libby, Montana. The vermiculite ore that was
mined contained varying amounts of asbestos as a contaminant, almost all of
which was removed during processing. Expanded vermiculite from Libby was used in
products such as fireproofing, insulation and potting soil. In November 1999,
Region 8 of the U.S. Environmental Protection Agency ("EPA") began an
investigation into alleged excessive levels of asbestos-related disease in the
Libby population related to these former mining activities. This investigation
led the EPA to undertake additional investigative activity and to carry out
response actions in and around Libby. On March 30, 2001, the EPA filed a lawsuit
in U.S. District Court for the District of Montana, Missoula Division (United
States v. W. R. Grace & Company et al.) under the Comprehensive Environmental
Response, Compensation and Liability Act for the recovery of costs allegedly
incurred by the United States in response to the release or threatened release
of asbestos in the Libby, Montana area relating to such former mining
activities. These costs include cleaning and/or demolition of contaminated
buildings, the excavation and removal of contaminated soil, health screening of
Libby residents and former mine workers, and investigation and monitoring costs.
In this action, the EPA also sought a declaration of Grace's liability that
would be binding in future actions to recover further response costs.

In connection with its defense, Grace conducted its own investigation to
determine whether the EPA's actions and cost claims were justified and
reasonable. However, in December 2002, the District Court granted the United
States' motion for partial summary judgment on a number of issues that limited
Grace's ability to challenge the EPA's response actions. In January 2003, a
trial was held on the remainder of the issues, which primarily involved the
reasonableness and adequacy of documentation of the EPA's cost recovery claims
through December 31, 2001. No decision has yet been issued. This lawsuit is not
subject to the automatic stay provided under the Bankruptcy Code.

Based on a proof of claim form filed against Grace by the United States, the
EPA's Libby-related cost recovery claims through January 31, 2003 totaled
approximately $82 million and total cost recovery claims will likely exceed $100
million. Grace has $61.0 million accrued at June 30, 2003 with respect to this
lawsuit and future cost recovery claims expected to be made by the EPA,
representing Grace's current best estimate of probable liability and defense
costs, pending the issuance of a decision of the trial court and the
availability of additional information about the EPA's 2002 costs and projected
future costs. Grace's liability for this matter is included in "liabilities
subject to compromise" and any payments would be subject to the outcome of the
Chapter 11 proceedings.

The EPA is also evaluating environmental risks at vermiculite processing sites
throughout the U.S. that processed vermiculite from Libby, Montana, and has made
claims against Grace to carry out or fund remediation activities. Grace is
reviewing the EPA's actions and cost claims to determine whether they are
justified and reasonable and, in several instances, has remediated or agreed to
remediate certain sites. Costs associated with the above are included in
"provision for environmental remediation" included in the Consolidated Statement
of Operations.

Insurance Matters

Grace is a party to three environmental insurance coverage actions involving one
primary and one excess insurance carrier regarding the applicability of the
carriers' policies to Grace's environmental remediation costs. The outcome of
such litigation, as well as the amounts of any recoveries that Grace may
receive, is presently uncertain. Accordingly, Grace has


                                      I-17
<PAGE>

not recorded a receivable with respect to such insurance coverage.

TAX MATTERS

Grace has received the examination report from the Internal Revenue Service
("IRS") on tax periods 1993 through 1996 asserting, in the aggregate,
approximately $114.0 million of proposed tax adjustments. The most significant
contested issue addressed in such report concerns corporate-owned life insurance
("COLI") policies and is discussed below. Other proposed IRS tax adjustments
include Grace's tax position regarding research and development credits,
reporting of certain divestitures and other miscellaneous proposed adjustments.
The tax audit for the 1993 through 1996 tax period is under the jurisdiction of
IRS Appeals, where Grace has filed a protest. Grace's federal tax returns
covering periods 1997 and forward are either under examination by the IRS or
open for future examination. Grace believes that the impact of probable tax
return adjustments would not have a material adverse effect upon Grace's
financial position. Any cash payment would be subject to Grace's Chapter 11
proceedings.

In 1988 and 1990, Grace acquired COLI policies on the lives of certain of its
employees as part of a strategy to fund the cost of postretirement employee
health care benefits and other long-term liabilities. COLI premiums have been
funded in part by loans issued against the cash surrender value of the COLI
policies. The IRS is challenging deductions of interest on loans secured by COLI
policies for years prior to 1999. In 2000, Grace paid $21.2 million of tax and
interest related to this issue for tax years 1990 through 1992. Subsequent to
1992, Grace deducted approximately $163.2 million in interest attributable to
COLI policy loans. Although Grace continues to believe that the deductions were
legitimate, the IRS has successfully challenged interest deductions claimed by
other corporations with respect to broad-based COLI policies in three out of
four litigated cases. Given the level of IRS success in COLI cases, Grace
requested and was granted early referral to the IRS Office of Appeals for
consideration of possible settlement alternatives of the COLI interest deduction
issue.

On September 23, 2002, Grace filed a motion in its Chapter 11 proceeding
requesting that the Bankruptcy Court authorize Grace to enter into a settlement
agreement with the IRS with respect to Grace's COLI interest deductions. The tax
years at issue are 1989 through 1998. Under the terms of the proposed
settlement, the government would allow 20% of the aggregate amount of the COLI
interest deductions and Grace would owe federal income tax and interest on the
remaining 80%. Grace has accrued for the potential tax and interest liability
related to the disallowance of all COLI interest deductions and continues to
accrue interest as part of its quarterly income tax provision. On October 22,
2002, the Bankruptcy Court issued an order authorizing Grace to enter into
settlement discussions with the IRS consistent with the aforementioned terms and
further ordered that any final agreement would be subject to Bankruptcy Court
approval. Grace is currently in negotiations with the IRS concerning the
proposed settlement, and the possible termination of the COLI policies.

The IRS has assessed additional federal income tax withholding and Federal
Insurance Contributions Act taxes plus interest and related penalties for
calendar years 1993 through 1995 against a Grace subsidiary that formerly
operated a temporary staffing business for nurses and other health care
personnel. The assessments, aggregating $21.8 million, were made in connection
with a meal and incidental expense per diem plan for traveling health care
personnel, which was in effect through 1999. The IRS contends that certain per
diem reimbursements should have been treated as wages subject to employment
taxes and federal income tax withholding. Grace contends that its per diem and
expense allowance plans were in accordance with statutory and regulatory
requirements, as well as other published guidance from the IRS. The IRS has
issued assessments aggregating $40.1 million for the 1996 and 1997 tax periods
and Grace expects the IRS will make additional assessments for the 1998 and 1999
tax periods. The matter is currently pending in the United States Court of
Claims. Grace is currently in discussions with the Department of Justice
concerning possible settlement options.

LITIGATION RELATED TO FORMER PACKAGING AND MEDICAL CARE BUSINESSES

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. The Bankruptcy Court authorized the Official Committee of Asbestos
Personal Injury Claimants and the Official Committee of Asbestos Property Damage
Claimants to proceed with claims

                                      I-18
<PAGE>

against Sealed Air and Fresenius on behalf of the Debtors' estates.

On November 29, 2002, Sealed Air and Fresenius each announced that they had
reached agreements in principle with such Committees to settle asbestos and
fraudulent conveyance claims related to such transactions. Under the terms of
the Fresenius settlement, as subsequently revised and subject to certain
conditions, Fresenius would contribute $115.0 million to the Grace estate. In
July 2003, the Fresenius settlement was approved by the Bankruptcy Court. Under
the terms of the proposed Sealed Air settlement, Sealed Air would make a payment
of $512.5 million (plus interest at 5.5% per annum, commencing on December 21,
2002) and nine million shares of Sealed Air common stock, valued at $428.9
million as of June 30, 2003, as directed by the Bankruptcy Court upon
confirmation of Grace's plan of reorganization. The Sealed Air settlement
remains subject to the approval of the Bankruptcy Court and the fulfillment of
specified conditions. Grace is unable to predict how these settlements may
ultimately affect its plan of reorganization.

PURCHASE COMMITMENTS

From time to time, Grace engages in purchase commitments in its various business
activities, all of which are expected to be fulfilled with no material adverse
consequences to Grace's operations or financial position.

GUARANTEES AND INDEMNIFICATION OBLIGATIONS

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

o    Contracts providing for the sale of a former business unit or product line
     in which Grace has agreed to indemnify the buyer against liabilities
     arising prior to the closing of the transaction, including environmental
     liabilities. These liabilities are included in "liabilities subject to
     compromise" in the Consolidated Balance Sheet;

o    Guarantees of real property lease obligations of third parties, typically
     arising out of (a) leases entered into by former subsidiaries of Grace, or
     (b) the assignment or sublease of a lease by Grace to a third party. These
     obligations are included in "liabilities subject to compromise" in the
     Consolidated Balance Sheet;

o    Contracts entered into with third party consultants, independent
     contractors, and other service providers in which Grace has agreed to
     indemnify such parties against certain liabilities in connection with their
     performance. Based on historical experience and the likelihood that such
     parties will ever make a claim against Grace, such indemnification
     obligations are immaterial; and

o    Product warranties with respect to certain products sold to customers in
     the ordinary course of business. These warranties typically provide that
     product will conform to specifications. Grace generally does not establish
     a liability for product warranty based on a percentage of sales or other
     formula. Grace accrues a warranty liability on a transaction-specific basis
     depending on the individual facts and circumstances related to each sale.
     Both the liability and annual expense related to product warranties are
     immaterial to the Consolidated Financial Statements.

