`================================================================================

                                  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 SEPTEMBER 30, 2004

                                       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
             -----------                                         ----------

66,000,159 shares of Common Stock, $0.01 par value, were outstanding at October
31, 2004.

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




                       W. R. GRACE & CO. AND SUBSIDIARIES

                                Table of Contents






                                                                                                      Page No.
                                                                                                      --------

PART I.    FINANCIAL INFORMATION

Item 1.             Financial Statements

                    Report of Independent Registered Public Accounting Firm                             I - 1

                    Consolidated Statements of Operations                                               I - 2

                    Consolidated Statements of Cash Flows                                               I - 3

                    Consolidated Balance Sheets                                                         I - 4

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

                    Consolidated Statements of Comprehensive Income (Loss)                              I - 5

                    Notes to Consolidated Financial Statements                                     I - 6 to I - 24

Item 2.             Management's Discussion and Analysis of Financial Condition and
                    Results of Operations                                                         I - 25 to I - 37

Item 3.             Quantitative and Qualitative Disclosures About Market Risk                         I - 38

Item 4.             Controls and Procedures                                                            I - 38


PART II.   OTHER INFORMATION

Item 1.             Legal Proceedings                                                            II - 1 to II - 2

Item 6.             Exhibits and Reports on Form 8-K                                                   II - 2









             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have reviewed the accompanying consolidated balance sheet of W. R. Grace &
Co. and its subsidiaries as of September 30, 2004, and the related consolidated
statements of operations, of shareholders' equity (deficit), and of
comprehensive income (loss) for each of the three-month and nine-month periods
ended September 30, 2004 and September 30, 2003, and the consolidated statements
of cash flows for the nine-month periods ended September 30, 2004 and September
30, 2003. These interim financial statements are the responsibility of the
Company's management.

We conducted our review in accordance with standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with standards
of the Public Company Accounting Oversight Board, 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. 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 the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheet as of
December 31, 2003, and the related consolidated statements of operations, of
cash flows, of shareholders' equity (deficit) and of comprehensive income (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 27, 2004 (except for Note 1A of the
financial statements referred to above, as to which the date is August 6, 2004).
In our opinion, the information set forth in the accompanying consolidated
balance sheet as of December 31, 2003, is fairly stated in all material respects
in relation to the consolidated balance sheet from which it has been derived.


/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
McLean, Virginia
November 1, 2004

                                      I-1


------------------------------------------------------------------------------------------------------------------------------------
W. R. GRACE & CO. AND SUBSIDIARIES                                          THREE MONTHS ENDED             NINE MONTHS ENDED
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)                              SEPTEMBER 30,                  SEPTEMBER 30,
------------------------------------------------------------------------------------------------------------------------------------
In millions, except per share amounts                                      2004            2003           2004           2003
                                                                     ---------------------------------------------------------------

Net sales.........................................................     $    579.9      $   521.0     $   1,670.8    $  1,469.2
                                                                     ---------------------------------------------------------------
Cost of goods sold, exclusive of depreciation and
    amortization shown separately below...........................          361.3          336.5         1,050.6         962.9
Selling, general and administrative expenses, exclusive of
    net pension expense shown separately below....................          106.7           90.0           321.1         276.4
Depreciation and amortization ....................................           26.9           26.1            80.4          76.1
Research and development expenses ................................           13.1           11.9            38.8          40.2
Net pension expense ..............................................           14.3           13.2            41.5          39.9
Interest expense and related financing costs .....................            4.5            4.1            12.3          12.4
Provision for environmental remediation ..........................           20.0           50.0            20.0          52.5
Other (income) expense............................................          (50.5)          (3.1)          (49.1)        (11.0)
                                                                     ---------------------------------------------------------------
                                                                            496.3          528.7         1,515.6       1,449.4
                                                                     ---------------------------------------------------------------
Income (loss) before Chapter 11 expenses, income taxes, and
    minority interest.............................................           83.6           (7.7)          155.2          19.8
Chapter 11 expenses, net .........................................           (4.3)          (2.2)          (11.8)        (11.7)
Provision for income taxes........................................          (28.0)          (0.7)          (51.9)        (14.0)
Minority interest in consolidated entities........................           (3.3)           0.7            (6.4)          0.2
                                                                     ---------------------------------------------------------------
    NET INCOME (LOSS) ............................................     $     48.0      $    (9.9)     $     85.1     $    (5.7)
------------------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS (LOSS) PER COMMON SHARE............................     $     0.73      $   (0.15)     $     1.30     $   (0.09)

     Average number of basic shares ..............................           65.8           65.6            65.7          65.5


DILUTED EARNINGS (LOSS) PER COMMON SHARE..........................     $     0.72      $   (0.15)     $     1.29     $   (0.09)

     Average number of diluted shares.............................           66.3           65.6            66.0          65.5
------------------------------------------------------------------------------------------------------------------------------------


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

                                      I-2


------------------------------------------------------------------------------------------------------------------------------------
W. R. GRACE & CO. AND SUBSIDIARIES                                                                     NINE MONTHS ENDED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)                                                        SEPTEMBER 30,
------------------------------------------------------------------------------------------------------------------------------------
In millions                                                                                         2004               2003
                                                                                             ---------------------------------------

OPERATING ACTIVITIES
Income before Chapter 11 expenses, income taxes, and minority interest...................    $      155.2       $         19.8
Reconciliation to net cash provided by operating activities:
     Depreciation and amortization ......................................................            80.4                 76.1
     Interest accrued on pre-petition debt subject to compromise.........................             8.7                  8.5
     Loss on sales of investments and disposals of assets................................             0.1                  1.0
     Net pension expense.................................................................            41.5                 39.9
     Net gain on litigation settlement...................................................           (50.0)                  --
     Provision for environmental remediation.............................................            20.0                 52.5
     Income from life insurance policies, net............................................            (1.8)                (4.1)
     Changes in assets and liabilities, excluding effect of businesses
        acquired/divested and foreign currency translation:
         Working capital items...........................................................           (18.7)               (55.7)
         Payments to fund defined benefit pension arrangements...........................           (26.7)               (37.3)
         Payments under postretirement benefit programs..................................            (9.2)                (8.8)
         Expenditures for asbestos-related litigation ...................................            (5.6)                (8.1)
         Proceeds from asbestos-related insurance .......................................             6.0                 11.0
         Expenditures for environmental remediation .....................................            (6.1)                (9.1)
         Expenditures for retained obligations of divested businesses ...................            (0.9)                (1.1)
         Changes in other accruals and non-cash items....................................             3.8                 10.1
                                                                                             ---------------------------------------
     NET CASH PROVIDED BY OPERATING ACTIVITIES BEFORE INCOME TAXES AND CHAPTER
        11 EXPENSES......................................................................           196.7                 94.7
Chapter 11 expenses paid, net ...........................................................            (8.0)               (14.4)
Income taxes paid, net of refunds .......................................................           (21.3)               (16.4)
                                                                                             ---------------------------------------
     NET CASH PROVIDED BY OPERATING ACTIVITIES ..........................................           167.4                 63.9
                                                                                             ---------------------------------------

INVESTING ACTIVITIES
Capital expenditures for property and equipment..........................................           (40.0)               (65.7)
Businesses acquired, net of cash acquired ...............................................           (53.0)                (3.6)
Investment in life insurance policies....................................................           (13.8)               (11.4)
Proceeds from life insurance policies....................................................            12.5                 10.0
Proceeds from sales of investments and disposals of assets...............................             1.7                  3.7
                                                                                             ---------------------------------------
     NET CASH USED FOR INVESTING ACTIVITIES .............................................           (92.6)               (67.0)
                                                                                             ---------------------------------------

FINANCING ACTIVITIES
Net change in loans secured by cash value of life insurance policies ....................            (3.2)                (2.6)
Borrowings under credit facilities, net of repayments....................................             6.0                  6.5
Borrowings under debtor-in-possession facility, net of fees .............................            (1.6)                46.7
Repayment of borrowings under debtor-in-possession facility..............................              --                (50.0)
Exercise of stock options................................................................             0.8                   --
                                                                                             ---------------------------------------
     NET CASH PROVIDED BY FINANCING ACTIVITIES ..........................................             2.0                  0.6
                                                                                             ---------------------------------------
Effect of currency exchange rate changes on cash and cash equivalents ...................            (0.9)                18.8
                                                                                             ---------------------------------------
     INCREASE IN CASH AND CASH EQUIVALENTS ..............................................            75.9                 16.3
Cash and cash equivalents, beginning of period ..........................................           309.2                283.6
                                                                                             ---------------------------------------
Cash and cash equivalents, end of period ................................................    $      385.1       $        299.9
------------------------------------------------------------------------------------------------------------------------------------


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

                                      I-3


----------------------------------------------------------------------------------------------------------------------------
W. R. GRACE & CO. AND SUBSIDIARIES                                                     SEPTEMBER 30,       DECEMBER 31,
CONSOLIDATED BALANCE SHEETS (UNAUDITED)                                                    2004                2003
----------------------------------------------------------------------------------------------------------------------------
In millions, except par value and shares

ASSETS
CURRENT ASSETS
Cash and cash equivalents..........................................................   $        385.1     $        309.2
Trade accounts receivable, less allowance of $5.2 (2003 - $4.6)....................            391.7              331.5
Inventories........................................................................            237.8              214.6
Deferred income taxes..............................................................             14.1               30.8
Other current assets...............................................................            111.4               43.8
                                                                                      --------------------------------------
     TOTAL CURRENT ASSETS .........................................................          1,140.1              929.9

Properties and equipment, net of accumulated depreciation and
     amortization of $1,276.5 (2003 - $1,216.9)....................................            623.9              656.6
Goodwill ..........................................................................             87.5               85.2
Cash value of life insurance policies, net of policy loans.........................             97.1               90.8
Deferred income taxes..............................................................            589.4              587.1
Asbestos-related insurance expected to be realized after one year..................            263.4              269.4
Other assets.......................................................................            285.1              256.2
                                                                                      --------------------------------------
     TOTAL ASSETS .................................................................   $      3,086.5     $      2,875.2
                                                                                      ======================================

LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
LIABILITIES NOT SUBJECT TO COMPROMISE
CURRENT LIABILITIES
Debt payable within one year.......................................................   $         16.4     $          6.8
Accounts payable...................................................................            127.7              101.8
Income taxes payable...............................................................             25.0               16.6
Other current liabilities..........................................................            197.1              130.2
                                                                                      --------------------------------------
     TOTAL CURRENT LIABILITIES ....................................................            366.2              255.4

Debt payable after one year........................................................              1.3                 --
Deferred income taxes..............................................................             34.1               35.3
Unfunded defined benefit pension liability.........................................            295.9              263.7
Other liabilities..................................................................             73.0               32.3
                                                                                      --------------------------------------
     TOTAL LIABILITIES NOT SUBJECT TO COMPROMISE...................................            770.5              586.7

LIABILITIES SUBJECT TO COMPROMISE - NOTE 2.........................................          2,433.7            2,452.3
                                                                                      --------------------------------------
     TOTAL LIABILITIES.............................................................          3,204.2            3,039.0
                                                                                      --------------------------------------

COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS' EQUITY (DEFICIT)
Common stock issued, par value $0.01; 300,000,000 shares authorized;
     outstanding: 2004 - 65,901,655 (2003 - 65,558,510)............................              0.8                0.8
Paid-in capital....................................................................            428.9              432.1
Accumulated deficit................................................................            (85.8)            (170.9)
Treasury stock, at cost:  shares: 2004 - 11,078,105 (2003 - 11,421,250)............           (131.8)            (135.9)
Accumulated other comprehensive loss...............................................           (329.8)            (289.9)
                                                                                      --------------------------------------
     TOTAL SHAREHOLDERS' EQUITY (DEFICIT)..........................................           (117.7)            (163.8)
                                                                                      --------------------------------------
     TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)..........................   $      3,086.5     $      2,875.2
----------------------------------------------------------------------------------------------------------------------------


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

                                      I-4


-------------------------------------------------------------------------------------------------------------------------------
W. R. GRACE & CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) (UNAUDITED)
-------------------------------------------------------------------------------------------------------------------------------
                                                                                           ACCUMULATED           TOTAL
                                        COMMON STOCK                                          OTHER           SHAREHOLDERS'
                                             AND          ACCUMULATED       TREASURY      COMPREHENSIVE          EQUITY
IN MILLIONS                            PAID-IN CAPITAL      DEFICIT          STOCK             LOSS             (DEFICIT)
-------------------------------------------------------------------------------------------------------------------------------

BALANCE, JUNE 30, 2004...............  $        431.3   $      (133.8)     $   (133.9)    $     (332.7)      $       (169.1)
Net income...........................            --              48.0            --               --                   48.0
Stock plan activity..................            (1.6)           --               2.1             --                    0.5
Other comprehensive income (loss)....            --              --              --                2.9                  2.9
                                       ----------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 2004..........  $        429.7   $       (85.8)     $   (131.8)    $     (329.8)      $       (117.7)
-------------------------------------------------------------------------------------------------------------------------------

BALANCE, DECEMBER 31, 2003...........  $        432.9   $      (170.9)     $   (135.9)    $     (289.9)      $       (163.8)
Net income...........................            --              85.1            --               --                   85.1
Stock plan activity..................            (3.2)           --               4.1             --                    0.9
Other comprehensive income (loss)....            --              --              --              (39.9)               (39.9)
                                       ----------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 2004..........  $        429.7   $       (85.8)     $   (131.8)    $     (329.8)      $       (117.7)
-------------------------------------------------------------------------------------------------------------------------------




-------------------------------------------------------------------------------------------------------------------------------
W. R. GRACE & CO. AND SUBSIDIARIES                                         THREE MONTHS ENDED            NINE MONTHS ENDED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)            SEPTEMBER 30,                SEPTEMBER 30,
-------------------------------------------------------------------------------------------------------------------------------
In millions                                                              2004           2003          2004           2003
                                                                      ---------------------------------------------------------

NET INCOME (LOSS).................................................    $    48.0     $    (9.9)     $    85.1     $    (5.7)
                                                                      ---------------------------------------------------------

OTHER COMPREHENSIVE INCOME (LOSS):
Foreign currency translation adjustments..........................          2.9           4.2           (4.6)         53.6
Minimum pension liability adjustments, net of income taxes........           --            --          (35.3)           --
                                                                      ---------------------------------------------------------
Total other comprehensive income (loss)...........................          2.9           4.2          (39.9)         53.6
                                                                      ---------------------------------------------------------
COMPREHENSIVE INCOME (LOSS).......................................    $    50.9     $    (5.7)     $    45.2     $    47.9
-------------------------------------------------------------------------------------------------------------------------------


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

                                      I-5


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 through two business
segments: "Davison Chemicals," which includes two product groups - refining
technologies and specialty materials; and "Performance Chemicals," which
includes three product groups - specialty construction chemicals, building
materials, and sealants and coatings.

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

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

VOLUNTARY BANKRUPTCY FILING: 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. Under Chapter 11, the Debtors have continued 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. Since
the Filing, all motions necessary to conduct normal business activities have
been approved by 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. The
interests of the Company's shareholders could be substantially diluted or
cancelled under a plan of reorganization. The value of Grace common stock
following a plan of reorganization, and the extent of any recovery by
non-asbestos-related creditors, will depend principally on the ultimate value
assigned to Grace's asbestos-related claims, which will be addressed through the
Bankruptcy Court proceedings.

Status of Chapter 11 Proceedings - 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.

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 through
November 24, 2004, and extensions of the Debtors' exclusive right to solicit
acceptances of a plan of reorganization through January 24, 2005. In connection
with this most recent extension, the Debtors were required to file a proposed
plan of reorganization by October 14, 2004. On October 25, 2004, the Bankruptcy
Court approved the Debtors' motion to delay filing its proposed plan of
reorganization until November 15, 2004. (See "Plan of Reorganization" for more
information.)

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, and
a legal representative of future

                                      I-6


asbestos claimants (appointed in May 2004), have the right to be heard on all
matters that come before the Bankruptcy Court and are likely to play important
roles in the Chapter 11 Cases. The Debtors are required to bear certain costs
and expenses of the committees and of the future asbestos claimants'
representative, including those of their counsel and financial advisors.

The Debtors' Chapter 11 cases had been assigned to Judge Alfred M. Wolin, a
senior U.S. District Court Judge who sat in Newark, New Jersey. Judge Wolin was
presiding over asbestos bodily injury matters and the fraudulent conveyance
litigation described below. He 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. On May 17, 2004, a federal
appeals court recused Judge Wolin and on May 27, 2004, Judge Ronald L.
Buckwalter, a U.S. District Court Judge from the Eastern District of
Pennsylvania, was assigned to the Chapter 11 Cases.

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
attic insulation ("ZAI"), which will be dealt with separately.

Approximately 14,900 proofs of claim were filed by the bar date. Of these
claims, approximately 9,400 were non-asbestos related, approximately 4,300 were
for asbestos-related property damage, and approximately 1,000 were for medical
monitoring. In addition, approximately 500 proofs of claim were filed after the
bar date.

Approximately 7,000 of the non-asbestos related claims involve claims by
employees or former employees for future retirement benefits such as pension and
retiree medical coverage. Grace views most of these claims as contingent and
expects to propose a plan of reorganization that would retain such benefits. The
other non-asbestos related claims include claims for payment for goods and
services; taxes; product warranties; principal plus interest under pre-petition
credit facilities; amounts due under leases; leases and other executory
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' 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. As of September
30, 2004, the Debtors had filed with the Bankruptcy Court objections to
approximately 1,400 claims, most objections of which were non-substantive
(duplicates, no supporting documentation, late filed claims, etc.). Of such
claims, 1,025 have been expunged, 31 have been withdrawn, and the remainder are
being addressed through dispute resolution procedures approved by the Bankruptcy
Court. The Debtors expect to file objections to a substantial number of
additional claims and revise their Filing Date liabilities each quarter to
reflect their analysis and evaluation of the claims.

The medical monitoring claims were made by individuals who allege exposure to
asbestos through Grace's products or operations. These claims, if sustained,
would require Grace to fund ongoing health monitoring costs for qualified
claimants. However, based on the number and expected cost of such claims, Grace
does not believe such claims will have a material effect on its Consolidated
Financial Statements.

Grace believes that its recorded liabilities represent a reasonable estimate of
the ultimate allowable amount for claims that are not in dispute or have been
submitted with sufficient information to both evaluate merit and estimate the
value of the claim. However, because of the uncertainties of the Chapter 11 and
litigation process, the in-progress state of Grace's efforts to resolve disputed
claims, and the lack of documentation in support of many claims, such recorded
liabilities may prove to be insufficient to satisfy all of such claims. As
claims are resolved, or where better information becomes available and is
evaluated, Grace will make adjustments to the liabilities recorded on its
financial statements as appropriate. Any such adjustments could be material to
its consolidated financial position and results of operations.

Litigation Proceedings in Bankruptcy Court - In July 2002, the Bankruptcy Court
approved special counsel to represent, at the Debtors' expense, the ZAI
claimants in a proceeding to determine certain threshold scientific issues
regarding ZAI. On October 18, 2004, the Bankruptcy Court heard oral arguments

                                      I-7


from the Debtors and the counsel representing the ZAI claimants. The Court
indicated that it may require additional proceedings before a decision is
issued.

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 Medical Care
Holdings, Inc. ("Fresenius") and the 1998 reorganization involving a predecessor
of Grace and Sealed Air Corporation ("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 against Fresenius and Sealed Air 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 Debtors' estate as
directed by the Bankruptcy Court upon confirmation of the Debtors' plan of
reorganization, subject to the fulfillment of specified conditions. 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 $417.2
million as of September 30, 2004), as directed by the Bankruptcy Court upon
confirmation of the Debtors' plan of reorganization. The Sealed Air settlement
has not been agreed to by the Debtors and remains subject to the approval of the
Bankruptcy Court and the fulfillment of specified conditions.

Plan of Reorganization - As noted under "Status of Chapter 11 Proceedings," the
Debtors' were required to submit a proposed plan of reorganization (the "Plan")
by October 14, 2004. In a meeting held on October 14, 2004 among Grace and
representatives of the members of the asbestos claimants' committees and the
representative for future asbestos claimants (the "FCR"), sufficient progress
was made for the parties to conclude that additional negotiations could lead to
a consensual Chapter 11 Plan. On October 15, 2004, Grace filed a motion with the
Bankruptcy Court to delay filing the Plan until November 15, 2004. On October
25, 2004, the Bankruptcy Court granted Grace's motion and extended the deadline
for filing a Plan until November 15, 2004. During this period, Grace expects to
continue negotiations with the FCR, committees representing asbestos claimants,
the general unsecured creditors committee, and the committee of equity holders
toward a consensual Plan. If negotiations do not lead to the filing of a
consensual Plan, Grace is prepared to file its own Plan which would provide for
the Bankruptcy Court to determine Grace's asbestos-related liability using
litigation and estimation protocols.

Whether Grace proposes its own Plan or a consensual Plan with the support of
creditors and equity holders, Grace is likely to make use of Section 524(g) of
the Bankruptcy Code to resolve its asbestos-related liabilities. Section 524(g)
requires, among other things, that a trust be established through which all
current and future claims would be channeled for resolution, and that at least a
majority of the voting securities of the reorganized Grace be owned by, or
contingently available to, the trust to resolve such claims.

Grace is reevaluating its asbestos-related liability in light of the requirement
to propose a Plan as discussed above. The measure of such liability, and the
ultimate net cost to Grace, depends on the resolution of a number of issues
that, in the absence of a consensual Plan, must be resolved through Bankruptcy
Court proceedings such as: the definition of an allowed claim; the actual or
estimated claims that meet such definition; the value of allowed claims for a
variety of medical conditions; the value, if any, of ZAI property damage claims;
the number of properties qualifying for asbestos abatement and the cost of
remediation; the method of funding an asbestos trust; the availability of funds
under litigation settlement agreements with Sealed Air and Fresenius; and, the
availability of insurance and timing of insurance recovery. Grace will address
these matters as part of a Plan. Because of these uncertainties, Grace's
estimate of the value of its asbestos-related liability may change materially as
the bankruptcy process progresses.

Recently, federal legislation has been proposed to address asbestos-related
bodily injury litigation. Such legislation could substantially change the type
of Plan that the Debtors ultimately propose. Because the passage of any such
legislation is speculative at this time, the Debtors proposed Plan will assume
that no legislation is passed during the confirmation process that would resolve
or otherwise determine the amount of the Debtors' asbestos-related bodily injury

                                      I-8


liabilities. Furthermore, the proposed legislation is unlikely to apply to the
Debtors' asbestos-related property damage or ZAI claims, which the Debtors still
would expect to resolve through the Chapter 11 process.

The Chapter 11 proceedings, including the proposed Plan due in November or any
revised Plan, could result in allowable claims that differ materially from
recorded amounts or amounts in the proposed Plan. Grace will continue to adjust
its estimates of allowable claims as facts come to light during the Chapter 11
process that justify a change, and as Chapter 11 proceedings establish
court-accepted measures of Grace's pre-petition liabilities.

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 September 30,
2004 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 expires on 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 of Debtors'
assets and the liquidation of certain of 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 September 30, 2004, 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, new
information obtained in the claims review process, 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.)
Obligations of Grace subsidiaries not covered by the Filing continue to be
classified on the Consolidated Balance Sheets based upon maturity dates or the
expected dates of payment. SOP 90-7 also requires separate reporting of certain
expenses, realized gains and losses, and provisions for losses related to the
Filing as reorganization items.

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 2003 Annual Report on Form
10-K/A. 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. 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 nine-month interim period ended September 30,
2004 are not necessarily indicative of the results of operations that may be
realized for the year ending December 31, 2004.

RECLASSIFICATIONS: Certain amounts in prior years' Consolidated Financial
Statements have been reclassified to conform to the 2004 presentation.

FINANCIAL INSTRUMENTS: Grace periodically enters into foreign exchange forward
contracts to manage exposure to fluctuations in foreign currency exchange rates.
Such contracts are viewed as risk management tools by Grace and are not used for
trading or

                                      I-9


speculative purposes. All such instruments are recorded on the balance sheet at
fair value with any gain or loss recognized in earnings. The ineffective portion
of all hedges, if any, is recognized currently in earnings. (See Note 5.)

EFFECT OF NEW ACCOUNTING STANDARDS: In December 2003, the Financial Accounting
Standards Board ("FASB") revised Statement of Financial Accounting Standards
("SFAS") No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits," to require additional disclosure about the assets,
obligations, cash flows, and net periodic benefit cost of defined benefit plans
and other postretirement plans. Grace adopted the provisions of SFAS No. 132 in
December 2003. (See Note 13.)

In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). Grace adopted the provisions of FIN 46
in 2002. The adoption of FIN 46 required Grace to consolidate Advanced Refining
Technologies LLC, a joint venture between Grace and Chevron Products Company.
The impact of this consolidation did not result in a material change to Grace's
Consolidated Financial Statements.

STOCK INCENTIVE PLANS: SFAS No. 123 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 options issued under 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-month and
nine-month periods ended September 30, 2004 and 2003 would have been reduced to
the pro forma amounts indicated below:

----------------------------------------------------------------------
PRO FORMA EARNINGS
  UNDER SFAS NO. 123             THREE MONTHS          NINE MONTHS
(In millions, except                ENDED                 ENDED
per share amounts)              SEPTEMBER 30,         SEPTEMBER 30,
----------------------------------------------------------------------
                                2004     2003        2004      2003
                              ----------------------------------------
Net income (loss), as
   reported...........        $  48.0   $  (9.9)   $   85.1  $   (5.7)
Deduct:
Total stock-based
  employee
  compensation, net
  of tax effects......             --      (0.4)       (0.1)     (1.1)
                              ----------------------------------------
Pro forma net
  income (loss) (1)...        $  48.0   $ (10.3)   $   85.0  $   (6.8)
                              ========================================
Basic earnings (loss)
  per share:
As reported...........        $   0.73  $ (0.15)   $   1.30  $  (0.09)
Pro forma net
  income (loss) (1) ..        $   0.73  $ (0.16)   $   1.29  $  (0.10)
Diluted earnings (loss)
  per share:
As reported...........        $   0.72  $ (0.15)   $   1.29  $  (0.09)
Pro forma net
  income (loss) (1) ..        $   0.72  $ (0.16)   $   1.29  $  (0.10)
----------------------------------------------------------------------

(1)  Due to Grace's Chapter 11 Filing, these pro forma amounts may not be
     indicative of future income and earnings per share.

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.
There were no option grants in the nine months ended September 30, 2004 and the
year ended December 31, 2003.

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 estimates are recorded in the period identified. Grace's

                                      I-10


accounting measurements that are most affected by management's estimates of
future events are:

o    Contingent liabilities such as asbestos-related matters (see Note 3),
     environmental remediation (see Note 12), income taxes (see Note 12), 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 net deferred tax assets, trade
     receivables, inventories, insurance receivables, income taxes, and
     goodwill.

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

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

As a result of the Filing, Grace's Consolidated Balance Sheets separately
identify the liabilities that are "subject to compromise." 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.

Components of liabilities subject to compromise are as follows:

-------------------------------------------------------------
(In millions)                  SEPTEMBER 30,    DECEMBER 31,
(Unaudited)                        2004            2003
-------------------------------------------------------------
Debt, pre-petition plus
  accrued interest..........  $      572.8    $      565.2
Asbestos-related liability           986.6           992.3
Income taxes................         201.9           217.9
Environmental remediation            346.3           332.4
Postretirement benefits
  other than pension........         122.9           134.3
Unfunded special pension
  arrangements..............          70.9            69.5
Retained obligations of
  divested businesses.......          56.3            57.0
Accounts payable ...........          31.4            31.9
Other accrued liabilities             44.6            51.8
                              -------------------------------
TOTAL LIABILITIES SUBJECT
  TO COMPROMISE ............  $    2,433.7    $    2,452.3
-------------------------------------------------------------

Set forth below is a reconciliation of the changes in pre-Filing Date liability
balances for the period from the Filing Date through September 30, 2004.

-------------------------------------------------------------
(In millions)                                  Cumulative
(Unaudited)                                   Since Filing
-------------------------------------------------------------
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.......          (221.6)
Expense/(income) items:
   Interest on pre-petition debt..........            55.4
   Employee-related accruals..............            13.1
   Change in estimate of asbestos-related
     property damage contingencies........            30.0
   Change in estimate of environmental
     contingencies........................           239.0
   Change in estimate of income tax
     contingencies.......................             (7.7)
  Balance sheet reclassifications.........           (25.7)
                                              ---------------
Balance, end of period....................    $    2,433.7
-------------------------------------------------------------

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-11


The Debtors' Chapter 11 expenses for the three-month and nine-month periods
ended September 30, 2004 and 2003 consist of:

--------------------------------------------------------------------------------
                                    THREE MONTHS ENDED        NINE MONTHS ENDED
  (In millions)                        SEPTEMBER 30,            SEPTEMBER 30,
--------------------------------------------------------------------------------
                                     2004         2003        2004         2003
                                  ----------------------------------------------
Legal and financial advisory
   fees.....................      $    4.9     $   2.3     $   13.0     $  12.0
Interest income ............          (0.6)       (0.1)        (1.2)       (0.3)
                                  ----------------------------------------------
Chapter 11 expenses,
   net......................      $    4.3     $    2.2    $   11.8     $  11.7
--------------------------------------------------------------------------------

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:

--------------------------------------------------------------------------------
W. R. GRACE & CO. - CHAPTER 11 FILING ENTITIES
   DEBTOR-IN-POSSESSION STATEMENTS OF
   OPERATIONS                                         NINE MONTHS ENDED
(In millions) (Unaudited)                               SEPTEMBER 30,
--------------------------------------------------------------------------------
                                                    2004              2003
                                              ----------------------------------
Net sales, including intercompany..........   $       865.3     $       761.5
                                              ----------------------------------
Cost of goods sold, including intercompany,
   exclusive of depreciation and amortization
   shown separately below..................           583.5             525.6
Selling, general and administrative expenses,
   exclusive of net pension expense shown
   separately below........................           191.2             165.7
Research and development
    expenses...............................            26.2              29.6
Depreciation and amortization..............            42.4              46.2
Net pension expense........................            36.5              36.1
Interest expense and related financing costs           11.9              12.2
Other (income) expense.....................           (79.7)            (44.3)
Provision for environmental remediation....            20.0              52.5
                                              ----------------------------------
                                                      832.0             823.6
                                              ----------------------------------
Income (loss) before Chapter 11 expenses,
   income taxes, and equity in net income of
   non-filing entities.....................            33.3             (62.1)
Chapter 11 expenses, net...................           (11.8)            (11.7)
Benefit from (provision for)
   income taxes............................           (21.7)              6.1
                                              ----------------------------------
Income (loss) before equity in net income of           (0.2)            (67.7)
   non-filing entities.....................
Equity in net income of non-filing entities            85.3              62.0
                                              ----------------------------------
NET INCOME (LOSS) .........................   $        85.1     $        (5.7)
--------------------------------------------------------------------------------





--------------------------------------------------------------------------------
W. R. GRACE & CO. - CHAPTER 11 FILING ENTITIES
    DEBTOR-IN-POSSESSION CONDENSED STATEMENTS OF
    CASH FLOWS                                            NINE MONTHS ENDED
(In millions) (Unaudited)                                   SEPTEMBER 30,
--------------------------------------------------------------------------------
                                                       2004             2003
                                                  ------------------------------
OPERATING ACTIVITIES
Income (loss) before Chapter 11 expenses, income
   taxes, and equity in net income of non-filing
   entities...................................... $     33.3       $    (62.1)
Reconciliation to net cash provided by (used for)
   operating activities:
    Non-cash items, net..........................       19.4            104.1
    Contributions to defined benefit pension
       plans.....................................      (23.1)           (32.8)
    Changes in other assets and liabilities,
       excluding the effect of businesses
       acquired/divested.........................      (14.6)            78.1
                                                  ------------------------------
NET CASH PROVIDED BY (USED FOR) OPERATING
   ACTIVITIES....................................       15.0             87.3

NET CASH PROVIDED BY (USED FOR) INVESTING
   ACTIVITIES....................................       41.1(1)         (32.9)

NET CASH PROVIDED BY (USED FOR) FINANCING
   ACTIVITIES....................................       (4.0)            (5.9)
                                                  ------------------------------

NET INCREASE (DECREASE) IN CASH AND CASH
   EQUIVALENTS...................................       52.1             48.5
Cash and cash equivalents, beginning of period...      120.5             56.8
                                                  ------------------------------
Cash and cash equivalents, end of period......... $    172.6       $    105.3
--------------------------------------------------------------------------------
(1)  Includes $97.4 million of principal payments on a loan from the Debtors to
     a Grace subsidiary in Germany (see Note 5) and a $49.4 million investment
     to fund the acquisition of Alltech International Holdings, Inc.