FINANCIAL ASSURANCES

Financial assurances have been established for a variety of purposes, including
insurance and environmental matters, asbestos settlements and appeals,
trade-related commitments and other matters. At June 30, 2003, Grace had gross
financial assurances outstanding of $246.2 million, comprised of $135.0 million
of gross surety bonds issued by various insurance companies and $111.2 million
of standby letters of credit issued by various banks. Of the standby letters of
credit, $19.3 million act as collateral for surety bonds, thereby reducing
Grace's overall obligations under its financial assurances to a net amount of
$226.9 million. Of the net amount of $226.9 million of financial assurances,
approximately $8.2 million were issued by non-Debtor entities and $218.7 million
were issued by the Debtors. Of the amounts issued by the Debtors, approximately
$192.5 million were issued before the Filing Date, with the remaining $26.2
million being subsequent to the Filing, of which $23.5 million was issued under
the DIP facility.


                                      I-19
<PAGE>

ACCOUNTING FOR CONTINGENCIES

Although the outcome of each of the matters discussed above cannot be predicted
with certainty, Grace has assessed its risk and has made accounting estimates as
required under U.S. generally accepted accounting principles. As a result of the
Filing, claims related to the items discussed above will be addressed as part of
Grace's Chapter 11 proceedings. Accruals recorded for such contingencies have
been included in "liabilities subject to compromise" on the accompanying
Consolidated Balance Sheet as of June 30, 2003. The amounts of these
liabilities, as ultimately determined through the Chapter 11 proceedings, could
be materially different from amounts recorded by Grace at June 30, 2003.


--------------------------------------------------------------------------------
13.  BUSINESS SEGMENT INFORMATION
--------------------------------------------------------------------------------

Grace is a global producer of specialty chemicals and specialty materials. It
generates revenues from two business segments: Davison Chemicals and Performance
Chemicals. Davison Chemicals produces a variety of catalyst and silica products.
Performance Chemicals produces specialty construction chemicals, building
materials and sealants and coatings. Intersegment sales, eliminated in
consolidation, are not material. The table below presents information related to
Grace's business segments for the three-month and six-month periods ended June
30, 2003 and 2002. Only those corporate expenses directly related to the segment
are allocated for reporting purposes. All remaining corporate items are reported
separately and labeled as such.

<TABLE>
<CAPTION>
==============================================================
                          THREE MONTHS        SIX MONTHS
BUSINESS SEGMENT DATA         ENDED              ENDED
(Dollars in millions)        JUNE 30,           JUNE 30,
==============================================================
                         2003      2002      2003      2002
                        --------------------------------------
<S>                     <C>      <C>       <C>      <C>
NET SALES
Davison Chemicals...... $261.6   $242.6    $500.7   $456.5

Performance Chemicals..  241.8    229.2     447.5    428.5
                        --------------------------------------
TOTAL.................. $503.4   $471.8    $948.2   $885.0
                        ======================================
PRE-TAX OPERATING
  INCOME
Davison Chemicals...... $ 27.3   $ 38.2    $ 47.6   $ 63.8

Performance Chemicals..   25.8     28.2      37.9     46.8
                        --------------------------------------
TOTAL.................. $ 53.1   $ 66.4    $ 85.5   $110.6
==============================================================
</TABLE>

The table below presents information related to the geographic areas in which
Grace operated for the three months and six months ended June 30, 2003 and 2002.

<TABLE>
<CAPTION>
===============================================================
                           THREE MONTHS          SIX MONTHS
GEOGRAPHIC AREA DATA          ENDED                ENDED
(Dollars in millions)        JUNE 30,             JUNE 30,
===============================================================
                         2003      2002      2003      2002
                        ---------------------------------------
<S>                     <C>      <C>       <C>       <C>
NET SALES
  United States.......  $201.1    $216.2    $389.7    $408.8
  Canada and Puerto
    Rico..............    18.2      11.7      33.8      21.7
  Europe..............   175.1     141.8     329.9     267.1
  Asia Pacific........    83.9      74.5     145.3     134.2
  Latin America.......    25.1      27.6      49.5      53.2
                        ---------------------------------------
TOTAL.................  $503.4    $471.8    $948.2    $885.0
===============================================================
</TABLE>


<PAGE>


The pre-tax operating income for Grace's business segments for the three-month
and six-month periods ended June 30, 2003 and 2002 is reconciled below to income
before Chapter 11 expenses, income taxes, and minority interest presented in the
accompanying Consolidated Statement of Operations.

<TABLE>
<CAPTION>
===============================================================
RECONCILIATION OF
BUSINESS SEGMENT DATA
TO FINANCIAL              THREE MONTHS         SIX MONTHS
STATEMENTS                    ENDED               ENDED
(Dollars in millions)        JUNE 30,            JUNE 30,
===============================================================
                         2003      2002      2003       2002
                        ---------------------------------------
<S>                     <C>      <C>       <C>        <C>
Pre-tax operating
  income - business
  segments............  $  53.1  $  66.4   $  85.5    $ 110.6
Add back:
Minority interest ....      0.3      1.3       0.5        0.9
                        ---------------------------------------
                           53.4     67.7      86.0      111.5
Interest expense and
  related financing
  costs...............     (4.1)    (5.6)     (8.3)     (10.4)
Interest income.......      1.3      0.8       2.5        1.6
Corporate operating
  costs...............    (19.5)    (9.8)    (38.4)     (20.2)
Other, net............     (7.3)    (3.1)    (14.3)      (6.0)
                        ---------------------------------------
Income before Chapter
  11 expenses, income
  taxes, and minority
  interest  ..........  $  23.8  $  50.0   $  27.5    $  76.5
===============================================================
</TABLE>

Corporate operating costs include expenses of corporate headquarters functions
incurred in support of core operations, such as corporate financial and legal
services, human resources management, communications and regulatory affairs.
This item also includes certain pension and postretirement benefits, including
the amortization of deferred actuarial losses, that are considered a core
operating cost but not allocated to business segments.


                                      I-20
<PAGE>

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

--------------------------------------------------------------------------------
DESCRIPTION OF BUSINESS
--------------------------------------------------------------------------------

W. R. Grace & Co. and its subsidiaries are engaged in specialty chemicals and
specialty materials businesses on a global basis. Its business segments are
Davison Chemicals, which produces catalyst and silica products, and Performance
Chemicals, which produces construction chemicals, building materials and
sealants and coatings.

As used herein, 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
--------------------------------------------------------------------------------

In response to a sharply increasing number of asbestos-related bodily injury
claims, on April 2, 2001 (the "Filing Date"), W. R. Grace & Co. and 61 of its
United States subsidiaries and affiliates, including W. R. Grace & Co.-Conn.
(collectively, the "Debtors"), filed voluntary petitions for reorganization (the
"Filing") under Chapter 11 of the United States Bankruptcy Code ("Chapter 11" or
the "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.

During 2000 and the first quarter of 2001, Grace experienced several adverse
developments in its asbestos-related litigation, including: a significant
increase in bodily injury claims, higher than expected costs to resolve bodily
injury and certain property damage claims and class action lawsuits alleging
damages from a former attic insulation product. (These claims are discussed in
more detail in Note 3 to the Consolidated Financial Statements.) After a
thorough review of these developments, the Board of Directors of Grace concluded
on April 2, 2001 that a federal court-supervised Chapter 11 process provided the
best forum available to achieve predictability and fairness in the claims
settlement process.

By filing under Chapter 11, Grace expects to be able to both obtain a
comprehensive resolution of the claims against it and preserve the inherent
value of its businesses. Under Chapter 11, the Debtors expect to continue to
operate their businesses as debtors-in-possession under court protection from
their creditors and claimants, while using the Chapter 11 process to develop and
implement a plan for addressing the asbestos-related claims against them.

Consequence of Filing - As a consequence of the Filing, pending litigation
against the Debtors for pre-petition matters is generally stayed (subject to
certain exceptions in the case of governmental authorities), and no party may
take action to realize its pre-petition claims except pursuant to an order of
the Bankruptcy Court.

The Debtors intend to address all of their pending and future asbestos-related
claims and all other pre-petition claims in a plan of reorganization. Such a
plan of reorganization may include the establishment of a trust through which
all pending and future asbestos-related claims would be channeled for
resolution. However, it is currently impossible to predict with any degree of
certainty the amount that would be required to be contributed to the trust, how
the trust would be funded, how other pre-petition claims would be treated or
what impact any reorganization plan may have on the shares of common stock of
the Company. The interests of the Company's shareholders could be substantially
diluted or cancelled under a plan of reorganization. The formulation and
implementation of the plan of reorganization is expected to take a significant
period of time.

Status of Chapter 11 Proceedings - Since the Filing, all motions necessary to
conduct normal business activities have been approved by the Bankruptcy Court.
In addition, the Debtors have received approval from the Bankruptcy Court to pay
or otherwise honor certain of its pre-petition obligations in the ordinary
course of business, including employee wages and benefits, customer programs,
shipping charges and a limited amount of claims of essential trade creditors.

As provided by the Bankruptcy Code, the Debtors had the exclusive right to
propose a plan of reorganization for a 120-day period following the Filing Date.
The Debtors have received extensions of their exclusivity period during which to
file a plan of reorganization through August 1, 2003, and extensions of the
Debtors' exclusive rights to solicit acceptances of a reorganization plan
through October 1, 2003. The Debtors have filed a motion with the Bankruptcy
Court to further extend the exclusivity periods for an additional six months.