--------------------------------------------------------------------------------
W. R. GRACE & CO. -
    CHAPTER 11 FILING ENTITIES
    DEBTOR-IN-POSSESSION BALANCE SHEETS       SEPTEMBER 30,      DECEMBER 31,
(In millions) (Unaudited)                         2004                2003
--------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents .................   $      172.6      $       120.5
Trade accounts receivable, net ............          117.0               99.6
Receivables from non-filing entities, net..           66.8               46.2
Inventories................................           76.7               81.2
Other current assets.......................           93.2               53.9
                                              ----------------------------------
TOTAL CURRENT ASSETS.......................          526.3              401.4

Properties and equipment, net..............          359.9              383.9
Cash value of life insurance
    policies, net of policy loans..........           97.1               90.8
Deferred income taxes .....................          589.0              587.9
Asbestos-related insurance expected to be
    realized after one year................          263.4              269.4
Loans receivable from non-filing entities,
    net....................................          390.6              448.0
Investment in non-filing entities..........          417.0              303.6
Other assets...............................           93.5               92.7
                                              ----------------------------------
TOTAL ASSETS...............................   $    2,736.8      $     2,577.7
--------------------------------------------------------------------------------

                                      I-12


--------------------------------------------------------------------------------
                                             SEPTEMBER 30,       DECEMBER 31,
(In millions) (Unaudited)                        2004                2003
--------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT)
LIABILITIES NOT SUBJECT TO COMPROMISE
Current liabilities..................     $       158.6        $        98.0
Other liabilities....................             262.2                191.2
                                          --------------------------------------
 TOTAL LIABILITIES NOT SUBJECT TO
  COMPROMISE.........................             420.8                289.2

LIABILITIES SUBJECT TO
  COMPROMISE.........................           2,433.7              2,452.3
                                          --------------------------------------
TOTAL LIABILITIES....................           2,854.5              2,741.5

SHAREHOLDERS' EQUITY (DEFICIT) ......            (117.7)              (163.8)
                                          --------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS'
  EQUITY (DEFICIT) ..................     $     2,736.8        $     2,577.7
--------------------------------------------------------------------------------

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. 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, and a legal representative of future 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 the Chapter 11
process.

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 legal status
of the claimant, 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 a liability for all outstanding property
damage claims for which sufficient information is available to form a reasonable
estimate of the cost to resolve such claims.

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 4,300 additional property damage claims were filed prior to the
March 31, 2003 claims bar date established by the Bankruptcy Court. Such claims
were reviewed in detail by Grace, categorized into claims with sufficient
information to be evaluated or claims that require additional information and,
where sufficient information existed, the cost of resolution was estimated.
(Approximately 170 claims contained insufficient information to permit an
evaluation.) As a result of such review, and after considering the factors
described above, Grace recorded a $30.0 million liability in the fourth quarter
of 2003 as its estimated cost of resolving such additional claims.

                                      I-13


Eight of the ZAI cases were filed as class action lawsuits in 2000 and 2001. In
addition, two class action lawsuits were filed in October 2004 with respect to
homes in Canada. These cases seek damages and equitable relief, including the
removal, replacement and/or disposal of all such insulation. The plaintiffs
assert that this product is in millions of homes and that the cost of removal
could be several thousand dollars per home. As a result of the Filing, these
cases have been transferred to the 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. In July 2002, the Bankruptcy Court approved special
counsel to represent, at the Debtors' expense, the ZAI claimants in a proceeding
to determine certain threshold scientific issues regarding ZAI. The parties have
completed discovery with respect to these threshold issues and have filed
motions asking the Bankruptcy Court to resolve a number of important legal and
factual issues regarding the ZAI claims. On October 18, 2004, the Bankruptcy
Court heard oral arguments from the Debtors and the counsel representing the ZAI
claimants. The Court indicated that it may require additional proceedings before
a decision is issued.

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 (adjusted for post-Filing defense and claims administration costs), 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.

Cumulatively 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.

Approximately 1,000 claims for medical monitoring were filed against the Debtors
prior to the 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. Based on the number and expected value of such claims,
Grace does not believe such claims will have a material effect on the
Consolidated Financial Statements.

ASBESTOS-RELATED LIABILITY

The total asbestos-related liability balances as of September 30, 2004 and
December 31, 2003 were $986.6 million and $992.3 million, respectively. The
decrease in the liability is due to the payment of ongoing post-Filing
administrative costs relating to claims management and defense costs permitted
by the Bankruptcy Court. The recorded liability is included in "liabilities
subject to compromise."

The liability covers indemnity and defense costs for pending and projected
future bodily injury claims as of the Filing Date, and pending property damage
claims for which sufficient information was available to evaluate and estimate
probable resolution costs, including the new property damage claims submitted
prior to the March 31, 2003 bar date. Since the Filing, Grace is aware that
bodily injury claims have been filed against co-defendant companies at higher
than historical rates, and that the cost incurred by such companies to resolve
asbestos-related cancer claims has increased. Grace believes that had it not
filed for Chapter 11 reorganization, it likely would have received thousands
more claims than it had previously projected, and that the cost to resolve
asbestos-related cancer claims would have been higher than projected. Grace is
in the process of reevaluating its asbestos-related liability as part of its
efforts to prepare a plan of reorganization, and, absent a negotiated
settlement, Grace will likely propose a litigation and estimation protocol for
measuring the allowed claims under Chapter 11. Accordingly, the actual amount of
Grace's asbestos-related liability could differ materially from the recorded
liability.

Recently, federal legislation has been proposed to address asbestos-related
bodily injury litigation. In addition, several states have enacted or proposed
legislation affecting asbestos-related bodily injury litigation. At this time,
Grace cannot predict what impact any such legislation would have on Grace's

                                      I-14


asbestos-related bodily injury liability or its ultimate plan of reorganization.

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 but one 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 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. Such 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 2004, Grace completed three business combinations for a total cash cost of
$53.0 million as follows:

o    In July 2004, Grace, through its German subsidiary, acquired GROM ANALYTIK
     + HPLC GmbH, a leader in column packing technology and services designed
     for high performance small molecule applications.

o    In August 2004, Grace, through its subsidiary The Separations Group,
     acquired Alltech International Holdings, Inc., a global manufacturer and
     supplier of chromatography products.

o    In August 2004, Grace, through its Belgium subsidiary, acquired Pieri
     Benelux NV. Pieri Benelux had been the exclusive distributor of Grace's
     line of Pieri products for architectural concrete in Benelux since the
     early 1980s.

Goodwill recognized in those transactions amounted to $5.1 million, of which
$3.6 million was assigned to Davison Chemicals and $1.5 million was assigned to
Performance Chemicals.

In 2003, Grace completed two business combinations for a total cash cost of $3.6
million as follows:

o    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.

o    In July 2003, Grace, through its subsidiary The Separations Group, acquired
     the chromatography business of Argonaut Technologies, Inc., which had been
     marketed under the Jones Chromatography name.

Goodwill recognized in those transactions amounted to $0.7 million, which was
assigned to Davison Chemicals.





--------------------------------------------------------------------------------
5.   OTHER (INCOME) EXPENSE
--------------------------------------------------------------------------------

Components of other (income) expense are as follows:

--------------------------------------------------------------------------------
OTHER (INCOME)                       THREE MONTHS              NINE MONTHS
   EXPENSE                               ENDED                    ENDED
(In millions)                        SEPTEMBER 30,            SEPTEMBER 30,
--------------------------------------------------------------------------------
                                   2004         2003        2004         2003
                                ------------------------------------------------
Investment loss (income)....    $    0.4     $   0.2     $   (1.8)    $  (4.1)
Interest income ............        (0.7)       (0.9)        (3.0)       (3.4)
Net loss (income) on sale of
   investments and disposals
   of assets................        (0.2)        0.1          0.1         1.0
Tolling revenue.............        (0.2)       (0.2)        (0.7)       (0.9)
Translation effects -
   intercompany loan ........       (2.3)         --         (1.2)         --
Value of currency hedges ....        2.3          --         11.6          --
Foreign currency transaction
   effects ..................        2.8        (0.4)         2.2         2.9
Net gain on litigation
   settlement ...............      (50.0)         --        (50.0)         --
Other miscellaneous loss
   (income) .................       (2.6)       (1.9)        (6.3)       (6.5)
                                ------------------------------------------------
Total other (income) expense.   $  (50.5)    $  (3.1)    $  (49.1)    $ (11.0)
--------------------------------------------------------------------------------

                                      I-15


In March 2004, Grace began accounting for currency fluctuations on a Euro 293
million intercompany loan between Grace's subsidiaries in the United States and
Germany as a component of operating results instead of as a component of other
comprehensive income. The change was prompted by new tax laws in Germany and
Grace's cash flow planning for its Chapter 11 reorganization, which indicated
that it is no longer reasonable to consider this loan as part of the permanent
capital structure in Germany. The effect of the change in exchange rates related
to this loan for the three months and nine months ended September 30, 2004 was
$2.3 million and $1.2 million favorable, respectively.

In May 2004, Grace entered into a series of foreign currency hedge agreements to
mitigate future currency fluctuations on the remaining loan balance. These hedge
agreements have varying rates on notional amounts that coincide with loan
repayments due periodically through June 2005. In 2004, Euro 81 million of loan
principal was repaid. For the nine months ended September 30, 2004, an $11.6
million hedge loss was recognized, offset by a $1.2 million foreign currency
gain.

In September 2004, Grace recorded a net gain of $50.0 million as a result of the
settlement of litigation with Honeywell International, Inc. related to
environmental contamination of a non-operating parcel of land.

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

--------------------------------------------------------------------------------
                                               SEPTEMBER 30,     DECEMBER 31,
(In millions)                                      2004              2003
--------------------------------------------------------------------------------
INVENTORIES
Raw materials...............................   $      57.2       $      53.5
In process..................................          36.4              35.8
Finished products...........................         152.4             134.0
General merchandise.........................          30.1              29.4
Less:  Adjustment of certain inventories to
   a last-in/first-out (LIFO) basis.........         (38.3)            (38.1)
                                               ---------------------------------
                                               $     237.8       $     214.6
--------------------------------------------------------------------------------
OTHER ASSETS
Deferred pension costs......................   $     113.1       $     115.9
Deferred charges ...........................          47.5              45.7
Long-term receivables, less  allowances
   of $0.7 (2003 - $0.7)....................           9.0               9.2
Patents, licenses and other intangible
   assets, net..............................          94.1              65.1
Pension-unamortized prior service
   cost.....................................          20.7              19.8
Investments in unconsolidated
   affiliates and other.....................           0.7               0.5
                                               ---------------------------------
                                               $     285.1       $     256.2
--------------------------------------------------------------------------------
OTHER CURRENT LIABILITIES
Accrued compensation........................   $      80.5       $      48.5
Deferred tax liability......................           1.5               1.5
Customer volume rebates.....................          24.5              28.1
Accrued commissions.........................          10.0               9.8
Accrued reorganization fees.................          10.7               6.9
Other accrued liabilities ..................          69.9              35.4
                                               ---------------------------------
                                               $     197.1       $     130.2
--------------------------------------------------------------------------------

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

Grace is the beneficiary of life insurance policies on certain current and
former employees with a net cash surrender value of $97.1 million and $90.8
million at September 30, 2004 and December 31, 2003, 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.

                                      I-16


The following table summarizes activity in these policies for the nine months
ended September 30, 2004 and 2003, and components of the net cash value at
September 30, 2004 and December 31, 2003:

--------------------------------------------------------------------------------
LIFE INSURANCE -
   ACTIVITY SUMMARY                                 NINE MONTHS ENDED
(In millions)                                         SEPTEMBER 30,
--------------------------------------------------------------------------------
                                              2004                 2003
                                         ---------------------------------------
Earnings on policy assets...........     $        24.0        $         28.9
Interest on policy loans............             (22.2)                (24.8)
Premiums............................               2.4                   2.4
Policy loan repayments..............               3.2                   2.6
Net investing activity..............              (1.1)                 (1.0)
                                         ---------------------------------------
Change in net cash value............     $         6.3        $          8.1
--------------------------------------------------------------------------------
Tax-free proceeds received..........     $        12.5        $         10.0
--------------------------------------------------------------------------------
COMPONENTS OF                              SEPTEMBER 30,        December 31,
   NET CASH VALUE                              2004                2003
--------------------------------------------------------------------------------
Gross cash value....................     $       478.8        $        478.5
Principal - policy loans............            (368.7)               (365.3)
Accrued interest - policy
   loans............................             (13.0)                (22.4)
                                         ---------------------------------------
Net cash value......................     $        97.1        $         90.8
--------------------------------------------------------------------------------
Insurance benefits in force.........     $     2,191.3        $      2,213.1
--------------------------------------------------------------------------------

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.

Grace has reached an agreement with the Internal Revenue Service (the "IRS") to
settle tax contingencies with respect to certain of these life insurance
policies and, as part of that agreement, to terminate such policies in early
2005. If termination had occurred as of September 30, 2004, Grace would have
received approximately $20 million in net cash value (gross cash value would
have been reduced by approximately $378 million and policy loans of
approximately $358 million would have been satisfied). In addition, Grace's
insurance benefits in force would have been reduced by approximately $2,002
million to approximately $190 million. (See Note 12 for additional information
on the agreement.)

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

--------------------------------------------------------------------------------
COMPONENTS OF DEBT                         SEPTEMBER 30,       DECEMBER 31,
(In millions)                                  2004                2003
--------------------------------------------------------------------------------
DEBT PAYABLE WITHIN ONE YEAR
DIP facility.........................   $         --          $         --
Other short-term borrowings..........             16.4                  6.8
                                      ------------------------------------------
                                        $         16.4        $         6.8
                                      ==========================================
DEBT PAYABLE AFTER ONE YEAR
DIP facility ........................   $         --          $         --
Other long-term borrowings..........               1.3                  --
                                      ------------------------------------------
                                        $          1.3        $         --
                                      ==========================================
DEBT SUBJECT TO COMPROMISE
Bank borrowings......................   $        500.0        $       500.0
Other borrowings.....................             15.1                 16.2
Accrued interest.....................             57.7                 49.0
                                      ------------------------------------------
                                        $        572.8        $       565.2
                                      ==========================================
Annualized weighted average interest
   rates on total debt...............              2.4%                 2.1%
--------------------------------------------------------------------------------

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 through April 1,
2006. Grace had no outstanding borrowings under the DIP facility as of September
30, 2004; however, $27.9 million of standby letters of credit were issued and
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. (See Note 12
for additional information on Grace's financial assurances.)





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

The Company is authorized to issue 300,000,000 shares of common stock. Of the
common stock unissued on September 30, 2004, approximately 8,175,798 shares were
reserved for issuance pursuant to stock option and other stock incentive plans.
In the nine months ended September 30, 2004 and the year ended December 31,
2003, Grace did not grant any stock options.

For additional information, see Notes 15 and 17 to the Consolidated Financial
Statements in Grace's 2003 Form 10-K/A.

                                      I-17


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

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

--------------------------------------------------------------------------------
EARNINGS (LOSS)
  PER SHARE
(In millions, except per share      THREE MONTHS ENDED      NINE MONTHS ENDED
amounts)                              SEPTEMBER 30,           SEPTEMBER 30,
--------------------------------------------------------------------------------
                                     2004        2003        2004        2003
                                 -----------------------------------------------
NUMERATORS
  Net income (loss).............  $   48.0    $  (9.9)    $   85.1    $  (5.7)
                                 ===============================================
DENOMINATORS
  Weighted average
   common shares -
   basic calculation ...........      65.8       65.6         65.7       65.5

  Dilutive effect
   of employee
   stock options ...............       0.5       --            0.3       --
                                 -----------------------------------------------
  Weighted average
   common shares
   diluted calculation..........      66.3       65.6         66.0       65.5
                                 ===============================================
BASIC EARNINGS (LOSS)
    PER  SHARE..................  $   0.73    $ (0.15)    $   1.30   $  (0.09)
                                 ===============================================
DILUTED EARNINGS (LOSS)
   PER SHARE....................  $   0.72    $ (0.15)    $   1.29   $  (0.09)
--------------------------------------------------------------------------------

As a result of loss incurred during the three months and nine months ended
September 30, 2003, employee compensation shares of approximately 200,000 and
100,000, respectively, were excluded from the diluted loss per share calculation
because their effect would have been antidilutive.

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

The table below presents the pre-tax, tax and after tax amounts of Grace's other
comprehensive income (loss) for the three months and nine months ended September
30, 2004 and 2003:

--------------------------------------------------------------------------------
THREE MONTHS ENDED                                                   AFTER-
  SEPTEMBER 30, 2004                  PRE-TAX          TAX             TAX
  (In millions)                       AMOUNT         BENEFIT         AMOUNT
--------------------------------------------------------------------------------
Foreign currency translation
  adjustments...................   $      2.9     $      --       $      2.9
                                  ----------------------------------------------
Other comprehensive income (loss)  $      2.9     $      --       $      2.9
--------------------------------------------------------------------------------
NINE MONTHS ENDED                                                    AFTER-
  SEPTEMBER 30, 2004                  PRE-TAX          TAX             TAX
  (In millions)                       AMOUNT         BENEFIT         AMOUNT
--------------------------------------------------------------------------------
Minimum pension
  liability.....................   $    (54.3)    $     19.0      $    (35.3)
Foreign currency translation
  adjustments...................         (4.6)          --              (4.6)
                                  ----------------------------------------------
Other comprehensive income (loss)  $    (58.9)    $     19.0      $    (39.9)
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
THREE MONTHS ENDED                                                   AFTER-
  SEPTEMBER 30, 2003                  PRE-TAX          TAX             TAX
  (In millions)                       AMOUNT         BENEFIT         AMOUNT
--------------------------------------------------------------------------------
Foreign currency translation       $      4.2     $     --        $      4.2
  adjustments...................
                                  ----------------------------------------------
Other comprehensive income (loss)  $      4.2     $     --        $      4.2
--------------------------------------------------------------------------------
NINE MONTHS ENDED                                                    AFTER-
  SEPTEMBER 30, 2003                  PRE-TAX          TAX             TAX
  (In millions)                       AMOUNT         BENEFIT         AMOUNT
--------------------------------------------------------------------------------
Foreign currency translation
  adjustments...................   $     53.6     $     --        $     53.6
                                  ----------------------------------------------
Other comprehensive income (loss)  $     53.6     $     --        $     53.6
--------------------------------------------------------------------------------





The table below presents the components of Grace's accumulated other
comprehensive loss at September 30, 2004 and December 31, 2003:

--------------------------------------------------------------------------------
COMPONENTS OF ACCUMULATED OTHER
   COMPREHENSIVE LOSS                     SEPTEMBER 30,         DECEMBER 31,
(In millions)                                 2004                 2003
--------------------------------------------------------------------------------
Minimum pension liability .........     $      (300.7)        $      (265.4)
Foreign currency translation ......             (29.1)                (24.5)
                                      ------------------------------------------
Accumulated other comprehensive
   loss............................     $      (329.8)        $      (289.9)
--------------------------------------------------------------------------------

Grace is a global enterprise that operates in over 40 countries with local
currency generally deemed to be the functional currency for accounting purposes.
The foreign currency translation amount represents the adjustment necessary to
translate the balance sheets valued in local currencies to the U.S. dollar as of
the end of each period presented. The change in foreign currency translation at
September 30, 2004 compared

                                      I-18


with December 31, 2003 is due to the strengthening of the U.S. dollar against
most other reporting currencies.

During the second quarter, Grace completed an experience study of the
assumptions and data that underlie its liability measurement for its U.S.
qualified defined benefit pension plans. Based on that study, the accumulated
benefit obligation of such plans as of the December 31, 2003 measurement date
was increased by $54.3 million (approximately 7% of the aggregate liability),
mainly due to longer estimated life spans. This change has been accounted for
within Grace's balance sheet as an increase to the recorded minimum pension
liability and the accumulated comprehensive loss account (net of tax effects)
reflected in shareholders' equity (deficit).

--------------------------------------------------------------------------------
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.

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 September 30, 2004. At September 30, 2004, Grace's
estimated liability for environmental investigative and remediation costs
totaled $346.3 million, compared with $332.4 million at December 31, 2003. This
liability covers both vermiculite and non-vermiculite related matters. The
amount is based on funding and/or remediation agreements in place and Grace's
best estimate of the cost to remediate sites not subject to a formal remediation
plan.

During the three-month period ended September 30, 2004, Grace recorded a $20.0
million increase in its estimated liability for vermiculite-related
environmental costs to reflect Grace's current understanding of the timeframe
and related costs necessary to remediate properties in and around Libby,
Montana.

Grace's net expenditures charged against previously established reserves for the
nine months ended September 30, 2004 and 2003 were $6.1 million and $9.1
million, respectively.

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 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.

                                      I-19


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. On August 28, 2003, the District Court issued a
ruling in favor of the United States that requires Grace to reimburse the
government for $54.5 million in costs expended through December 2001, and for
all appropriate future costs to complete the clean-up. Grace has appealed the
court's ruling to the 9th Circuit Court of Appeals.

As a result of such ruling and Grace's analysis of estimated remediation costs
at vermiculite processing sites currently or formerly operated by Grace, Grace
estimates its total liability for vermiculite-related matters to be $205.3
million at September 30, 2004. Grace's estimate of expected costs is based on
public comments regarding the EPA's spending plans, discussions of spending
forecasts with EPA representatives, and analysis of other information made
available from the EPA. The EPA's cost estimates have changed several times and
increased substantially over time. Consequently, Grace's estimate may change
materially as more information becomes available. Grace's liability for this
matter is included in "liabilities subject to compromise."

Non-Vermiculite Related Matters

At September 30, 2004, Grace's estimated liability for remediation of sites not
related to its former vermiculite mining and processing activities, which
includes approximately 20 owned and 50 non-owned sites, was $141.0 million. This
liability relates to Grace's current and former operations, including its share
of liability for off-site disposal at facilities where it has been identified as
a potentially responsible party. This liability also reflects Grace's evaluation
of environmental-related claims submitted as part of the Chapter 11 process for
which sufficient information was available to evaluate the extent of any
possible liability. As Grace receives new information and continues its claims
evaluation process, its estimated liability may change materially. Grace's
liability for these matters is included in "liabilities subject to compromise."

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 not recorded a
receivable with respect to such insurance coverage.

TAX MATTERS

Grace has received the examination report from the IRS for tax periods 1993
through 1996 asserting, in the aggregate, approximately $114 million of proposed
tax adjustments, plus accrued interest. 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, the reporting
of certain divestitures and other miscellaneous proposed adjustments. Grace's
federal tax returns covering periods 1997 and forward are either under
examination by the IRS or open for future examination. As a consequence of any
finally determined federal tax adjustments, Grace will be liable for additional
state taxes plus interest accrued thereon. Grace believes that the impact of
probable tax return adjustments are adequately recognized as liabilities at
September 30, 2004. Any cash payment as a result of such adjustment 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 challenged 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 $163.2 million in interest attributable to COLI policy
loans.

Grace has agreed with the IRS on a settlement amount and certain other terms
pertaining to this matter (the "COLI Settlement"), and on October 13, 2004 the
Bankruptcy Court authorized Grace to enter into a settlement agreement. Grace
anticipates executing a closing agreement (the "Closing Agreement") with the

                                      I-20


IRS in the first quarter of 2005. Pursuant to the Closing Agreement, the
government will allow 20% of the aggregate amount of the COLI interest
deductions and Grace will owe federal income tax and interest with respect to
the remaining 80% of the COLI interest deductions disallowed. In addition, Grace
will terminate the COLI policies and include 20% of the gain realized in taxable
income, with the government exempting 80% of such gain from tax. As a result of
the settlement, Grace adjusted its 2004 expected tax rate to reflect (1) the
release of $18.2 million of tax reserves and (2) the addition of $20.8 million
in tax expense on the additional income that will be generated by the
termination of COLI policies. In addition, assuming that the COLI policies were
terminated on September 30, 2004, Grace would have recorded taxable income of
$59 million and received $20 million in cash proceeds. It is anticipated that
Grace will apply its net operating loss carryforwards to offset the taxable
income generated from terminating the COLI policies, although alternative
minimum taxes may apply.

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 that was in effect through 1999, the year in which Grace sold the
business. 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 additional assessments aggregating $40.1
million for the 1996 through 1998 tax periods. The statute of limitations has
expired with respect to the 1999 tax year. Grace has a right to indemnification
for approximately 36% of any tax liability (including interest thereon) for the
period from July, 1996 through December, 1998 from its former partner in the
business. The matter is currently pending in the United States Court of Claims.
Grace is currently in discussions with the Department of Justice and the IRS
concerning possible settlement options with respect to the aggregate $61.9
million assessment. Grace expects this matter to be resolved at an amount that
would not have a significant adverse impact on its Consolidated Financial
Statements.

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 Sheets;

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 Sheets;

o    Licenses of intellectual property by Grace to third parties in which Grace
     has agreed to indemnify the licensee against third party infringement
     claims;

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.

                                      I-21


FINANCIAL ASSURANCES

At September 30, 2004, Grace had gross financial assurances issued and
outstanding of $252.5 million, comprised of $137.1 million of gross surety bonds
issued by various insurance companies and $115.4 million of standby letters of
credit and other financial assurances issued by various banks. Of the standby
letters of credit, $18.8 million act as collateral for surety bonds, thereby
reducing Grace's overall obligations under its financial assurances to a net
amount of $233.7 million. These financial assurances were established for a
variety of purposes, including insurance and environmental matters, asbestos
settlements and appeals, trade-related commitments and other matters. Of the net
amount of $233.7 million of financial assurances, approximately $8.9 million
were issued by non-Debtor entities and $224.8 million were issued by the
Debtors. Of the amounts issued by the Debtors, approximately $191.1 million were
issued before the Filing Date, with the remaining $33.7 million being subsequent
to the Filing, of which $27.9 million was issued under the DIP facility.

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 certain of the items discussed above will be addressed
as part of Grace's Chapter 11 proceedings. Accruals recorded for such
contingencies have been included in "liabilities subject to compromise" on the
accompanying Consolidated Balance Sheets. The amounts of these liabilities as
ultimately determined through the Chapter 11 proceedings could be materially
different from amounts recorded by Grace at September 30, 2004.

--------------------------------------------------------------------------------
13.  PENSION PLANS AND OTHER POSTRETIREMENT BENEFIT PLANS
--------------------------------------------------------------------------------

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

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

Grace provides postretirement health care and life insurance benefits (referred
to as other post-employment benefits or "OPEB") for retired employees of certain
U.S. business units and certain divested units. The postretirement medical plan
provides various levels of benefits to employees hired before 1991 and who
retire from Grace after age 55 with at least 10 years of service. These plans
are unfunded, and Grace pays a portion of the costs of benefits under these
plans as they are incurred. Grace applies SFAS No. 106, "Employers' Accounting
for Postretirement Benefits Other Than Pensions," which requires that the future
costs of postretirement health care and life insurance benefits be accrued over
the employees' years of service.

In December 2003, President Bush signed the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 (the "Act") into law. The Act
introduces a prescription drug benefit under Medicare ("Medicare Part D") as
well as a federal subsidy to companies that provide a benefit that is at least
actuarially equivalent (as defined in the Act) to Medicare Part D. At this time,
the Company does not believe that the prescription drug benefit under its
postretirement health care plan is actuarially equivalent to the Medicare Part D
benefit. Therefore, the Company does not anticipate receiving a federal subsidy.

                                      I-22


The components of net periodic benefit cost for the three months and nine months
ended September 30, 2004 and 2003 are as follows:

--------------------------------------------------------------------------------
COMPONENTS OF NET
   PERIODIC BENEFIT
   COST                                       THREE MONTHS ENDED
(In millions)                                    SEPTEMBER 30,
--------------------------------------------------------------------------------
                                         2004                      2003
                             ---------------------------------------------------
                                 PENSION        OPEB        Pension       OPEB
                             ---------------------------------------------------
Service cost..............     $   3.6      $   0.1       $   2.5      $   0.2
Interest cost.............        14.9          1.5          14.3          2.1
Expected return on
 plan assets..............       (12.9)          --         (11.4)          --
Amortization of prior
  service cost............         1.3         (3.2)          1.3         (3.1)
Amortization of unrecognized
  actuarial loss..........         4.4          0.5           4.5          1.0
                             ---------------------------------------------------
NET U.S. PERIODIC BENEFIT
  COST ...................        11.3         (1.1)         11.2          0.2
Foreign and other ........         3.0           --           2.0           --
                             ---------------------------------------------------
NET EXPENSE ..............     $  14.3      $  (1.1)      $  13.2      $   0.2
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
COMPONENTS OF NET
   PERIODIC BENEFIT
   COST                                        NINE MONTHS ENDED
(In millions)                                    SEPTEMBER 30,
--------------------------------------------------------------------------------
                                        2004                      2003
                             ---------------------------------------------------
                                 PENSION       OPEB       Pension        OPEB
                             ---------------------------------------------------
Service cost..............     $  10.6      $   0.4     $   7.5       $   0.6
Interest cost.............        44.6          5.0        42.4           6.5
Expected return on plan
  assets..................       (38.0)          --       (33.4)           --
Amortization of prior
  service cost............         4.0         (9.5)        4.1          (9.5)
Amortization of unrecognized
  actuarial loss..........        13.2          1.9        13.9           3.0
                             ---------------------------------------------------
NET U.S. PERIODIC BENEFIT
  COST ...................        34.4         (2.2)       34.5           0.6
Foreign and other ........         7.1           --         5.4            --
                             ---------------------------------------------------
NET EXPENSE ..............     $  41.5      $  (2.2)    $  39.9       $   0.6
--------------------------------------------------------------------------------

At the December 31, 2003 measurement date for Grace's defined benefit pension
plans (the "Plans"), the accumulated benefit obligation ("ABO") was
approximately $1,222 million as measured under U.S. generally accepted
accounting principles. At September 30, 2004, Grace's recorded pension liability
for underfunded plans was $366.8 million ($295.9 million included in liabilities
not subject to compromise and $70.9 million related to supplemental pension
benefits for officers and certain key employees, included in "liabilities
subject to compromise"). The recorded ABO liability reflects (1) the shortfall
between dedicated assets and the ABO of underfunded plans ($202.9 million); and
(2) the ABO of pay-as-you-go plans ($163.9 million).