                                      I-21
<PAGE>

Three creditors' committees, two representing asbestos claimants and the third
representing other unsecured creditors, and a committee representing
shareholders have been appointed in the Chapter 11 Cases. These committees have
the right to be heard on all matters that come before the Bankruptcy Court and,
together with a legal representative of future asbestos claimants (whom Grace
expects to be appointed by the Bankruptcy Court in the future), are likely to
play important roles in the Chapter 11 Cases. The Debtors are required to bear
certain of the committees' and the future asbestos claimants representative's
costs and expenses, including those of their counsel and financial advisors.

The Debtors' Chapter 11 cases have been assigned to Judge Alfred M. Wolin, a
senior federal judge who sits in Newark, New Jersey. Judge Wolin is presiding
over asbestos bodily injury matters and the fraudulent conveyance litigation
described below. He has assigned the Debtors' other bankruptcy matters to Judge
Judith Fitzgerald, a U.S. bankruptcy judge from the Western District of
Pennsylvania, sitting in Wilmington, Delaware.

Claims Filings - The Bankruptcy Court established a bar date of March 31, 2003
for claims of general unsecured creditors, asbestos-related property damage
claims and medical monitoring claims related to asbestos. The bar date did not
apply to asbestos-related bodily injury claims or claims related to Zonolite(R)
attic insulation ("ZAI"), which will be dealt with separately.

Approximately 15,000 proofs of claim were filed by the bar date. Of these
claims, approximately 10,000 were non-asbestos related, approximately 4,000 were
for asbestos-related property damage, and approximately 1,000 were for medical
monitoring. In addition, approximately 400 proofs of claim were filed after the
bar date. The discussion below refers to claims filed before 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. The other non-asbestos related claims include claims
for payment for goods and services; taxes; product warranties; amounts due under
leases; contracts rejected in the Bankruptcy Court; environmental remediation;
indemnification or contribution from actual or potential co-defendants in
asbestos-related and other litigation; pending non-asbestos related litigation;
and non-asbestos related personal injury.

The Debtors' preliminary analysis indicates that many claims are duplicates,
represent the same claim filed against more than one of the Debtors, lack any
supporting documentation, or provide insufficient supporting documentation. The
Debtors have begun to file with the Bankruptcy Court non-substantive objections
with respect to such claims. The Debtors expect to file a substantial number of
additional objections, both non-substantive and substantive, as analysis and
evaluation of the claims progresses.

As claims are resolved, Grace will make adjustments to the liabilities recorded
on its financial statements as appropriate. Any such adjustments could be
material to the Company's consolidated financial position and results of
operations. Because of the uncertainties of the Chapter 11 process, the
in-progress state of the Debtors' investigation of submitted claims, and the
lack of documentation submitted in support of many claims, Grace, at this time,
is not able to estimate the value of the claims that may ultimately be
determined and allowed by the Bankruptcy Court.

Litigation Proceedings in Bankruptcy Court - In July 2002, the Bankruptcy Court
approved special counsel to represent the ZAI claimants, at the Debtors'
expense, in a proceeding to determine certain threshold scientific issues
regarding ZAI. The court has set a litigation schedule that would result in
pretrial hearings on these issues in September of 2003.

On November 29, 2002, Sealed Air Corporation ("Sealed Air") and Fresenius
Medical Care AG ("Fresenius") each announced that they had reached agreements in
principle with the Official Committee of Asbestos Personal Injury Claimants and
the Official Committee of Asbestos Property Damage Claimants to settle asbestos
and fraudulent conveyance claims related to the 1998 transaction involving
Grace's former packaging business and Sealed Air, and the 1996 transaction
involving Grace's former medical care business and Fresenius, respectively.
Under the terms of the Fresenius settlement, as subsequently revised and subject
to certain conditions, Fresenius would contribute $115.0 million to the Grace
estate. In July 2003, the Fresenius settlement was approved by the Bankruptcy
Court. Under the terms of the proposed Sealed Air settlement, Sealed Air would
make a payment of $512.5 million (plus interest at 5.5% per annum, commencing on
December 21, 2002) and nine million shares of Sealed Air common stock, valued at
$428.9 million as of June 30, 2003, as directed by the Bankruptcy Court upon
confirmation of Grace's plan of reorganization. The Sealed Air settlement
remains


                                      I-22
<PAGE>

subject to the approval of the Bankruptcy Court and the fulfillment of specified
conditions. Grace is unable to predict how these settlements may ultimately
affect its plan of reorganization.

Impact on Debt Capital - All of the Debtors' pre-petition debt is in default due
to the Filing. The accompanying Consolidated Balance Sheet as of June 30, 2003
reflects 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 with Bank of America, N. A. (the "DIP facility") in the
aggregate amount of $250 million. The term of the DIP facility, originally set
to expire April 1, 2003, has been extended for up to an additional three years
through April 1, 2006.

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 Debtors' assets
and the liquidation of certain 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, a
plan of reorganization could materially change the amounts and classifications
reported in the Consolidated Financial Statements, which do not currently give
effect to any adjustments to the carrying value or classification of assets or
liabilities that might be necessary as a consequence of a plan of
reorganization.

Pursuant to SOP 90-7, Grace's pre-petition liabilities that are subject to
compromise are required to be reported separately on the balance sheet at an
estimate of the amount that will ultimately be allowed by the Bankruptcy Court.
As of June 30, 2003, 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). The recorded amounts of such
liabilities generally reflect accounting measurements as of the Filing Date,
adjusted as warranted, for changes in facts and circumstances and/or rulings
under Grace's Chapter 11 proceedings subsequent to the Filing. (See Note 2 to
the Consolidated Financial Statements for detail of the liabilities subject to
compromise as of June 30, 2003, and December 31, 2002.) Obligations of Grace
subsidiaries not covered by the Filing continue to be classified on the
Consolidated Balance Sheet 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.

--------------------------------------------------------------------------------
CRITICAL ACCOUNTING ESTIMATES
--------------------------------------------------------------------------------

The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires that management make estimates and
assumptions affecting the assets and liabilities reported at the date of the
Consolidated Financial Statements, and the revenues and expenses reported for
the periods presented. Actual amounts could differ from those estimates. 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:

o   Contingent liabilities such as asbestos-related matters, environmental
    remediation, income taxes, and retained obligations of divested businesses.
o   Pension and postretirement liabilities that depend on assumptions regarding
    discount rates and/or total returns on invested funds.
o   Depreciation and amortization periods for long-lived assets, including
    property and equipment, intangible, and other assets.
o   Realization values of various assets such as trade receivables, inventories,
    insurance receivables, income taxes, and goodwill.

The accuracy of these and other estimates may also be materially affected by the
uncertainties arising under the Chapter 11 Cases.

--------------------------------------------------------------------------------
CONSOLIDATED OPERATIONS
--------------------------------------------------------------------------------

Set forth below is a chart that lists key operating statistics and percentage
changes for the three-month and six-month periods ended June 30, 2003 and 2002.
This chart should be referenced when reading


                                      I-23
<PAGE>

management's discussion and analysis of the results of operations and financial
condition. The financial information presented throughout this discussion
divides Grace's financial results between "core operations" and "noncore
activities." Core operations comprise the financial results of Davison
Chemicals, Performance Chemicals and the costs of corporate activities that
directly or indirectly support business operations. In contrast, noncore
activities comprise all other events and transactions not directly related to
the generation of operating revenue or the support of core operations.

Neither pre-tax income from core operations nor pre-tax income from core
operations before depreciation and amortization purport to represent income or
cash flow as defined under generally accepted accounting principles, and should
not be considered an alternative to such measures as an indicator of Grace's
performance. These measures are provided to distinguish operating results of
Grace's current business base from results and related assets and liabilities of
past businesses, discontinued products and corporate legacies.