Grace plans to pay benefits as they become due under virtually all pay-as-you-go
plans and to maintain compliance with federal funding laws for its U.S.
qualified plans. In that regard, Grace contributed approximately $20 million to
its U.S. qualified defined benefit pension plans in the third quarter 2004 as
approved by the Bankruptcy Court. Grace expects to make payments of
approximately $4.4 million to participants in its domestic nonqualified pension
plans, approximately $14 million under non-U.S. plans, and approximately $12
million to its OPEB program in 2004.

Payments to fund the OPEB program are discretionary and not subject to any
minimum regulatory funding requirements. For the nine months ended September 30,
2004 and 2003, Grace made benefit payments of $9.2 million and $8.8 million,
respectively, under these programs.





--------------------------------------------------------------------------------
14.  BUSINESS SEGMENT INFORMATION
--------------------------------------------------------------------------------

Grace is a global producer of specialty chemicals and specialty materials. It
generates revenues from two business segments: Davison Chemicals, which consists
of the refining technologies and specialty materials product groups; and
Performance Chemicals, which consists of the specialty construction chemicals,
building materials, and sealants and coatings product groups. Intersegment
sales, eliminated in consolidation, are not material. The table below presents
information related to Grace's business segments for the three-month and
nine-month periods ended September 30, 2004 and 2003. Only those corporate
expenses directly related to the segment are allocated for reporting purposes.
All remaining corporate items are reported separately and labeled as corporate
costs or other.

--------------------------------------------------------------------------------
                                 THREE MONTHS                NINE MONTHS
BUSINESS SEGMENT DATA                ENDED                      ENDED
(In millions)                   SEPTEMBER 30,               SEPTEMBER 30,
--------------------------------------------------------------------------------
                              2004          2003          2004         2003
                         -------------------------------------------------------
NET SALES
Davison Chemicals......   $    303.8     $   267.0    $    872.5    $     767.7
Performance Chemicals..        276.1         254.0         798.3          701.5
                         -------------------------------------------------------
TOTAL..................   $    579.9     $   521.0    $  1,670.8    $   1,469.2
                         =======================================================
PRE-TAX OPERATING INCOME
Davison Chemicals......   $     42.6     $    32.5    $    112.1    $      80.1
Performance Chemicals..         39.5          38.6         106.0           76.5
                         -------------------------------------------------------
TOTAL..................   $     82.1     $    71.1    $    218.1    $     156.6
--------------------------------------------------------------------------------

                                      I-23


The table below presents information related to the geographic areas in which
Grace operated for the three months and nine months ended September 30, 2004 and
2003.

--------------------------------------------------------------------------------
GEOGRAPHIC AREA                   THREE MONTHS                NINE MONTHS
   DATA                              ENDED                       ENDED
(In millions)                     SEPTEMBER 30,              SEPTEMBER 30,
--------------------------------------------------------------------------------
                              2004          2003          2004         2003
                         -------------------------------------------------------
NET SALES
  United States.......    $    222.9     $     214.9   $   649.0     $    604.6
  Canada and Puerto Rico        30.1            23.2        79.8           57.0
                         -------------------------------------------------------
  Total North America.         253.0           238.1       728.8          661.6
                         -------------------------------------------------------
  Europe,
   other than
   Germany............         178.0           149.1       519.9          437.2
  Germany.............          28.9            22.2        86.3           64.0
                         -------------------------------------------------------
  Total Europe........         206.9           171.3       606.2          501.2
                         -------------------------------------------------------
  Asia Pacific........          92.3            83.1       251.8          228.4
  Latin America.......          27.7            28.5        84.0           78.0
                         -------------------------------------------------------
TOTAL.................     $   579.9     $     521.0   $ 1,670.8     $  1,469.2
--------------------------------------------------------------------------------

The pre-tax operating income for Grace's business segments for the three-month
and nine-month periods ended September 30, 2004 and 2003 is reconciled below to
income (loss) before Chapter 11 expenses, income taxes, and minority interest
presented in the accompanying Consolidated Statements of Operations.

--------------------------------------------------------------------------------
RECONCILIATION OF BUSINESS
   SEGMENT DATA TO FINANCIAL         THREE MONTHS               NINE MONTHS
   STATEMENTS                           ENDED                       ENDED
(In millions)                        SEPTEMBER 30,              SEPTEMBER 30,
--------------------------------------------------------------------------------
                                 2004         2003          2004         2003
                              --------------------------------------------------
Pre-tax operating income
   (loss) - business
   segments.................   $   82.1     $   71.1      $ 218.1     $  156.6
Minority interest ..........        3.3         (0.7)         6.4         (0.2)
Gain (loss) on sale of
   investments and
   disposals of assets......        0.2         (0.1)        (0.1)        (1.0)
Provision for environmental.
   remediation .............      (20.0)       (50.0)       (20.0)       (52.5)
Net gain on litigation
   settlement...............       50.0           --         50.0           --
Interest expense and
   related financing costs..       (4.5)        (4.1)       (12.3)       (12.4)
Corporate costs.............      (24.4)       (20.8)       (72.6)       (59.2)
Other, net..................       (3.1)        (3.1)       (14.3)       (11.5)
                              --------------------------------------------------
Income (loss) before Chapter
   11 expenses, income taxes,
   and minority interest....   $   83.6     $   (7.7)     $ 155.2     $   19.8
--------------------------------------------------------------------------------

Corporate 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-24


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

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

W. R. Grace & Co. and its subsidiaries are engaged in specialty chemicals and
specialty materials businesses on a worldwide basis through two business
segments: Davison Chemicals, which includes two main product groups - refining
technologies and specialty materials; and Performance Chemicals, which includes
three product groups - specialty construction chemicals, building materials and
sealants and coatings. During the second quarter, Grace realigned its Davison
Chemicals product groups into "refining technologies" (which includes catalysts
and other products and services used by petroleum refiners) and "specialty
materials" (which includes specialty catalysts, silica-based engineered
materials, and products used for separations and life sciences applications).
All sales information for the Davison Chemicals segment has been restated to
reflect this realignment.

The table below shows the Grace business segments and product groups as a
percentage of total Grace sales.

--------------------------------------------------------------------------------
                                     THREE MONTHS               NINE MONTHS
PERCENTAGE OF                           ENDED                     ENDED
   TOTAL GRACE SALES                 SEPTEMBER 30,             SEPTEMBER 30,
--------------------------------------------------------------------------------
                                 2004         2003          2004         2003
                              --------------------------------------------------
Refining
  technologies.............     29.2%         29.6%        28.9%         29.9%
Specialty materials .......     23.2%         21.6%        23.3%         22.4%
                              --------------------------------------------------
DAVISON CHEMICALS .........     52.4%         51.2%        52.2%         52.3%
                              --------------------------------------------------
Construction
  chemicals ...............     24.1%         23.1%        23.6%         22.1%
Building materials ........     11.3%         12.5%        11.5%         12.1%
Sealants and coatings .....     12.2%         13.2%        12.7%         13.5%
                              --------------------------------------------------
PERFORMANCE
  CHEMICALS ...............     47.6%         48.8%        47.8%         47.7%
                              --------------------------------------------------
TOTAL .....................    100.0%        100.0%       100.0%        100.0%
--------------------------------------------------------------------------------

Refining technologies includes: fluid cracking catalysts and additives used in
petroleum refineries to convert distilled crude oil into transportation fuels
and other petroleum-based products, and hydroprocessing catalysts used to
upgrade heavy oils and remove certain impurities. Key external drivers for
refining technologies products are the economics of the refining industry,
specifically the impacts of demand for transportation fuels and petrochemical
products, and crude oil supply.

Specialty materials includes: silica-based engineered materials, which are used
in a wide range of industrial and consumer applications such as paper, wood and
coil coatings, food processing, plastics, adsorbents, and personal care
products; separations and life sciences materials and products, which are used
for biotechnology and pharmaceutical applications; and specialty catalysts,
which are used in a variety of chemical processes and are essential components
in the manufacture of polyethylene and polypropylene resins used in products
such as plastic film, high-performance plastic pipe and other plastic parts.
Sales of these products are affected most by general economic conditions, and
specifically by the underlying growth rate of targeted end-use applications.

Construction chemicals and building materials are used primarily by the
non-residential construction industry. Construction chemicals add strength,
control corrosion, and enhance the handling and application of concrete, and
reduce the manufacturing cost and improve the quality of cement. Performance for
this product group is driven by non-residential construction activity and, to a
lesser extent, residential construction activity, which tend to lag the general
economy in both decline and recovery. Building materials prevent water damage to
structures and protect structural steel against collapse due to fire. The
performance of this product group also is driven by non-residential construction
activity and by residential re-roofing activity, with greater lags than
construction chemicals, reflecting longer lead times for large projects. Since
building materials is largely a North American product group, it is most notably
affected by the level of U.S. construction activity.

Sealants and coatings are used to seal beverage and food cans, and glass and
plastic bottles, and to protect metal packaging from corrosion and the contents
from the influences of metal. Although this product group is affected by general
economic conditions, there is an ongoing shift in demand from metal and glass to
plastic packaging for foods and beverages. This shift is causing a decline in
can sealant usage, but provides opportunities to use closure sealants and other
products for plastic packaging.





--------------------------------------------------------------------------------
VOLUNTARY BANKRUPTCY FILING
--------------------------------------------------------------------------------

See Note 1 to the Consolidated Financial Statements for a discussion of Grace's
Voluntary Bankruptcy Filing.

--------------------------------------------------------------------------------
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

                                      I-25


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 (see Note 3 to the
     Consolidated Financial Statements), environmental remediation (see Note 12
     to the Consolidated Financial Statements), income taxes (see Note 12 to the
     Consolidated Financial Statements), 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 net deferred tax assets, 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 dollar and
percentage changes for the three-month and nine-month periods ended September
30, 2004 and 2003. The chart should be referenced when reading management's
discussion and analysis of financial condition and results of operations. The
chart, as well as 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 and
generally relate to Grace's former operations and products.

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 U.S. 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-26


------------------------------------------------------------------------------------------------------------------------------------
ANALYSIS OF CONTINUING OPERATIONS                        THREE MONTHS ENDED                          NINE MONTHS ENDED
 (In millions)                                              SEPTEMBER 30,                              SEPTEMBER 30,
------------------------------------------------------------------------------------------------------------------------------------
                                                                  $ Change  % Change                         $ Change    % Change
                                                                     Fav       Fav                             Fav          Fav
                                                 2004     2003     (Unfav)   (Unfav)      2004       2003     (Unfav)     (Unfav)
                                             ---------------------------------------------------------------------------------------

NET SALES:
      Davison Chemicals ..................... $ 303.8   $ 267.0   $  36.8     13.8%     $ 872.5    $ 767.7    $ 104.8       13.7%
      Performance Chemicals..................   276.1     254.0      22.1      8.7%       798.3      701.5       96.8       13.8%
                                             ---------------------------------------------------------------------------------------
TOTAL GRACE SALES - CORE OPERATIONS ......... $ 579.9   $ 521.0   $  58.9     11.3%    $1,670.8   $1,469.2    $ 201.6       13.7%
------------------------------------------------------------------------------------------------------------------------------------
PRE-TAX OPERATING INCOME (LOSS)
     Davison Chemicals(1) ................... $  42.6   $  32.5   $  10.1     31.1%     $ 112.1    $  80.1    $  32.0       40.0%
     Performance Chemicals ..................    39.5      38.6       0.9      2.3%       106.0       76.5       29.5       38.6%
                                             ---------------------------------------------------------------------------------------
     Corporate costs:
        Support functions ...................    (7.9)     (7.9)       --       --%       (24.5)     (23.3)      (1.2)      (5.2%)
        Pension, performance-related
           compensation, and other ..........   (16.5)    (12.9)     (3.6)   (27.9%)      (48.1)     (35.9)     (12.2)     (34.0%)
                                             ---------------------------------------------------------------------------------------
     Total Corporate costs ..................   (24.4)    (20.8)     (3.6)   (17.3%)      (72.6)     (59.2)     (13.4)     (22.6%)
                                             ---------------------------------------------------------------------------------------
PRE-TAX INCOME (LOSS) FROM CORE OPERATIONS ..    57.7      50.3       7.4     14.7%       145.5       97.4       48.1       49.4%
PRE-TAX INCOME (LOSS) FROM NONCORE ACTIVITIES    26.4     (54.1)     80.5      NM          12.6      (68.4)      81.0        NM
Interest expense ............................    (4.5)     (4.1)     (0.4)    (9.8%)      (12.3)     (12.4)       0.1        0.8%
Interest income .............................     0.7       0.9      (0.2)   (22.2%)        3.0        3.4       (0.4)     (11.8%)
                                             ---------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE CHAPTER 11 EXPENSES AND
   INCOME TAXES .............................    80.3      (7.0)     87.3      NM         148.8       20.0      128.8      644.0%
Chapter 11 expenses, net ....................    (4.3)     (2.2)     (2.1)   (95.5%)      (11.8)     (11.7)      (0.1)      (0.9%)
Provision for income taxes ..................   (28.0)     (0.7)    (27.3)     NM         (51.9)     (14.0)     (37.9)    (270.7%)
                                             ---------------------------------------------------------------------------------------
NET INCOME (LOSS)............................ $  48.0   $  (9.9)  $  57.9      NM       $  85.1    $  (5.7)   $  90.8        NM
------------------------------------------------------------------------------------------------------------------------------------
KEY FINANCIAL MEASURES:
PRE-TAX INCOME (LOSS) FROM CORE OPERATIONS
     Davison Chemicals(1)  ..................    14.0%     12.2%      NM      1.8 pts     12.8%      10.4%       NM        2.4 pts
     Performance Chemicals ..................    14.3%     15.2%      NM     (0.9)pts     13.3%      10.9%       NM        2.4 pts
     Total Core Operations ..................     9.9%      9.7%      NM      0.2 pts      8.7%       6.6%       NM        2.1 pts
PRE-TAX INCOME (LOSS) FROM CORE OPERATIONS
   BEFORE DEPRECIATION
   AND AMORTIZATION ......................... $  84.6   $  76.4   $   8.2     10.7%     $ 225.9    $ 173.5    $  52.4       30.2%
     AS A PERCENTAGE OF SALES ...............    14.6%     14.7%      NM      (0.1)pts     13.5%      11.8%      NM        1.7 pts
------------------------------------------------------------------------------------------------------------------------------------
NET CONSOLIDATED SALES BY REGION:
     North America .......................... $ 253.0   $ 238.1   $  14.9      6.3%     $ 728.8    $ 661.6    $  67.2       10.2%
     Europe .................................   206.9     171.3      35.6     20.8%       606.2      501.2      105.0       20.9%
     Asia Pacific ...........................    92.3      83.1       9.2     11.1%       251.8      228.4       23.4       10.2%
     Latin America ..........................    27.7      28.5      (0.8)    (2.8%)       84.0       78.0        6.0        7.7%
                                             ---------------------------------------------------------------------------------------
TOTAL  ...................................... $ 579.9   $ 521.0   $  58.9     11.3%    $1,670.8   $1,469.2    $ 201.6       13.7%
------------------------------------------------------------------------------------------------------------------------------------


NM = Not meaningful

(1)  Pre-tax operating income (loss) for Davison Chemicals excludes the income
     or loss attributable to the interests of the minority owner in the Advanced
     Refining Technologies joint venture.

                                      I-27


--------------------------------------------------------------------------------
GRACE OVERVIEW
--------------------------------------------------------------------------------
NET SALES

The following tables identify the year-over-year 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-month and nine-month
periods ended September 30, 2004 and 2003, respectively.

--------------------------------------------------------------------------------
  NET SALES                    THREE MONTHS ENDED SEPTEMBER 30, 2004 AS A
    VARIANCE                       PERCENTAGE INCREASE (DECREASE) FROM
    ANALYSIS                      THREE MONTHS ENDED SEPTEMBER 30, 2003
--------------------------------------------------------------------------------
                                                         CURRENCY
                           VOLUME       PRICE/MIX      TRANSLATION      TOTAL
                        --------------------------------------------------------
Davison Chemicals......     (9.4%)        20.5%            2.7%         13.8%
Performance
  Chemicals ...........      6.5%         (0.5%)           2.7%          8.7%
Net sales..............     (1.7%)        10.3%            2.7%         11.3%
--------------------------------------------------------------------------------
BY REGION:
  North America........      1.1%          5.0%            0.2%          6.3%
  Europe...............    (11.4%)        24.7%            7.5%         20.8%
  Latin America........      2.1%         (2.4%)          (2.5%)        (2.8%)
  Asia Pacific.........     16.0%         (6.8%)           1.9%         11.1%
--------------------------------------------------------------------------------

Grace's sales in the three-month period ended September 30, 2004 were favorably
impacted by improved product mix in refining technologies and favorable currency
translation from a weaker U.S. dollar. Foreign currency translation contributed
$14.2 million or 2.7 percentage points of the sales growth, mainly due to the
strengthening of the Euro against the U.S. dollar. Sales were unfavorably
impacted by lower volumes, primarily of refining technology products, offset by
higher volumes of construction chemicals and specialty materials. Acquisitions
contributed $15.4 million or 3.0 percentage points of the sales growth,
primarily from Grace's acquisition in October 2003 of certain assets of Tricosal
Beton - Chemie GmbH & Co. KG, a leading supplier of specialty chemicals and
materials to the European construction industry, and the August 2004 acquisition
of Alltech International Holdings, Inc. ("Alltech"), a global manufacturer and
supplier of chromatography products.

--------------------------------------------------------------------------------
  NET SALES                     NINE MONTHS ENDED SEPTEMBER 30, 2004 AS A
    VARIANCE                       PERCENTAGE INCREASE (DECREASE) FROM
    ANALYSIS                      NINE MONTHS ENDED SEPTEMBER 30, 2003
--------------------------------------------------------------------------------
                                                         CURRENCY
                           VOLUME       PRICE/MIX      TRANSLATION      TOTAL
                         -------------------------------------------------------
Davison Chemicals......      2.2%          7.5%            4.0%         13.7%
Performance
  Chemicals ...........     10.2%         (0.6%)           4.2%         13.8%
Net sales..............      6.0%          3.6%            4.1%         13.7%
--------------------------------------------------------------------------------
BY REGION:
  North America........      4.7%          5.2%            0.3%         10.2%
  Europe...............      8.0%          2.8%           10.1%         20.9%
  Latin America........      5.8%          1.6%            0.3%          7.7%
  Asia Pacific.........      6.3%          0.7%            3.2%         10.2%
--------------------------------------------------------------------------------

Grace's sales in the nine-month period ended September 30, 2004 were favorably
impacted by higher volume in construction chemicals and specialty materials,
product mix in refining technologies, and favorable currency translation from a
weaker U.S. dollar. Foreign currency translation contributed $60.5 million or
4.1 percentage points of the sales growth, mainly due to the strengthening of
the Euro against the U.S. dollar. In addition, acquisitions contributed $29.1
million or 2.0 percentage points of the sales growth.

PRE-TAX INCOME FROM CORE OPERATIONS

Operating profit and margins for the three-month and nine-month periods ended
September 30, 2004 were higher as compared with the prior year periods primarily
due to an increase in sales from improved economic conditions, including
stronger construction activity in the U.S., cost structure improvements from
productivity initiatives, and foreign currency translation effects.

Corporate costs include corporate functional costs (such as financial and legal
services, human resources, communications and information technology), the cost
of corporate governance (including directors and officers ("D&O") liability
insurance, a portion of which is allocated to noncore activities) and pension
costs related to both corporate employees and to the effects of changes in
assets and liabilities for all Grace pension plans. Corporate costs for the
three-month and nine-month periods ended September 30, 2004 were higher than the
comparable prior year periods primarily due to performance-related compensation
and added professional fees in preparation for the review and audit of
accounting controls under the Sarbanes-Oxley Act of 2002.

                                      I-28


PRE-TAX INCOME (LOSS) FROM NONCORE ACTIVITIES

--------------------------------------------------------------------------------
PRE-TAX INCOME (LOSS) FROM             THREE MONTHS              NINE MONTHS
   NONCORE ACTIVITIES                      ENDED                    ENDED
(In millions)                          SEPTEMBER 30,            SEPTEMBER 30,
--------------------------------------------------------------------------------
                                     2004         2003        2004         2003
                                   ---------------------------------------------
Environmental provision -
   vermiculite mining .......        $ (20.0)     $ (50.0)  $ (20.0)   $ (52.5)
Environmental provision - all
   other sites ..............             --           --        --         --
Provision for asbestos-related
   litigation ...............             --           --        --         --
COLI income (loss), net .....           (0.4)        (0.2)      1.8        4.1
D&O insurance cost ..........           (1.3)        (1.7)     (3.9)      (5.1)
Pension and postretirement
   benefit costs ............           (3.0)        (1.4)     (7.5)      (7.1)
Translation effects -
   intercompany loan.........            2.3           --       1.2         --
Value of currency
   hedges ...................           (2.3)          --     (11.6)        --
Foreign currency transaction
   effects...................           (2.8)         0.4      (2.2)      (2.9)
Net gain on litigation
   settlement................           50.0           --      50.0         --
Other .......................            3.9         (1.2)      4.8       (4.9)
                                   ---------------------------------------------
                                     $  26.4     $  (54.1)  $  12.6    $ (68.4)
--------------------------------------------------------------------------------

Pre-tax income (loss) from noncore activities for the three-month and nine-month
periods ended September 30, 2004 were comparable to the prior-year periods
except for: (1) the foreign currency effect of an intercompany loan as described
below, (2) a pre-tax charge of $20.0 million in 2004 for a change in Grace's
estimate of the costs necessary to address vermiculite clean-up in Libby,
Montana, and (3) a net gain of $50.0 million from the settlement of litigation
under an agreement with Honeywell International, Inc. related to environmental
contamination of a non-operating parcel of land.

In March 2004, Grace began accounting for currency fluctuations on a Euro 293
million intercompany loan between Grace's subsidiaries in the United States and
Germany as a component of operating results instead of a component of other
comprehensive income. The change was prompted by new tax laws in Germany and
Grace's cash flow planning for its Chapter 11 reorganization, which indicated
that it is no longer reasonable to consider this loan as part of the permanent
capital structure in Germany. The effect of the change in exchange rates related
to this loan for the three months and nine months ended September 30, 2004 was
$2.3 million and $1.2 million favorable, respectively.

In May 2004, Grace entered into a series of foreign currency hedge agreements to
mitigate future currency fluctuations on the remaining loan balance. These hedge
agreements have varying rates on notional amounts that coincide with loan
repayments due periodically through June 2005. In 2004, Euro 81 million of loan
principal was repaid. For the nine months ended September 30, 2004, an $11.6
million hedge loss was recognized, offset by a $1.2 million foreign currency
gain, and was reported in other (income) expense. These hedges are considered
derivative instruments that are viewed as risk management tools by Grace and are
not used for trading or speculative purposes.

In September 2004, Grace recorded a net gain of $50.0 million as a result of the
settlement of litigation with Honeywell International, Inc. related to
environmental contamination of a non-operating parcel of land.

CHAPTER 11 EXPENSES

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 Chapter 11
expenses consist primarily of legal, financial and consulting fees incurred by
Grace, three creditors' committees, and the representative of future asbestos
claimants. Grace believes that Chapter 11 expenses will range between $2 million
and $6 million per quarter for the foreseeable future depending on the extent of
Bankruptcy Court proceedings over the period.

In addition, Grace's pre-tax income from core operations included expenses for
Chapter 11-related compensation of $8.5 million and $3.5 million for the
three-month periods ended September 30, 2004 and 2003, respectively, and $19.3
million and $11.4 million for the nine-month periods ended September 30, 2004
and 2003, respectively. As a consequence of operating under Chapter 11, Grace
changed its long-term incentive compensation program from a stock-based to a
cash-based program. Grace has also sought to address employee retention issues
by providing additional 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 D&O liability
insurance premiums; and lost business and acquisition opportunities due to the
complexities of operating under Chapter 11.

INTEREST

Net interest expense in the three-month and nine-month periods ended September
30, 2004 was

                                      I-29


consistent with the prior year period. The payment of interest accrued on
pre-petition debt and other liabilities is subject to the outcome of Grace's
Chapter 11 proceedings.

INCOME TAXES

Grace's provision for income taxes at the federal corporate rate of 35.0% was
$48.0 million and $2.9 million for the nine months ended September 30, 2004 and
2003, respectively. The primary differences between these amounts and the
overall provision for income taxes of $51.9 million and $14.0 million for each
respective year is attributable to current period interest on tax contingencies
and the non-deductibility of certain Chapter 11 expenses, both of which add to
tax expense.

On October 22, 2004, President Bush signed the American Jobs Creation Act of
2004 (the "Jobs Act") into law. While Grace and its advisors are currently
analyzing the many revisions to the tax laws enacted by the Jobs Act, Grace has
focused primarily at this time on the potential impacts of the domestic
manufacturing deductions and the foreign repatriation incentives. With respect
to manufacturing, commencing in 2005, the Jobs Act phases in over a five-year
period an annual manufacturing deduction of up to 9% on the lesser of a
taxpayer's income from domestic manufacturing activities or taxable income.
Given Grace's current U.S. net operating loss carryover position, it is
anticipated that, at least in the short term, the manufacturing deduction may
only minimally reduce potential alternative minimum taxes.

With respect to foreign repatriation incentives, the Jobs Act provides an 85%
dividends received deduction with respect to certain dividends received from a
U.S. corporation's foreign subsidiaries. The dividends must be used to fund
certain permitted domestic activities, as specified in the Jobs Act. These
domestic activities include the building or improvement of infrastructure,
research and development, and the financial stabilization of the corporation.
Grace is closely tracking this new law and, pending further guidance from the
government on a number of technical provisions in the law, will consider
repatriating certain of its foreign earnings in 2005. The dividend-received
deduction is available to taxpayers for only a limited period of time, expiring
after year-end 2005.

--------------------------------------------------------------------------------
BUSINESS SEGMENT OVERVIEW
--------------------------------------------------------------------------------

DAVISON CHEMICALS

Recent Acquisitions and Joint Ventures

See Note 4 to the Consolidated Financial Statements for a description of
acquisitions and joint ventures completed in the nine-month periods ended
September 30, 2004 and 2003.

Three Months Ended September 30, 2004

--------------------------------------------------------------------------------
                                      THREE MONTHS ENDED SEPTEMBER 30,
                         -------------------------------------------------------
NET SALES BY PRODUCT                                   $ Change        % Change
  LINE                                                    Fav             Fav
(In millions)                 2004         2003         (Unfav)         (Unfav)
--------------------------------------------------------------------------------
Refining technologies...  $    169.1    $    154.5   $      14.6           9.4%
Specialty
  materials.............       134.7         112.5          22.2          19.7%
                         -------------------------------------------------------
TOTAL DAVISON
  CHEMICALS.............  $    303.8    $    267.0   $      36.8          13.8%
--------------------------------------------------------------------------------
                                      THREE MONTHS ENDED SEPTEMBER 30,
                         -------------------------------------------------------
NET SALES BY                                           $ Change        % Change
 REGION                                                   Fav             Fav
(In millions)                 2004         2003         (Unfav)         (Unfav)
--------------------------------------------------------------------------------
North America...........  $     117.0   $     103.1  $      13.9          13.5%
Europe..................        125.0         102.9         22.1          21.5%
Asia Pacific............         51.3          48.4          2.9           6.0%
Latin America...........         10.5          12.6         (2.1)        (16.7%)
                         -------------------------------------------------------
TOTAL DAVISON
  CHEMICALS.............  $     303.8   $     267.0  $      36.8          13.8%
--------------------------------------------------------------------------------





Sales

Third quarter sales for the Davison Chemicals segment were favorably affected by
an improved global economic environment, acquisitions, and favorable currency
translation (which contributed 2.7 percentage points of the increase for the
quarter). Sales of refining technologies products increased primarily from
favorable product mix factors, including sales of higher performing catalysts
and added revenue from the pass-through of certain raw material costs, and from
favorable foreign currency translation (1.7 percentage points of the increase).
Sales of specialty materials products increased primarily from strong volume in
all key regions in specialty catalysts and engineered materials, favorable
foreign currency translation (4.2 percentage points of the increase), and sales
from the acquisition of Alltech completed in August 2004.

Sales increases were particularly strong in North America and Europe during the
third quarter of 2004. In North America, increased sales were primarily
attributable to volume growth in specialty materials, as well as favorable
product mix factors, reflecting stronger economic activity in the United States.
Sales in Europe were up primarily from favorable foreign

                                      I-30


currency translation as well as volume growth in specialty materials. The higher
sales in Asia Pacific were due to favorable product mix factors in the
hydroprocessing catalyst business, as well as volume growth in specialty
materials.

Operating Income

Pre-tax operating income of the Davison Chemicals segment for the third quarter
was higher than the 2003 third quarter, driven primarily by higher sales in
North America and Europe, and foreign currency translation effects. Operating
margin was also higher, primarily from favorable product mix and lower
manufacturing costs, which offset increases in the cost of raw materials and
energy.

Nine Months Ended September 30, 2004

--------------------------------------------------------------------------------
                                       NINE MONTHS ENDED SEPTEMBER 30,
                         -------------------------------------------------------
NET SALES BY PRODUCT                                  $ Change        % Change
  LINE                                                   Fav             Fav
(In millions)                2004         2003         (Unfav)         (Unfav)
--------------------------------------------------------------------------------
Refining technologies...  $    482.7    $    439.5   $      43.2           9.8%
Specialty
  materials.............       389.8         328.2          61.6          18.8%
                         -------------------------------------------------------
TOTAL DAVISON
  CHEMICALS.............  $    872.5    $    767.7   $     104.8          13.7%
--------------------------------------------------------------------------------
                                       NINE MONTHS ENDED SEPTEMBER 30,
                         -------------------------------------------------------
NET SALES BY                                           $ Change        % Change
 REGION                                                   Fav             Fav
(In millions)                 2004         2003         (Unfav)         (Unfav)
--------------------------------------------------------------------------------
North America...........  $     337.8   $     294.0  $      43.8          14.9%
Europe..................        365.3         308.9         56.4          18.3%
Asia Pacific............        136.5         129.6          6.9           5.3%
Latin America...........         32.9          35.2         (2.3)         (6.5%)
                         -------------------------------------------------------
TOTAL DAVISON
  CHEMICALS.............  $     872.5   $     767.7  $     104.8          13.7%
--------------------------------------------------------------------------------

Sales

Year-to-date sales for the Davison Chemicals segment benefited from the improved
global economic environment and favorable foreign currency translation (which
accounted for 4.0 percentage points of the increase). Sales increases of
refining technologies products reflected favorable foreign currency translation
(2.5 percentage points), higher volumes of hydroprocessing catalysts and a
favorable product mix of fluid cracking catalysts. High demand for
transportation fuels and high costs of crude oil resulted in increases in both
volume and production rates of major petroleum refineries world-wide. These are
favorable factors for refining catalysts suppliers. Sales increases of specialty
materials products reflected higher volumes of polyolefin catalysts and silica
products used in coatings, separations, and consumer applications and favorable
foreign currency translation (6.0 percentage points). Stronger economic activity
in the United States and Europe were the primary market factors driving the
increase.