                                      I-24
<PAGE>

<TABLE>
<CAPTION>
====================================================================================================================================
ANALYSIS OF CONTINUING OPERATIONS                        THREE MONTHS ENDED                           SIX MONTHS ENDED
 (Dollars in millions)                                        JUNE 30,                                    JUNE 30,
====================================================================================================================================
                                                                              % Change                                   % Change
                                                  2003          2002         Fav (Unfav)      2003           2002       Fav (Unfav)
                                              --------------------------------------------------------------------------------------
<S>                                           <C>          <C>                  <C>      <C>            <C>                <C>
NET SALES
    DAVISON CHEMICALS
    Catalyst products....................     $    186.6   $    175.9           6.1%     $    354.6     $    329.0         7.8%
    Silica products......................           75.0         66.7          12.4%          146.1          127.5        14.6%
                                              --------------------------------------------------------------------------------------
  TOTAL DAVISON CHEMICALS................          261.6        242.6           7.8%          500.7          456.5         9.7%
                                              --------------------------------------------------------------------------------------
    PERFORMANCE CHEMICALS
    Construction chemicals...............          114.0        106.4           7.1%          204.8          190.3         7.6%
    Building materials...................           59.6         60.0          (0.7%)         113.1          117.2        (3.5%)
    Sealants and coatings................           68.2         62.8           8.6%          129.6          121.0         7.1%
                                              --------------------------------------------------------------------------------------
  TOTAL PERFORMANCE CHEMICALS............          241.8        229.2           5.5%          447.5          428.5         4.4%
                                              --------------------------------------------------------------------------------------
TOTAL GRACE SALES - CORE OPERATIONS......     $    503.4   $    471.8           6.7%     $    948.2     $    885.0         7.1%
====================================================================================================================================
PRE-TAX OPERATING INCOME (A):
    Davison Chemicals (b)................     $     27.3   $     38.2         (28.5%)    $     47.6     $     63.8       (25.4%)
    Performance Chemicals................           25.8         28.2          (8.5%)          37.9           46.8       (19.0%)
    Corporate operating costs............          (19.5)        (9.8)        (99.0%)         (38.4)         (20.2)      (90.1%)
                                              --------------------------------------------------------------------------------------
PRE-TAX INCOME FROM CORE OPERATIONS (C)..           33.6         56.6         (40.6%)          47.1           90.4       (47.9%)
                                              --------------------------------------------------------------------------------------
PRE-TAX LOSS FROM NONCORE ACTIVITIES.....           (7.3)        (3.1)       (135.5%)         (14.3)          (6.0)     (138.3%)
Interest expense.........................           (4.1)        (5.6)         26.8%           (8.3)         (10.4)       20.2%
Interest income..........................            1.3          0.8          62.5%            2.5            1.6        56.3%
                                              --------------------------------------------------------------------------------------
INCOME BEFORE CHAPTER 11 EXPENSES AND
 INCOME TAXES............................           23.5         48.7         (51.7%)          27.0           75.6       (64.3%)
Chapter 11 expenses, net.................           (6.8)        (8.4)         19.0%           (9.5)         (12.8)       25.8%
Provision for income taxes ..............          (10.2)       (19.1)         46.6%          (13.3)         (29.2)       54.5%
                                              --------------------------------------------------------------------------------------
Net income ..............................     $      6.5   $     21.2         (69.3%)    $      4.2     $     33.6       (87.5%)
====================================================================================================================================
KEY FINANCIAL MEASURES:
   PRE-TAX INCOME FROM CORE OPERATIONS AS
   PERCENTAGE OF SALES:
    Davison Chemicals (b)................           10.4%        15.7%         (5.3) pts        9.5%          14.0%       (4.5) pts
    Performance Chemicals................           10.7%        12.3%         (1.6) pts        8.5%          10.9%       (2.4) pts
    Consolidated.........................            6.7%        12.0%         (5.3) pts        5.0%          10.2%       (5.2) pts
   PRE-TAX INCOME FROM CORE OPERATIONS
   BEFORE DEPRECIATION AND
   AMORTIZATION (C) .....................     $     58.9   $     80.0         (26.4%)    $     97.1     $    136.6       (28.9%)
As a percentage of sales.................           11.7%        17.0%         (5.3) pts       10.2%          15.4%       (5.2) pts
====================================================================================================================================
NET SALES BY REGION:
North America............................     $    219.3   $    227.9          (3.8%)    $    423.5     $    430.5        (1.6%)
Europe...................................          175.1        141.8          23.5%          329.9          267.1        23.5%
Asia Pacific.............................           83.9         74.5          12.6%          145.3          134.2         8.3%
Latin America............................           25.1         27.6          (9.1%)          49.5           53.2        (7.0%)
                                              --------------------------------------------------------------------------------------
TOTAL....................................     $    503.4   $    471.8           6.7%     $    948.2     $    885.0         7.1%
====================================================================================================================================
</TABLE>

NM  = Not meaningful     a = Pre-tax operating income for all periods presented
                             reflects a reallocation of the cost of earned
                             pension benefits of active participants from
                             corporate to the respective business segments.

                         b = Davison Chemicals pre-tax operating income excludes
                             minority interest related to the Advanced Refining
                             Technologies joint venture.

                         c = Neither pre-tax income from core operations nor
                             pre-tax income from core operations before
                             depreciation and amortization purport to represent
                             income or cash flow as defined under generally
                             accepted accounting principles, and should not be
                             considered an alternative to such measures as an
                             indicator of the Company's performance. These
                             measures are provided to distinguish operating
                             results of Grace's current business base from
                             results and related assets and liabilities of past
                             businesses, discontinued products and corporate
                             legacies.


                                      I-25
<PAGE>

COSTS OF DOING BUSINESS IN CHAPTER 11

Although it is difficult to measure precisely how Chapter 11 has impacted
Grace's overall financial performance, there are certain added costs that are
directly attributable to operating under the Bankruptcy Code. Net reorganization
expenses of $9.5 million in the first six months of 2003 and $12.8 million in
the first six months of 2002 consist primarily of legal, financial and
consulting fees incurred by Grace and three creditors' committees. In addition,
for the six months ended June 30, 2003 and 2002, Grace's pre-tax income from
core operations included expenses of $7.2 million and $5.3 million,
respectively, for Chapter 11-related compensation charges. Poor stock price
performance in the period leading up to and after the Filing diminished the
value of Grace's stock option program to current and prospective employees,
which caused Grace to change its long-term incentive compensation program into a
cash-based program. Grace has also sought to address employee retention issues
by providing added compensation to certain employees and increasing Grace's
contribution to its retirement savings and investment plan.

There are numerous other indirect costs to manage Grace's Chapter 11 proceedings
such as: management time devoted to Chapter 11 matters; added cost of debt
capital; added costs of general business insurance, including directors and
officers liability insurance; and lost business and acquisition opportunities
due to the complexities of operating under Chapter 11.

NET SALES

The following tables identify the increase or decrease in sales attributable to
changes in product volume, product price and/or mix, and the impact of foreign
currency translation for the three- and six-month periods ended June 30, 2003,
respectively.

<TABLE>
<CAPTION>
================================================================
                       THREE MONTHS ENDED JUNE 30, 2003 AS A
NET SALES               PERCENTAGE INCREASE (DECREASE) FROM
VARIANCE ANALYSIS        THREE MONTHS ENDED JUNE 30, 2002
================================================================
                      VOLUME   PRICE/MIX  TRANSLATION   TOTAL
                     -------------------------------------------
<S>                     <C>       <C>          <C>        <C>
Davison Chemicals ...   5.3%      (4.3%)       6.8%       7.8%
Performance
  Chemicals .........   0.6%       0.4%        4.5%       5.5%
Net sales............   3.0%      (2.0%)       5.7%       6.7%
----------------------------------------------------------------
By Region:
  North America......  (3.2%)     (1.0%)       0.4%      (3.8%)
  Europe.............  11.8%      (7.5%)      19.2%      23.5%
  Asia Pacific.......   8.9%       1.1%        2.6%      12.6%
  Latin America......  (6.5%)      9.7%      (12.3%)     (9.1%)
================================================================
</TABLE>

Grace's second quarter sales totaled $503.4 million compared with $471.8 million
in the prior year quarter, a 6.7% increase. Favorable currency translation
effects from a weaker U.S. dollar, primarily in Europe, accounted for most of
the increase. Added volume in certain product lines was also a contributing
factor but was more than offset by the negative impact of lower selling prices
for certain products and/or product mix. Acquisitions contributed $8.3 million
or 1.8 percentage points of the sales volume growth.

<TABLE>
<CAPTION>
================================================================
                        SIX MONTHS ENDED JUNE 30, 2003 AS A
NET SALES               PERCENTAGE INCREASE (DECREASE) FROM
VARIANCE ANALYSIS          SIX MONTHS ENDED JUNE 30, 2002
----------------------------------------------------------------
                      VOLUME   PRICE/MIX  TRANSLATION   TOTAL
                     -------------------------------------------
<S>                     <C>       <C>          <C>        <C>
Davison Chemicals ...   8.2%      (5.3%)       6.8%       9.7%
Performance
  Chemicals .........  (0.3%)      0.7%        4.0%       4.4%
Net sales............   4.1%      (2.5%)       5.5%       7.1%
----------------------------------------------------------------
By Region:
  North America......  (2.0%)      0.1%        0.3%      (1.6%)
  Europe.............  12.7%      (8.1%)      18.9%      23.5%
  Asia Pacific.......  10.4%      (5.3%)       3.2%       8.3%
  Latin America......  (4.5%)     13.3%      (15.8%)     (7.0%)
================================================================
</TABLE>

Grace's year-to-date sales totaled $948.2 million compared with $885.0 million
in the prior year period, a 7.1% increase. Favorable currency translation
effects from a weaker U.S. dollar, primarily in Europe, accounted for most of
the increase. Added volume in certain product lines was also a contributing
factor but was offset by the negative impact of lower selling prices and/or
product mix. Acquisitions contributed $16.2 million or 1.8 percentage points of
the sales volume growth.

PRE-TAX INCOME FROM CORE OPERATIONS

Pre-tax income from core operations comprises the business segment results of
Davison Chemicals and Performance Chemicals offset by corporate operating costs.
Pre-tax income from core operations in the second quarter of 2003 was $33.6
million compared with $56.6 million in the second quarter of 2002, a 40.6%
decrease. Pre-tax income from core operations was $47.1 million for the six
months ended June 30, 2003, compared with $90.4 million for the prior year
period, a 47.9% decrease. Year-to-date pre-tax operating margin was 5.0%, 5.2
percentage points lower than the prior year.

Operating results continue to be adversely affected by economic weakness,
particularly U.S. commercial construction, and by higher manufacturing and
energy costs. The 2003 second quarter continues to reflect higher pension
expense to account for the effect of negative investment returns on Grace's
defined benefit pension plans in recent years.

Corporate operating costs for the second quarter of 2003 were $19.5 million, a
$9.7 million increase from the prior year quarter. Corporate operating costs for
the six months ended June 30, 2003 were $38.4 million, an $18.2 million increase
from the prior year period. Corporate costs include corporate functional costs
(such as financial and legal services, human resources, communications and


                                      I-26
<PAGE>

information technology), the cost of corporate governance (including directors
and officers liability insurance) and pension costs related to both corporate
employees and to the effects of changes in assets and liabilities for all Grace
pension plans. The increase is primarily attributable to added costs for pension
benefits to account for the negative financial market factors that have impacted
the funded status of defined benefit pension plans in recent years.