Sales in all regions were up due to increased volume and favorable foreign
currency translation. In North America, increased sales were primarily
attributable to volume growth in both refining technologies and specialty
materials, as well as favorable product mix factors, reflecting stronger
economic activity in the United States. European and Latin American sales were
higher due to the effects of favorable currency translation and growth in
specialty materials products. Sales in Asia Pacific were up primarily from
volume growth in specialty materials and favorable product mix factors in
refining technologies, as well as the effects of favorable foreign currency
translation.

Operating Income

Year-to-date operating income of the Davison Chemicals segment was up from 2003,
driven primarily by higher sales in North America and Europe, as well as foreign
currency translation effects on Euro-based sales. The operating margin increase
over the prior year period was attributable to favorable product mix, lower
manufacturing costs and positive results from productivity initiatives.





PERFORMANCE CHEMICALS

Recent Acquisitions and Joint Ventures

See Note 4 to the Consolidated Financial Statements for a description of
acquisitions and joint ventures completed in the nine-month period ended
September 30, 2004.

Three Months Ended September 30, 2004

--------------------------------------------------------------------------------
                                          THREE MONTHS ENDED SEPTEMBER 30,
                            ----------------------------------------------------
NET SALES BY                                           $ Change       % Change
  PRODUCT LINE                                            Fav            Fav
(In millions)                   2004        2003        (Unfav)        (Unfav)
--------------------------------------------------------------------------------
Construction chemicals.....  $  139.7    $  120.1      $    19.6         16.3%
Building materials.........      65.6        65.0            0.6          0.9%
Sealants and coatings......      70.8        68.9            1.9          2.8%
                            ----------------------------------------------------
TOTAL PERFORMANCE
  CHEMICALS................  $  276.1    $  254.0      $    22.1          8.7%
--------------------------------------------------------------------------------
                                       THREE MONTHS ENDED SEPTEMBER 30,
                            ----------------------------------------------------
                                                       $ Change       % Change
NET SALES BY REGION                                       Fav            Fav
(In millions)                   2004        2003        (Unfav)        (Unfav)
--------------------------------------------------------------------------------
North America..............  $  136.0    $  135.0      $     1.0          0.7%
Europe.....................      81.9        68.4           13.5         19.7%
Asia Pacific...............      41.0        34.7            6.3         18.2%
Latin America..............      17.2        15.9            1.3          8.2%
                            ----------------------------------------------------
TOTAL PERFORMANCE
  CHEMICALS................  $  276.1    $  254.0      $    22.1          8.7%
--------------------------------------------------------------------------------

                                      I-31


Sales

The increase in sales for the Performance Chemicals segment in the third quarter
of 2004 compared with the third quarter of 2003 was primarily attributable to
construction chemicals volume growth, a 2003 acquisition, and favorable foreign
currency translation. The October 2003 acquisition of certain assets of Tricosal
Beton-Chemie GmbH & Co. KG by a German subsidiary accounted for $7.2 million, or
2.8 percentage points of the sales growth, while currency translation accounted
for 2.7 percentage points of the sales growth. In addition to sales from the
German acquisition, the sales increase in construction chemicals also reflected
the continued success of customer and new product programs worldwide. The
increase in sales of building materials was mainly due to favorable foreign
currency translation (2.3 percentage points) as well as volume increases in
waterproofing products, especially specialty structural products and residential
tapes. These gains were partially offset by a volume decline in fire protection
products, reflecting hurricane-related project delays in the southeastern U.S.
in 2004 and a large UK project in 2003. Sales increases in sealants and coatings
reflected favorable foreign currency translation (3.0 percentage points) and
volume increases in can and closure sealants and coatings, partially offset by
declines in tolling revenue.

The sales increase in North America mainly reflected the success of construction
chemicals growth programs, offset by volume declines in fire protection products
and tolling revenue in sealants and coatings. In Europe, higher sales were due
to favorable foreign currency translation (8.3 percentage points) and the German
acquisition (10.5 percentage points). Sales in Asia Pacific increased from
volume growth in construction chemicals, waterproofing products, can and closure
sealants and coatings, as well as the effects of favorable foreign currency
translation (4.0 percentage points). Increased sales in Latin America primarily
reflected volume growth in construction chemicals.

Operating Income

Pre-tax operating income was slightly higher than a strong 2003 third quarter,
while operating margin was down, reflecting sales increases and productivity
gains, offset by increases in raw material and transportation costs.

Nine Months Ended September 30, 2004

--------------------------------------------------------------------------------
                                          NINE MONTHS ENDED SEPTEMBER 30,
                                 -----------------------------------------------
NET SALES BY                                               $ Change     % Change
  PRODUCT LINE                                               Fav          Fav
(In millions)                        2004        2003      (Unfav)      (Unfav)
--------------------------------------------------------------------------------
Construction chemicals .......     $  394.1    $  324.9     $  69.2      21.3%
Building materials ...........        191.5       178.1        13.4       7.5%
Sealants and coatings ........        212.7       198.5        14.2       7.2%
                                 -----------------------------------------------
TOTAL PERFORMANCE CHEMICALS ..     $  798.3    $  701.5     $  96.8      13.8%
--------------------------------------------------------------------------------
                                          NINE MONTHS ENDED SEPTEMBER 30,
                                 -----------------------------------------------
                                                          $ Change     % Change
NET SALES BY REGION                                         Fav           Fav
(In millions)                       2004        2003       (Unfav)      (Unfav)
--------------------------------------------------------------------------------
North America ................     $  391.0    $  367.6     $  23.4         6.4%
Europe .......................        240.9       192.3        48.6        25.3%
Asia Pacific .................        115.3        98.8        16.5        16.7%
Latin America ................         51.1        42.8         8.3        19.4%
                                 -----------------------------------------------
TOTAL PERFORMANCE CHEMICALS ..     $  798.3    $  701.5     $  96.8        13.8%
--------------------------------------------------------------------------------

Sales

The increase in sales for the Performance Chemicals segment in the first nine
months of 2004 compared with the first nine months of 2003 was primarily
attributable to volume growth in all product lines, a recent acquisition, and
favorable foreign currency translation. The German acquisition accounted for
$20.1 million, or 2.9 percentage points of the sales growth, while currency
translation accounted for 4.2 percentage points of the sales growth. Aside from
the acquisition, the sales increase in construction chemicals primarily
reflected the continued success of customer and new product programs and
stronger U.S. commercial construction activity from good construction weather in
the first quarter versus a particularly weak first quarter of 2003, as well as
foreign currency translation. The increase in sales of building materials was
mainly due to increases in specialty waterproofing products, especially roofing
underlayments, driven by strong re-roofing activity and continued penetration
against other technologies, and the impact of favorable foreign currency
translation. The increase was partially offset by a small decline in sales of
fire protection products resulting from building code changes and third-quarter,
hurricane-related project delays in the U.S., as well as a large 2003 project in
the UK. Sales increases in sealants and coatings reflected favorable foreign
currency translation (5.0 percentage points), growth initiatives in coatings and
volume increases in can and closure sealants, partially offset by declines in
tolling revenue.

Sales increases in North America reflected the success of construction chemicals
and waterproofing growth programs, as well as stronger U.S. construction
activity. In Europe, higher sales were due to favorable foreign currency
translation (11.2 percentage points), the German acquisition (10.5 percentage
points) and volume

                                      I-32


growth in construction chemicals. Sales in Asia Pacific increased from the
effects of favorable foreign currency translation (6.5 percentage points), as
well as volume growth across all product lines. Increased sales in Latin America
reflected volume increases in construction chemicals and can and closure
sealants, offset by unfavorable currency translation (0.7 percentage points).

Operating Income

Pre-tax operating income and operating margin were substantially higher in the
first three quarters of 2004 compared with the prior year period, reflecting
sales increases, successful productivity programs, discretionary expense
management and favorable foreign currency translation.

OPERATING RETURNS ON ASSETS EMPLOYED

The following charts set forth the Davison Chemicals and Performance Chemicals
total asset position and pre-tax return on average total assets at September 30,
2004 and December 31, 2003. It should be noted that the manufacture of Davison
Chemicals products generally requires significantly higher capital costs than
the manufacture of Performance Chemicals products.

--------------------------------------------------------------------------------
                                                       $ Change       % Change
                                                      (excluding     (excluding
                                                       currency       currency
DAVISON                                              translation)   translation)
  CHEMICALS           SEPTEMBER 30,    DECEMBER 31,       Fav            Fav
 (In millions)            2004            2003          (Unfav)        (Unfav)
--------------------------------------------------------------------------------
Receivables........ $    171.6      $    146.3       $     25.8         17.6%
Inventory..........      149.1           133.6             16.2         12.1%
Other current
  assets...........        2.8             2.1              0.8         38.1%
                    ------------------------------------------------
Total current
  assets...........      323.5           282.0             42.8         15.2%
Properties and
  equipment,
  net..............      426.2           444.0            (16.4)        (3.7%)
Goodwill and
  other intangible
  assets...........       99.5            65.8             34.2         52.0%
Other assets.......        3.2             5.3             (1.7)       (32.1%)
                    ------------------------------------------------
Total assets....... $    852.4      $    797.1       $     58.9          7.4%
                    ================================================
Pre-tax return
  on average
  total assets
  (trailing 12
  months)..........       18.6%           15.4%             NM           3.2 pts
--------------------------------------------------------------------------------

During the nine months ended September 30, 2004, Davison Chemicals' total assets
increased by $55.3 million, including $3.6 million of unfavorable foreign
currency translation. The increase was primarily due to the Alltech and Grom
acquisitions completed during the third quarter and increased accounts
receivable and inventory, offset by a decrease in properties and equipment. The
increase in accounts receivable was primarily due to year-over-year sales
growth. Inventory quantities were higher to meet increased demand. Properties
and equipment decreased due to depreciation expense and lower capital
expenditures as compared with the prior year period, when a major Davison
Chemicals plant expansion was completed.

The pre-tax return on average total assets increased by 3.2 percentage points,
primarily due to a 40.0% increase in pre-tax operating income.

--------------------------------------------------------------------------------
                                                       $ Change       % Change
                                                      (excluding     (excluding
                                                       currency       currency
PERFORMANCE                                          translation)   translation)
  CHEMICALS           SEPTEMBER 30,    DECEMBER 31,      Fav            Fav
 (In millions)            2004            2003         (Unfav)        (Unfav)
--------------------------------------------------------------------------------
Receivables....    $    224.4      $    196.2      $     29.5           15.0%
Inventory......          88.8            80.9             8.5           10.5%
Other current
   assets......           4.1             5.9            (1.7)         (28.8%)
                   ------------------------------------------------
Total current
   assets......         317.3           283.0            36.3           12.8%
Properties and
  equipment,
   net.........         191.1           203.2           (11.0)          (5.4%)
Goodwill and
  other intangible
  assets.......          82.1            84.5            (1.8)          (2.1%)
Other assets...          41.8            38.5             2.7            7.0%
                   ------------------------------------------------
Total assets...    $    632.3      $    609.2      $     26.2            4.3%
                   ================================================
Pre-tax return on
  average total
  assets (trailing
  12 months)...          22.2%           18.7%            NM             3.5 pts
--------------------------------------------------------------------------------

Performance Chemicals' total assets increased by $23.1 million, including $3.1
million of unfavorable foreign currency translation, primarily due to an
increase in receivables, offset by a decrease in properties and equipment. The
increase in receivables was caused primarily by increased sales in the third
quarter of 2004 compared with the fourth quarter of 2003, which is also a low
point in this segment's operating cycle. Depreciation expense exceeded new
capital spending during the nine months ended September 30, 2004.

The pre-tax return on average total assets increased by 3.5 percentage points,
driven by a 38.6% increase in pre-tax operating income.

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

EFFECT OF CHAPTER 11

As described under "Voluntary Bankruptcy Filing" in Note 1 to the Consolidated
Financial Statements, 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)

                                      I-33


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.

Grace is in the process of developing a proposed plan of reorganization. In such
plan of reorganization, Grace will propose how to resolve its pre-petition
liabilities and contingencies, including undisputed trade-related,
employee-related and financing-related claims, as well as claims associated with
asbestos-related litigation, environmental remediation, tax matters and other
claims filed with the Bankruptcy Court that Grace may dispute. The Chapter 11
proceedings could result in allowable claims that differ materially from
recorded amounts or amounts in Grace's proposed plan of reorganization. Grace
will continue to adjust its estimates of allowable claims as facts come to light
during the Chapter 11 process that justify a change, and as Chapter 11
proceedings establish court-accepted measures of Grace's noncore liabilities.

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.

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
September 30, 2004 and December 31, 2003:

--------------------------------------------------------------------------------
NET NONCORE LIABILITIES                       SEPTEMBER 30,         DECEMBER 31,
(In millions)                                      2004                  2003
--------------------------------------------------------------------------------
Asbestos-related liabilities .........        $   (986.6)            $   (992.3)
Asbestos-related insurance
    receivable .......................             263.4                  269.4
                                            ------------------------------------
Asbestos-related liability, net ......            (723.2)                (722.9)
Environmental remediation ............            (346.3)                (332.4)
Postretirement benefits ..............            (122.9)                (134.3)
Retained obligations and other .......             (56.3)                 (57.0)
                                            ------------------------------------
NET NONCORE LIABILITY ................        $ (1,248.7)            $ (1,246.6)
--------------------------------------------------------------------------------

The resolution of many 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 liabilities 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
September 30, 2004.

ASBESTOS-RELATED MATTERS

Grace is a defendant in lawsuits relating to previously sold asbestos-containing
products. During the nine months ended September 30, 2004, Grace had receipts of
$6.0 million under settlements with insurance carriers, which was offset by $5.6
million for the defense and disposition of asbestos-related property damage and
bodily injury litigation. At September 30, 2004, Grace's balance sheet reflected
a gross asbestos-related liability of $986.6 million ($723.2 million net of
insurance). This liability represents management's estimate, based on facts and
circumstances existing prior to the Filing and an analysis of new property
damage claims received after 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.

Grace is reevaluating its asbestos-related liability in light of the requirement
to propose a plan of reorganization. The measure of such liability, and the
ultimate net cost to Grace, depends on the resolution of a number of issues
that, in the absence of a consensual plan, must be resolved through Bankruptcy
Court proceedings such as: the definition of an allowed claim; the actual or
estimated claims that meet such definition; the value of allowed claims for a
variety of medical conditions; the value, if any, of ZAI property damage claims;
the number of properties qualifying for asbestos abatement and the cost of
remediation; the method of funding an asbestos trust; the availability of funds
under litigation settlement agreements with Sealed Air and Fresenius; and, the
availability of insurance and timing of insurance recovery. Grace will address
these matters as part of a plan of reorganization. Because of these
uncertainties, Grace's estimate of the value of its asbestos-related liability
may change materially as the bankruptcy process progresses.

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, related insurance coverage, or its ultimate plan of reorganization.

The Consolidated Balance Sheet at September 30, 2004 includes an asset of $263.4
million pursuant to settlement

                                      I-34


agreements with insurance carriers, which relate directly to the amount and
nature of the recorded asbestos-related liability. 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 the timing and amount of Grace's recovery.

Grace was required to file its plan of reorganization with the Bankruptcy Court
by October 14, 2004. On October 25, 2004, the Bankruptcy Court extended the
deadline for filing a plan of reorganization until November 15, 2004.
Measurement of Grace's asbestos-related liabilities will be materially affected
by Bankruptcy Court rulings, the outcome of litigation and negotiations among
interested parties, and the ultimate form of the plan of reorganization. See
Note 1 to the Consolidated Financial Statements for further discussion of
Grace's proposed plan of reorganization.

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 September 30, 2004, Grace's recorded
liability for environmental investigation and remediation costs totaled $346.3
million, as compared with $332.4 million at December 31, 2003. This liability
covers both vermiculite and non-vermiculite related matters. The amount is based
on funding and/or remediation agreements in place, together with Grace's best
estimate of its cost to resolve contamination risks at sites not subject to a
formal remediation plan. During the third quarter of 2004, Grace recorded a
pre-tax charge of $20.0 million to increase its estimated liability for
vermiculite-related environmental costs to reflect Grace's current understanding
of the timeframe and related costs necessary to remediate properties in and
around Libby, Montana. This increase was based on additional information
provided by the EPA and Grace's analysis of the EPA's future spending plans.
Grace's total estimated liability for vermiculite-related remediation or
reimbursement costs at September 30, 2004 was $205.3 million, which includes
remediation activities in and around Libby, and at vermiculite processing sites
currently or formerly operated by Grace. However, the EPA's cost estimates have
changed several times and increased substantially over time. Consequently,
Grace's estimated liability may change materially as more information becomes
available. Grace's liability for this matter is included in "liabilities subject
to compromise" as of September 30, 2004.

At September 30, 2004, Grace's estimated liability for remediation of sites not
related to its former vermiculite mining and processing activities was $141.0
million. This liability relates to Grace's current and former operations,
including its share of liability for off-site disposal at facilities where it
has been identified as a potentially responsible party. The decrease from
December 31, 2003 is related to ongoing remedial efforts at Grace owned sites.
This liability also reflects Grace's evaluation of environmental-related claims
submitted as part of the Chapter 11 process for which sufficient information was
available. As Grace receives new information and continues its claims evaluation
process, its estimated liability may change materially. Grace's liability for
this matter is included in "liabilities subject to compromise" as of September
30, 2004.

See Note 12 to the Consolidated Financial Statements for a background
description of Grace's vermiculite and non-vermiculite related matters.

DEFINED BENEFIT PENSION PLANS

Grace sponsors defined benefit pension plans for its employees in the United
States, Canada and the United Kingdom, and funds government sponsored programs
in other countries where it operates. Certain of the Grace sponsored plans are
advance-funded and others are pay-as-you-go. The advance-funded plans are
administered by trustees who direct the management of plan assets and arrange to
have obligations paid when due out of a trust. The most significant
advance-funded plans cover Grace's salaried employees in the U.S. and employees
covered by collective bargaining agreements at certain of its U.S. facilities.

At the December 31, 2003 measurement date for the U.S. advance-funded defined
benefit pension plans (the "Plans"), the accumulated benefit obligation ("ABO")
was approximately $880 million (as measured under U.S. generally accepted
accounting principles and increased by approximately $55 million in the second
quarter of 2004 for the results of a recent actuarial experience study). The ABO
is measured as the present value (using a 6.25% discount rate as of December 31,
2003) of vested and non-vested benefits earned from employee service to date,
based upon current salary levels. Assets available to fund the ABO at December
31, 2003 were approximately $658 million, or approximately $222 million less
than the measured obligation.

In July 2004, Grace petitioned the Bankruptcy Court for permission to contribute
approximately $20 million

                                      I-35


to the trusts that hold assets of the Plans. This request is in addition to a
$40.0 million contribution approved by the Bankruptcy Court for 2003. The 2004
motion was approved and Grace contributed $19.8 million to the trusts in
September 2004. Although it is Grace's intention to satisfy its obligations
under the Plans and to comply with all of the requirements of the Employee
Retirement Income Security Act of 1974, contributions to the Plans' trusts
require Bankruptcy Court approval. There can be no assurance that the Bankruptcy
Court will continue to approve arrangements to satisfy the funding needs of the
Plans.

See Note 13 for the components of net periodic pension cost for the third
quarter and year-to-date. Grace expects total pension expense for 2004 to be
approximately $55 million, and benefit payments to retirees to aggregate between
$85 million and $90 million for all pension programs in 2004. At September 30,
2004, Grace's recorded pension liability for underfunded plans was $366.8
million ($295.9 million included in liabilities not subject to compromise and
$70.9 million related to supplemental pension benefits for officers and certain
key employees, included in "liabilities subject to compromise") which includes
the following components: (1) shortfall between dedicated assets and ABO of
underfunded plans ($202.9 million); and (2) ABO of pay-as-you-go plans ($163.9
million).

POSTRETIREMENT BENEFITS

Grace provides certain 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 was $3.7 million
and $9.2 million during the three-month and nine-month periods ended September
30, 2004, respectively, compared with $3.1 million and $8.8 million during the
three-month and nine-month periods ended September 30, 2003, respectively.
Grace's recorded liability for postretirement benefits of $122.9 million at
September 30, 2004 is stated at net present value discounted at 6.25%. 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.

In December 2003, President Bush signed the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 (the "Act") into law. The Act
introduces a prescription drug benefit under Medicare ("Medicare Part D") as
well as a federal subsidy to companies that provide a benefit that is at least
actuarially equivalent (as defined in the Act) to Medicare Part D. At this time,
the Company does not believe that the prescription drug benefit under its
postretirement health care plan is actuarially equivalent to the Medicare Part D
benefit. Therefore, the Company does not anticipate receiving a federal subsidy.

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

CASH RESOURCES AND AVAILABLE CREDIT FACILITIES

At September 30, 2004, Grace had $482.2 million in cash and cash-like assets on
hand ($385.1 million in cash and cash equivalents and $97.1 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 $213.5
million (net of borrowings, letters of credit, and holdback provisions) was
available at September 30, 2004. The term of the DIP facility expires 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

--------------------------------------------------------------------------------
                                                            NINE MONTHS
CORE OPERATIONS                                                ENDED
(In millions)                                               SEPTEMBER 30,
--------------------------------------------------------------------------------
                                                         2004           2003
                                                  ------------------------------
CASH FLOWS:
Pre-tax operating income.......................      $     145.5    $     97.4
Depreciation and amortization..................             80.4          76.1
PRE-TAX EARNINGS BEFORE DEPRECIATION
    AND AMORTIZATION...........................            225.9         173.5
Working capital and other changes..............            (13.0)        (55.7)
                                                  ------------------------------
CASH FLOW BEFORE INVESTING.....................            212.9         117.8
Capital expenditures...........................            (40.0)        (65.7)
Businesses acquired............................            (53.0)         (3.6)
                                                  ------------------------------
NET CASH FLOW FROM CORE OPERATIONS.............      $     119.9    $     48.5
--------------------------------------------------------------------------------

Grace's net cash flow from core operations before investing increased primarily
due to higher pre-tax operating income and decreased investment in working
capital. Capital expenditures were lower compared to the same prior year period,
offset by an increase in cash invested in business acquisitions. Capital
expenditures principally represented spending for routine equipment
replacements. A substantial portion of the expenditures during the first half of
2003 were directed toward the construction of new refining catalyst production
capacity at Grace's Lake Charles, Louisiana site.

Grace expects to continue to invest excess cash flow and/or other available
capital resources in its core

                                      I-36


business base. These investments are likely to be in the form of added plant
capacity, product line extensions and geographic market expansions, and/or
acquisitions in existing product lines. Investments that are outside the
ordinary course of business may be subject to Bankruptcy Court approval and
review by the Chapter 11 committees.

--------------------------------------------------------------------------------
                                                              NINE MONTHS
NONCORE ACTIVITIES                                              ENDED
(In millions)                                                SEPTEMBER 30,
--------------------------------------------------------------------------------
                                                         2004            2003
                                                  ------------------------------
CASH FLOWS:
Pre-tax income (loss) from noncore activities..     $     12.6      $    (68.4)
Non-cash charges...............................          (15.9)           61.0
Cash spending for:
  Asbestos-related litigation, net of insurance
    recovery...................................            0.4             2.9
  Environmental remediation....................           (6.1)           (9.1)
  Postretirement benefits......................           (9.2)           (8.8)
  Retained obligations and other...............           (0.9)           (1.1)
                                                  ------------------------------
NET CASH FLOW FROM NONCORE
  ACTIVITIES ..................................     $    (19.1)     $    (23.5)
--------------------------------------------------------------------------------

See the Consolidated Statements of Cash Flows included in the Consolidated
Financial Statements for investing and financing activities for the nine months
ended September 30, 2004 and 2003.

DEBT AND OTHER CONTRACTUAL OBLIGATIONS

Total debt outstanding at September 30, 2004 was $590.5 million, including $57.7
million of accrued interest on pre-petition debt. As a result of the Filing,
Grace is now in default on $515.1 million of pre-petition debt which, together
with accrued interest thereon, has been included in "liabilities subject to
compromise" as of September 30, 2004. 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.

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

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 Financial Condition and Results of
Operations, 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/A.

                                      I-37


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Grace had no outstanding derivative financial instruments that qualify for
accounting treatment under SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities" at September 30, 2004. Grace has entered into foreign
exchange forward contracts to manage exposure to fluctuations in foreign
currency exchange rates on an intercompany loan between Grace and a subsidiary
in Germany. (See Note 5 to the Consolidated Financial Statements.) 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 2003 Annual Report on Form 10-K/A.

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 controls to assist it in fulfilling its
responsibility for financial reporting. These internal controls consist of
policies and procedures that are designed to assess and monitor the
effectiveness of the control environment, risk identification, control
activities, information flow, and communication. A chartered Disclosure
Committee oversees Grace's public financial reporting process and key managers
are required to confirm their compliance with Grace's policies and internal
controls. While no system of internal controls can ensure elimination of all
errors and irregularities, Grace's internal controls, which are reviewed and
modified in response to changing conditions, have been designed to provide
reasonable assurance that assets are safeguarded, policies and procedures are
followed, transactions are properly executed and reported, and appropriate
disclosures are made. The concept of reasonable assurance is based on the
recognition that there are limitations in all systems of internal control and
that the costs of such systems should not exceed their benefits.


EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

As of September 30, 2004, Grace carried out an evaluation of the effectiveness
of the design and operation of its disclosure controls and procedures pursuant
to Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). Based upon that evaluation, Grace's Chief Executive Officer and
Chief Financial Officer concluded that 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 significant change in the Company's internal control
over financial reporting that has materially affected, or is reasonably likely
to materially affect, the Company's internal control over financial reporting.


                                      I-38


                           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.

1. In 1995, citizens groups brought suit in U.S. District Court in New Jersey
against Honeywell International, Inc. and Grace for injunctive relief requiring
the remediation of chromium contamination of certain Grace-owned property in New
Jersey (Interfaith Community Organization, et al. v. Honeywell International,
Inc., et al.). Grace asserted cross-claims against Honeywell to recover all past
and future costs and damages, and for injunctive relief requiring Honeywell to
remediate the site. In May 2003, the District Court found in favor of the
plaintiff and Grace. Honeywell appealed the judgment to the United States Court
of Appeals for the Third Circuit. On September 20, 2004, Grace and Honeywell
entered into a settlement agreement under which Grace transferred the Jersey
City property to Honeywell, Honeywell agreed to indemnify Grace and paid Grace
$62.5 million. Grace recorded a gain of $50 million net of legal expenses,
transfer taxes, and the book value of the property.

2. On October 29, 2004, Grace received a letter informing the company that it
has been named as a target of a federal grand jury investigation involving
possible obstruction of federal agency proceedings, violations of federal
environmental laws, and conspiring with others to violate federal environmental
laws. Grace believes that the investigation is related to its former vermiculite
mining and processing activities in Libby, Montana. Grace has not been advised
of any details about the possible violations of law and is unable to assess at
this point whether the results of this investigation will be material to Grace.
Grace is aware that several current and former senior level employees associated
with Grace's construction products business also have been named as targets of
the investigation.

3. On October 26, 2004, a purported class action complaint (Bunch et. al. v. W.
R. Grace & co. et. al.) was filed in the United States District Court for the
Eastern District of Kentucky against Grace, each member of Grace's Board of
Directors, certain current officers of Grace, the Grace Investment and Benefits
Committee, Fidelity Management Trust Company, State Street Bank and Trust
Company and State Street Global Advisors (collectively, the "Defendants"). The
complaint was brought on behalf of persons who owned shares of Grace common
stock within Grace's savings and investment plan, a defined contribution
retirement plan under section 401(k) of the Internal Revenue Code (the "S&I
Plan"). The complaint alleges that the Defendants were fiduciaries of the S&I
Plan under the Employee Retirement Income Security Act of 1974 ("ERISA"), and
that the Defendants violated certain fiduciary duties under ERISA by appointing
the State Street Defendants to manage the Grace stock within the S&I Plan with
the authority to sell the Grace stock within the Plan, and by prohibiting the
S&I Plan participants from exercising independent control over that appointment
and the subsequent sale of all of the Grace stock from the S&I Plan. The
complaint states that the sale of the Grace stock resulted in substantial
retirement fund losses for the participants. The complaint also alleges that the
Defendants violated their fiduciary duties by failing to avoid certain conflicts
of interest, and by failing to disclose financial information regarding Grace
and other information, which prevented participants from making informed
decisions with respect to their investments within the S&I Plan.

                                      II-1


Grace believes that prosecution of this action should be stayed in Grace's
Chapter 11 proceeding. Grace likely would have an obligation to indemnify the
Defendants for any liability arising out of this lawsuit. However, Grace also
believes that the allegations are without merit and that any liability arising
therefrom would be covered by its fiduciary liability insurance.

This lawsuit is the second purported class action lawsuit filed alleging
breaches of fiduciary duty in connection with the management of the Grace common
stock fund in the S&I Plan. As further described in Grace's Quarterly Report on
Form 10-Q for the period ended June 30, 2004, the first lawsuit alleged breaches
of fiduciary duties under ERISA for failing to sell or take other appropriate
action with respect to Grace common stock when the defendants knew or should
have known the stock had become an imprudent investment, principally as a result
of the risk related to Grace's asbestos-related liabilities; and that the
defendants failed to disclose to S&I Plan participants the risk of investing in
Grace common stock.

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 third quarter of 2004:

          July 22, 2004 - Press release announcing Grace's financial results for
          the quarter ended June 30, 2004.

          September 9, 2004 - Election of Alfred E. Festa as a Director.

          September 22, 2004 - Settlement Agreement with Honeywell
          International, Inc. concerning contamination of Grace-owned property
          at Route 440 in Jersey City, New Jersey.



                                      II-2


                                    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:  November 5, 2004                       By /s/ Paul J. Norris
                                                 ------------------
                                                 Paul J. Norris
                                                 Chairman and
                                                 Chief Executive Officer

Date:  November 5, 2004                       By /s/ Robert M. Tarola
                                                 --------------------
                                                 Robert M. Tarola
                                                 Senior Vice President and
                                                 Chief Financial Officer
                                                 (Principal Accounting Officer)



                                      II-3


                                  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-4`