PRE-TAX LOSS FROM NONCORE ACTIVITIES

Pre-tax loss from noncore activities comprises all events and transactions not
directly related to the generation of revenue or the support of core operations.
Expense from noncore activities totaled $7.3 million for the second quarter of
2003, compared with expense of $3.1 million for the prior year period. For the
six months ended June 30, 2003, expense from noncore activities totaled $14.3
million, compared with $6.0 million for the prior year period. Expense from
noncore activities in 2003 included a pre-tax charge for Grace's current
estimate of defense and other probable costs to resolve pending environmental
litigation, as well as pension and other postretirement benefits for former
employees of divested businesses. These expenses were offset by income from
Grace's life insurance policies. Expense from noncore activities in 2002 also
included pension expenses related to former employees of divested businesses
offset by income from Grace's life insurance policies.

CHAPTER 11 EXPENSES

Net reorganization expenses of $6.8 million and $9.5 million for the three-month
and six-month periods ended June 30, 2003, and $8.4 million and $12.8 million
for the three-month and six-month periods ended June 30, 2002, consisted
primarily of legal, financial and consulting fees incurred by Grace and three
creditors' committees related to the Chapter 11 Filing. Grace believes that
reorganization expenses will range between $6 million and $10 million per
quarter for the foreseeable future.

INTEREST

Net interest expense for the three months ended June 30, 2003 was $4.1 million,
down from $5.6 million in 2002. The net interest expense for the six months
ended June 30, 2003 was $8.3 million, down from $10.4 million in 2002. This
decrease was attributable to a lower contractual interest rate on pre-petition
debt subject to compromise. Average debt levels were $520.7 million in the first
six months of 2003 and $508.6 million in the first six months of 2002. Payment
of interest accrued on pre-petition debt is subject to the outcome of Grace's
Chapter 11 proceedings. Weighted average interest rates for June 30, 2003 and
2002 were 2.2% and 2.8%, respectively.

INCOME TAXES

Grace's provision for income taxes at the federal corporate rate of 35% was $6.1
million for the six months ended June 30, 2003. The primary difference between
this amount and the overall provision for income taxes of $13.3 million is
attributable to current period interest on tax contingencies and the
non-deductibility of certain Chapter 11 expenses.

DAVISON CHEMICALS

Business Description

Davison Chemicals is a leading global supplier of catalyst and silica products.
Catalyst products represented approximately 37% of Grace's 2003 and 2002 second
quarter sales. This segment includes fluid cracking catalysts and additives used
in petroleum refineries to convert distilled crude oil into transportation fuels
and other petroleum-based products; hydroprocessing catalysts, which upgrade
heavy oils and remove certain impurities; polyolefin catalysts, which are
essential components in the manufacture of polyethylene and polypropylene used
in products such as plastic film, high-performance plastic pipe and other
plastic parts; and chemical catalysts, which are used in a variety of chemical
processes. Silica products, which represented 15% of Grace's 2003 second quarter
sales (14% - 2002), are used in a wide range of industrial and consumer
applications, such as coatings, food processing, plastics, adsorbents, personal
care products and biotechnology separations.

Recent Acquisitions and Joint Ventures

In April 2003, Grace, through its subsidiary The Separations Group, acquired the
business and assets of MODcol Corporation, a manufacturer of preparative
chromatography columns and provider of custom column packaging services. This
acquisition has been integrated into Grace's silica business.

In January 2002, Grace, through its Swedish subsidiary, acquired the catalyst
manufacturing assets of Borealis A/S. This acquisition has been integrated into
Grace's polyolefin catalysts business.

Three Months Ended June 30, 2003

Second quarter sales for the Davison Chemicals segment were $261.6 million, up
7.8% from the prior year quarter. Excluding the effects of favorable currency
translation, sales were up 1.0% for the quarter. Acquisitions


                                      I-27
<PAGE>

accounted for $8.3 million or 3.4 percentage points of sales growth. Added
volume before the effects of acquisitions was more than offset by the negative
impact of lower selling prices on certain products and/or product mix. Operating
income of the Davison Chemicals segment was $27.3 million, 28.5% lower than the
2002 second quarter; operating margin of 10.4% was 5.3 percentage points lower
than the prior year quarter. Operating income and margins in the second quarter
of 2003 were negatively affected by higher manufacturing costs, primarily from
higher natural gas prices and maintenance requirements at certain production
facilities.

Sales of catalyst products, which include refining catalysts, polyolefin
catalysts and other chemical catalysts, were $186.6 million, up 6.1% compared
with the prior year quarter, primarily attributable to currency effects and an
acquisition completed in Japan in August 2002. Catalyst sales were notably lower
in North America primarily due to usage patterns and lower demand compared with
the second quarter of 2002. Sales of silica products were $75.0 million, up
12.4% compared with the second quarter of 2002, primarily from currency effects.
Volume increases from growth programs in digital printing and separations
applications were offset by lower sales in other applications.

Sales in Europe and Asia Pacific were up 20.6% and 15.6%, respectively. Sales in
North America and Latin America were down 3.5% and 17.8%, respectively. In
Europe, the increase in sales was attributable to growth in both the catalyst
and silica product lines, as well as favorable currency translation. In Asia
Pacific, the increase in sales was primarily attributable to growth within the
catalyst product line while sales within silicas remain consistent compared with
the second quarter of 2002. The decrease in North America and Latin America was
based on lower demand within both catalysts and silicas.

Six Months Ended June 30, 2003

Year-to-date sales for the Davison Chemicals segment were $500.7 million, up
9.7% from 2002 (excluding currency translation impacts, sales were up 2.9%).
Acquisitions accounted for $15.8 million or 3.5 percentage points of the sales
growth. Added volume before the effects of acquisitions was offset by the
negative impact of lower selling prices on certain products and/or product mix.
Year-to-date operating income was $47.6 million, compared with $63.8 million for
the prior year, a 25.4% decrease. Year-to-date operating results reflect similar
economic and cost factors as experienced in the second quarter.

Sales of catalyst products were up 7.8% compared with the prior year period, as
a result of currency effects and acquisitions in the polyolefin and
hydroprocessing catalyst businesses, offset by lower sales in North America
caused by a decrease in demand. Sales of silica products were up 14.6% for the
period primarily from currency translation impacts, growth programs in coatings,
digital printing, and separations applications, and added volume in North
America and Europe.

Sales in North America, Europe, and Asia Pacific were up 2.6%, 22.4%, and 7.1%,
respectively. Sales in Latin America were down 14.0%. In North America, the
increase in sales was primarily due to growth in the silica product line. In
Europe, the increase in sales was primarily due to favorable currency
translation impacts and growth in both the catalyst and silica product lines.
The increase in Asia Pacific reflects growth within the catalyst product line,
as well as the effect of favorable currency translation, offset by a slight
decline in silicas. The decrease in Latin America was attributable to lower
demand in both the catalyst and silica product lines along with unfavorable
foreign currency exchange.

PERFORMANCE CHEMICALS

Business Description

The major product groups of the Performance Chemicals segment are (1) specialty
construction chemicals and specialty building materials, which are used
primarily by the nonresidential construction industry; and (2) container
sealants and coatings for food and beverage packaging, and other related
products. Specialty construction chemicals, which represented 23% of Grace's
2003 and 2002 second quarter sales, add strength, control corrosion, and enhance
the handling and application of concrete, and reduce the manufacturing cost and
improve the quality of cement. Specialty building materials, which represented
12% of Grace's 2003 second quarter sales (13% - 2002), prevent water damage to
structures and protect structural steel against collapse due to fire. Sealants
and coatings products, which represented 13% of Grace's 2003 and 2002 second
quarter sales, are used to seal beverage and food cans, and glass and plastic
bottles, and protect metal packaging from corrosion and package contents from
the influences of the metal.

Recent Acquisitions and Joint Ventures

During the first six months of 2003, Performance Chemicals did not enter into
any new business combinations.

In March 2002, Grace acquired the business and the assets of Addiment,
Incorporated, a leading supplier of


                                      I-28
<PAGE>

specialty chemicals to the concrete paver and masonry industries in the U.S. and
Canada. This business has been integrated into the construction chemicals
product line.

Three Months Ended June 30, 2003

Second quarter sales for the Performance Chemicals segment were $241.8 million,
up 5.5% from the prior year quarter, primarily from favorable currency
translation impacts. Operating income for the Performance Chemicals segment was
$25.8 million, compared with $28.2 million in the prior year quarter. Operating
margin of 10.7% was 1.6 percentage points lower than the prior year period,
reflecting higher transportation costs and petroleum-based and other raw
material costs, and an unfavorable regional and product mix.

Sales of specialty construction chemicals, which include concrete admixtures,
cement additives and masonry products, were up 7.1% versus the prior year
quarter (2.1% excluding currency translation impacts). Sales were strong in
geographic regions other than North America, reflecting the success of new
product programs and sales initiatives in key economies worldwide. In North
America, sales were slightly down, reflecting weak North American construction
activity, partially offset by growth programs. Sales of specialty building
materials, which include waterproofing and fire protection products, were down
0.7% (down 3.5% before translation impacts) compared with a strong second
quarter in 2002. The decline reflects softness in North American construction
and re-roofing activity, due partly to an unusually rainy spring, and the
effects of new building codes that permit less fire protection materials for
structural steel used in commercial buildings. Sales of specialty sealants and
coatings, which include container sealants, coatings and polymers, were up 8.6%
compared with the second quarter of 2002 (up 3.3% before the effect of currency
translation), reflecting growth initiatives in coatings and closure compounds,
particularly in Europe and Asia.

Sales in Europe and Asia Pacific were up 28.3% and 8.6%, respectively. Sales in
North America and Latin America were down 4.0% and 0.7%, respectively. The
increase in Europe was attributable to favorable currency translation impacts
and growth in construction chemicals and specialty building materials. In Asia
Pacific, higher sales were primarily attributable to growth in construction
chemicals and sealants and coatings, along with the favorable impact of foreign
exchange, offset by a decline in specialty building materials. The decline in
North American sales was based on a decrease in overall volume throughout all
product lines, primarily specialty building materials. In Latin America, the
decrease in sales was attributable to unfavorable currency translation impacts,
offset by growth within sealants and coatings and construction chemicals.

Six Months Ended June 30, 2003

Sales for the Performance Chemicals segment for the six months ended June 30,
2003 were $447.5 million, up 4.4% from the prior year period with almost all of
the increase attributable to favorable currency translation impacts. Operating
income was $37.9 million, down 19.0% from the prior year period, and operating
margin of 8.5% was 2.4 percentage points unfavorable to the prior year period.
Operating income and margin were adversely affected by continued softness in
U.S. construction, an unusually rainy spring in the U.S., which delayed
re-roofing activity, and unfavorable product mix.

Sales of construction chemicals were up 7.6%, reflecting favorable currency
translation impacts and the success of new product programs and sales
initiatives in key economies worldwide. Sales of building materials were down
3.5%, reflecting the softness in North American construction and re-roofing
activity, due partly to severe winter and spring weather, and to the effects of
new building codes that permit less fire protection materials for structural
steel used in commercial buildings. This decline was offset by continued growth
in Europe. Sales of sealants and coatings were up 7.1%, reflecting favorable
currency translation impacts in Europe and growth initiatives in coatings and
closure compounds, particularly in Latin America and Europe, offset by
unfavorable currency exchange in Latin America.

Sales in Europe and Asia Pacific were up 25.4% and 9.8%, respectively. Sales in
North America were down 4.8%, while sales in Latin America remained unchanged
compared with the prior year period. In Europe, higher sales were due to
favorable currency translation and growth in all product lines, primarily
construction chemicals and building materials. Sales in Asia Pacific increased
primarily from the effects of favorable foreign currency as well as volume
growth in construction chemicals, offset by a slight decline in sealants and
coatings. In North America, the decline in sales occurred primarily in specialty
building materials, reflecting the softness in North American construction
activity, an unusually rainy spring, which delayed re-roofing activity, and the
effects of new building codes that permit less fire protection materials for
structural steel used in commercial buildings. In Latin America, sales remained
consistent with the prior year, with an increase in construction chemicals and
sealants and coatings, offset by unfavorable foreign currency translation.


                                      I-29
<PAGE>

FINANCIAL POSITION AND CASH FLOWS

The following chart sets forth Grace's net asset position supporting its core
operations and its net cash flows from core operations.

<TABLE>
<CAPTION>
==================================================================
CORE OPERATIONS                       JUNE 30,      December 31,
(Dollars in millions)                   2003            2002
------------------------------------------------------------------
<S>                                <C>             <C>
BOOK VALUE OF INVESTED CAPITAL
Receivables......................  $   346.6       $    313.7
Inventory........................      208.0            173.6
Properties and equipment, net....      631.3            616.0
Pension accounts and other.......      547.1            604.6
                                   -------------------------------
ASSETS SUPPORTING CORE
OPERATIONS.......................    1,733.0          1,707.9
Accounts payable and accruals....     (325.4)          (313.5)
                                   -------------------------------
CAPITAL INVESTED IN CORE
OPERATIONS.......................  $ 1,407.6       $   1,394.4
Pre-tax return on average
 invested capital (trailing
 twelve months)..................        9.8%            12.8%
                                   ===============================
                                           SIX MONTHS ENDED
                                              JUNE 30,
                                   -------------------------------
CASH FLOWS:                             2003            2002
                                   -------------------------------
Pre-tax operating income.........  $    47.1       $     90.4
Depreciation and amortization....       50.0             46.2
                                   -------------------------------
PRE-TAX EARNINGS BEFORE
 DEPRECIATION AND AMORTIZATION...       97.1            136.6
Working capital and other
changes..........................      (29.1)           (27.8)
                                   -------------------------------
CASH FLOW BEFORE INVESTING.......       68.0            108.8
Capital expenditures.............      (45.1)           (32.0)
Businesses acquired..............       (2.2)           (25.0)
                                   -------------------------------
NET CASH FLOW FROM CORE
OPERATIONS.......................  $    20.7       $     51.8
==================================================================
</TABLE>

Grace had a net asset position supporting its core operations of $1,407.6
million at June 30, 2003, compared with $1,394.4 million at December 31, 2002
(including the cumulative translation account reflected in Shareholders' Equity
(Deficit) of $70.2 million for 2003 and $119.6 million for 2002). The change in
invested capital supporting core operations was primarily due to:

a)      An increase in receivables of $32.9 million, which was due to an
        increase in the average number of days sales outstanding from 63 days to
        71 days due to a shift in regional mix, as well as $13.5 million
        attributable to currency translation, primarily of European and Asian
        receivables, reflecting a weaker dollar.

b)      An overall increase in inventory of $34.4 million, consisting of
        increases in catalyst inventory to satisfy expected second half
        deliveries as well as currency translation impacts, primarily in
        European and Asian inventories, reflecting a weaker dollar.

c)      A decline in pension accounts and other of $57.5 million caused
        primarily by net pension expense of $26.7 million, as well as an overall
        decline in the cumulative translation adjustment.

The pre-tax return (trailing twelve months) on capital invested in core
operations decreased by 3.0 percentage points in the six months ended June 30,
2003, due to a 47.9% decline in pre-tax operating income. In addition, net cash
flows from core operations decreased due to the decline in pre-tax operating
income, as well as an increase in capital spending, offset by a decline in cash
invested in business acquisitions.

--------------------------------------------------------------------------------
FINANCIAL CONDITION
--------------------------------------------------------------------------------

EFFECT OF CHAPTER 11

As described under "Voluntary Bankruptcy Filing", the Company and its principal
U.S. operating subsidiary are debtors-in-possession under Chapter 11 of the
Bankruptcy Code. Grace's non-U.S. subsidiaries, although not part of the Filing,
are owned directly or indirectly by the Company's principal operating subsidiary
or other filing entities. Consequently, it is likely that a Chapter 11
reorganization plan will involve the combined value of Grace's global businesses
and its other assets to fund (with cash and/or securities) Grace's obligations
as adjudicated through the bankruptcy process. Grace has analyzed its cash flow
and capital needs to continue to fund its businesses and believes that, while in
Chapter 11, sufficient cash flow and credit facilities are available to support
its business strategy.

The following sections address Grace's financial condition in more detail and
describe the major contingencies that are being addressed as part of the Chapter
11 process. Grace's ability to present a plan of reorganization to the
Bankruptcy Court depends largely on the timing of resolution of these
contingencies.


LIABILITIES AND CONTINGENCIES

Grace has a number of financial exposures originating from past businesses,
products and events. These obligations arose from transactions and/or business
practices that date back to when Grace was a much larger company, when it
produced products or operated businesses that are no longer part of its revenue
base, and when government regulations and scientific knowledge were much less
advanced than today. The following table summarizes the net noncore liability at
June 30, 2003 and December 31, 2002 and the net cash flow from noncore
activities for the six months ended June 30, 2003 and 2002:


                                      I-30
<PAGE>

<TABLE>
<CAPTION>
===============================================================
NONCORE ACTIVITIES
(Dollars in millions)
--------------------------------    JUNE 30,     December 31,
NET NONCORE LIABILITIES:              2003           2002
===============================================================
<S>                              <C>             <C>
Asbestos-related liabilities...  $  (968.5)      $  (973.2)
Asbestos-related insurance
receivable ....................      272.4           282.6
                                -------------------------------
Asbestos-related liability,
net ...........................     (696.1)         (690.6)
Environmental remediation......     (197.5)         (201.1)
Postretirement benefits........     (141.9)         (147.2)
Retained obligations and other.      (55.3)          (55.3)
                                -------------------------------
NET NONCORE LIABILITY..........  $(1,090.8)      $(1,094.2)
===============================================================
                                        SIX MONTHS ENDED
                                            JUNE 30,
NET CASH FLOWS FROM NONCORE     -------------------------------
ACTIVITIES:                           2003            2002
===============================================================
Pre-tax loss from noncore
activities..................... $   (14.3)       $    (6.0)
Non-cash changes...............      12.3              6.5
Cash spending for:
  Asbestos-related litigation,
  net of insurance recovery....       5.5              3.9
  Environmental remediation....      (6.0)           (10.9)
  Postretirement benefits......      (5.7)           (11.2)
  Retained obligations and
  other........................      (0.7)            (1.6)
---------------------------------------------------------------
NET CASH FLOW FROM NONCORE
ACTIVITIES .................... $    (8.9)       $   (19.3)
===============================================================
</TABLE>

As described under "Voluntary Bankruptcy Filing," the resolution of most of
these noncore recorded and contingent liabilities will be determined through the
Chapter 11 proceedings. Grace cannot predict with any certainty how, and for
what amounts, any of such estimates will be resolved. The amounts of these
liabilities as ultimately determined through the Chapter 11 proceedings could be
materially different from amounts recorded by Grace at June 30, 2003.

ASBESTOS-RELATED MATTERS

Grace had net receipts of $6.7 million and $5.5 million for the defense and
disposition of asbestos-related property damage and bodily injury litigation,
including amounts received under settlements with insurance carriers during the
three months and six months ended June 30, 2003, respectively, compared with net
receipts of $4.4 million and $3.9 million during the three months and six months
ended June 30, 2002, respectively. At June 30, 2003, Grace's balance sheet
reflected a gross asbestos-related liability of $968.5 million ($696.1 million
net of insurance). This liability represents management's estimate, based on
facts and circumstances existing prior to the Filing, of the undiscounted net
cash outflows necessary to satisfy Grace's pending property damage claims for
which sufficient information is available, and its pending and projected future
bodily injury claims. Changes to the recorded amount of such liability will be
based on Chapter 11 developments and management's assessment of the claim
amounts that will ultimately be allowed by the Bankruptcy Court. Recently,
federal legislation has been proposed to address asbestos bodily injury claims.
In addition, several states have enacted or proposed legislation affecting
asbestos bodily injury claims. At this time, Grace cannot predict what impact
any such legislation would have on Grace's asbestos bodily injury liability, or
its ultimate plan of reorganization.

The Consolidated Balance Sheet at June 30, 2003 includes total amounts due from
insurance carriers of $272.4 million pursuant to settlement agreements with
insurance carriers. The recovery of amounts due from insurance carriers is
dependent upon the timing, character and exposure periods of asbestos-related
claims. Grace's Chapter 11 proceedings and proposed federal legislation could
also affect recovery timing and amounts.

Grace intends to address all of its pending and future asbestos-related claims
as part of a plan of reorganization under Chapter 11. Grace will seek to have
the Bankruptcy Court establish a process to assess and appropriately quantify
the numerous property damage and bodily injury claims against it. Measurement of
Grace's asbestos-related liabilities could be materially affected by Bankruptcy
Court rulings, the outcome of litigation and negotiations among interested
parties. Grace's ultimate liability for asbestos-related liabilities could be
materially higher than the amounts recorded.

ENVIRONMENTAL MATTERS

Grace is subject to loss contingencies resulting from extensive and evolving
federal, state, local and foreign environmental laws and regulations. Grace has
expended substantial funds to comply with such laws and regulations and expects
to continue to do so in the future. At June 30, 2003, Grace's recorded liability
for environmental investigative and remediation costs related to both continuing
and discontinued operations totaled $197.5 million, as compared with $201.1
million at December 31, 2002. This estimate of environmental costs is based on
funding and/or remediation agreements in place, together with Grace's best
estimate of its cost for sites not subject to a formal remediation plan.

From the 1920's until 1990, Grace and previous owners conducted vermiculite
mining and related activities near Libby, Montana. The vermiculite ore that was
mined contained varying amounts of asbestos as a contaminant, almost all of
which was removed during processing. Expanded vermiculite from Libby was used in
products such as fireproofing, insulation and potting soil. In November 1999,
Region 8 of the U.S. Environmental Protection Agency ("EPA") began an
investigation into alleged excessive levels of asbestos-related disease in the
Libby population related to these former mining activities. This investigation
led the EPA to undertake additional investigative activity and to carry out


                                      I-31
<PAGE>

response actions in and around Libby. On March 30, 2001, the EPA filed a lawsuit
in U.S. District Court for the District of Montana, Missoula Division (United
States v. W. R. Grace & Company et al.) under the Comprehensive Environmental
Response, Compensation and Liability Act for the recovery of costs allegedly
incurred by the United States in response to the release or threatened release
of asbestos in the Libby, Montana area relating to such former mining
activities. These costs include cleaning and/or demolition of contaminated
buildings, the excavation and removal of contaminated soil, health screening of
Libby residents and former mine workers, and investigation and monitoring costs.
In this action, the EPA also sought a declaration of Grace's liability that
would be binding in future actions to recover further response costs.

In connection with its defense, Grace conducted its own investigation to
determine whether the EPA's actions and cost claims were justified and
reasonable. However, in December 2002, the District Court granted the United
States' motion for partial summary judgment on a number of issues that limited
Grace's ability to challenge the EPA's response actions. In January 2003, a
trial was held on the remainder of the issues, which primarily involved the
reasonableness and adequacy of documentation of the EPA's cost recovery claims
through December 31, 2001. No decision has yet been issued. This lawsuit is not
subject to the automatic stay provided under the Bankruptcy Code.

Based on a proof of claim form filed against Grace by the United States, the
EPA's Libby-related cost recovery claims through January 31, 2003 totaled
approximately $82 million and total cost recovery claims will likely exceed $100
million. Grace has $61.0 million accrued at June 30, 2003 with respect to this
lawsuit and future cost recovery claims expected to be made by the EPA,
representing Grace's current estimate of probable liability and defense costs,
pending the issuance of a decision of the trial court and the availability of
additional information about the EPA's 2002 costs and projected future costs.
Grace's liability for this matter is included in "liabilities subject to
compromise" and any payments would be subject to the outcome of the Chapter 11
proceedings.

The EPA is also evaluating environmental risks at vermiculite processing sites
throughout the U.S. that processed vermiculite from Libby, Montana, and has made
claims against Grace to carry out or fund remediation activities. Grace is
reviewing the EPA's actions and cost claims to determine whether they are
justified and reasonable and, in several instances, has remediated or agreed to
remediate certain sites. Costs associated with the above are included in
"provision for environmental remediation" included in the Consolidated Statement
of Operations.

POSTRETIREMENT BENEFITS

Grace provides certain postretirement health care and life insurance benefits
for retired employees, a large majority of which pertain to retirees of
previously divested businesses. These plans are unfunded, and Grace pays the
costs of benefits under these plans as they are incurred. Spending under this
program during the six months ended June 30, 2003 was $5.7 million, compared
with $11.2 million in 2002. Grace's recorded liability for postretirement
benefits of $141.9 million at June 30, 2003 is stated at net present value
discounted at 6.75%. The continuing payment of these benefits has been approved
by the Bankruptcy Court; however, the program would still be subject to the
terms of a Chapter 11 reorganization plan.

RETAINED OBLIGATIONS OF DIVESTED BUSINESSES

The principal retained obligations of divested businesses relate to contractual
indemnification and to contingent liabilities not passed on to the new owner. At
June 30, 2003, Grace had recorded $55.3 million, to satisfy such obligations.
Most of these matters are now subject to the automatic stay of the Bankruptcy
Court and are expected to be resolved as part of Grace's Chapter 11 proceedings.

TAX MATTERS

Grace has received the examination report from the Internal Revenue Service
("IRS") on tax periods 1993 through 1996 asserting, in the aggregate,
approximately $114.0 million of proposed tax adjustments. The most significant
contested issue addressed in such report concerns corporate-owned life insurance
("COLI") policies and is discussed below. Other proposed IRS tax adjustments
include Grace's tax position regarding research and development credits,
reporting of certain divestitures and other miscellaneous proposed adjustments.
The tax audit for the 1993 through 1996 tax period is under the jurisdiction of
IRS Appeals, where Grace has filed a protest. Grace's federal tax returns
covering periods 1997 and forward are either under examination by the IRS or
open for future examination. Grace believes that the impact of probable tax
return adjustments would not have a material adverse effect upon Grace's
financial position. Any cash payment would be subject to Grace's Chapter 11
proceedings.

In 1988 and 1990, Grace acquired COLI policies on the lives of certain of its
employees as part of a strategy to


                                      I-32
<PAGE>

fund the cost of postretirement employee health care benefits and other
long-term liabilities. COLI premiums have been funded in part by loans issued
against the cash surrender value of the COLI policies. The IRS is challenging
deductions of interest on loans secured by COLI policies for years prior to
1999. In 2000, Grace paid $21.2 million of tax and interest related to this
issue for tax years 1990 through 1992. Subsequent to 1992, Grace deducted
approximately $163.2 million in interest attributable to COLI policy loans.
Although Grace continues to believe that the deductions were legitimate, the IRS
has successfully challenged interest deductions claimed by other corporations
with respect to broad-based COLI policies in three out of four litigated cases.
Given the level of IRS success in COLI cases, Grace requested and was granted
early referral to the IRS Office of Appeals for consideration of possible
settlement alternatives of the COLI interest deduction issue.

On September 23, 2002, Grace filed a motion in its Chapter 11 proceeding
requesting that the Bankruptcy Court authorize Grace to enter into a settlement
agreement with the IRS with respect to Grace's COLI interest deductions. The tax
years at issue are 1989 through 1998. Under the terms of the proposed
settlement, the government would allow 20% of the aggregate amount of the COLI
interest deductions and Grace would owe federal income tax and interest on the
remaining 80%. Grace has accrued for the potential tax and interest liability
related to the disallowance of all COLI interest deductions and continues to
accrue interest as part of its quarterly income tax provision. On October 22,
2002, the Bankruptcy Court issued an order authorizing Grace to enter into
settlement discussions with the IRS consistent with the aforementioned terms and
further ordered that any final agreement would be subject to Bankruptcy Court
approval. Grace is currently in negotiations with the IRS concerning the
proposed settlement, and the possible termination of the COLI policies.

The IRS has assessed additional federal income tax withholding and Federal
Insurance Contributions Act taxes plus interest and related penalties for
calendar years 1993 through 1995 against a Grace subsidiary that formerly
operated a temporary staffing business for nurses and other health care
personnel. The assessments, aggregating $21.8 million, were made in connection
with a meal and incidental expense per diem plan for traveling health care
personnel, which was in effect through 1999. The IRS contends that certain per
diem reimbursements should have been treated as wages subject to employment
taxes and federal income tax withholding. Grace contends that its per diem and
expense allowance plans were in accordance with statutory and regulatory
requirements, as well as other published guidance from the IRS. The IRS has
issued assessments aggregating $40.1 million for the 1996 and 1997 tax periods
and Grace expects the IRS will make additional assessments for the 1998 and 1999
tax periods. The matter is currently pending in the United States Court of
Claims. Grace is currently in discussions with the Department of Justice
concerning possible settlement options.

--------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
--------------------------------------------------------------------------------

CASH RESOURCES AND AVAILABLE CREDIT FACILITIES

At June 30, 2003, Grace had $409.7 million in cash and cash-like assets on hand
($317.9 million in cash and cash equivalents and $91.8 million in net cash value
of life insurance). In addition, Grace had access to committed credit facilities
aggregating $250.0 million under the DIP facility, of which $188.0 million (net
of borrowings, letters of credit, and holdback provisions) was available at June
30, 2003. The term of the DIP facility, originally set to expire on April 1,
2003, has been extended for up to an additional three years through April 1,
2006. Grace believes that these funds and credit facilities will be sufficient
to finance its business strategy while in Chapter 11.

CASH FLOW

Grace's net cash flow provided by core operations before investing for the six
months ended June 30, 2003 was $68.0 million, compared with $108.8 million for
the six months ended June 30, 2002. Total capital expenditures for the six
months ended June 30, 2003 and 2002 were $45.1 million and $32.0 million,
respectively. A substantial portion of these expenditures was directed toward
the business segments for routine capital replacements and construction of new
catalyst production capacity at the Lake Charles, Louisiana site. Acquisition
investments, net of cash acquired, were $2.2 million and $25.0 million for the
six months ended June 30, 2003 and 2002, respectively. For the six months ended
June 30, 2003 and 2002, pre-tax income from core operations before depreciation
and amortization was $97.1 million and $136.6 million, respectively. Grace
expects to continue to invest excess cash flow and/or other available capital
resources in its core business base. These investments are likely to be in the
form of added plant capacity, product line extensions, geographic market
expansions and acquisitions. Investments that are outside the ordinary course of
business may be subject to Bankruptcy Court approval and Chapter 11 creditor
committee review.


                                      I-33
<PAGE>


The pre-tax cash outflow from noncore activities for the six months ended June
30, 2003 and 2002 was $8.9 million and $19.3 million, respectively. Expenditures
for environmental remediation were lower in the first six months of 2003, due in
part to Grace's Chapter 11 proceedings and the completion of remediation work at
certain sites. Postretirement benefits were lower, reflecting higher cost
sharing by retirees.

Cash flows used for investing activities for the six months ended June 30, 2003
and 2002 were $50.2 million and $59.9 million, respectively. Net cash outflows
for investing activities in the first six months of 2003 consisted primarily of
$45.1 million for capital expenditures, and net investment in life insurance
policies of $3.7 million. Net cash outflows for investing activities in the
first six months of 2002 consisted primarily of $25.0 million for acquisitions,
$32.0 million for capital expenditures, and net investments in life insurance
policies of $3.6 million.

Net cash provided by financing activities in the first six months of 2003 was
$30.3 million and net cash used for financing activities in the first six months
of 2002 was $4.1 million. In 2003, net cash inflows were principally composed of
$30.0 million of borrowings under the DIP facility, offset by $3.0 million of
fees related to renewal and unused line fees under the DIP facility and $1.4
million in net repayments for loans secured by the cash value of life insurance
policies. In 2002, net cash outflows principally consisted of net repayments for
loans secured by the cash value of life insurance policies.

The decline in operating profit in the first six months of 2003 compared with
2002 was realized primarily by the Debtors, prompting the need to draw on the
DIP facility to meet cash requirements. Additionally, the Debtors have received
Bankruptcy Court approval to make $48.5 million of contributions to their
defined benefit pension plans to address the underfunded status of such plans.
On July 1, 2003, the Debtors contributed $8.5 million to such plans, using cash
borrowed under the DIP facility. The Debtors expect to contribute an additional
$40.0 million to such plans during the second half of the year, using available
cash of non-Debtor subsidiaries.

DEBT AND OTHER CONTRACTUAL OBLIGATIONS

Total debt outstanding at June 30, 2003 was $583.9 million, including $43.6
million of accrued interest on pre-petition debt. As a result of the Filing,
Grace is now in default on $502.9 million of pre-petition debt, which, together
with accrued interest thereon, has been included in "liabilities subject to
compromise" as of June 30, 2003. The automatic stay provided under the
Bankruptcy Code prevents Grace's lenders from taking any action to collect the
principal amounts as well as related accrued interest. However, Grace will
continue to accrue and report interest on such debt during the Chapter 11
proceedings (unless further developments lead management to conclude that it is
probable that such interest will be compromised).

Financial assurances have been established for a variety of purposes, including
insurance and environmental matters, asbestos settlements and appeals,
trade-related commitments and other matters. At June 30, 2003, Grace had gross
financial assurances issued and outstanding of $246.2 million, comprised of
$135.0 million of gross surety bonds issued by various insurance companies and
$111.2 million of standby letters of credit issued by various banks. Of the
standby letters of credit, $19.3 million act as collateral for surety bonds,
thereby reducing Grace's overall obligations under its financial assurances to a
net amount of $226.9 million. Of the net amount of $226.9 million of financial
assurances, approximately $8.2 million were issued by non-Debtor entities and
$218.7 million were issued by the Debtors. Of the amounts issued by the Debtors,
approximately $192.5 million were issued before the Filing Date, with the
remaining $26.2 million being subsequent to the Filing, of which $23.5 million
was issued under the DIP facility.

FORWARD-LOOKING STATEMENTS

The forward-looking statements contained in this document are based on current
expectations regarding important risk factors. Actual results may differ
materially from those expressed. In addition to the uncertainties referred to in
Management's Discussion and Analysis of Results of Operations and Financial
Condition, other uncertainties include: the impact of worldwide economic
conditions; pricing of both Grace's products and raw materials; customer outages
and customer demand; factors resulting from fluctuations in interest rates and
foreign currencies; the impact of competitive products and pricing; the
continued success of Grace's process improvement initiatives; the impact of tax,
legislation and other regulations in the jurisdictions in which Grace operates;
and developments in and the outcome of the Chapter 11 proceedings discussed
above. Also, see "Introduction and Overview - Projections and Other
Forward-Looking Information" in Item 1 of Grace's current Annual Report on Form
10-K.


                                      I-34
<PAGE>

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
--------------------------------------------------------------------------------

Grace had no outstanding derivative financial instruments on June 30, 2003. For
further information concerning Grace's quantitative and qualitative disclosures
about market risk, refer to Notes 13 and 15 in the Consolidated Financial
Statements in Grace's 2002 Annual Report on Form 10-K.

ITEM 4. CONTROLS AND PROCEDURES
--------------------------------------------------------------------------------

GENERAL STATEMENT OF RESPONSIBILITY

The management of Grace is responsible for the preparation, integrity and
objectivity of the Consolidated Financial Statements and the other information
included in this report. The financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America and accordingly include certain amounts that represent management's best
estimates and judgments. Actual amounts could differ from those estimates.
Management maintains internal control systems to assist it in fulfilling its
responsibility for financial reporting. These systems include business,
accounting and reporting policies and procedures, selection of personnel,
segregation of duties and an internal audit function. In 2002, a Disclosure
Committee was established to oversee Grace's public financial reporting process
and key managers are required to confirm their compliance with Grace's policies
and internal control systems. While no system can ensure elimination of all
errors and irregularities, Grace's systems, 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 not exceed their benefits.


EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

As of June 30, 2003, Grace evaluated the effectiveness of the design and
operation of its disclosure controls and procedures pursuant to Rule 13a-15
under the Securities Exchange Act of 1934, as amended (the "Exchange Act").
Based upon that evaluation, Grace's Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and procedures are
effective in ensuring that information required to be disclosed in the Company's
periodic filings under the Exchange Act is accumulated and communicated to such
officers to allow timely decisions regarding required disclosures. There was no
change in the Company's internal control over financial reporting during the
second quarter of 2003 that has materially affected, or is reasonbly likely to
materially affect, the Company's internal control over financial reporting.


                                      I-35
<PAGE>

                           PART II. OTHER INFORMATION
--------------------------------------------------------------------------------

ITEM 1.  LEGAL PROCEEDINGS
--------------------------------------------------------------------------------

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

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------------------------------------------------------

(a)  Exhibits. The following is a list of Exhibits filed as part of this
     Quarterly Report on Form 10-Q:

     15   Accountants' Awareness Letter

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

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

     32   Certification of Periodic Report by Chief Executive Officer and Chief
          Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002

(b)  Reports on Form 8-K. The following reports on Form 8-K were filed during
     the second quarter of 2003:

     April 23, 2003 - Press release announcing Grace's financial results for the
     first quarter of 2003.


                                      II-1
<PAGE>

                                    SIGNATURE

In accordance with the requirements of the Securities Exchange Act of 1934, the
Registrant caused this Report to be signed on its behalf by the undersigned,
thereunto duly authorized.

                                                     W. R. GRACE & CO.
                                          -------------------------------------
                                                      (Registrant)

Date:  August 5, 2003                     By /s/ Paul J. Norris
                                             ----------------------------------
                                            Paul J. Norris
                                            Chairman, President and
                                            Chief Executive Officer

Date:  August 5, 2003                     By /s/ Robert M. Tarola
                                             ----------------------------------
                                             Robert M. Tarola
                                             Senior Vice President and
                                             Chief Financial Officer
                                             (Principal Accounting Officer)


                                      II-2
<PAGE>

                                  EXHIBIT INDEX

EXHIBIT NO.  DESCRIPTION OF EXHIBIT

   15        Accountants' Awareness Letter

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

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

   32        Certification of Periodic Report by Chief Executive Officer and
             Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act
             of 2002


                                      II-3